So over the past 4 years, annual sales have increased by 51%. This is equivalent to a 14.5% annual increase in sales. Based on the past growth, we can take a conservative 11% annual growth expectation. If sales grow at annual 11% rate over the next 8 years, we can expect Tysabri’s annual sales to top $3.68 billion in 2020. At that point, Biogen would need to pay a royalty to Elan of $780 million ($360 million on the first $2 billion in sales and $420 million on the next $1.68 billion in sales). Even if sales are flat from 2020 on, 10 years of having to make that royalty payment would equate to $7.8 billion. Based on Elan’s current amount of shares outstanding (511 million), that would mean a share price of $15.25. Additionally, because Elan has a major presence in Europe, Biogen may view this as an opportunity to gain global market share. Biogen analysts are likely crunching the numbers right now in order to determine fair value of Elan. One thing is certain–fair value is certainly higher than the current share price of $13.70.
Risks
The risks ofinvesting in Elan Corporation, plc (ADR) (NYSE:ELN) are substantial. Before the first Royalty Pharma bid, Elan was trading at approximately $10 per share. Given that the share price has increased by 37% over the past 4 months, investors face substantial risk of investing at these levels. If no deal materializes, the share price is likely to fall back below $11 and possibly all the way back to $10. It is also possible that Royalty could come back with a deal offer similar to the one that just expired. If no other bidder were to step up, it is likely the share price would trade closer to $13 causing new investors to lose some of their investment. Additionally, there is likely to be extreme volatility depending on day to day news announcements on the status of the sales process.
Conclusion
Based on the above analysis, it seems logical that a higher takeout offer is forthcoming. Elan Corporation, plc (ADR) (NYSE:ELN) has a lot going for it, including a strong international presence, increasing royalties from Tysabri sales, and a management team that now seems willing to sell at the right price. Despite the risks of investing at these levels, I view this as a limited risk/high reward scenario.
The article Elan Likely To Receive Higher Takeout Bids originally appeared on Fool.com and is written by Ted Mayer.
Ted Mayer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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