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Why Elan Corporation, plc (ADR) (ELN) Shouldn’t Take Royalty Pharma’s Sweetened Bid

After years of being plagued by a waning stock price, FDA regulatory issues and safety concerns over its blockbuster drug, its finally good to be Elan Corporation, plc (ADR) (NYSE:ELN).

Shunning a February $11 per share takeover bid from U.S. based pharmaceutical investment firm Royalty Pharma, Irish based Elan got a sweetened offer of up to $12 a share. The new deal values Elan at $7.3 billion, up from $6.55 billion.

But Elan Corporation, plc (ADR) (NYSE:ELN) probably won’t bite.

Elan Corporation, plc (ADR) (NYSE:ELN)With some $3.25 billion in cash burning a hole its pocket, received after Elan sold its rights to the highly successful multiple sclerosis drug Tysabri to partner Biogen Idec Inc. (NASDAQ:BIIB), Elan is suddenly a sought after acquisition. In addition to the upfront payment, Elan Corporation, plc (ADR) (NYSE:ELN) will continue to pad its pocket with a share of royalties from the drug.

Biogen Idec Inc. (NASDAQ:BIIB)’s motive for the hefty payment and future agreement was clear:it wants Tysabri all to itself. Last year, Tysabri sales amounted to $1.6 billion, up 8% from 2011. In additional to claiming sole ownership to Tysarbri, 2013 has already been good for Biogen Idec Inc. (NASDAQ:BIIB). The Weston, MA based company recently received FDA approval for its new multiple sclerosis treatment Tecfidera as a “first-line” treatment.

That means doctors can prescribe the drug for newly diagnosed MS patients and those already taking MS drugs. Analysts predict Tecfidera could potentially become one of the top-selling prescription drugs of all time by the end of the decade.

Elan’s future isn’t as clear. Who knows if it will be a stand-alone company 10 years from now. But its prospects looking interesting. Since the Tysabri sale and with no medicines in its pipeline, a slimmed down Elan has plenty of options.

Dublin headquartered Elan Corporation, plc (ADR) (NYSE:ELN) spun off Prothena Corporation PLC (NASDAQ:PRTA) late last year. A biotechnology company that focuses on the discovery and development of potential monoclonal antibodies directed specifically to disease causing proteins, the company posted a Q4 loss of $12.2 million, or 82 cents a share. That was more than the $9.6 million, or 66 cents a share loss in the same quarter a year ago. Operating costs, which surged to $12.8 million from $9.6 million, contributed to the loss. But on a bright note, revenue for the quarter surged to $575 million from $127 million a year ago. Elan still owns 18% of Prothena, but believes the two separated companies are worth more alone that together.

The question now is if Elan shareholders will stick together. The group did just back a $1 billion share repurchase plan by Elan. But according to Royalty Pharma, its new bid is “simply and highly compelling,” and was made after consulting with some 60% of Elan’s shareholders.

However, with more cash than almost every other specialty pharmaceutical company, and a continued share of Tysabri royalties (12% of Tysabri sales in the first year, 18% after that, and 25% when annual sales rise above $2 billion) other suitors are likely to call on the new svelte, but cash flush, Elan.

“Elan is going to go shopping with this significant cash inflow. It’s a lot of money,” Steven Silver a Standard & Poor’s analysts told Bloomberg.

Indeed, Elan Corporation, plc (ADR) (NYSE:ELN) can afford “to shop” itself.

If Royalty Pharma really wants Elan, they are going to have sweeten the pot much more.

Diane Alter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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