Elan restructures Tysabri venture, gets $3.25 billion cash; no plans for debt repayment with proceeds

By Paul Deckelman

New York, Feb. 6 - Elan Corp. plc said on Wednesday that it restructured its joint-venture agreement with fellow biotechnology firm Biogen Idec Inc., giving up its 50% stake in the venture in return for $3.25 billion of upfront cash from Biogen and a royalty structure that will allow it to enjoy a portion of any sales revenue from the venture's Tysabri medication for multiple sclerosis.

Dublin, Ireland-based Elan plans to use the cash payment mostly to grow its business by investing in other promising drug therapies, but will also return a generous chunk of those proceeds to its shareholders.

The company's chief financial officer, however, said that Elan has no plans at this time to use any of the windfall to pay down or even eliminate its debt, which stood at $600 million as of Dec. 31.

On a conference call with analysts following the release of the company's financial results for the 2012 fourth quarter and full-year periods as well as the announcement of the Tysabri joint-venture restructuring, CEO Nigel Clerkin told an analyst, "We refinanced our debt back in September or October, as you know, taking the maturity profile out and lowering the coupon. So we're happy with the current debt that we have and so we have no near-term plan to do anything there."

Elan, through its Elan Finance Public Ltd. and Elan Finance Corp. subsidiaries, priced a $600 million issue of seven-year senior notes at par on Sept. 25 to yield 6¼%, after upsizing that quick-to-market deal from an originally planned $500 million. It used the proceeds from the bond deal, plus cash on hand, to redeem its roughly $625 million of outstanding 8¾% notes due 2016 via a tender offer and a follow-up redemption call.

The company has been active in the capital markets over the past few years, chopping down what was once a multi-billion-dollar debt load to its current size.

Elan's chief executive officer, G. Kelly Martin, in discussing plans to return capital to the shareholders "at the appropriate time and in the right manner" using part of the deal proceeds, declared: "We wanted to have done that [return capital to the shareholders] for the last decade, but we've had to chew through $4.5 billion of debt."

During the question-and-answer portion of the conference call that followed the formal presentation by the two Elan executives, Clerkin told an analyst that the transaction, as defined in its financial covenants, would require the consent of neither the company's bondholders nor its shareholders.

While the financial covenants call for the proceeds from any asset sale to be re-invested within 365 days of the closing and any excess proceeds left over used to make buyback offer for the bonds at par, the CFO said that this transaction was structured so that it is, technically speaking, not an asset sale but an ordinary transaction.

With the bonds most recently trading well above par even before this transaction, Clerkin suggested, "If there are any bondholders who would be interested in tendering their bonds at par, we would certainly have a discussion with them," although that is not likely to happen.

Under the terms of the Biogen transaction, the current 50-50 joint-venture structure will terminate and Biogen will have full ownership and control of Tysabri. It will make an up-front cash payment of $3.25 billion to Elan. The latter company will also receive a royalty of 12% of Tysabri global net sales in the first 12 months after the deal closes, to then be replaced by a tiered royalty structure after 12 months.

At that point, Elan will get 18% on up to $2 billion of global net sales and 25% on anything over $2 billion of global net sales.

The Elan executives said tax treatment of the deal would be favorable since the company is based in Ireland, considered a corporate tax haven.

Besides the bond market transactions, Clerkin said that Elan had further bolstered its liquidity position when it liquidated the last of its holdings Alkermes plc that it had acquired September 2011 following the merger of its own Elan Drug Technologies segment with Alkermes.

As per the terms of that deal, Alkermes made a cash payment of $500 million, apart from giving Elan 31.9 million of its ordinary shares. Elan sold 75% of that stake last March and exited the last 25% at the end of January.

That brought its total proceeds for the sale of the Alkermes stock to $550 million. Clerkin said the company had realized a 20% return on its shareholding, boosting its total consideration from the sale of EDT by $100 million, to $1.05 billion.

The company's position in cash and cash equivalents improved to $431.3 million at Dec. 31, versus $ 271.7 million a year earlier. Restricted cash stayed the same at $2.6 million, while the company had $167.9 million of investment securities that it didn't have a year earlier.

In the fourth quarter Elan's net loss increased to $152.8 million, from $134.7 million a year earlier.

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