J&J Tinkers With Elan Deal, But It May Not Be Enough for Biogen

If Elan thinks that Johnson & Johnson's reduction by $100 million of the $1 billion it agreed to pay for an 18.4 percent stake in Elan will fix their problem with Biogen, they may have another thing coming, according to a reading of the agreement between them. The judge wasn't objecting to the price of deal, she was objecting to its form.

Elan has until Sept. 26 to "cure" a breach in its agreement with Biogen over the MS drug Tysabri. If the breach is not cured, Elan will forfeit all its Tysabri rights to Biogen, free of charge. A federal judge ruled that J&J's financing deal with Elan -- which would give Elan the ability to buy Tysabri outright if Biogen undergoes a change of control -- had "delegated an obligation" to J&J without Biogen's consent, and was therefore a breach.

And while the judge's ruling makes J&J's involvement with Elan more risky -- and therefore cheaper, in market terms -- it's not the cost that the judge (and Biogen) was complaining about. Nonetheless, changing the sticker price seems to be strategy employed by Elan and J&J over the weekend, per the WSJ:

J&J is attempting to knock at least $100 million off of the $1 billion in cash it agreed to pay as part of the alliance, these people said, adding that the new terms could be announced in coming days. J&J's pledge to invest an additional $500 million in developing Elan drugs will remain unchanged.
BNET argued Aug. 7 that the Elan-Biogen agreement hinges on this phrase in their contract:
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 ...
The judge's ruling seemed to follow that logic: By making a side agreement with J&J, Elan had "assigned" a "right or obligation" without getting Biogen's "written consent." Indeed, when she ruled from the bench, judge Deborah Batts was quoted as saying:
It appears to the court that Elan has delegated an obligation it has to Biogen, by taking direction from Johnson & Johnson.
The In Vivo blog makes a slightly different argument, that the breach was more to do with whether J&J was taking a controlling stake in Elan:*
... the case turned on the phrase "the sole discretion of the non-acquired party."
That phrase appears in a different section of the Elan-Biogen agreement. It's redacted from the SEC filing, but this is what remains:
In the event of a Change of Control, the Non-Acquired Party shall have the right, exercisable in accordance with this Section, to purchase the interest of the Acquired Party under this Agreement ...

... the ultimate decision of whether to exercise its right under this Section will be at the sole discretion of the non-Acquired Party. In the event the Non-Acquired Party exercises its election to purchase the interest of the Acquired Party under this Agreement, the Parties shall *** APPROXIMATELY 15 LINES OMITTED ***

The redaction make it impossible for us to guess what must be done should the "non-acquired party" (Biogen) want to stick its wrench into the works. Regardless, at whatever price, the Elan-J&J deal seems to give J&J only a minority stake in Elan until the point at which Biogen gives up its rights to Tysabri. There's no change of control at Elan prior to that point. So the entire breach seems to hinge on whether Elan has currently assigned a right without Biogen's consent.

Which is why, absent any other kind of change to the Elan-J&J deal, you can expect Biogen to insist that the breach remains uncured come Sept. 26.

Image by Flickr users thetruthabout, CC. *In Vivo author Alex Lash says this phrase mischaracterized his argument. Previous BNET coverage of Elan: