UPDATE 2-Elan gives J&J potential option to buy Biogen MS stake

* J&J can finance Elan purchase of 50 pct Tysabri stake

* Deal contingent on change of control at Biogen

* J&J and Elan would enter fresh 50-50 collaboration

* Elan shares up 1.2 pct

(Adds analyst comment, update share price)

By Padraic Halpin

DUBLIN, July 21 (Reuters) - Ireland's Elan (ELN.I) said on Tuesday it gave U.S. healthcare conglomerate Johnson & Johnson (JNJ.N) the potential option to acquire Biogen Idec Inc's (BIIB.O) 50 percent stake in multiple sclerosis drug Tysabri.

The potential option is part of a recent deal in which J&J agreed to pay $1 billion for an 18.4 percent stake in Elan and $500 million for a majority stake in its pipeline of experimental Alzheimer's disease drugs.

Elan and Biogen, which is based in Cambridge, Massachusetts, have a 50-50 partnership under which each has the right to acquire full control of Tysabri should there be a change of control at either company.

But in the event of a change of control at Biogen, J&J can now choose to finance a possible Elan purchase of Biogen's rights to Tysabri, which is on track to make $1 billion a year.

"We have entered into an arrangement with Johnson & Johnson that would allow them to finance us to purchase the other 50 percent of Tysabri in the event that there was a change of control at Biogen," Elan Chief Financial Officer Shane Cooke told a news conference. "If J&J were to finance us to do that, then we would enter into a collaboration with J&J on a 50-50 basis," he said, adding that its change-of-control agreement with Biogen was unchanged.

GOOD PARTNER

Analysts said the arrangement, while hypothetical, gives Elan more control over the fate of Tysabri and takes an element of risk out of the partnership with Biogen.

"My initial reaction was 'what are they doing here' but it is really just covering their position," Ian Hunter, an analyst at Goodbody Stockbrokers said.

"They now know who their potential partner could be if anything happened at Biogen Idec. There's no uncertainty."

Dublin-based Elan confirmed the new agreement after Reuters learned of it from sources with knowledge of the $1.5 billion deal.[ID:nN20149879].

Elan, which beat expectations with a 14 percent rise in second-quarter revenues, said around 43,300 patients worldwide were on Tysabri therapy at the end of June.

Biogen and Elan originally predicted 100,000 patients would be taking Tysabri by the end of 2010. While they still expect to reach that figure, which would generate $2 billion to $3 billion a year, they don't expect to reach it within that timeframe.

"J&J would be a pretty good partner in the event that all these things triggered that particular situation," said Jack Gorman, an analyst at Davy brokerage.

"J&J would bring plenty of commercial clout, autoimmune and infusion expertise and, given they're a big pharma with biotech capability, presumably they'd also have manufacturing capability."

Elan shares were down 2.3 percent at 5.58 euros by 1545 GMT after jumping 9 percent on Monday following media reports that it may invest in a biologics operation in Ireland.

(Editing by Erica Billingham and Lin Noueihed)