Why Elan Corporation, plc (ELN) Cut Its Ties To Tysabri

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Elan Corporation, plc (NYSE:ELN) just announced a restructuring of its Tysabri collaboration with Biogen Idec Inc. (NASDAQ:BIIB) going from a 50/50 collaboration to an upfront payment of $3.25 billion, and a double digit tiered royalty structure for the complete assets.

Under the terms of the deal, Elan receives a royalty payment of 12% of Tysabri’s global net sales for the first 12 months, and it then gets a tiered royalty structure after a year. Biogen gets full ownership and control of Tysabri.

Elan Corporation, plc (ADR) (NYSE:ELN)

Billed as a “tax efficient transaction,” and “one that provides a simplified structure enabling improved alignment of therapy to patients,” the deal also provides Elan with capital and long term cash flow for investment growth and business diversification.

Elan CEO Kelly Martin said the deal provides shareholders with an immediate return from Tysabri as well as long-term participations on the success of the product through the royalty agreement. Furthermore, it reduces risk.

While it all sounds like a win-win for Elan, shares of the Dublin, Ireland based pharmaceutical company slumped more than 8% on the news, as Biogen enjoyed a better than 2% gain. The action left some scratching their heads and asking why, especially after credit rating firm Moody’s called the deal a “credit negative” for Biogen.

Tysabri is used to treat multiple sclerosis and Crohn’s disease. It is said to work by reducing the ability of inflammatory cells to attach and pass through the body. It is administered intravenously every 28 days. Sales of the drug were some $1.1 billion in 2012.

The drug received FDA approval in 2004. It was subsequently withdrawn after it was linked to a rare neurological brain condition called PML. It returned to the market two years later after a safety review and no further PML linked fatalities. However since its return, some 31 cases of PML have been linked to Tysabri.  But the drug remains on the market (with a high-risk label) because its benefits are believed to outweigh its risks. Many doctors and patients maintain it is the most effective MS treatment currently on the market. In Europe, the drug is only approved to treat MS.

As Elan unburdens itself from risks associated with Tysabri, it still stands to be rewarded from sales of the blockbuster drug.

But could there be an ulterior motive behind Biogen’s move? The company recently announced its longer-lasting, in-trial, injectable MS drug, peginterferon beta-la, helped reduce patients risk of relapse by 36% when administered every two weeks, meeting study goals. Side effects were minimal and included redness at the sight of injection and flu like symptoms.

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