Elan to Unravel Biotech Ventures
Turmoil at Elan Corp. is rattling dozens of small biotechnology companies that have partnership deals with the big Irish pharmaceutical firm.
Elan announced last week a new corporate structure that would end its joint ventures, which have come under regulatory scrutiny in the United States. More than 50 biotech firms in the United States and Canada have drug development ventures with Elan, which funded the deals.
The problems at Elan illustrate the risks that small biotech companies face when they rely heavily on research partnerships with big drug companies, an arrangement that many start-ups have counted on for funding and growth.
For companies such as Menlo Park-based DepoMed Inc., the outlook is uncertain. DepoMed, which develops time-release drugs, said in a regulatory filing that Elan provides most of its revenue, and it would be hurt if the relationship ended.
DepoMed Chief Executive John Fara said the company is in talks with Elan about extending the partnership.
“We have products coming out of the collaboration. The question is what would happen to them,” Fara said.
Another question is whether Elan can continue to underwrite such drug development projects. Elan, as part of its restructuring, reported a second-quarter loss of $802 million last week after writing down investments, including joint ventures, by $826.6 million. It plans to lay off 1,000 of its 4,700 employees by December and shed an additional 2,100 by the end of next year.
Elan faces a so-called poison put in December 2003, when it must repay $953 million in bonds with cash or equity. By then, Elan said it hopes to raise $1.5 billion from sales of assets unrelated to neurology, pain management and autoimmune disease. If it is unable to repay the debt in cash, the bondholders will own the company.
John McCamant, an editor at Medical Technology Stock Letter, said he expects Elan to unwind the complicated joint-venture deals, a process that could take six to 12 months. Companies with low cash reserves may have to put their drug development projects on hold as Elan works things out, he said.
“These JVs are all stuck in limbo,” said McCamant, referring to the joint ventures. “It’s a true mess.”
Only a year ago, small biotech companies viewed Elan as a coveted business partner. The pharmaceutical company financed the deals and, just as importantly, shared valuable drug-delivery technology with its partners, McCamant said.
But the joint ventures were structured in a way that led the Securities and Exchange Commission to question Elan’s accounting practices.
In a typical scenario, Elan would invest $20 million in a partner and form a joint venture. Then the joint venture would pay Elan a $15-million technology-licensing fee. Critics said the arrangement allowed Elan to book a portion of its investment as revenue.
As it turned out, Elan’s partners paid a high price to do business with the drug maker. Elan’s investment typically took the form of debt that was convertible to equity, giving it a substantial stake in its partners.
Until recently, Elan was viewed as a long-term investor. But Elan’s troubles have changed its attitude. Lately, Elan has asked some of its partners to register the stock it owns with the SEC, a step that would allow Elan to sell it. Investors, fearing dilution of their holdings if those shares come onto the market, have responded by hammering the shares of Elan’s partners.
Among the companies taking a hit is Ligand Pharmaceuticals, a San Diego biotech firm that lost $42 million last year. Ligand’s shares have lost nearly half their value since June 7, when the company disclosed that it had received a registration request from Elan.
Ligand spokesman Michael J. Watts said that Ligand has not yet registered the 19.9% stake owned by Elan, which acquired the stake as part of a complicated drug-licensing deal. Ligand is in discussions with Elan over whether and how the shares might be sold, he said.
Ligand’s shares closed at $8.40 Friday on Nasdaq, down 20 cents.
Many of Elan’s deals are with private companies clustered in such biotech centers as Boston, North Carolina and San Diego.
Isis Pharmaceuticals is trying to unwind two joint ventures with Elan; it is the only company that has more than one such deal with the Irish drug maker. The Carlsbad-based company recently prepaid a $19.7-million debt to Elan at a 25% discount, a favorable deal made possible by Elan’s weakened bargaining position. But Elan continues to hold a 5% stake in Isis, mostly in the form of convertible debt and warrants.
Elan isn’t expected to convert the securities to stock unless Isis’ shares rebound. Isis has lost about half its market value since February, when Elan’s accounting methods came under SEC scrutiny.
Isis’ shares closed at $8.06 Friday, down 56 cents on Nasdaq, well below conversion prices that range from $18.34 to $54, said analyst Fariba Ghodsian of Roth Capital Partners.
But for Isis, improving its balance sheet is only part of the challenge. It must resolve ownership rights to two experimental drugs developed by the joint ventures, one for rheumatoid arthritis and the other for hepatitis C.
Isis spokeswoman Karen Lundstedt said the company wants to continue developing the drugs and is in negotiations with Elan over rights to them. Sunny Uberoi, a spokesman for Elan, said that the company is reviewing the joint ventures on a case-by-case basis and said it is too early to comment on any of them.
The experimental rheumatoid arthritis drug fits with Elan’s focus on autoimmune disease. But the company is not the strong marketing partner it appeared to be when it formed the joint venture with Isis in 1999.
James McCamant, editor of the Medical Technology Stock Letter and John McCamant’s father, said Isis would not have a problem finding a new development partner on the rheumatoid arthritis drug, which he considers promising. Whether Elan is willing to sell out under fire-sale conditions is another matter.
“It is a decision that Isis and Elan are going to have to make,” he said.
