Elan's Secret Poison Pill With J&J Is Another Insult to Shareholders

(MoneyWatch)  Elan (ELN) seems to be addicted to poison pills: The company now has two of them, in the form of buyout rights granted to Johnson & Johnson (JNJ) and Biogen (BIIB.O) that are triggered if the company is acquired by someone else.

While Elan was difficult to acquire before its deal with J&J, it would now seem to be impossible: Anyone who wants the company will probably see its two biggest drugs walk out the door as soon as the ink is dry on the contract.

The provisions put Elan's shareholders at a disadvantage in two ways. First, no one will want to own this stock if no one else can buy it in a takeover bid. Second, because Elan failed to disclose the J&J trigger when it was enacted, shareholders were in the dark for about five months before they learned that their stock's fate was dependent on the whim of management at J&J.

Reuters revealed late Friday that when Elan closed its controversial deal with J&J over Elan's Alzheimer's venture back in September, it included giving J&J the right to acquire Elan's entire Alzheimer's immunotherapy program portfolio,* including bapineuzumab, if someone else acquired Elan. Bapi is regarded as one of Elan's most promising drugs.

Elan didn't disclose that until February, in its annual report, and few noticed that disclosure until Reuters pointed it out over the weekend. It says:

Under the terms of the Johnson & Johnson Transaction, if we are acquired, an affiliate of Johnson & Johnson will be entitled to purchase our 49.9% financial interest in Janssen AI at the then fair value.

It's complicated but here's a summary: Elan's bapineuzumab et al is about 25 percent owned by Elan, 25 percent by J&J and 50 percent by Pfizer (PFE). Tysabri, its MS drug, is about 50 percent owned by Elan and 50 percent by Biogen. If Elan is acquired, Biogen and J&J both have the rights to acquire Elan's stakes in their partnerships.

Elan was previously regarded as a takeover target despite the Biogen arrangement. But the new information about J&J puts Elan in a virtual lockbox. It's something of an insult to anyone who bought Elan shares because they believed the company might sell itself to someone better positioned to develop and market its drugs.

What's doubly insulting is Elan's belief that the J&J trigger did not need to be disclosed to investors in a timely fashion. The company said:

Change of control clauses are a standard part of any asset transaction within the pharmaceutical industry.

Everyone else thinks that's rubbish -- it's the type of material disclosure that should have been revealed promptly. Yet Elan's management sat through two conference calls with investors and neglected to mention it both times. Hopefully, the next Q&A session will feature some pointed interrogation about what else investors ought to know about this company.

* Correction: Elan said in an email: "The COC clause in the J&J transaction only pertains to the Alzheimer's Immunotherapy Program (AIP), not Elan's entire Alzheimer's portfolio, which contains 4 additional programs and several compound not included in the AIP." Apologies for the error. Related:

• The 5 Worst Drug Companies of 2009
• Winners and Losers in the New Elan-J&J Deal
• J&J Tinkers With Elan Deal, But It May Not Be Enough for Biogen
• Judge Orders Elan CEO Submit to Interrogation by Biogen Lawyers
• Elan v. Biogen: A Look at What Their Tysabri Contract Actually Says