Elan Hives Off Prothena

Elan Corporation, plc ( ELN - Snapshot Report ) , a neuroscience-based biotechnology company, recently completed the separation of a significant part of its drug discovery business (the Prothena business). Following the completion of the demerger, the erstwhile Prothena unit of Elan has started operating as an independent, publicly traded entity. The new entity, known as Prothena Corporation plc ( PRTA ) , is headquartered in Ireland.

Following the completion of the demerger, the stockholders at Elan on December 14, 2012 (the record date) have received an ordinary share of Prothena for every 41 ordinary shares or American Depositary Shares (ADSs) of Elan owned by them. We note that 1 ADS = 1 share.

Moreover, a wholly owned subsidiary of Elan had subscribed to Prothena shares worth $26 million. They received 18% of Prothena shares (calculated immediately after the subscription was made). Furthermore, the shareholders at Elan directly own 82% of Prothena.

We remind investors that in September 2011, Elan had sold its drug delivery unit - Elan Drug Technologies - to Alkermes ( ALKS - Analyst Report ) for approximately $1 billion. The merged entity, headquartered in Dublin, Ireland, is known as Alkermes plc.

Per the agreement, Elan received $500 million in cash apart from 31.9 million of Alkermes’ ordinary shares. Elan received a 25% stake in the combined company.

In March 2012, Elan sold 24.15 million shares, or 76% of its stake in Alkermes. Excluding underwriting fees, Elan recorded net proceeds of approximately $381 million from this transaction. Elan retained the remaining 7.75 million Alkermes shares due to certain legal and contractual transfer restrictions.

We currently have a Neutral recommendation on Elan. The stock carries a Zacks #3 Rank (Hold) in the short run. Pharma stocks that currently look better-positioned include Valeant Pharma ( VRX - Snapshot Report ) . Valeant Pharma carries a Zacks #1 Rank (Strong Buy).