Elan Does Right by Its Shareholders

Elan(ELN) CEO Kelly Martin deserves praise for shepherding last week's deal with Johnson & Johnson(JNJ) that puts the Irish drugmaker on firmer financial footing.

Given that I awarded Martin the ignominious honor of being the Worst Biotech CEO of 2008 last December, it only seems fair to pat the guy on the back when he does good for Elan and its shareholders.

Elan's balance sheet desperately needed an overhaul, which Martin helped deliver. J&J is taking an 18.4% ownership stake in Elan for $1 billion. The cash drastically reduces Elan's net debt to $400 million from $1.4 billion. Martin tells me that some, not all, of the J&J cash will be used to pare down the $1.1 billion in debt that starts coming due in 2011.

In exchange for its investment, J&J acquires all the rights to three of Elan's most advanced Alzheimer's drug candidates, including bapineuzumab, which is already in phase III trials. J&J will create a new company to develop the Alzheimer's drugs, in which Elan receives a 49.9% stake. The Alzheimer's Newco - as yet unnamed -- will be seeded with $500 million from J&J, after which the two companies each kick in development expenses.

The Alzheimer's Newco and its assets, however, are firmly under the control of J&J. "This is an asset transfer; it is not a joint venture or a partnership," explains J&J spokesman Sri Ramaswami.

This is the "no free lunch" part of the deal. Elan's commercial rights to its most important pipeline drugs are reduced to 25% from 50%, and it effectively loses control over how the drug are developed and marketed. (Wyeth(WYE), soon to be Pfizer(PFE), has owned the other half of bapineuzumab for a long time.)