RP Management, LLC (“Royalty Pharma”) today announces that contact was made on Monday February 18, 2013 with the Chairman of the Board of Elan Corporation, plc, followed by a meeting then taking place on Wednesday February 20, 2013, at which an indicative proposal was made to acquire the entire issued and to be issued share capital of Elan.
Royalty Pharma is proposing, on an indicative basis, to make an offer for Elan (the “Possible Offer”) of US$11[1] for every Elan Share and every Elan ADS.
While Royalty Pharma has not received a formal response to its Proposal and has been unsuccessful in its efforts to engage with Elan since making the Proposal, Royalty Pharma remains committed to working towards a recommended transaction. Royalty Pharma was, however, surprised by Elan’s public announcement on Friday February 22, 2013 discussing Elan’s standalone strategy but not addressing the fact that Elan had received Royalty Pharma’s Proposal.
Royalty Pharma’s Proposal offers Elan Shareholders a simple and clear choice: — Remain an investor in a company whose material assets (in the context of the assets of the Elan Group, taken as a whole), following the completion of the Tysabri Transaction, will consist of cash and the Tysabri Royalty while Elan’s management pursues its announced strategy which includes maintaining expected operating expenses in the range of US$170-190 million[2] in the 2013 financial year and investing in a variety of yet-to-be-disclosed business assets; or — Sell their Elan Stock for a cash amount that Royalty Pharma believes reflects the full value of Elan today.
Royalty Pharma believes that the risks and lack of earnings visibility associated with Elan’s acquisition and in-licensing strategy are substantial. The pharmaceutical industry is highly competitive and Royalty Pharma believes many companies have suffered poor returns pursuing such a strategy.  Royalty Pharma believes that good assets in the pharmaceutical industry are in short supply, that there will therefore be significant competition for these assets, and that this competition is likely to result in acquirors being required to pay significant premiums to acquire these assets. In addition, Royalty Pharma believes that a successful acquisition strategy would require Elan to build an operating infrastructure and sales force to allow it to realize synergies from acquisitions.
Royalty Pharma notes that while Elan’s management has demonstrated its ability to execute several significant disposals (including the sale of some or all of bapineuzumab, Elan Drug Technologies and Tysabri), the current senior management team of Elan has not made any significant acquisitions or in-licensed any significant late stage products for Elan and thus does not have a track record of generating attractive returns from acquisitions or in-licensed products for Elan.
 Furthermore, if Elan makes additional investments in businesses and assets it acquires or in-licenses, those investments may depress Elan’s net income and cash flow for some period, and perhaps even cause those to become negative.
[1] For information only, US$11 was equivalent to ?8.36 at a ?/US$ exchange rate of 1.32 as at February 22, 2013.   Any offer, if made, will be made in US dollars.
[2] On the basis of Elan’s announcement of its results for the 2012 financial year made on February 6, 2013.
Royalty Pharma’s Proposal delivers full value for Elan Stock today and in cash Royalty Pharma believes that the Proposal offers Elan Shareholders an attractive financial alternative that will allow them to realize value for their Elan Stock in cash immediately and eliminate the execution risk associated with identifying, acquiring, integrating and growing attractive assets in the context of a highly competitive strategic landscape. In the event that the Possible Offer were forthcoming and were to close, Elan Shareholders would be able to reinvest any cash proceeds received for their Elan Stock in other pharmaceutical companies without paying a premium in order to gain control (often known as a “control premium”) of those companies, which Elan may need to pay to acquire control of companies.  As a result, Royalty Pharma firmly believes that its Proposal should be compelling to Elan Shareholders.
The Possible Offer represents: — a cash premium of 12.6 percent to the Current Enterprise Value[3] of Elan based on the closing share price of Elan Stock on February 15, 2013 of US$10.35 on the New York Stock Exchange[4]; — a cash premium of 6.3 percent to the closing share price of Elan Stock on February 15, 2013 of US$10.35 on the New York Stock Exchange; — a cash premium of 12.7 percent to the volume weighted average closing share price on the New York Stock Exchange for Elan Stock between February 6, 2013, being the date on which the Tysabri Transaction was announced to the market, and February 15, 2013 of US$9.76; — a cash premium of 9.5 percent to the Broker Median Price Target of US$10.05 for Elan Stock set by those brokers that Royalty Pharma is aware have published price targets since the announcement of the Tysabri Transaction[5]; — a Proposal Enterprise Value[6] for Elan equal to 16.4x and 12.1x 2014 and 2015 Broker Projected EBITDA[7] respectively (the median 2014 and 2015 projected EBITDA multiples for the Specialty Pharma Companies are 7.5x and 5.9x respectively, and for the Large Cap Biotech Companies are 11.1x and 9.1x respectively[8]); and — a Proposal price equal to 55.0x and 30.6x 2014 and 2015 Broker Projected Earnings Per Share[9] respectively (the median 2014 and 2015 projected earnings per share multiples for the Specialty Pharma Companies are 11.7x and 8.7x respectively, and for the Large Cap Biotech Companies are 15.1x and 11.3x respectively[10]).
