What do you do when your drug discovery costs swamp your profits from a successful marketed drug. If you’re Elan Corporation(ELN), you spin off your drug discovery business with a bundle of cash, keeping your marketed drugs and late stage pipeline.

Elan, an Irish biotech firm, is driven largely by Tysabri,a multiple sclerosis drug marketed with Biogen Idec(BIIB). After early setbacks where Tysabri caused, in rare cases, a rare and devastating brain infection called progressive multifocal leukoencephalopathy, Elan and Biogen were able to slowly reintroduce the product with a strong warning, and have now grown it to over $1 billion in sales, in art, by identifying patients who may be most susceptible to the infection.

Elan recently suffered a major setback when development of a blockbuster Alzheimer’s drug in conjunction with Johnson & Johnson was ended due to disappointing results.In the aftermath of this, the company announced this morning that it would spin off its drug discovery business, Neotope Biosciences with $120-$130 million in cash while retaining a 14-18% stake.

The company lacks a permanent CEO, and it appears as though the spin is designed to isolate Tysabri for an acquisition by partner Biogen. This may also explain the aggressive timeline- the company hopes to complete the spin by the end of the year.

The more interesting piece here is the parent. Besides the acquisition potential, the continued growth and exposed profitability of Tysabri create an attractive investment opportunity. Neotope, on the other hand, will be just another cash-rich early stage biotech with a high burn rate. At the current rate of spend, the company will need to find additional financing in two years, at which point it will still be far away from a marketed products.

Here is the core of Elan’s press release announcing the spin:

Elan Corporation, plc announced today that its Board of Directors has approved the spin-off of the discovery science and Neotope Biosciences from the company. Completion of this transaction will create two independent, highly focused, public companies that will enable investors to align timelines, risk and returns in order to best achieve their investment objectives. The two companies will be: Elan Corporation plc A focused business that will generate growth; immediate and long term profits; and expanding margins. Additionally, this profitable business will be able to utilize our advantageous tax structure and create incremental after-tax earnings to the direct benefit of shareholders. Initially consisting of three main assets: Tysabri (marketed in collaboration with Biogen Idec) for Multiple Sclerosis (MS) and other potential indications; ELND005 a small molecule asset that is Phase 2/Phase 2b ready in a range of neuropsychiatry and symptomatic diseases that targets non-amyloid pathologies; and lastly, the continued interest in Janssen AI which with Pfizer manages the on-going AIP portfolio including Phase 2 Bapineuzumab (subQ); Phase 2 vaccine (ACC-001) and Phase 1 AAB-003 (mab). Neotope Biosciences plc Drug discovery business platform, originally established in 2010, focused primarily on identifying and translating targets into potential therapies for chronic degenerative and other related disease areas. This entity will continue to focus on innovation, differentiated scientific advancement, unique intellectual property creation and translational capability to transform science into clinical assets. Transaction Conditions and Timeline Completion of the spin-off is subject to conditions, including approval by our shareholders and by holders of our 2016 Notes, which the Company will be seeking as soon as is practical. Additional details of the proposed spin-off, including proportionate shareholding and separate financial information relating to both Elan and to Neotope Biosciences will be provided to shareholders. If the transaction is effected, we expect there to be a separate listing of Neotope Biosciences on a U.S. exchange, by the end of 2012. Elan will incur a charge upon completion of the transaction. Leadership Comments “This is a bold and logical strategic step as it provides shareholders with the ability to delineate risk, timelines and business characteristics to their own specific investment objectives. As we have done over the past decade and will continue to do in the future, the strengthening of the balance sheet, capital structure, income statement and progression of the science for the benefit of patients, has been a constant goal and objective of the management team and supported by the board of directors,” said Robert A. Ingram, Chairman of Elan and Kelly Martin, CEO. Messrs. Ingram and Martin added that, “All of our previous actions, including most notably the separation of the Elan Drug Technologies business and its merger with Alkermes plc as well as the establishment of Janssen AI with Johnson & Johnson in a sharing of the risk/reward around the AIP asset, have been designed to improve the risk/return profile of the company, cluster businesses and assets logically for shareholders.” Mr. Martin commented further, “By establishing Neotope Biosciences and Elan as distinct businesses – each with its own specific business characteristics and dynamics – we provide investors with important clarity, transparency and choice as it relates to their investment decisions.” Mr. Martin added, “For Elan Corporation, plc, the completion of this transaction is a natural progression and final step to becoming a company that generates both profits and growth to the benefit of stakeholders. The dominant focus will be broadening and deepening patient access to TYSABRI on a global basis and registering ELND005 for multiple indications in neuropsychiatry and other symptomatic indications. This move to immediate profitability will enable us to utilise the benefit of the significant accumulated losses that have been built up over the years. We intend to explore ways to share this benefit with our stakeholders through some combination of debt repurchases, share buy backs, dividends or all three. Further communication on this topic will be forthcoming in the months ahead and upon completion of the transaction.” “With Elan’s commitment to capitalize Neotope’s Bioscience, our highly talented scientific team who have previously discovered TYSABRI and an approach to immunotherapy for Alzheimer’s, will have the resources and time to advance programs for chronic degenerative diseases, such as synuclein for Parkinson’s disease, along the drug development stages and provide opportunities for investors to participate in this journey”, said Dr. Lars Ekman, Chairman designate of Neotope Biosciences. Dr. Ekman continued, “In the longer term, the team’s heightened focus and dedication to translating unique scientific insight into clinical programs will provide benefits to the field of life sciences across a broad array of diseases for the ultimate benefit of patients. With this transaction, their successes and insights are expected to provide enormous benefit to the world.” Messrs. Ingram and Martin concluded, “Our board and management team have spent the previous twelve months assessing the optimal alignment of assets, risk/reward and income statement dynamics to the marketplace and our shareholders. These discussions took place well in advance of the recent release of the top line outcomes of the Bapinezumab Phase 3 trials. The transparent alignment of distinctive timelines and unique business characteristics to enable shareholder investment decisions and choice was our guiding principle and remained a constant which ultimately resulted in today’s announcement.” Highlights of Previous Decade The previous decade for Elan has been characterized as one of consistent focus and execution on delivering improvements in all aspects of its business fundamentals. Highlights of this journey include: Expected 2012 revenues of $1.2 – 1.25 billion; growth of 150% since 2004

