$6.6 bln won’t be enough to end Elan’s rash dreams
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Royalty Pharmaâs $6.6 billion indicative offer for Elan probably wonât be enough to end the latterâs ambitious dreams. The biotechnology company has grand M&A plans after selling most of the rights to its blockbuster drug, Tysabri, for $3.25 billion earlier this month. Royalty Pharma may well use that cash more wisely than Elanâs current bosses, but a 4 percent premium wonât seal the deal.
Elan sold most of its interest in Tysabri, a multiple sclerosis treatment, to partner Biogen Idec for a big slug of cash and 12 percent of next yearâs sales. The royalty could increase to as much as 25 percent if Tysabri brings in more than $2 billion a year. As a result, Elan is now primarily a cash-rich royalty machine rather than a drug producer.
The danger with this kind of cash shell is that management pursues value-destructive deals, overpays itself for doing relatively little, or both. Elanâs decision to buy back $1 billion of stock, which coincided with Royalty Pharmaâs approach last week, reduces this risk somewhat as does its plan to refinance $600 million of debt. But all that will still leave the company with close to $2 billion to spend buying other assets. Elanâs Irish jurisdiction offers tax advantages, but there are plenty of other pharmaceutical companies with lots of cash which could extract real operational synergies from such deals, increasing the risk Elan would have to overpay.
Royalty Pharma is a specialist at managing largely passive drug-related revenue. The new Elan would fit the bill, and snapping it up would remove any concern about profligate M&A. But the price isnât right. Royalty Pharma thinks its measly 4 percent premium to Fridayâs closing price is fair because so much of Elanâs value is in cash and the company sold Tysabri at a similar valuation. But acquirers pay big premiums for cash-rich companies all the time, and Elan sold its rights to its partner â the only credible buyer â on the cheap. Moreover, the deal increases the incentive for Biogen to sell Tysabri instead of other drugs, because Biogen now captures a greater share of the economic spoils.
With Elan set to receive a higher payout if Tysabri sales improve, it looks as though Royalty Pharma is trying to score a bargain. Investors seem to think it will have to pay more â Elanâs shares traded about 3 percent above the offer price on Monday afternoon. Elanâs dreams may be over-sized, but for now Royalty Pharmaâs alternative for the biotechâs shareholders is too scrawny.