Elan takeover more likely after Johnsons deal

Elan and Johnson & Johnson's stake deal has made an outright acquisition of our top ranked biotech takeover candidate more plausible

Damien Conover | 03-07-09 | E-mail Article

Johnson & Johnson is taking a major stake in Elan Corp in order to gain access to the latter firm's Alzheimer's programme and leading drug bapineuzumab. The deal looks favourable to both companies. While we don't expect the transaction to greatly change our fair value estimate for J&J, we are reviewing the assumptions in our Elan model, which could result in a change to our fair value estimate for that firm.

Under the terms of the transaction, J&J will take a 50.1% ownership in Elan's Alzheimer's programme and an 18.4% ownership in the remaining part of Elan that excludes the Alzheimer's programme. In return, Elan will receive a $1 billion equity investment and a $500 million commitment to fund development and marketing of Alzheimer's drug bapineuzumab. The deal doesn't surprise us, as we had ranked Elan as the top biotech takeover candidate at the beginning of the year. While the deal is not a full acquisition, it supports our thesis that Elan can bring value to a larger pharmaceutical company.

We believe the joint venture helps both companies. J&J expands its reach into neuroscience with access to one of the most promising Alzheimer's drugs, bapineuzumab, as well as several earlier-stage Alzheimer's drugs. Also, it gains exposure to the multiple sclerosis market through Elan's drug Tysabri.

Elan gains needed funding, as it was burning cash and was facing major debt redemptions over the next couple of years. By joining forces with J&J, bapineuzumab gains credibility that could boost its approval chances. Further, Elan retains some of the upside to its Alzheimer's platform by holding on to 49.9% of the newly-formed joint venture. Our only concern is whether the company gave up too much potential upside for its potentially highly lucrative Alzheimer's franchise in exchange for near-term liquidity help. The deal also limits the number of potential Elan suitors to Johnson & Johnson, although an outright acquisition has become more plausible.

Damien Conover, CFA is a senior Morningstar stock analyst based in the United States.

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