UPDATE 2-US judge finds Elan breached pact with Biogen

* Elan has until Sept 26 to provide remedy

* Control of multiple sclerosis drug at issue

* Elan had struck Tysabri option deal with J&J

* Shares of Elan fall in after-hours trade (Adds analyst comment, company reaction, further background)

By Grant McCool

NEW YORK, Sept 3 (Reuters) - Irish drugmaker Elan Corp PLC (ELN.I) (ELN.N) breached a collaboration agreement with Biogen Idec Inc (BIIB.O) for the multiple sclerosis drug Tysabri in making a deal with Johnson & Johnson (JNJ.N), a U.S. judge ruled on Thursday.

Manhattan federal court judge Deborah Batts said Elan has until Sept. 26 to repair the breach in the contract.

Pharmaceutical giant J&J had received an option to give debt-ridden Elan the money to acquire Biogen's share of Tysabri if Biogen were bought. J&J would thus become Elan's partner.

Biogen's lawyer Michael Gruenglas argued in court on Thursday that Elan had given up rights in breach of its 50-50 partnership with Biogen and "is no longer in the driver's seat, Johnson & Johnson is driving the car."

Gruenglas was persistently questioned by the judge, but ultimately won the day.

"It appears to the court that Elan has designated an obligation it has to Johnson & Johnson by taking direction from Johnson & Johnson on the purchase price negotiations," Batts said in a ruling from the bench after five hours of arguments.

She said Biogen "is within its rights" to give Elan "the opportunity to cure that breach." Elan "has 23 days to fix that problem" she said.

Tysabri is Biogen's most important growth driver, on track to generate $1 billion in sales this year.

One analyst said the ruling was a blow to Elan.

"Presumably it opens the door to Biogen more explicitly negotiating for the balance of Tysabri," said Geoffrey Porges, analyst with Sanford Bernstein.

"Additionally, if a bidder or interested party in Biogen has been in the wings they may see this as an opportunity as well. I would certainly expect Biogen's stock to react favorably, if only temporarily."

Biogen's stock was unchanged in after-hours trading Thursday. Elan's shares fell 6.4 percent to $6.88 from their $7.35 close on the New York Stock Exchange.

ELAN'S J&J DEAL

J&J agreed recently to pay $1 billion for an 18.4 percent stake in Elan and $500 million for a majority stake in Elan's pipeline of experimental Alzheimer's disease drugs. It also received an option to acquire a half share in the blockbuster multiple sclerosis drug Tysabri.

Elan said last month that it had received a letter from Biogen dated July 28, alleging Elan was in material breach of a collaboration agreement between the two companies.

Under their partnership, Biogen and Elan each has the right to acquire the other's share of Tysabri should there be a change of control at either company. Neither is allowed to assign that right to a third party without permission.

Biogen claimed Elan had breached the partnership by entering a "strategic financing agreement" with J&J.

Elan sued Biogen in August seeking declaratory and injunctive relief and asking the judge to enter judgment against Biogen permanently preventing it from terminating the collaboration agreement.

Biogen spokeswoman Naomi Aoki said that, assuming Elan resolves the breach, "we look forward to continuing to work with them to bring Tysabri to MS patients."

Elan said it respected the court's decision. "We are committed to working with JNJ to close the transaction as quickly as possible, consistent with the Biogen-Elan Tysabri Collaboration Agreement," the company said in a statement.

The case is Elan Pharma International Limited v. Biogen, Inc 09-cv-06928 in U.S. District Court for the Southern District of New York (Manhattan) (Additional reporting by Bill Berkrot and Toni Clarke; Editing by Tim Dobbyn)