Squeezing Blood From a Half-Dollar

• Email
• Share
• Print

Thank goodness. After months of soap-opera rumors, including potential deals with Pfizer (NYSE: PFE), Lundbeck, Bristol-Myers Squibb (NYSE: BMY), and Novartis (NYSE: NVS), we finally have a definitive close to Elan's (NYSE: ELN) strategic review.

Apparently Johnson & Johnson (NYSE: JNJ) beat out at least 30 other companies to get a portion of Elan. With that much competition, you'd think the deal would have had insanely good terms, but they just don't look that special to me.

Johnson & Johnson is investing $1 billion in Elan in exchange for an 18.4% stake in the company. That works out to $9.32 per share -- considerably higher than yesterday's close, but Elan traded above $37 per share a year ago, so the dilution is coming at a tough price for investors.

The other part of the deal involves Johnson & Johnson setting up a joint venture seeded with Elan's Alzheimer's disease program, including its phase 3 candidate, bapineuzumab, which is partnered with Wyeth (NYSE: WYE). Essentially the deal works out so that Johnson & Johnson picks up the next $500 million in expenses and then Elan will begin to incur 49.9% of the costs. After that, Elan is entitled to 49.9% of the profits or losses and some royalties once sales hit certain undisclosed thresholds.

So Elan gets an infusion of cash and lowers its burn rate for the next few years until the $500 million is used up, which it desperately needed to do, considering it has over $1.76 billion in debt.

But it's also giving up a lot. As any third-grader can tell you, half of a half is a quarter, and that's now how much of bapineuzumab Elan owns. Considering the drug's multi-billion-dollar potential, going down to a 25% stake could be a big mistake.

And that's the ironic part about this. If bapineuzumab fails, Elan's management will look like geniuses, but, if it succeeds, the tight spot they worked the company into that led to these less-than-favorable terms will come back to bite them.

More Foolishness:

• Johnson & Johnson is on a deal-making roll.
• Rick Munarriz picked Elan as one of his five stocks for under $10 back in February.
• Bargain stocks are everywhere.