Deal Modification for Elan, J&J

We believe the dispute between Elan Corp. (ELN - Snapshot Report) and its US partner Biogen Idec (BIIB - Analyst Report) over the multiple-sclerosis drug Tysabri has been resolved at last.

It started when Elan signed a deal with Johnson & Johnson (JNJ - Analyst Report) last July. But now, the two companies have amended this deal to drop the terms involving Tysabri.

J&J will now pay $885 million, down from the previously-announced $1 billion, for an 18.4% stake in Elan. However, J&J's $500 million investment for a majority stake in the Alzheimer's disease pipeline remains unchanged. Although Elan claimed that the new terms will restore its 'unintended breach' of contract with Biogen Idec related to Tysabri rights, we are yet to know whether its US partner has accepted this argument.

Biogen and Elan have a 50-50 partnership deal for Tysabri under which each has rights to acquire full control of the drug if there is any change in ownership at either company. Though neither is allowed to sell this right to a third party without consent of the other, Biogen claimed that Elan had violated this clause while tying up with J&J.

In its original deal with J&J, Elan had reportedly given the company an option to acquire its 50% stake in Tysabri in case of a change in ownership at Biogen. Biogen thus went to court to defend its Tysabri rights.

Earlier this month, a court ruled that although Elan's deal did not result in an assignment of rights to J&J, it did involve a breach of the company's contract with Biogen for Tysabri. Elan was given 23 days to correct the breach or lose its rights to the drug.

Failing this favorable ruling, Biogen would have been in a tight spot. Elan would have enjoyed a key role in any takeover deal involving Biogen as any interested buyer would have to discuss the Tysabri rights with Elan.

In our opinion, Biogen has the best pipeline in all of biotech and could be an attractive takeover candidate for pharma companies interested in biologics. We have a Neutral rating on the stock.

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