Biogen silence on J&J deal may presage legal storm

BOSTON (Reuters) - There has been radio silence from biotechnology company Biogen Idec Inc (BIIB.O) since Elan Corp Plc (ELN.I) and Johnson & Johnson (JNJ.N) announced a deal that many believe rules out any potential bidder for Biogen except J&J.

But with billionaire Carl Icahn's representatives on Biogen's board, it is inconceivable that the company won't challenge the legitimacy of the deal, no doubt through the courts and no doubt soon.

"I expect they are going to litigate this until they're blue in the face," said Larry Feinberg, who runs Oracle Investment Management Inc, a $1 billion healthcare hedge fund that owns Biogen shares. "Biogen can't just sit there."

Icahn's ultimate, though not necessarily short-term, goal is to engineer a sale of Biogen, which makes the multiple sclerosis drugs Avonex and Tysabri. But the best way to get a high premium is for there to be a competitive bidding process.

J&J's recent deal with Elan -- which includes an indirect route to an option on the Irish drugmaker's side of its 50-50 partnership with Biogen in marketing Tysabri -- means it has cleverly placed itself in a position in which it could bid for Biogen with little if any competition.

History indicates that companies sold when one bidder has already established a dominant position go for less than where there is competitive bidding.

For example, when Swiss drugmaker Roche Holding AG (ROG.VX) made its offer for the 44 percent of biotechnology company Genentech that it did not already own, its majority position was enough to deter any competing bids.

Its initial offer represented a premium of 8.8 percent and its final successful offer was at a premium of 16 percent.

Compare that with what Roche had to do to acquire the independent diagnostics company Ventana Medical Systems. After its initial bid was rejected it ended up paying a premium of 72.3 percent over Ventana's share price before Roche announced its initial offer.

Now, there is nothing to stop J&J making a hostile bid for Biogen, without fear of someone topping them, and therefore picking it up relatively cheap.

"This does suggest it reduces the value of Biogen by some billions," said Samuel Isaly, managing partner at OrbiMed Advisors, which holds 2.1 million shares of Biogen, 8.8 million shares of Elan, and 2.8 million shares of J&J. "It's a muddy situation but on balance I'm less happy."

J&J has agreed to pay $1 billion for an 18.4 percent stake in debt-ridden Elan and $500 million for a majority stake in Elan's pipeline of experimental Alzheimer's disease drugs.

It also gives J&J an option to acquire a half share in Tysabri, which is on track to generate $1 billion this year. That part of the deal, however, was not disclosed and only emerged after questions from reporters.

Elan markets Tysabri in a 50-50 partnership with Biogen. Under the terms of their contract, each has the right to acquire full control of Tysabri should there be a change of control at either company.

Neither company has the right to assign the other's share of Tysabri to a third party without permission, though that permission cannot be unreasonably withheld.

J&J and Elan have attempted to circumvent that clause. Instead of directly assigning J&J its right to Biogen's share of Tysabri, Elan has given J&J an option to finance Elan's acquisition of Biogen's share in the event of a change of control at Biogen.

Some lawyers think the chances of Biogen successfully challenging that agreement are slim.

"If they haven't assigned the right they haven't assigned it," said Morton Pierce, head of global mergers and acquisitions at the law firm Dewey & LeBoeuf LLP, who was not involved with the agreement. "If the contract is ambiguous in any way you can look at a party's intentions, but this language is typical in an assignment clause and it doesn't sound to me that the parties have violated it."

But given the ability of lawyers to minutely analyze the simplest of sentences, Biogen could potentially drag out the closing of the deal until it comes up with a better option.

If the deal holds, however, J&J will be in the pink.

"What J&J has the ability to do is wait out the risk tolerance of Biogen's investors," said Mike McCully, a senior analyst at Deloitte Recap LLC, a pharmaceutical and biotech advisory company. "It's a very high stakes chess game that is going on."

(Reporting by Toni Clarke; Editing by Gary Hill)