* J&J buys 18.4 pct stake in Elan for $1 bln
* U.S. group takes over interest in Alzheimer's program
* Relationship with Wyeth to continue
* Elan shares rise 8.6 pct; J&J falls 1.9 pct (Adds J&J, analyst comments; updates share prices)
By Toni Clarke
BOSTON, July 2 (Reuters) - Johnson & Johnson (JNJ.N) has agreed to pay $1 billion for an 18.4 percent stake in Irish drugmaker Elan Corp ELN.I, and will acquire a major stake in Elan's portfolio of experimental drugs to treat Alzheimer's disease.
The transaction, announced on Thursday, will, among other things, give J&J a 25 percent interest in a closely watched Alzheimer's drug called bapineuzumab, which Elan is developing in a 50-50 partnership with Wyeth. Wyeth is being acquired by Pfizer Inc (PFE.N).
The agreement caps a lengthy battle between Elan and some of its largest shareholders, who had called on Elan to shake up its board, streamline operations and tighten what they considered lax corporate governance.
Last month, the company agreed to nominate two dissidents to its board, including Jack Schuler, a shareholder who publicly called for the resignation of Elan's chief executive, Kelly Martin.
As a potential board member, Schuler declined to discuss the J&J transaction, but another of Elan's previous critics welcomed it.
"We are encouraged by this deal," said Matt Strobeck, partner at Westfield Capital Management Co, which holds 18.8 million Elan shares. "Now not only is the balance sheet strengthened but we believe the board has been dramatically improved."
Elan said it plans to use the new funds to cut its debt by 70 percent to about $400 million. Moody's Investors Service said it has placed Elan's ratings under review for a possible upgrade.
"The transaction is expected to have a very favorable impact on Elan's capital structure and liquidity profile," said Moody's Senior Vice President Michael Levesque.
On the New York Stock Exchange on Thursday, Elan ELN.N closed up 8.6 percent at $7.60 and J&J fell 1.9 percent to $55.98.
For New Brunswick, New Jersey-based J&J, the deal represents a leap into a therapeutic area in which it has only a limited presence.
J&J sells Reminyl, which is in the same class of medicines as Pfizer Inc's best-selling Aricept treatment for Alzheimer's disease. But the drugs, which block an enzyme called acetylcholinesterase, only slightly improve cognition and for a very brief period.
Combined U.S. sales of all Alzheimer's drugs rose to $3.4 billion last year, according to market research firm IMS Health, but analysts believe revenue could explode if new medicines can appreciably slow damage to the brain and memory.
"J&J has a much better chance to make bapineuzumab successful than Elan because it has the resources to conduct trials and distribute it," said David Katz of asset manager Matrix Asset Advisors. "And from a patient perspective, to have J&J involved is a good thing."
But the bet on bapineuzumab is risky.
Some analysts have all but written the drug off after a mid-stage trial showed that while it helped some patients with a certain genetic profile, it raised the risk of potentially serious side effects in the brain.
For J&J, which sells an array of products ranging from Band-Aids to arthritis drug Remicade, the potential warrants the risk.
"The fact that this drug may have potential to delay disease progression, we believe is significant," said company spokesman Srikant Ramaswami.
Elan and Wyeth remain committed to the drug, which is Elan's most advanced product. But under the transaction with J&J, Elan will receive 25 percent of any profit instead of the 50 percent it would have received previously.
That is because J&J and Elan plan to form a new company, which will be 50.1 percent owned by J&J and 49.9 percent owned by Elan. J&J will contribute an initial $500 million to the venture. Elan will contribute its Alzheimer's immunotherapy program.
"Elan loses control of one of its babies but they have a stake in it once it gets to market so they will get their due returns for the work they have put in," said Ian Hunter, an analyst with Dublin-based Goodbody Stockbrokers.
Elan said the new entity will be governed by a seven-person board. Five members will come from J&J.
As many as 5 million Americans are believed to have Alzheimer's disease, a progressive neurological condition associated with aging.
The deal adds to Elan's complicated series of partnerships. Its main product is the multiple sclerosis drug Tysabri, which it markets together with U.S. biotechnology company Biogen Idec Inc (BIIB.O).
Elan said it has no intention of selling any part of Tysabri. Naomi Aoki, a spokeswoman for Biogen, said J&J's entry will make no difference to its partnership with Elan.
J&J said the transaction would dilute its adjusted earnings in 2009 by between 2 and 3 cents a share.
Elan said it will update its financial guidance on its next earnings call, but it expects to be profitable on a pretax basis by the end of 2010. (Reporting by Toni Clarke; Additional reporting by Ben Hirschler, Carmel Crimmins, Lewis Krauskopf, Ransdell Pierson and Jessica Hall; Editing by Maureen Bavdek, Richard Chang, Tim Dobbyn)