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Royalty Pharma launches improved bid for Elan

By Padraic Halpin and Jessica Toonkel

DUBLIN/ NEW YORK (Reuters) - U.S. investment firm Royalty Pharma launched a cash offer on Monday for Elan worth up to $7.3 billion, improving on its initial proposal to take over the Irish drugmaker and the lucrative royalty rights on its main drug.

Royalty made an indicative approach worth $11 per share in February, which Elan rejected for being "highly conditional". Facing a May 10 deadline to make a firm offer, it came back on Monday with one worth up to $12 a share.

The New York-based company, targeting royalty rights for multiple sclerosis (MS) treatment Tysabri worth hundreds of millions of dollars annually, said its cash offer may fall below $12 depending on Elan's pricing of a share buyback this week.

Elan, in which U.S. group Johnson & Johnson is an 18 percent shareholder, hatched the plan after selling its 50 percent interest in Tysabri for $3.25 billion plus future royalties to U.S. partner Biogen Idec.

The company secured strong approval from shareholders last week for the $1 billion buyback, which will be priced at between $11.25 and $13 a share, as it seeks to convince its investors it should be allowed to reinvent itself through a series of acquisitions.

However, with little track record in making acquisitions, Royalty has questioned Elan's ability to pull off such a plan and urged shareholders, many of whom it has met in recent weeks, to put pressure on the company's board to accept its bid.

"Royalty Pharma believes Elan stockholders will welcome the offer, as an alternative to the high-risk strategy outlined by Elan's management," Royalty said in a statement.

"Elan stockholders should encourage their board to immediately engage with Royalty Pharma with a view to achieving a recommended offer."

No one at Elan was immediately available to comment,

The Dublin-based company, left with just one experimental drug in its pipeline following the Tysabri deal, improved the terms of its own plan last month by offering shareholders up to 20 percent of future royalties from the blockbuster MS drug.

However Royalty may also offer some upside by paying more via a contingent value right (CVR) if Tysabri hits certain sales milestones, two people familiar with the matter told Reuters last week.

Royalty's chief executive Pablo Legorreta told reporters on a conference call on Monday that its offer did not include a CVR but that the company reserved the right to include one.

The value of the offer will fall at a staggered pace depending on the result of the buyback and could return to $11 per share if the strike price at a Dutch auction for the buyback is between $12.25 and $13 a share.

Shareholders should "send a message to the Elan board" by tendering all of their stock at $11.75 or $12 and fully benefit from Royalty's $12 offer, the company said.

Elan's shares closed at $12 in New York on Friday and the shares were trading up 1.3 percent at 9.1 euros ($11.92) in Dublin after the announcement on Monday.

"I think it's a fair price for the assets as they stand. Investors have a straight choice: Do they take the cash today or do they believe in management's ability to execute accretive acquisitions," said Deutsche Bank analyst Richard Parkes.

"I think the offer has a reasonable chance of being acceptable, but it will all come down to the Dutch auction."

Royalty Pharma said it would finance the offer through existing resources and new credit facilities. Its advisers are JPMorgan, BofA Merrill Lynch and Groton Partners.

Citi and Ondra Partners acted as financial advisors to Elan on its recent Tysabri deal, while Cadwalader, Wickersham & Taft and A&L Goodbody acted as legal counsel.

(Additional reporting by Martinne Geller in New York and Conor Humphries in Dublin; Editing by Jeffrey Benkoe and Greg Mahlich)

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