* Mylan, Allergan, Endo, Forest considering bids-sources
* Partnership with Royalty is possible, but complex
By Jessica Toonkel
NEW YORK, June 27 The game may not yet be over for U.S investment firm Royalty Pharma in its months-long pursuit of Elan Corp.
The Irish drugmaker earlier this month rejected a hostile bid by Royalty worth up to $8 billion. Instead, it put itself up for sale and is in early discussions with several mid-size drugmakers to find a rival buyer..
Mylan Inc, Allergan Inc, Endo Health Solutions Inc and Forest Laboratories Inc are among pharmaceutical companies that have shown preliminary interest in bidding for Elan, according to several people familiar with the matter who wished to remain anonymous because they are not permitted to speak to the media.
While all the companies are primarily interested in Elan for the tax savings that come from being domiciled in Ireland, Elan's lack of drug pipeline and high price tag make it a long shot that any bid will materialize, the sources cautioned.
If no rival offer emerges, Elan's stock could fall back to where it was before Royalty made its first offer in February. Elan's shares in New York, which traded slightly above $10 per share right before Royalty's offer, have risen to around $14 a share on expectations of a takeover.
Royalty, which is not currently participating in the sale process but is nevertheless watching the situation closely, could then get a second shot at buying the company.
Representatives from Allergan, Mylan, Forest and Endo declined to comment. Royalty and Elan declined to comment.
When Elan announced on June 14 it was putting itself up for sale, it invited Royalty to participate in the bidding.
Under Irish takeover laws, Royalty is not allowed to submit another hostile bid for Elan for the next 12 months. The only way it can buy Elan is by entering the sales process or if another bidder approaches it about a partnership. So far Royalty Pharma has not agreed to enter the bidding, two sources familiar with Royalty said.
Some Elan shareholders have raised the possibility that a partnership between Royalty Pharma and another bidder could be a good option, albeit a complicated one.
They suggest that one of the industry buyers could acquire Elan and sell a portion of the royalties on the drugmaker's multiple sclerosis drug Tysabri to Royalty Pharma.
With such a deal, Royalty would get what it has wanted all along - the Tysabri royalties. The industry buyer would get a lower tax rate, and Elan would get a better price for the company.
No such discussions have taken place, although Royalty Pharma would be open to a partnership, the sources familiar with the firm said.
"The story is how is Royalty going to play its poker hand," said one industry banker who is not involved in the situation and wished to remain anonymous because he is not permitted to speak to the media. "Do they wait till the very end and put all their chips on the table? Or do they do it earlier?"
Structuring a partnership whereby Royalty would receive a portion of the Tysabri royalties and a separate bidder would get the tax break would be tough to do.
First, under the terms of the sales process, Elan is precluding any bidders from partnering up, meaning that a bidder that wanted to team up with Royalty Pharma would need to renegotiate that restriction with Elan, according to one of the sources with knowledge of the matter.
Regulators have also set up rules to prevent companies from making acquisitions just to lower their tax rates. For the acquirer to take advantage of the 12.5 percent corporate tax rate in Ireland, the newly combined company would to have sufficient business activities in Ireland and the original Elan shareholders would have to own at least 20 percent of shares of the merged company.
"If regulators get the sense that a company is buying Elan just for the tax break, they will scrap the deal," said one of the sources.
Royalty Pharma may still win the day if no rival bids emerge. Elan shareholders then could press Elan to go back to Royalty, or Royalty could enter the bidding at the last minute.
"I think at the end of the day there is a high likelihood this goes to Royalty Pharma," the industry banker said.