On Wednesday, Ireland based mid cap biotech stock Elan Corporation plc (NYSE: ELN) sank 10.13% on relatively good news that the company is selling its rights to multiple sclerosis (MS) drug Tysabri to large cap Biogen Idec (NASDAQ: BIIB) but who got the better deal and more importantly, which stock is the better deal for investors? To quickly recap, Elan Corporation plc had a 50-50 split arrangement with Biogen Idec for Tysabri – a blockbuster drug of last resort for the treatment of multiple sclerosis that generated $1.6 billion in sales last year. As part of the deal, Biogen Idec will pay $3.25 billion plus a royalty of 12% for the first year and then 18% on the first $2 billion in sales for the years that follow along with 25% on sales above $2 billion.
What the Deal for Tysabri Gives Biogen Idec and Elan Corporation plc
Aside from having to buy out Elan Corporation plc, the deal means that Biogen Idec will now have complete control over Tysabri to avoid cannibalizing sales for its other multiple sclerosis drug Avonex along with BG-12 (that is, if the FDA approves it in the near future). That’s important because Biogen Idec is up against tough competition in the multiple sclerosis drug space from the likes of Switzerland based Novartis AG (NYSE: NVS) and Israel based Teva Pharmaceutical Industries (NYSE: TEVA).
Elan Corporation plc also comes out a winner with the deal because it gets a big cash infusion that can be directed towards getting its drug pipeline approved or to make acquisitions or for other uses. Likewise, Elan Corporation plc reported three net losses last year of $229.90M (most recent reported quarter), $60.30M and $31.80M; net income of 560.50M (2011); and then another string of net losses of $324.70M (2010), $176.20M (2009) and $71.00M (2008) over the past few years.
Biogen Idec Vs. Elan Corporation plc: Are Investors Winners or Losers With Either?
Clearly, investors in Biogen Idec have been winners as the stock is up 32.1% over the past year and up 160.6% over the past five years plus the deal strengthens its position in the multiple sclerosis drug market. That could mean Biogen Idec is almost a sure thing while its trailing P/E of 27.95 and forward P/E of 17.59 don’t look too bad.
However, whether it’s a great long term deal for investors in Elan Corporation plc remains to be seen. For starters, the deal kills any rumor that Biogen Idec will acquire Elan Corporation plc – a big reason for the 10.13% drop as short-term traders headed for the exits. The problems is for the long-term. On the surface, the deal seems like a good one; but beneath the surface, Elan Corporation plc’s management may not have the right priorities for what it does with the windfall from the sale of Tysabri.
In early January 2011, Elan Corporation plc confirmed with Reuters that it would layoff 10% of its workforce or 130 people with most of the layoffs to occur at the company's research and development site in San Francisco with 50% of the cuts being scientists. However, management intends to keep the private jet.
Moreover and according to Reuters, FAA records show that Elan Corporation plc is part owner of not just any private jet but a Gulfstream G-400 through Warren Buffet’s NetJets. The Gulfstream G-400 is one of the largest jets in the NetJets’ fleet and can carry 13 executives (or their secretaries, mistreeses and what not) 4,100 nautical miles – basically nonstop from Chicago to Berlin without any refueling. It estimated to cost between $10,000 and $11,000 an hour for capital outlay, maintenance costs and hourly fees for a NetJets’ Gulfstream G-400 – meaning one round-trip flight from San Francisco to New York would cost about $100,000 or roughly one laid off scientist.
The use of corporate jets has long irked activist investors in Elan Corporation plc – almost as much as the stock being down 32.8% over the past year and down 63.7% over the past five years.
The Bottom Line. The deal for multiple sclerosis drug Tysabri looks like a win-win for both Biogen Idec and Elan Corporation plc, investors might want to stick with the former rather than the later as while investors should not have a problem with executives using private jets, they should have a problem with the direction ELN’s stock has headed in for the past five years while its executives used those private jets.