J&J Comes Riding to Elan's Rescue

Johnson & Johnson has today taken what looks like a $1.5bn gamble on experimental drug bapineuzumab and the rest of Elan’s Alzheimer’s pipeline. In a surprising announcement, the US group revealed that it would be investing $1bn in exchange for an 18.4% stake in the Irish group and the full rights to its Alzheimer's Immunotherapy Program (AIP).

J&J will also be dipping its hand into its pocket again to contribute up to $500m to shoulder the development costs and launch of bapineuzumab. In return, Elan is set to receive a 49.9% stake in a J&J company that will be formed to acquire the AIP, and will be eligible for a 49.9% slice of any profits and tiered royalties generated by marketed products from the collaboration.

Shares in Elan surged as news of the deal, which will also see J&J get a seat on the board and 107 million of Elan’s ADRs at $9.32, a 33% premium to last night's closing share price. In early trade Elan's ADRs jumped 17% to trade at $8.19.

Smart move

On the surface the agreement looks like a very neat get-out-of-jail-free card for Elan, allowing the group to shunt the expense and risk of development onto J&J, while retaining a stake in any future success of the drug. The level of dilution to existing shareholders, which will also give them just over 80% of any upside, also does not appear too high a price to pay.

It also fulfills many of Elan's aims set out in a strategic review five and a half months ago (Elan's strategic review failing to convince, January 13, 2009), which included: addressing its balance sheet issues to financially strengthen the company; fully funding the AIP programme all the way to commercialisation; getting access to a global world class sales and marketing force; strengthening the shareholder base and reducing overall risk.

Beyond shifting risk to J&J, the deal also dramatically reduces Elan’s enormous net debt of $1.4bn by an impressive 70% to just $400m. Savings will also flow through from the group not having to put its own hand in its pocket to fund the development of bapineuzumab. In 2008 spending on the Alzheimer's drug and associated programmes totaled $113m and were expected to hit similar levels this year.

Cost savings

The transaction should also reduce the group’s SG&A costs by about $500m over the next three to five years, which could help Elan return to profitability and become cash flow positive by the end of next year, the Irish firm's finance director Shane Cooke said on a conference call today.

The choice of J&J also looks like a good one. The group has a large sales force and a presence in over 100 countries, including several emerging markets, something that Elan believes will come in handy due to the fact that in 30 to 40 years time, 65% of the 100 million people predicted to suffer from Alzheimer's will live in emerging markets.

However, J&J’s interest is not a precursor to a takeover of Elan anytime soon, as the group has put in place a standstill agreement that prevents J&J from acquiring any more shares for five years.

Two way street?

It's arguable whether this is such a good deal for J&J. At present it is not clear what the sales split between Wyeth and Elan will be for bapineuzumab. It is widely assumed that it will be a classic 50/50, but even today Kelly Martin, Elan's chief executive, admitted that the situation still had not been resolved and was "complicated".

As such, J&J at best will be getting 25% of profits of bapineuzumab for its money, which makes the $1.5bn investment look almost reasonable given that the drug is worth $3.82bn to Elan, according to EvaluatePharma’s NPV Analyzer. The US firm also gets the other AIP products, which yet to have any value assigned to them.

Bapineuzumab is a big risk, data for the drug have been mixed and it may only be truly effective in a small population of Alzheimer's sufferers. Concerns over its potential have seen 2012 sales forecasts fall from $974m in July 2008 to just $172m last month.

Despite the danger, J&J, which currently only has one marketed product in Alzheimer's and only a handful of research products in the pipeline, may have made its move to prevent it being left behind in the race to develop drugs for a market that is estimated to be worth $7.8bn by 2010.

Bidders at the table

The price that J&J paid may also reflect competition for the assets. Today, Mr Martin revealed that there had been considerable levels of interest in the strategic review, with over 30 companies including sub-$500m market cap pharma groups, several big pharma groups and financial firms running an eye over the company.

Rumours this weekend that Novartis was poised to make a move indicates that there may have been serious competition driving the price up. Back in June, market whispers also linked Bristol-Myers Squibb with Elan (Elan stake rumours set the market guessing, June 2, 2009).

But for J&J, which seems to be getting less risk averse with its acquisition strategies (J&J goes hunting and bags a Cougar, May 22, 2009), buying the rights to bapineuzumab and the other AIP products could be a gamble worth taking.

Disclosure: No Positions

Comments

[delta 777:]

Elan has been suffering a horrible partnership in Tysabri with Biogen, who may have been sandbagging Tysabri to promote their competing drug Avonex, meanwhile salivating at the prospect of being able to make a hostile move to buy Elan's interest in Tysabri for pennies, against a very weak Elan in 2010 when standoff clauses in their partnership expire.
Wyeth/AHP is potentially also a wolf in sheeps clothing with respect to their bapineuzumab partnership with Elan (anyone remember Immunex?-R.I.P.) and when Pfizer acquires Wyeth, this cabal can not be anticipated to behave like angels in their partnership behavior
Even more significant than the much needed direct financial boost that Elan has been needing to set up, JNJ has both sufficient clout and a big enough legal department to deal with the pack of hyenas that have been circling to pick Elan's bones as well as an excellent background to insure that bapineuzumab will be properly guidedto market, even though they do not (nominally) have control of this drug. The JNJ/Elan arrangement also is a great protection of other Elan pipeline drugs against the type of manipulation that Tysabri has suffered at the hands of Biogen. JNJ has a pretty good rep as an ethical outfit.
Somewhat disturbing is key scientists Selkoe and Bloom stepping down from the Elan Board of Directors.

Jul 03 04:44 PM