Thursday, July 02, 2009

J&J Buys Elan Out of a Jam

Elan sent up a signal flare five or six months ago and now Johnson & Johnson has come to its rescue, with a $1 billion stock buy and an innovative asset purchase agreement around Elan's most advanced Alzheimer's disease programs.

The result: this very interesting deal plus Pfizer's takeover of Wyeth creates a bizarre situation that we haven't seen before: one of the biopharmaceutical industry's most hotly anticipated and potentially valuable late-stage assets (if not THE most hotly anticipated and potentially valuable late-stage asset) and the broader program that created it will now have two brand new owners, which happen to be two of the biggest (if not THE biggest) pharma/health care companies in the industry.

Oh, and as of yet, there is absolutely no commercial agreement in place for what happens when and if the drugs that emerge from this collaboration get approved.

We'll have all the fun and juicy details and analysis later in 'The Pink Sheet' DAILY but allow us to sketch it out briefly here. Elan was between a rock (a bunch of debt it was going to have some trouble paying off, a recurring theme in the company's history) and a hard place (it needs to spend serious cash on its bapineuzumab Alzheimer's program with Wyeth--not to mention all its other R&D--if the company to be successful).

So it began a strategic review earlier this year and once a week rumors surfaced that so-and-so was going to buy the company, or a piece of the company, or its delivery/formulation business, etc. Now enter J&J, who gets $1 billion in Elan stock at about a 1/3 premium (an 18.4% stake in the biotech) in exchange for all the rights and obligations associated with its Alzheimer's immunotherapy program (AIP, which includes bapineuzumab). J&J will also get an Elan board seat.

J&J will ensconce those assets in a J&J Newco in which Elan will have a 49.9% stake. Importantly for Elan, the first $500 million in AIP expenses will be paid for by J&J: given Wyeth/Pfizer funds half of AIP's R&D cost that means $1 billion in expenses are racked up before Elan needs to spend another penny on bapi & co. After that, Elan and J&J split their half of the programs' costs and profits per the 51.1/49.9% structure in the J&J Newco (for which Elan will have two seats on a seven-seat board). The terms of the deal prohibit J&J from buying more Elan shares for five years.

Elan will pay off the lion's share of its debt (about 70% of it) and keep all its other programs, including its non-AIP Alzheimer's work. Elan CEO Kelly Martin emphasized on a call today announcing the deal that Elan would continue to invest heavily in R&D--in fact it would increase investment in certain situations.

Analysts on the Elan call were uniform in praising the deal. The market (so far) likes it too, with Elan shares up about 21% in early trading. Why not: J&J quickly and emphatically gets into an area where it had a stated significant interest (though at not an insignificant cost) and Elan gets out of a jam and keeps what could still be incredible upside, with a major hedge against ongoing risk. Though extremely promising, bapineuzumab has stumbled a little bit and is no sure-thing.

The deal's most intriguing wrinkle though is not what has been sorted out, but what hasn't. Elan and Wyeth's original April 2000 deal did not include specific provisions for a commercial strategy, details that the companies were scheduled to iron out in the second half of this year.

That responsibility will now fall to Pfizer and Johnson & Johnson, once their respective deals close later this year. Now there's a negotiation we bet will be very interesting.

image from flickr user andi used under a creative commons license

No comments: