dealREPORTER Says Biogen Unlikely To Buy Elan, Take-Out Premium To Unravel

Shares of Elan (NYSE:ELN) have been buoyed by two hopeful catalytic events, both of which appear to have gone away. As a result, this stock, which has nearly doubled in the last 18 months and carries a $6.8 billion market valuation, could be poised for a sharp fall. Hope that the company’s drug candidate bapineuzumab would become an important treatment for Alzheimer’s disease put momentum behind the shares. But recently, partner Pfizer reported that the compound showed no effect in two landmark Phase III trials, snuffing out that dream. More significant is speculation that Elan’s partner for its multiple sclerosis (MS) treatment, Tysabri, could acquire the company for the other half of the drug’s profits. That partner is Biogen Idec (NASDAQ:BIIB), which also awaits FDA approval for its next flagship product, BG-12, a revolutionary ORAL treatment for MS. BG-12 has demonstrated strong efficacy results in Phase III trials; is taken by mouth; and has a relatively favorable safety profile. Tysabri, on the other hand, is given by IV infusion and can have severe, even deadly side effects. So why would Biogen waste resources on ELN, when it could simply cannibalize Tysabri sales (50% economics to BIIB) with new sales of BG-12 (100% economics to BIIB)?  In fact, the dealREPORTER and its affiliate BioPharm Insight - well-known industry intelligence publications - just reported that an acquisition of ELN by BIIB is unlikely, given Biogen’s purported focus on the launch of BG-12. That story can be found here.

After the Phase III trial failures for bapineuzumab, many analysts revived the speculation of a deal between Biogen and Elan, keeping the price of ELN propped up. With BG-12 expected to come to market early next year, it is unlikely that any company, including BIIB, will step up to acquire ELN. This is especially true given that ELN is already trading at 5.7x sales (peak levels for larger revenue-generating biotech companies) and that sales could fall sharply if BG-12’s launch negatively impacts Tysabri’s base of patients.  Additionally, a “Change in Control” provision between BIIB and ELN for Tysabri may stand in the way of another company purchasing ELN in order to obtain the profits on Tysabri that BIIB does not own. With ELN shares fully valued, any upside in the stock is likely limited. Given the new information from the dealREPORTER, ELN shares may fall back into the single-digit range as take out speculation comes out of the stock and the risk of BG-12’s impact on Tysabri becomes factored in. Notably, the FDA is set to make a decision on the approval of BG-12 in late December, and as a result, investors and analysts are likely to become more focused on competitive changes in the MS treatment market as the end of the year approaches.

Bullish analysts expect Tysabri sales to grow by as much as 26% next year. If revenues for this key product flatten or decline, the expectation that ELN could become profitable next year is likely to disappear, along with the hope of a blockbuster Alzheimer’s treatment and/or an opportunity to make money on a sale of the company. At these levels, it appears that the potential risk to ELN far outweighs any potential reward, suggesting that investors who have ridden this stock up could take profits.