Elan Corp.'s decision to sell much of its stake in its multiple sclerosis drug reduces the company's risk – and raises it. The Dublin-based biotech company is getting $3.25-billion (U.S.) from partner Biogen Idec for part of its 50-per-cent share in its blockbuster drug, and main asset, Tysabri. That should maximize Elan's profit and reduce the incentive Biogen has to sell competing drugs. The danger is that the cash burns a hole in the company's pocket.
It's rare for a biotech company to ditch a successful drug. Pipelines of prospective therapies are all well and good, but few make it to market – and seldom do they become big sellers like Tysabri. It accounted for essentially all of Elan's $1.2-billion of revenue last year.
The problem for Elan is that Biogen controls distribution outside the United States and sells competing drugs for multiple sclerosis worldwide. Worse, Biogen's new drug for the disease, BG-12, is more convenient and probably safer than Tysabri. The worry was that Biogen would be tempted to prioritize sales of its own fully-owned drugs instead of Tysabri.
By selling most of its interest to Biogen, Elan's incentives are better aligned. The company gets a $3.2-billion slug of cash and 12 per cent of net sales over the next year, increasing to as much as 25 per cent thereafter if annual sales exceed $2-billion. That's a reasonable result for a company overwhelmingly dependent on one drug that has already been withdrawn from the market once on safety concerns.
Elan has promised to return a chunk of cash to investors and plow some into developing the smattering of drugs in its pipeline. Unfortunately, there's no assurance Elan will use the rest of its funds wisely.
Executives are playing up the prospect of buying assets and companies. But big pharma and biotech companies have far more cash on hand than Elan – Amgen, for example, has $24-billion.
Shareholders appear to appreciate this, too – Elan's stock closed down 10 per cent on Wednesday. Until management proves them wrong, their skepticism is justified.