Biotech Values

[DewDiligence]

ELN JNJ – Those are great questions, p3, but they go well beyond the scope of the matter I was addressing, which is who got the larger piece of the Bap wishbone. I’ll defer to one the “Tysabri specialists” who posts on this board for the answers to your questions (and feedback on your own answers). However, there are some additional points I can make about the Bap deal that may not have been made:

1. I don’t consider the share price of JNJ’s equity purchase to be a bona fide premium to the market price even though it works out to $9 and change. Why not? Because ELN could surely have sold the entire company at that price when the company was shopped around by the IB’s. Moreover, if ELN’s management were competent, they ought to have been able to raise money at that price in a well-timed conventionally underwritten financing with an investor roadshow.

2. The first $500M of expenses that JNJ will contribute toward Bap development is worth only half that amount to ELN because JNJ owns roughly half of the JNJ-ELN JV. Absent this provision in the deal, each company would have contributed $250M toward the first $500M of development expenses. This provision is thus worth $250M to ELN.

3. ELN no longer has any material say in Bap policymaking because JNJ is the majority owner of the JNJ-ELN JV with a 50.1% stake. In the event of a disagreement between JNJ and ELN over development policy, JNJ’s desires prevail and JNJ effectively becomes a 50/50 partner with WYE for policymaking purposes. (Under the old scheme where ELN and WYE were equal partners, a policymaking deadlock could have been settled by arbitration.) I would submit that policymaking control of the JNJ-ELN JV has substantial economic value—perhaps as much as the $250M value to ELN of item #2 above.

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When you add it all up, items #2 and #3 above essentially offset one another. The net result, therefore, is that the JNJ-ELN deal is effectively a large financing transaction in which ELN ceded 25% of the Bap program in return for nothing. That’s why I maintain that this was a great deal for JNJ and a desperation deal for ELN.