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Elan's $1 billion drug royalty deal aids bid defense

By Padraic Halpin

DUBLIN (Reuters) - Irish drugmaker Elan Corporation has agreed a $1 billion royalties deal that could soothe concerns about its potentially risky acquisition strategy and fend off a takeover bid from Royalty Pharma.

Elan, battling to keep its independence after rejecting Royalty's $5.7 billion bid last month, is buying 21 percent of the royalties that U.S. company Theravance receives from GlaxoSmithKline (GSK) for its respiratory drugs.

The Irish company is seeking to diversify from its neurological focus after selling its 50 percent interest in multiple sclerosis treatment Tysabri to U.S. partner Biogen Idec in February for $3.25 billion plus royalty rights.

Royalty Pharma wants to add those rights, worth hundreds of millions of dollars, to its stable of royalty streams and has tried to unnerve Elan shareholders by questioning the company's lack of experience in pulling off big deals.

Elan Chief Executive Kelly Martin denied that Monday's deal was designed to frustrate Royalty's bid, but some analysts said the deal may allay fears among investors that Elan would make high-risk investments in drugs with significant costs attached.

"This (Theravance deal) was not done because of Royalty whatsoever," Martin told Reuters. "Royalty - to myself, to the board, to pretty much every shareholder that we can talk to, frankly - is utterly irrelevant.

"I can say unequivocally that I haven't spoken to one shareholder who thinks Royalty Pharma's offer is either credible or of any substance whatsoever."

Elan said that it has more deals in the pipeline and that it would give its shareholders a fifth of all royalties from the Theravance deal, matching the 20 percent dividend they are already set to receive through the royalty stream Elan maintains in Tysabri.

LATE-STAGE DEVELOPMENT

The shareholders, who have also been rewarded through Elan's $1 billion share buyback, have until May 31 to make up their minds on Royalty Pharma's $11.25-a-share bid. Royalty needs 90 percent of Elan shareholders to accept the bid.

Elan's shares closed at $11.78 in New York on Friday.

Monday's deal, part of which will be financed by an imminent bond issue, hands Elan a chunk of Theravance's interest in four drugs in late-stage development.

Among them is Breo, a new treatment for chronic obstructive pulmonary disease (COPD), which was approved by the U.S. Food and Drug Administration on Friday.

Anoro, a potentially more profitable COPD drug that Theravance is developing with GSK, is also part of the deal.

The U.S. regulatory approval of Breo, which will compete with GSK's $8 billion-a-year blockbuster Advair, will make Monday's deal earnings accretive from next year, Elan said.

Breo, which will branded Relvar outside the United States if it gains wider approval, is expected by analysts to generate annual sales of $559 million by 2015, Thomson Reuters data show. Anoro is expected to generate peak annual sales of nearly $1.4 billion.

Analysts were divided on the merits of the deal for Elan. UBS said that $1 billion seemed pricey, while Deutsche Bank said that it was difficult to see significant shareholder value being generated.

Berenberg Bank said that, as a pure royalty acquisition, the agreement put Elan on a more solid financial footing. Jefferies, meanwhile, said the stake in long-duration drug assets made it an impressive deal.

(Editing by David Goodman)

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