Royalty Pharma plans to finance the Possible Offer through a combination of available cash and debt. Entities to which Royalty Pharma is the investment advisor currently have access to over US$1 billion in cash available for investment, and Royalty Pharma is working with financial advisors led by J.P. Morgan and lenders led by BofA Merrill Lynch to put in place the necessary debt financing to consummate the Possible Offer.
It is intended that the Possible Offer would proceed either by way of an offer or a scheme of arrangement under section 201 of the Act and will be made by a newly incorporated company controlled by entities managed by Royalty Pharma.
[3] As defined in appendix II.
[4] February 15, 2013 representing the last trading day prior to Royalty Pharma contacting Elan’s chairman regarding the Proposal.
[5] Based on the price targets of the brokers listed in the Sources and Bases section.  The third party broker forecasts do not constitute a profit forecast for any period, nor should any statement be interpreted to mean that earnings or earnings per share will necessarily be greater or lesser than those for the relevant preceding financial periods for Elan.
[6] As defined in appendix II.
[7] Based on forecasts made by the brokers listed in the Sources and Bases section.  The third party broker forecasts do not constitute a profit forecast for any period, nor should any statement be interpreted to mean that Elan’s earnings or earnings per share will necessarily be greater or lesser than those for the relevant preceding financial periods for Elan.
[8] Sourced from FactSet, company filings and equity research and based on closing share prices on February 22, 2013. The Specialty Pharma Companies are Alkermes plc, Allergan, Inc., Cubist Pharmaceuticals, Inc., Endo Health Solutions Inc., Forest Laboratories, Inc., Jazz Pharmaceuticals plc, The Medicines Company, Salix Pharmaceuticals, Ltd., Shire plc, Valeant Pharmaceuticals International, Inc and Warner Chilcott Plc. The Large Cap Biotech Companies are Amgen Inc., Biogen, Celgene Corporation and Gilead Sciences, Inc.
[9] Based on forecasts made by the brokers listed in the Sources and Bases section.  The third party broker forecasts do not constitute a profit forecast for any period, nor should any statement be interpreted to mean that Elan’s earnings or earnings per share will necessarily be greater or lesser than those for the relevant preceding financial periods for Elan.
[10] Sourced from FactSet, company filings and equity research and based on closing share prices on February 22, 2013. The Specialty Pharma Companies and the Large Cap Biotech Companies are as listed in footnote 8.
IMPORTANT NOTICE The Proposal is subject to the following pre-conditions, which will need to be satisfied or waived prior to any announcement of the Possible Offer under Rule 2.5 of the Irish Takeover Rules: (i)    being granted access to and completion of satisfactory due diligence into the business of Elan, including management meetings; (ii)    no acquisitions, dispositions, restructuring activities, debt refinancing, stock buybacks or other extraordinary transactions by Elan apart from the completion of the Tysabri Transaction; (iii)    the Tysabri Transaction shall have closed and the terms shall not have been amended or altered in any material respect from the terms announced on February 6, 2013; (iv)    unanimous recommendation of the Possible Offer, if made, by the directors of Elan; (v)    each of the directors of Elan giving firm irrevocable undertakings to accept the Possible Offer, if made, or to vote in favour of the scheme of arrangement (as applicable) in respect of all the Elan Stock in which they have an interest; (vi)    the entry into an expense reimbursement agreement in a form acceptable to Royalty Pharma in respect of an amount equal to the maximum allowable under the terms of the Irish Takeover Rules and the financial advisor to Elan confirming to the Irish Takeover Panel that such agreement is in the best interests of Elan’s Shareholders; (vii)    Elan’s assistance, as appropriate, in obtaining support from its major institutional shareholders for the Possible Offer, if made; and (viii)   execution of an appropriate implementation agreement to govern the conduct of a scheme of arrangement if the transaction is to be structured in that manner.
Royalty Pharma reserves the right to waive any or all of the pre-conditions described in this announcement and to implement the Possible Offer by means of either a general offer or a scheme of arrangement.
Royalty Pharma reserves the right to reduce the Possible Offer price in the event that: (i)     Elan announces, declares or pays a dividend or any other distribution to its shareholders or announces or makes any share buyback or redemption; or (ii)    Elan agrees to or undertakes any extraordinary transaction, including an acquisition, in-licensing, or debt refinancing.
Customary terms and conditions under the Irish Takeover Rules will attach to the Possible Offer if made.