Just so we're clear. If you split two in half, you have two sets with one each. And if you add them back together, you have two. There's no magic math here.
Yet Elan (NYSE: ELN ) traded up 4.5% yesterday after announcing that it plans to spin off its drug discovery business into a separate company. Investors seem to be claiming the sum of the parts really is worth more than the whole.
Don't get me wrong, I see how the move is a good idea. The two units are in different places in their biotech lives.
Elan sells multiple sclerosis treatment Tysabri with Biogen Idec (Nasdaq: BIIB ) and has a few other late-stage assets. Those drugs are either bringing in revenue right now or hopefully will within the next few years.
The drug discovery business, Neotope Biosciences, is more of a long-term play. The group hopes to have three drugs in the clinic by 2015, which puts the drugs years away from an FDA approval. When spinning out the unit, Elan plans on seeding Neotope with capital for 2.5 years, which should get the latter to a value inflection point where it can raise more capital on its own.
Splitting up the company will allow investors to own either of the companies or continue to own both. Choice is always good. But from a value point of view, there's no change in the value because shareholders will get shares of Neotope as a special dividend, making Elan's value go down.
By shedding Neotope's research expenses, Elan expects to be profitable immediately. That'll allow it to take advantage of carried-forward operating losses to lower its tax bill. But they'll eventually run out, so the operating losses have little impact on Elan's long-term value.
The real hope for the "sum of the parts" argument is that one or both of the units is more attractive individually and might be taken out for a premium. PDL Biopharma (Nasdaq: PDLI ) spun off its drug discovery business, Facet Biotech, which Abbott Labs (NYSE: ABT ) eventually purchased.
It doesn't always work out that well, though. Myriad Genetics (Nasdaq: MYGN ) spun off its drug discovery business, Myrexis, which has lost 40% of its value since its inception in 2009.
Choice is good, but buying for a spinout and a purchase isn't exactly the best investment thesis.
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