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Elan v. Biogen: A Look at What Their Tysabri Contract Actually Says

The obvious question in the Elan v. Biogen lawsuit is, What does the contract actually say about breaches of their Tysabri deal? A look at the agreement itself reveals that Elan could have potentially screwed up big time.

The back story: Elan and Biogen have a joint agreement over multiple sclerosis drug Tysabri, a likely $1 billion blockbuster. Elan did a $1 billion financing deal with Johnson & Johnson that gives J&J an 18.4 percent stake in Elan and, if Biogen has a change of control, the right to finance the purchase of Tysabri. Biogen has declared that the J&J deal is a breach of its agreement with Elan. Penalty for breaching the deal is forfeiture of all Elan's rights in Tysabri, free of charge.

Elan asked the judge to file the Biogen agreement and the J&J financing agreement under seal, because they contain "competitively sensitive" information. That's a shame because in the suit, Elan says this:

The language of the two agreements ... is plain and unambiguous.
In other words, if you wanted to guess how this dispute is likely to be solved -- perhaps you're an investor or an employee -- reading these "plain and unambiguous" documents would be helpful.

In fact, the Elan-Biogen agreement is available for anyone to see. It's part of a 2002 10-K filing with the SEC. The penalty for breaching the agreement is easy to interpret. It says:

... the breaching Party shall have no further rights under the licenses granted to it.
So this is an either/or decision for the judge: either it was breached or it was not.

Here's the section on what constitutes a breach, which is a little more tricky:

17.1 ASSIGNMENT. Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either Party without the prior express written consent of the other, except as expressly set forth below in this Section 17.1.
That seems simple enough. Elan must get Biogen's written consent. The next bit says:
... either Party may assign this Agreement and its rights and delegate its obligations hereunder to any of its Affiliates or, with the written consent of the other Party which such consent shall not be unreasonably withheld, to a Third Party in connection with the transfer or sale of all or substantially all of its business ... (provided that any such assignment to a Third Party shall be deemed a Change in Control ...)
To translate: Elan can assign rights to an "Affiliate" (such as a unit or division of Elan), but that doesn't seem to be happening in the J&J deal. More importantly, Elan can assign rights to a Third Party if it is part of a "change in control," and that triggers Biogen's right to buy Tysabri outright. The J&J deal does not appear to be a change of control -- J&J only gets 18.4 percent of Elan.

So the question for the judge is this: Does Elan's financing deal with Elan give J&J "any right or obligation" to Tysabri without Biogen's written consent? If the judge answers yes, then Elan will lose everything.

Elan is arguing that J&J's stake only allows Elan to ask J&J for financing after Biogen undergoes a change of control. Here's what the company is currently saying:

There's nothing in the pending Transaction that is contrary to our collaboration agreement with Biogen Idec for Tysabri, ... Nothing about that relationship has changed. This is the same agreement we have been operating under for the last nine years.
Elan said on its earnings call:
... we have entered into a financing arrangement with J&J that is relevant only should there be a change of control at Biogen Idec -- Under the terms of that finance arrangement J&J has the right to finance our purchase of the other half of Tysabri.
Indeed, J&J gains no current rights to Tysabri, and nor will it unless Biogen sells itself to someone else.

But the judge may decide that these post-change-of-control options are figleaves. At the heart of the agreement is the ability of J&J to scoop up rights to Tysabri at a lowered price -- with the agreement in place, competitors will be deterred from bidding against J&J if J&J wants to acquire Biogen and thus, via Elan on the other side, Tysabri. That lowered price affects Biogen, and thus the basis of the agreement. The purpose of the agreement is to make sure that both sides sign off on changes to "any right or obligation" on either side. And clearly, that hasn't happened.

If the judge agrees that Elan has given J&J "any right or obligation" in relation to Tysabri -- and that's a pretty broad canvas -- then Elan may have screwed itself.

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