Friday, December 13, 2013

2013 M&A Of The Year Nominee: Biogen Idec/Elan's Tysabri Royalties

It's time for the IN VIVO Blog's Sixth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A of the Year, Alliance of the Year, and Financing of the Year. We'll supply the nominations (about a half dozen in each category throughout over the next week or so) 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™.

Elan’s move to sell its share of the Tysabri (natalizumab) royalty to long-time partner Biogen Idec was the ball that set the Rube Goldberg device in motion, precipitating its endgame and landing it on the 2013 shortlist for M&A deal of the year. Ultimately, this sale gave Elan the thing it needed to become appealing to virtually any acquirer – lots of cash.

The sanity of Elan management has come into question on a number of occasions over the last year; industry, analysts, shareholders and media all wondered at some point what Elan CEO Kelly Martin could possibly be thinking when he began selling off the company’s most valuable assets and starting inking deals for royalty streams. What didn’t become entirely apparent until the former spec pharma darling was bought out by Perrigo for $8.6 billion in late-July was that Martin was (on purpose, probably) turning Elan into a shell company with lots of cash and an incredibly desirable tax rate.

Elan’s transformation into the pile of cash in Ireland that Perrigo eventually bought was driven by the previous year's clinical failure. In 2012, its highly-anticipated Alzheimer’s drug bapineuzumab failed spectacularly in Phase III – showing no signs of efficacy over placebo. After the bombshell, Elan had little in any of its other programs that would make it worthwhile to an acquirer; reimagining the company would be the only way to return value to shareholders. (Had that drug succeeded, perhaps we'd be writing about another deal -- the acquisition of the company by one of its Big Pharma partners, Pfizer or -- 2009 DOTY nominee --  Johnson & Johnson?)

So Martin set out to make Elan worth something to anyone by selling off its tangible assets for lots of cash. The company quickly divested its 25% stake in Alkermes for $550 million and spun-out its drug discovery unit into an independent biotech, dubbed Prothena. But it was the Tysabri deal with Biogen that really gave Elan its flexibility.

In early-February, Elan announced that it was selling the majority piece of its 50% stake in the blockbuster multiple sclerosis drug, which brought in $1.6 billion in 2012 and is expected by the companies to grow by 15% in 2013. Biogen agreed to pay Elan $3.25 billion upfront, as well as royalties on all future sales of Tysabri – effectively ending the decade-long partnership.

The Irish company (now Perrigo) will receive 12% of sales for the first year; then, its royalty rate jumps to 18% on all sales under $2 billion and 25% on sales over $2 billion. Royalties will continue for the life of the product and will include all indications – the drug is currently approved in relapsing/remitting MS, but it is also being studied in secondary-progressive MS, and Biogen has indicated it may look into the drug as a treatment for stroke. The SPMS trial is expected to report out in 2015.

Some people questioned the wisdom of selling off the bulk of the Tysabri royalty, but for Elan to reach its goal of getting acquired it made the most sense. While the Tysabri royalty is lucrative, the 50% ownership of the drug meant that Elan played a major part in how the lifecycle of the drug was managed; this could be particularly unappealing to any company that doesn’t have a stake in the MS space, therefore limiting the number of companies that would be interested in acquiring Elan. Once Tysabri became simply a big chunk of cash and potential for more cash in the future with no strings attached, it became appealing to any company, whether they were a player in the MS market or not.

For Biogen, this deal was a no-brainer – the company has long been hoping to be the majority owner of one of its best-selling products. Tysabri fits right into the biotech’s sweet spot; it also owns the MS drugs Avonex (interferon beta-1a) and Tecfidera (dimethyl fumerate), which all together represent about 40% of the total MS market.

No comments: