PHILADELPHIA The issue of "control" has become a controversial topic in the biotechnology industry as a web of partnerships and joint ventures has complicated several merger negotiations.
Bristol-Myers Squibb Co (BMY.N) had been in talks to buy a minority stake in Irish biotechnology company Elan Corp ELN.I, but debates over the value of buying a non-controlling portion of the company scuttled discussions, sources previously told Reuters.
Due to two partnership agreements, Elan cannot sell itself outright or sell a majority stake without losing rights to its two most lucrative products.
That makes it less attractive for a would-be suitor to pay a hefty price for only a small portion of Elan that gives it no control over the asset.
"In general, it's hard to justify a value if you don't have certainty of what you're getting and don't have the ability to fully make the most of what you're buying," said one healthcare investment banker who declined to be named.
In January, Elan hired Citigroup to conduct a strategic review of its business, which it said at the time could lead to a sale or merger of the company. A sale or merger, however, is quite difficult without jeopardizing the value of Elan, analysts said.
Biogen Idec Inc (BIIB.O) and Elan jointly market the multiple sclerosis drug Tysabri. Drugmaker Wyeth WYE.N, currently being acquired by Pfizer Inc (PFE.N), and Elan are jointly developing the Alzheimer's drug bapineuzumab. These are currently Elan's two most important products.
Biogen and Wyeth have change of ownership clauses that allow them to buy out the two drugs, which together make up the bulk of Elan's value. Therefore, it becomes difficult to sell Elan outright and hard for a minority buyer to pay a high valuation for something it cannot control.
WHEN IS CHANGE A CHANGE OF CONTROL?
The issue of "control" or "change of control" has become a central point in the merger of Merck and Schering-Plough.
"Any time you start thinking about change of control, you need to think long and hard about that process and how the world can change," the investment banker said.
The fight over Schering-Plough's partnership over two rheumatoid arthritis drugs may not have seemed as crucial when the pact was forged in 1998. Today, the drug Remicade generates about $2.1 billion in annual sales for Schering-Plough.
Merck and Schering-Plough contend their $41.1 billion cash-and-stock deal is a "reverse merger," under which Schering-Plough would technically be the surviving corporation.
Still, the combined company would have Merck's name and be controlled by Merck shareholders and management. The merged entity would have a board that consists of 15 Merck directors and three Schering directors. Merck also has a larger market cap at $58.1 billion, compared with Schering's $39.8 billion market capitalization.
Johnson & Johnson (JNJ.N), which has a partnership with Schering-Plough over the two rheumatoid arthritis drugs, has asked for an arbitrator to decide whether Schering-Plough is actually undergoing under a change of control.
The Merck/Schering-Plough merger may meet the definition of a reverse takeover and the letter of the law, but does it meet the spirit of the agreement Schering-Plough forged with J&J?
"Arbitrators have a bit more leeway than a judge. They can look at what the parties' intention was at the time, they can look at what various drafts of the contract said, and delve into what the language intended or meant," Columbia University Law School Professor John Coffee said.
The 1998 Remicade pact with J&J defined "control" as the ability of any entity to direct more than half of the voting rights of another entity; or the right to receive more than half of the profit; or to otherwise control the management decisions of the other entity.
Analysts and investment bankers expect J&J to get some financial settlement that includes either a lump-sum payment or the right to buy Schering-Plough's consumer products or over-the-counter medicines at a bargain price.
Even in the recent proxy battle over the board of Amylin Pharmaceuticals Inc AMLN.O, the issue of change-of-control came into play.
Dissident shareholders Icahn and Eastbourne had originally nominated separate minority slates to Amylin's 12-member board.
They were eventually allowed to put forth a combined slate of five nominees to avoid triggering a so-called poison put that would take effect if there was a change of control of the board. The "poison put" would require the company to accelerate debt repayments to its potential detriment.
The dissidents won two seats on the board, Amylin said on Tuesday.
(Reporting by Jessica Hall, editing by Matthew Lewis)
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