Elan quietly gives J&J option on Alzheimer drug

BOSTON (Reuters) - Irish drugmaker Elan Corp Plc ELN.I has quietly given Johnson & Johnson JNJ.N the right to acquire its 49.9 percent stake in their joint Alzheimer's disease venture -- a move that could deter potential bidders for Elan.

The agreement, buried in Elan’s recently filed annual report, is part of a broader transaction announced last July in which J&J agreed to pay $1 billion for 18.4 percent of Elan and take a 50.1 percent stake in a new company working on Elan’s most advanced experimental Alzheimer’s drugs.

The terms of that deal were revised downwards after it emerged Elan and J&J had come to a secret -- and improper -- agreement under which J&J could gain a half share in the blockbuster multiple sclerosis drug, Tysabri, which Elan markets in a 50-50 partnership with U.S. biotech company Biogen Idec Inc BIIB.O.

Now, it emerges Elan not only gave J&J an option on Tysabri, it also gave the company an option to acquire its 49.9 percent stake in Janssen Alzheimer Immunotherapy, the subsidiary formed by J&J to acquire Elan’s Alzheimer’s Immunotherapy Program (AIP). The unit includes bapineuzumab, Elan’s most advanced experimental Alzheimer’s drug.

“Many large shareholders are up in arms about this,” said Larry Feinberg, who runs Oracle Investment Management and holds 5 million Elan shares. “Elan has one of the best neuroscience businesses in the world, but now Biogen has right of first refusal on Tysabri and J&J has right of first refusal on bapineuzumab. It’s something that will get in the way of a potential acquirer.”

Discussion of a possible buyer for Elan is far from academic. The company is one of research firm Morningstar’s top 10 likely acquisition targets.

Biogen, whose standstill agreement with Elan expires in June, has long been considered the most logical suitor for Elan as the relationship between them -- each has the right to acquire the other’s share of Tysabri should there be a change of control at either company -- represents a hurdle to potential third-party acquirer .

But Elan concedes its agreement with J&J on bapineuzumab could have a similarly chilling effect.

“We are party to agreements that may discourage a takeover attempt that might be viewed as beneficial to our shareholders,” the company said in its annual report, listing as examples its Tysabri agreement and the newly revealed Alzheimer’s drug agreement with J&J.

Elan did not directly respond to an email asking why it did not disclose the matter when the transaction was announced. Bob Purcell, a company spokesman, said only that “change of control clauses are a standard part of any asset transaction within the pharmaceutical industry.”

A potential Elan acquirer would get either a non-controlling financial interest in Janssen AI or the cash equivalent to its fair value, he said.

Karen Andersen, an analyst at Morningstar, said the agreement should have been reported at the time.

“I think this is material information,” she said. “I think this should have been volunteered and discussed when they had their conference calls to discuss the deal, rather than putting us in a position of digging for it later.”

Bapineuzumab is being developed in conjunction with Pfizer Inc PFE.N, which took the drug over when it acquired Wyeth. Pfizer currently has a 50 percent stake in the partnership, while J&J and Elan have roughly 25 percent each. If J&J exercises its option -- which would kick in if Elan were to be acquired -- it would gain Elan's share.

Some investors have written off bapineuzumab because it showed mixed results in a mid-stage clinical trial. But Alzheimer’s disease, a degenerative condition that robs victims of memory, afflicts 26 million people worldwide and, if bapineuzumab turns out to be successful, it could generate billions of dollars in revenue.

The company’s delay in disclosing the Alzheimer’s option is particularly galling to investors, given its side agreement with J&J on Tysabri last year landed Elan in court.

In that case, a U.S. federal court judge ruled Elan breached its contract with Biogen, prompting Elan to withdraw the Tysabri option from its deal with J&J. J&J, in response, cut the amount it would pay for its Elan stake by $115 million to $885 million.

Elan’s shares have fallen 13 percent to $7.45 from a 12-month high of $8.58 at the time the original transaction was announced on July 2.

Reporting by Toni Clarke; editing by Andre Grenon