Shares in Elan surged by close to 14 per cent in New York yesterday after the company said it had agreed to settle its lawsuit with King Pharmaceuticals over the sale of its primary care franchise.
The agreement will see the two companies proceed with an amended version of the sale and clears the way for Elan to meet its debt obligations this year without the need for an equity issue.
Under the terms of the new deal, Tennessee-based King will pay $750 million (€641 million) for muscle-relaxant Skelaxin and sleep drug Sonata, $100 million less than the amount originally agreed in January.
However, Elan will receive an additional $25 million milestone payment on January 2nd, 2004, contingent on the ongoing patent exclusivity of Skelaxin.
It will also receive payments of 5 per cent of net sales of the current formulation of Skelaxin until the end of 2005. From 2006 to 2021, it will receive payments of 10 per cent of net sales exceeding $50 million annually.
Elan will also get an additional $61 million in milestone payments relating to the development of enhanced formulations of Sonata.
"The agreement to settle this lawsuit clears the way for us to close the sale of our primary care franchise to King," Elan chief executive Mr Kelly Martin said. "Moreover, the new, amended agreements enable us to participate in future revenue streams on sales of Skelaxin."
The stock market responded positively to the ending of the uncertainty surrounding the sale with Elan shares gaining nearly 15 per cent in early trading in Dublin before slipping back to close 8.5 per cent higher at €4.06. They closed 59 cents higher at $4.83 in the US.
"Settlement of this deal virtually negates the financial risk surrounding Elan out to 2004, reducing, as it does, future debt and the payment required to recover royalty rights as well as increasing cash reserves," said Goodbody analyst Mr Ian Hunter.
Elan said it would have to seek shareholder approval of the amended transaction at a second extraordinary meeting but expected to complete the deal by the end of June.
Following completion of the sale, Elan will have raised around $1.6 billion from its asset-disposal programme, ahead of its original $1.5 billion target. The deal will cut its total contractual and potential future payments to $2.6 billion from $3.1 billion, mainly due to the elimination of payments of $443 million related to Sonata.
Elan's cash balances will be boosted by $312 million to $1.3 billion while the transaction is expected to result in a pre-tax gain of around $35 million, after taking account of a $200 million charge related to the purchase of royalty rights attached to Sonata and other transaction costs.
After agreeing to buy the business from Elan in January, King backed out of the deal after the US Federal Trade Commission (FTC) launched an investigation into whether Elan had blocked generic rivals to Skelaxin.
Elan, for whom the deal was a key element in its recovery plan, responded by suing King. The court hearing was due to open in New York this week, though the recent announcement by the FTC that it had dropped part of its inquiry was believed to have weakened King's case.
"Incorporating the new terms of the deal into our sum of the parts calculation gives a value of $7.30 per share, which would imply significant upside from current levels," said Merrion analyst Mr Peter Frawley.
However, he warned Elan shares were likely to remain speculative until the risk surrounding a Securities and Exchange Commission investigation into the company and class action law suits was removed and more detailed clinical data on one of its key drugs, Antegren, was released.
