Alkermes Buys Elan Business

After several years debating the future of its drug formulation business, Elan has agreed to sell Elan Drug Technologies to Waltham, Mass.-based Alkermes in a deal valued at roughly $960 million.

In what Leerink Swann stock analyst Joshua Schimmer calls “a savvy deal,” Alkermes will pay Elan $500 million in cash and fork over 31.9 million shares, a 25% stake, in the expanded company. Alkermes will move its headquarters to Dublin, where Elan is already based, providing it with a healthy tax advantage, Schimmer points out.

Elan has been trying to overhaul itself for several years. In January 2009, the company said it was exploring strategic alternatives to shore up its finances and accelerate the development of its pipeline. A month later, Elan laid off 14% of its workforce, or 230 workers, and created a holding company with two divisions: biopharmaceuticals, which encompasses its neurology drug portfolio, and Elan Drug Technologies. In April 2010, Elan put EDT on the selling block but took it off four months later.

Elan says it will use the proceeds from the sale to Alkermes to pay down debt, which should be reduced by one-third. After the transaction, the newly focused company expects to enjoy compounded annual revenue growth of 15% over the next three to five years.

For Alkermes, the combination means its portfolio will expand to five products, each boasting a long patent life. Much of Alkermes’ business is built around improving formulations of existing drugs.

The deal also resolves the uncertainty around Alkermes’ top revenue-generating product Risperdal Consta, a long-acting version of Johnson & Johnson’s schizophrenia drug. With the deal, Alkermes gains the royalty stream from the drug’s main competitor, Invega Sustenna, developed by Elan and sold by J&J. Investors have long worried that the Elan drug could steal market share from Risperdal Consta.

“The only thing that matters now to Alkermes shareholders is growth of the overall franchise,” JPMorgan analyst Cory Kasimov told investors.