Dew,
I just got to my mailbox. Here are my comments:
<<<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.>>>
You certainly have it smacked down when you state that the $500 million in development expenses should really only be a $250 million credit on the deal for ELN and not the $500 million. JNJ would have contributed $250 million to the JV without the provision.
<<<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.>>>
I see it as rather the reverse. It was a "without tysabri" premium. Most conservative drug companies do not want to have anything to do with the potential and unpredictable liability that may be associated with tysabri. It is like dynamite. I think that tysabri is clearly a miracle drug for 10s of thousands of MS sufferers and potentially could be for 100s of thousands. This said, the marketing of the drug has been so horrendous that MS sufferers tend to be more scared of tysabri than they are of MS, even if the MS is putting them in a wheelchair or worse.
I think JNJ paid a premium perhaps to what the alzheimer program may be worth, but they paid it because they were able to acquire these crown jewels from ELN without the risk of tysabri. Different way to look at it, but JNJ can afford to be risk adverse and does not need the potential liability of tysabri, even if it could produce a few hundred million to a billion dollars of profit some day. JNJ does not need that sort of headache.
So I see it as a case where the asset was worth more than the rest of the company because tysabri certainly does not have a negative value, but it implicates the rest of the value of the company when the assets are not taken individually.
<<<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.>>>
There is no doubt about this as well. The minority discount. However, ELN has never demonstrated its ability to properly protect their interests in the subservient role before, and by purposefully putting themselves back into that role I think demonstrates two things: (1) this deal was not out of strength by any means at all, and (2) ELN has realized that it really, really, really, SUCKS at marketing drugs.
My God!!! The number of crohns patients on tysabri, despite the fact that tysabri is a very valuable treatment in that indication (albeit the PML risk is probably worse with the crohns set of patients than with MS due to higher immune modulating drug use and steroid use) can literally be counted on one hand, maybe two hands!!! All this after spending, what, 9 figures bringing the drug to market for that indication.
What about prialt? What about tysabri for MS itself.
I think ELN is realizing that they will make more money as the R&D arm for big pharma then they will at becoming big pharma.
That is really a blow for many who thought ELN could become a big pharma company itself, but that is how I see it, and it may have been a very strategic and purposeful decision for ELN in order to plug this glaring weakness the company has when it comes to drug marketing. Disappointing, but from a perspective of a management consultant, this glaring deficiency is obvious and this plugs it while funneling profits to ELN should the venture succeed. BUT, THEN AGAIN, THAT IS WHAT WYETH WAS FOR. No go back to the it was a desperate move conclusion.
I am still not quite sure what to make of everything investment wise. The market cap has not changed much, but the upside certainly has been diluted by 50% even though the on-going risks are less.
In the end, I really don't like it from the perspective of ELN. As I've stated before, it really SUCKS! From the ELN perspective. How much potential value to ELN management waste and flush down the toilet? We are talking billions and billions of dollars.
Tinker
AI
