Tuesday, December 08, 2009

2009 M&A/Alliances DOTY Nominee: J&J/Elan's 18% Solution

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger.
First up on our list of worthy candidates is a nominee for the M&A/Alliance category: Johnson & Johnson's July purchase of Elan's Alzheimer's immunotherapy program (AIP) via a stock purchase plan that gives the health care giant an 18.4% stake in the biotech.

Why is this interesting? For starters, the deal's complicated structure helps both J&J and Elan hedge against risk. In return for roughly $1 billion in capital (slightly less after Elan got into a tussle with BiogenIdec about a potential change of control to Tysabri), J&J is creating a new co focused on Alzheimer's immunotherapy, with a near-term focus on the interesting, but still very risky Phase III antibody bapineuzumab.

Elan benefits because it doesn't have to fork over all the upside to its Alz program, given the biotech retains a 49.9% stake in the newco and also has a 49.9% share in its profits or losses.

Elan also also gets significant help funding bapi's development with this deal. With J&J committing another $500 million to the antibody's Phase III trials that molecule will have to rack up $1 billion in costs before Elan has to pay another penny (Recall, Elan partner Wyeth (now Pfizer) pays the other half of the development costs.)

Most importantly Elan gets much needed capital to tackle the thorny issue of its ticking debt clock. Certainly a simple asset sale wouldn't have triggered the same boatload of money--with back-end loaded deals the preference, you can bet a significant amount of the cash tied to licensing bapi would hinge on FDA or EU approval, which is still years away. Thus, any other deal structure--except the whole-sale acquisition of Elan--would have left the biotech in need of cash to shore up its financial position.

But J&J would have had to fork over a lot more than $1.5 billion to take Elan in-house. And it would have ended up paying a pretty penny for additional infrastructure and programs it didn't really want. With this deal, J&J, which before this had only a modest R&D presence in Alzheimer's, brings an experienced group of some 70 development experts to a therapeutic area that it's pegged as being critical to its future. But by limiting the deal to AIP, J&J doesn't buy unwanted--and costly--excess capability. Moreover, given this newco (of which we still don't know the name) could easily be spun out of J&J, there's the potential for even more value creation not solely limited to bapineuzumab's success in the marketplace.

And should Elan's other Alz programs take off, that's okay, too. J&J's equity stake in the biotech means it will share in Elan's success, but as a financial investor, not as the owner of the technology.

Think of it as a new alternative to the Roche/Genentech structure. But because J&J is limiting its stake to 18%, it remains a minority shareholder so there aren't the thorny issues about board control and ownership that remained a constant source of friction for both Roche and Genentech.

The J&J biz dev team is clearly enamored with the clarity provided by The 18% Solution. Nearly three months after the J&J/Elan tie-up, the pharma cut a similar deal with Dutch player Crucell, taking an 18% stake in the company in exchange for building capacity in another hot therapeutic area: vaccines.

So why does J&J deserve the DOTY for the M&A/Alliance category? Because long before other Big Pharmas, J&J's realized that sometimes owning just a piece of the pie is more beneficial than paying too much for the whole thing. Mmm, pie.

Pie image courtesy of flickrer jacqueline-w used with permission through a creative commons license.

No comments: