Royalty's sweetened offer puts pressure on Elan board

DUBLIN/NEW YORK Mon Apr 15, 2013 4:26pm BST

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DUBLIN/NEW YORK (Reuters) - Royalty Pharma's ROYPH.UL sweetened bid for Irish drugmaker Elan ELN.I heaps pressure on Elan's management to open its books to the U.S. investment firm in the hope of a better offer, analysts and shareholders said on Monday.

Royalty made its formal cash offer worth up to $7.3 billion (4.76 billion pounds), or $12 a share, ahead of a May 10 deadline for a firm bid, improving on an initial approach worth $11 per share that was rejected by Elan in February for being "highly conditional".

The New York-based company, targeting royalty rights for multiple sclerosis (MS) treatment Tysabri worth hundreds of millions of dollars annually, said the offer may fall below $12 depending on Elan's pricing of a share buyback this week.

Elan wants to reinvent itself through a series of acquisitions and reward shareholders with cash after selling its 50 percent interest in Tysabri for $3.

The company, in which U.S. group Johnson & Johnson (JNJ.N) holds an 18 percent stake, secured strong approval from shareholders last week for the $1 billion buyback priced at between $11.25 and $13 a share.

However, Elan has little track record in making acquisitions and Royalty has questioned its ability to pull off such a plan.

Elan's share price, hit hard last year when its main experimental drug hope failed, rose by almost 10 percent to $10.30 after it unveiled its disposal plan but has been pushed 16 percent higher by Royalty's offer.

Royalty urged shareholders, many of whom it has met in recent weeks, to pressure Elan's board to accept its bid.

"I think it's a good start," said Elan investor Matt Strobeck, a former partner at Boston-based Westfield Capital Management Co., who met with Royalty Pharma executives in March.

"Elan's board should now open up its books to Royalty Pharma so they can justify why they think the company should get a higher price... The board would be breaching its fiduciary duty to shareholders if it does not allow Royalty to examine its financials."

No one at Elan was immediately available to comment.

"A FAIR PRICE"

The Dublin-based company, left with just one experimental drug in its pipeline following the Tysabri deal, improved the terms of its own plan last month by offering shareholders up to 20 percent of future royalties from the blockbuster MS drug.

However, Royalty could also factor in Tysabri's future performance via a contingent value right (CVR) that would reward Elan's current shareholders should Tysabri hit certain sales milestones, two people familiar with the matter told Reuters last week.

Royalty's Chief Executive Pablo Legorreta told reporters on Monday that its offer did not include a CVR, but that the company reserved the right to include one.

Strobeck, who has sold most of his personal stake but still owns some shares in custodian accounts, said he would tender at $12 with a CVR or some kind of similar structure. He declined to say how many Elan shares he sold or still owns.

The value of Royalty's bid will fall depending on the result of the buyback and could return to $11 per share if the strike price at an auction for repurchasing the stock is between $12.25 and $13 a share.

Shareholders should "send a message to the Elan board" by tendering all of their stock at $11.75 or $12 and fully benefit from Royalty's $12 offer, the company said.

Elan's shares ELN.N, which closed at $12.01 in New York on Friday, fell a touch to $11.98 after the announcement on Monday. Its shares on the Dublin market were up 1 percent at 9.09 euros ($11.91) at 1535 BST.

"I think it's a fair price for the assets as they stand. Investors have a straight choice: Do they take the cash today or do they believe in management's ability to execute accretive acquisitions," said Deutsche Bank analyst Richard Parkes.

Royalty Pharma said it would finance the offer through existing resources and new credit facilities. Its advisers are J.P. Morgan (JPM.N), BofA Merrill Lynch (BAC.N) and Groton Partners.

Citi and Ondra Partners acted as financial advisors to Elan on its recent Tysabri deal, while Cadwalader, Wickersham & Taft and A&L Goodbody were legal counsel.

(Additional reporting by Martinne Geller in New York and Conor Humphries in Dublin; Editing by Tom Pfeiffer)

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