June 3, 2010 / 9:21 PM / 10 years ago

Elan investors seek to slow spin-off of EDT unit

BOSTON (Reuters) - Several large investors in Elan Corp Plc ELN.I ELN.N are urging the company to delay a planned spin-off of its drug delivery business, arguing the company could extract more value from the unit by waiting.

Elan, which makes the multiple sclerosis drug Tysabri in partnership with U.S. biotechnology company Biogen Idec Inc (BIIB.O), tried to spin off Elan Drug Technologies (EDT) in 2008, but the economic crisis lead to a drought in financing and Elan shelved the idea.

Now it wants to try again.

EDT develops technologies that can slow the release of a drug into the bloodstream or minimize side effects. The company receives royalties on products that incorporate its technology.

EDT’s newest products include Invega Sustenna, a once-monthly antipsychotic marketed by Johnson & Johnson (JNJ.N), and Ampyra, a drug to improve walking in patients with multiple sclerosis that is sold by Acorda Therapeutics Inc (ACOR.O).

The business is very different from Elan’s more risky drug discovery business, which is valued in part based on sales of Tysabri but also on its pipeline of experimental treatments for Alzheimer’s disease, Parkinson’s disease and other central nervous system disorders.

In general, Elan’s shareholders support the idea of separating the two businesses. But not all of them agree with the timing. And many have communicated their views to the company’s board.

Despite their complaints, Kelly Martin, the company’s chief executive, said at the annual meeting last month that he has discussed the proposed spin-off with 50 Elan shareholders and potential EDT investors and had received an “almost universally positive” response.

He said that if a separation takes place it will likely take place within the next 12 months. But some investors believe the company is seeking to do the transaction as soon as possible, and are urging it to wait — possibly 18 months or more — until the sales potential of Ampyra becomes clearer and the risks to Tysabri from new competitors is further defined.

“Spinning out EDT now freights current shareholders with all the risk and gives the rewards to new investors,” said Matthew Strobeck, partner at Westfield Capital Management, Elan’s fourth-biggest shareholder.

Investment analysts currently estimate the value of EDT to be between $1 billion and $1.3 billion. That, to many of Elan’s shareholders, vastly underestimates the potential royalty stream from new products and those in development.

Ampyra was only approved in January, but some analysts expect it will eventually generate sales of more than $1 billion. That would throw off roughly $170 million a year to Elan in the form of royalties.

“At some point it might be prudent to separate the companies but why do it now?” said Ib Sonderby, of Zoar Invest, a privately held investment firm based in Denmark. Sonderby owns some 300,000 Elan shares himself and on behalf of his family and sits on the boards of companies that collectively own 2 million Elan shares.

Elan spokesman Bob Purcell declined to comment on the specifics of the company’s interactions with its investors.


Elan, whose shares have fallen 85 percent over the past two years and are currently trading at roughly the same level they were five years ago, admits it has no need for cash.

At a news conference following the company’s annual meeting last month, Chief Financial Officer Shane Cooke, who heads EDT, said the company does not need to spin off the unit because of financial pressure. And he said it was not something that had to be done in a certain time frame.

Nonetheless, the company has set the ball in motion.

Opponents of an early spin-off argue that any buyer placing a value on EDT right now would be basing their analysis on projections and estimates. That valuation could increase once the actual sales trajectory becomes clearer and there is less uncertainty about the future of the new products.

The main product in Elan’s neurology business is Tysabri, whose future is currently fraught with uncertainty. A rival product from Novartis AG NOVN.VX is being reviewed by U.S. regulators and if approved could dent Tysabri’s sales.

The drug was temporarily withdrawn from the market in 2005 after being associated with a potentially deadly brain infection known as PML. It was reintroduced in 2006 with stricter safety warnings, but the rate of PML has been shown to increase the longer patients remain on the product.

Biogen and Elan are developing a test they hope will screen out patients most likely to develop PML. If the test is effective, the value of Tysabri could increase. If it fails and sales growth slows, the cash generated by EDT could prove to be a lifeline for Elan, the investors say.

Still, not everyone is opposed to a deal.

“I own Elan now and if I want a part of EDT I can just put in my order to buy shares in the IPO,” said Sam Isaly, managing partner at OrbiMed Advisors, Elan’s fifth-biggest shareholder. He conceded, however, that there is “a sort of subterranean email exchange out there on how Elan should fix themselves.”


Shareholder opposition to the EDT plan represents the latest clash in a long-running battle between some of the company’s biggest shareholders and its board. At Elan’s annual meeting, a remarkably high 28 percent of shareholders voted against re-electing Chairman Kyran McLaughlin and director Kieran McGowan. McLaughlin is retiring as chairman later this year.

“This is a window into the level of unrest on the part of shareholders,” said one large Elan investor who opposes the EDT plan but asked to remain anonymous due to the sensitivity of the situation. “In my opinion, people are slowly coming to the boil.”

CEO Martin has also come under fire, and, as though to order, Elan said on Thursday that he will step down in 2012.

Investors have criticized Martin for at least two years for missteps that included his use of private jets, mismanagement of expectations for the company’s experimental Alzheimer’s drug bapineuzumab, and secret dealings with Elan investor Johnson & Johnson that lead Biogen to sue Elan, successfully, for breaching the terms of their partnership.

Some investors had hoped Martin would be fired when the new chairman is appointed later this year. They see his decision to step down after two years as a recognition that investor dissatisfaction has reached untenable proportions, but also as a crafty move to lock himself into position, potentially on lucrative financial terms, before a new chairman is named.

Elan declined to comment on the terms of Martin’s contract, but investors suspect they will add to his compensation.

“It is very unusual that a chairman who has told the world he is stepping down, as McLaughlin has, would agree to a contract with a CEO instead of leaving it to the new chairman,” said Sonderby. “It looks as if they are trying to take whatever they can out of the honey pot.”

Additional reporting by Ben Hirschler in London, editing by Matthew Lewis

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