Is Elan Corporation, plc (ADR) (ELN) Pushing Its Luck?

Elan’s valuation used a $25 million annual cash expenditures model in which operating costs all but ceased in the face of ELND005 divestment.  Shareholders wisely recognized the lack of growth potential in this business model, and voted instead to continue ELND005 development.  This represents a major additional cost to the company, as the drug is only in Phase 2 trials.  Elan estimated ELND005 development would cost $80 million in 2013, and owes Transition Therapeutics Inc (USA) (NASDAQ:TTHI) $93 million in potential milestone payments.  Not to mention the fact that after the failure of bapineuzumab in Phase 3 trials ELND005 is the only wholly-owned drug in Elan’s pipeline, significantly cutting into growth prospects should Elan remain independent.

Possible Suitor

Following the embarrassing rejection of management’s plans by shareholders, Elan Corporation, plc (ADR) (NYSE:ELN) has now publicly opened its doors to buyout offers.  But with the rejection of Royalty’s 15% premium offer (after incentives), is anyone out there willing to pay more?

Biogen is the most obvious candidate to snag Elan.  Rather than sharing Tysabri revenues, Biogen could choose to make a one-time bulk payment, especially if it thinks Tysabri revenues can continue to grow at 19% annually, above Wall Street estimates.  Biogen only has $660 million in cash, though, and might choose to spend that cash in-house or in acquisition of a more robust pipeline.

The Future of Elan

If I were a shareholder, I would encourage management to complete a deal or to invest its cash hoard in expanding the pipeline – a strategy management seems unwilling to adopt.  It seems more likely that investors will jump to approve another deal if the initial cash offering presents a premium over the current price, without sales incentives.

Seth Robey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Seth is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is Elan Pushing Its Luck? originally appeared on Fool.com and is written by Seth Robey.

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