Thursday 17 October 2019

Dan White: Elan shareholders should take the Royalty money and run

Investors in the biotech firm have endured a rollercoaster ride but the annual meeting gives them a chance to force change, writes Dan White

Dan White

ELAN'S rejection of the latest hostile bid from Royalty as it seeks to construct a "poison pill" through a series of rushed acquisitions smacks of panic.

After Elan's mixed record of the past decade, shareholders should maybe take the Royalty money and run.

For investors in Elan, the past decade has resembled nothing but a rollercoaster ride. Back at the beginning of the past decade the shares lost over 98 per cent of their value on worries about the company's aggressive accounting policies. Since then the shares have twice collapsed in value. Even at the $12.50 (€9.60) (most trading in Elan shares takes place in New York and the company reports its results in dollars) now being offered by Royalty, the Elan share price is still only at one-fifth of its mid-2001 peak of more than $60.

Ever since it was first founded by Don Panoz in 1969, Elan has been the classic "jam tomorrow" company. For more than four decades a payday seemed to be just out of shareholders' grasp.

That all changed in February of this year when Elan agreed to sell its half-share of wonder-drug Tysabri to its partner Biogen for $3.25bn (€2.5bn) in cash. Suddenly it seemed as if Elan shareholders had finally hit the jackpot.

In fairness to the company it did quickly announce plans for a $1bn (€769m) share buyback, returning almost a third of the Tysabri sale proceeds to shareholders. But it is what Elan plans to do with the remainder of the Tysabri cash that should give shareholders cause for concern.

This month Elan has announced not one but three acquisitions which, if approved by shareholders, would see the company spend $1.38bn (€1.06bn). Elan has agreed to pay US company Therevance $1bn (€769m) for the royalties it receives from pharma giant GlaxoSmithKline for a number of respiratory drugs. It followed this up by agreeing to pay $340m (€263m) for Austrian drug company AOP Orphan and $40m (€31m) for a 48 per cent stake in Dubai-based NewBridge Pharmaceuticals.

Elan has also raised $850m (€654m) of debt.

And what is spurring this bout of intense activity by Elan? Could it possibly have anything to do with Royalty Pharma's hostile bid for Elan. Royalty unveiled its first hostile bid for Elan last month when it offered $11.25 per share, valuing the Irish company at $5.7bn (€4.38bn).

The initial Royalty bid was rejected by the Elan board, which claimed that it "substantially undervalued" the company . Royalty came back with a higher bid of $12.50 per share last week, valuing Elan at $6.4bn (€4.92bn). This higher bid has also been rejected by the Elan board.

Elan chairman Bob Ingram pulled no punches stating that: "The revised offer from Royalty Pharma continues to grossly undervalue our company's current business platform and our future prospects.

"This offer is no more than an opportunistic attempt to acquire our company at a substantial discount at our shareholders' expense. Put simply, for Royalty Pharma to win, you – our shareholders – must lose."

Unlike its previous offer, where it was seeking the approval of 90 per cent of Elan's shareholders, Royalty has stated that it is now seeking the approval of a simple majority of Elan shareholders. This further increases the pressure on the Elan board.

With the Elan share price of $12.36, just below the latest Royalty offer price, the market is signalling loud and clear its belief that the Royalty bid fairly values Elan and that another, higher, bid is unlikely. If, as the Elan board believes, there is a store of untapped value in the company, then the share price clearly doesn't reflect it.

While the transactions that have been announced by Elan may well be in the company's best long-term interests, am I alone in being concerned at the speed with which these deals were assembled after the initial Royalty bid?

If I were an Elan shareholder I would be worried that the Tysabri cash was burning a hole in the board's pocket – Royalty has argued that Elan "overpaid" for Therevance.

Far better, one would have thought, to make haste slowly. Instead, faced with the Royalty bid, Elan chief executive Kelly Martin seems determined to revert to his previous profession of investment banker. Will these rushed deals deliver long-term value to Elan shareholders or will they merely serve to block the Royalty bid in the short term?

By coincidence Elan's annual shareholders' meeting takes place on Thursday. This will give the company's owners the opportunity to make their views on the board's rejection of the Royalty bid clear.

With nine of Elan's 11 directors (including both Messrs Ingram and Martin) up for re-election, shareholders can force a change of direction at their company.

Irish Independent

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