Monday, September 14, 2009

Elan and J&J: We Can Work It Out?

Call it Elan's $100 million miscalculation. That figure could be the difference between the deal announced July 2 by Elan Corp. and Johnson & Johnson and the new terms of the deal that the companies could announce at any time, according to reports this weekend in the Wall Street Journal and Reuters.

The companies have to renegotiate their $1.5 billion pact, which gives J&J 18.4% of Elan and slight majority control over Elan's Alzheimer's disease programs, because a federal judge ruled Sept. 3 that a component of the deal violated a longstanding contract between Elan and Biogen Idec. Elan didn't even disclose the component for three weeks because its outside counsel Charles Gilman of Cahill, Gordon & Reindel didn't think it was material. That's what he told the court Sept. 3.

Biogen wasn't amused. Soon after the side deal came to light in late July, it accused Elan of breach of contract. The companies have been development and marketing partners for nearly a decade on Tysabri, a multiple sclerosis drug that has slowly gained the trust of patients and doctors after it was taken off the shelf for a year soon after its late 2004 launch. Tysabri recently hit $480 million in half-year sales, though analysts are split how much larger its market will grow, due to its continued link to a rare but deadly brain infection.

The Journal reported J&J wants to shave at least $100 million from the equity portion of the Elan deal, with the $500 million committed to the Alzheimer's development to remain unchanged.

The difference is a pittance to J&J, but Elan has tabbed the cash from J&J's equity purchase to pay down debt. It had $1.8 billion in long-term debt at the half-year mark.

After browbeating Biogen's lawyer throughout the hearing, Judge Deborah Batts ruled in his favor, setting off choruses in our heads, if not in the courtroom itself, of "Cruel to Be Kind." She ordered Elan to fix the breach of contract by Sept. 26 or risk losing to Biogen its half of the Tysabri rights. The breach centered on Elan giving J&J the right to finance a buyout of Biogen's half of Tysabri, if and when Biogen is ever the subject of a change of control.

Over Elan's objections, the judge ruled the financing right was, in legal terms, an "assignment of rights" -- Elan handing its power in the Tysabri relationship to J&J without Biogen's consent. The case came down to this: Where there's money, there's power. Elan said J&J's money -- its option to help finance a future buyout -- was merely a banking relationship and didn't give it power until the money was in Elan's hands. Biogen said no, that money is power even before changing hands, and the judge agreed.

Speaking of "Money," we wonder if Pink Floyd's version ever made the in-flight rotation on the private company planes that raised so much investor ire. I think I need a lear jet, indeed.

For those who want to parse the legalese, the case turned on the phrase "the sole discretion of the non-acquired party." That phrase is in the Biogen-Elan contract, written up in 2000. If either partner is ever bought out, the other -- the "non-acquired party" -- must decide whether to enter negotiations to buy out the Tysabri rights from the acquired party. The judge said J&J's financing option shifted that discretion to J&J, and she pointed to language in the Elan-J&J agreement to make her ruling.

The agreement, still under seal but quoted extensively in the Sept. 3 hearing, said that once Biogen is subject to change of control, Elan must take up negotiations for Tysabri "in a manner directed by J&J." Elan would sit at the negotiating table, but J&J would whisper in its ear. Or, in the words of Biogen outside counsel Michael Gruenglas of Skadden, Arps, Meagher & Flom of New York on Sept. 3, "In section 2B it says that, starting in the second line, J&J shall give written notice to Elan either instructing Elan to exercise the Elan right and to undertake the [negotiating] process provided for in [the Biogen-Elan contract]. Elan's not in the driver's seat. They're not even in the car." Beep-beep, beep-beep, yeah!

Elan counsel Gilman pointed to wording in the J&J-Elan contract that guaranteed Elan would keep all its rights, but the judge, in one of the rare instances she challenged Gilman during the hearing, shot back that just because it says so in the contract doesn't mean it's true.
J&J can walk away from the entire Elan deal by Tuesday, Sept. 15, so the clock is ticking.

If indeed Elan and J&J renegotiate their contract to eliminate the offending financing option -- or more specifically the apparent power over Tysabri rights the option seems to give J&J -- the next question is whether Biogen will approve it or go for the throat. Bet on the former: Gruenglas in court said more than once that Biogen doesn't want to grab Elan's Tysabri rights, it only wants Elan to "cure" the breach. Though take note: More than once in this case things have not been as they seem. That certainly sounds like a song waiting to be written.

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