Elan sinks deeper as it seeks to revise J&J deal

BOSTON (Reuters) - Elan Corp Plc (ELN.I) and Johnson & Johnson (JNJ.N) are widely expected to renegotiate a $1.5 billion deal after a court ruled the agreement breached a partnership between Elan and Biogen Idec Inc (BIIB.O).

But any renegotiation that lowers the price of the deal could make Elan vulnerable to charges it breached its fiduciary duty to shareholders, potentially opening the door to lawsuits and new pressure on Elan CEO Kelly Martin to resign.

J&J agreed in July to pay $1 billion for an 18.4 percent stake Elan and $500 million for a majority stake in its pipeline of experimental Alzheimer's drugs. It seemed like the answer to Elan's prayers.

The Irish drugmaker, which has been lambasted by some shareholders for its spending habits and what they perceive to be lax corporate oversight, said it would use funds from the deal to reduce its debt 70 percent to $400 million.

Now it may not be able to do that.

"We expect Elan and J&J to hastily renegotiate the terms of the recent agreement, with Elan effectively returning part of the cash that J&J paid them," said Geoffrey Porges, an analyst at Sanford Bernstein.

On Thursday, a U.S. judge ruled that the deal -- which has not yet closed -- breaches Elan's 50-50 partnership to sell multiple sclerosis drug Tysabri with Biogen, a Cambridge, Massachusetts-based biotech company whose shareholders include billionaire investor Carl Icahn.

The ruling also amounts to a black eye for J&J, a healthcare behemoth with a reputation for tough, cost- conscious negotiations. The deal would have given J&J an advantage over anyone seeking to acquire Biogen.

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 from the other.

Yet Elan and J&J secretly agreed that, if Biogen were to be acquired, J&J would provide the funding for Elan to acquire Biogen's share of Tysabri. J&J would then become Elan's partner and own 50 percent of Tysabri.

Tysabri is a key growth driver for both companies, with sales set to reach more than $1 billion this year.

When news of this agreement leaked out, Biogen claimed Elan illegally transferred its right to acquire Biogen's share of Tysabri to J&J.

Elan countered it was not transferring its right, merely exercising prudence in lining up funding for Tysabri should Biogen be sold.

On Thursday, however, a U.S. judge ruled that Elan was in breach of the agreement and ordered the company to fix the breach by September 26 or lose its share of Tysabri sales.

The news is another blow to Kelly Martin, who has been roundly criticized by some investors for excessive spending on offices and private jet contracts at a time the company was steeped in debt. Some even called for his resignation.

The company's stock has fallen 44 percent to $7.30 from its 52-week high and some see the latest setback as further evidence Martin should go.

"This is reckless behavior on the part of Elan's CEO," said Matt Strobeck, partner at Westfield Capital Management, which is Elan's fourth biggest shareholder. "He failed to disclose material information; he purposely violated an agreement in order to get the deal done; and by violating the agreement, he risked losing the company's main product."

A spokeswoman for Elan did not respond to an email request seeking comment.

A J&J spokesman said the companies are working toward closing a deal that does not breach Elan's partnership with Biogen.

If J&J offers a lower price, the new agreement could reveal the value J&J placed on its Tysabri option, something Elan tried to play down.

"I am assuming the financing option on Tysabri had factored into the price agreed initially," said Steven Silver, an analyst at Standard & Poor's.

If that value is revealed, Elan could find it has some explaining to do.

(Reporting by Toni Clarke; editing by Andre Grenon)