Give credit where due - Ireland's Elan (ELN) has always been willing to take dramatic steps in the hope of improving ultimate returns to shareholders. The latest move is a doozy - basically splitting the company into an early-stage research-driven biotech and a cash-farming collection of assets. Odd as it may seem, this may be a case where breaking up a company results in parts worth more than the whole.
Bapi Drives Transformation
With the failure of IV bapineuzumab in Phase 3 Alzheimer's study, and the near-cessation of development by partners Johnson & Johnson (JNJ) and Pfizer (PFE), Elan is radically transforming itself and clearly splitting up the risk/return trade-offs for shareholders.
On one side is the company that will continue to be known as Elan. This company will hold the rights to Tysabri (which is partnered with Biogen Idec (BIIB)), the 25% stake in the AIP partnership, the experimental drug ELND-005, and up to $4 billion in tax loss carryforwards.
On the other side will be Neotope Biosciences - a very early stage biotech company that will build around neoepitope technology and look to develop drugs targeting synucleinopathies, type 2 diabetes, cancer, amyloidosis, and perhaps prion diseases as well.
The Case For The New Elan
A huge portion of the value of the new post-split Elan will be driven by the revenue and profits of Tysabri - a highly effective drug for multiple sclerosis. Tysabri is covered by patents through the end of the decade and even as patents roll off, it's unclear that would-be generic competitors like Teva (TEVA) or Mylan (MYL) will be able to launch biosimilars right away.
As for Elan's other assets, the valuation case is not perfectly clear. Although bapineuzumab could theoretically be useful in earlier stages of the disease (and a Phase 2 subcutaneous study is ongoing), I wouldn't put any value on this asset; likewise a Phase 2 vaccine and Phase 1 mAb aren't worthless, but have yet to demonstrate enough clinical utility to really deserve a fair value of their own. The same may be said for ELND-005; Elan is choosing to hang on to this Phase 2 compound which failed in earlier studies in Alzheimer's, but apparently shows some promise for treating psychological disorders like bipolar.
The biggest question for the new Elan is whether Tysabri can continue to grow even with the introduction of new multiple sclerosis medications. Novartis's (NVS) Gilyena hasn't really hurt it, but doctors seem more optimistic about new drugs coming from Biogen Idec and Sanofi (SNY). While it is unlikely that doctors would switch patients away from Tysabri (once docs find an effective treatment for a patient, they stick with it), they likely will try this other drugs first and that could slow the growth.
Assuming that Elan keeps a lid on development expenses for ELND-005, Elan could generate as much as $1 in earnings by 2015 and ample cash for dividends or buybacks. That suggests a value for Tysabri on the order of $10 to $13, and Biogen Idec may be willing to pay even more for 100% economics on the drug.
It's tougher to evaluate Elan's value to other potential suitors, though. Biogen Idec has a change of control provision tied to Tysabri, and the laws and rules regarding the transfer of tax loss carryforwards can be a bit murky. Nevertheless, pharmaceutical and private equity companies pay lawyers and accountants to figure that out, and I do believe those carryforwards have some value.
The Case For Neotope
Neotope is a much trickier proposition. While the company has some interesting potential platform technology (especially in synucleins), valuing unproven preclinical technology is even more of a guess than trying to value pipeline assets that have already been tested in humans.
What's more, it doesn't sound as though the company will even be in position to start human studies for a couple of years - management mentioned a target of 3 INDs by 2015, with a drug for amyloidosis likely first in line. In the meantime, the company will be burning $50 million to $60 million a year in cash, though Elan will be kicking in $120 million or so in start-up capital and keeping a 14-18% ownership stake.
Simply put, the value on Neotope is a crapshoot. Ordinarily it's hard to even get a solid IPO for a company with no human trials, let alone a robust valuation - exciting technology will get investors' interest, but it won't hold it for more than a year or so. I'm not going to say that there's no potential here, but Prana Biotechnology (PRAN) has actual human data in Alzheimer's and Huntington's (and is reasonably close to an IND for Parkinson's) and carries an enterprise value of less than $50 million.
Still, A Worthwhile Transaction
Even with all of the uncertainty around both halves of what is still Elan today, this split makes a certain amount of sense. The driving operational factors (and discount rate) for the Tysabri cash flow stream are so different than those for Neotope that they don't necessarily make sense without some sort of intermediate pipeline between them (though keeping ELND-005 with Elan is a little curious in that regard). Said differently, the market doesn't really like "barbell stories" like Elan, and it is likely that the risks of the Neotope business would actually detract from the value of the Tysabri asset.
I think the new, more focused, Elan could be worth something in the low-to-mid teens, while Neotope is at least worth something more than zero. That doesn't necessarily offer a compelling case for buying these shares today, but it does at least argue that existing shareholders have some reason to hold on.