Operating Expenses have decreased by more than 50% since 2002

Adjusted EBITDA of positive $147 million in 2011, versus negative $203 million in 2004

Debt and Contractual obligations reduced by 76% since 2002

Corporate tax rate of 12.5% with the benefit of accumulated losses and structures in excess of $4 billion

Launched Tysabri (twice) – for MS with potential for additional indications

Reduced AD clinical risk with J&J – maintained programs while retaining 25% of P&L

Successful divestment of EDT, generating $1 billion of non-dilutive capital for Elan plc

Advanced ELN005 through Phase 2 with potential therapeutic symptomatic applications

Advancement of pre-clinical novel targets programs: synuclein, MCAM, tau, amyloid Strategic Rationale Today, Elan Corporation, plc is comprised of two distinct investment propositions with differing science-business risks and timeframes: Commercial and growth oriented profitable business capable of generating meaningful after tax earnings for the benefit of stakeholders over the long term. Time horizons immediate and on-going.

Early discovery and translation to humans focused on pathology-biology based mis-folding protein targets in chronic degenerative diseases. Science and its predictability remain the major risk factor; time horizons of 5+ years to the clinic. The Board of Directors as well as executive management believe separating into two distinct business will enable appropriate alignment of funding/capital structures with the mission of each respective business; where the interests of the shareholders and the management team will be synchronized with the risk, return and timelines of activities. Elan Corporation plc Profile Immediately profitable and high growth company

Headquartered in Dublin, Ireland

2011 revenues of $1.2 billion; 2011 GAAP Operating Expenses of $403 million

Post transaction GAAP Operating Expenses of ~ $300 million

2013 post a successful spin-off transaction estimated EBITDA in excess of $400 million and estimated Net Income in excess of $250 million; and targeting $1.00 earnings per share for our shareholders by 2015, with the new business construct

Corporate tax of 12.5%; more than $4 billion in accumulated losses and other structures for after tax EPS incremental returns and stakeholder benefits

ELND005 with Phase 2/Phase 2b in several neurology and neuropsychiatry symptomatic indications

Leadership:

Chairman: Robert A. Ingram

Chief Executive Officer: Kelly Martin

Employees: approximately 90 – 110 people

Equity interests in Janssen AI – AIP Programs, Alkermes plc, Proteostasis Therapeutics, and Neotope Biosciences Neotope Biosciences plc Profile Drug discovery company focused on translating distinct targets into therapies for chronic degenerative and other related diseases

Incorporated in Ireland with operations in South San Francisco, California

Key targets: synuclein, tau, MCAM, amyloid for application to a wide variety of diseases

Potential for three INDs by 2015

Expected cash spend of $50 – $60 million per annum

Leadership: Chairman: Dr. Lars Ekman Chief Executive Officer: Dr. Dale Schenk

Employees: approximately 80 people

Elan Corporation plc to commit $120-$130 million start-up capital and to retain 14 – 18% minority equity position Conditions The transaction is subject to a number of conditions, including approval by shareholders and the holders of the 2016 Notes.

Disclosure: The author holds no position in any stock mentioned

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