Elan (ELN) announced today "it is proceeding with a formal sale process in light of the expressions of interest received to date. As part of this process, Royalty Pharma will be invited to participate if they so wish. Accordingly, shareholders are urged not to tender into the current Royalty Pharma hostile offer." It is clear that Elan's initiative to take a stake in Theravance and AOP has been rejected by shareholders. The board has lost control of the strategic direction of the company. The sale of the company becomes the only viable option at current time. There is little doubt that Elan will be sold in next few months. The question is what price the shareholders can expect to get from the sale. The following are a few scenarios:
1. Royalty Pharma renegotiates a friendly deal with Elan.
Royalty Pharma currently is offering $13.00 plus an up to $2.50 CVR. For a friendly deal, the offer has to be at least $15.5 all in cash. It still makes financial sense for Royalty Pharma. According to Elan, the underlying value of Tysabri's royalty is $11.85 per share and the upside is $17.15 per share. I did my own calculation and find the valuation estimate by Elan is a bit high. Here is my analysis: Assume that over next 10 years that Tysabri generates minimum average $2.6 billion sales annually (9% annual growth), the royalty will give Elan $510 million/year. This translates to $1/share. A 9.5 multiple gives you $9.5/share. Additionally, Elan has net $3.65/share in cash. The minimum valuation is $13.15. However, if additional indications can be found or patent is being extended, then there is a lot more upsides. A $15.5 bid is reasonable given the low risk profile and upside potential.
2. Biogen (BIIB) takes over Elan
Biogen currently owns Tysabri's patent and pays Elan royalty on the revenue of Tysabri. If Biogen believes that Tysabri's sales can grow more than 10% annually or other indications can be found in Tysabri, then it makes sense for Biogen to take over Elan to pocket all the upside potentials. Given the high stock price Biogen is having, an offer of combination of cash and stock would be desirable for Biogen. A $16-18 bid will not be dilutive to Biogen. There are some additional benefits to Biogen. First, Biogen can use Elan's loss to reduce its taxes. Second, there are some compounds currently being developed by Elan that may have potential. Third, Biogen can select a pool of talent it wants and get a foothold in European market.
3. Other strategic buyers
Elan has indicated that it has received some unsolicited offers. They are most likely from other pharmaceutical companies. Given the known offer from Royalty Pharma, any new offers have to come above $15.50 to have a chance to succeed.
In conclusion, Elan will likely be sold at the price range between $15.5 to $18 in next few months.