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Elan rejects Royalty bid as grossly undervaluing its prospects

By Padraic Halpin

DUBLIN (Reuters) - Irish drugmaker Elan rejected a reduced $11.25 per share bid from Royalty Pharma , putting the ball back in the U.S. investment company's court in an increasingly convoluted takeover saga.

Royalty made its initial approach in February, attracted by the promise of lucrative revenues from Elan's multiple sclerosis drug Tysabri. But Elan has fought to maintain its independence through a series of maneuvers designed to frustrate the bid, which is contingent on 90 percent acceptances.

Royalty last week lowered its bid for Elan to $11.25 a share from an earlier $12 offer, pricing in the result of a $1 billion share buyback by Elan. The $12 per share offer had valued Elan at $7.3 billion and had been sweetened from an initial proposal.

Buoyed by the outcome of the buyback, Elan, which claimed last month that most of its shareholders did not view Royalty's original proposal as worth consideration, strongly advised shareholders to take no action in relation to the bid.

"The offer from Royalty Pharma grossly undervalues Elan's current business platform and our future prospects. As a result the board unanimously and without reservation rejected the offer," Elan Chairman Robert Ingram said in a statement on Monday.

As part of the share buyback, U.S. healthcare firm Johnson & Johnson cut its stake in Elan to 4.9 percent from 18 percent, accounting for more than 90 percent of shares repurchased.

Analysts were divided as to whether the buyback's outcome signaled confidence in Elan's plans to reinvent itself through a series of acquisitions, or speculation that Royalty would eventually return with a higher bid.

But after 73 percent of shares excluding Johnson & Johnson's were not tendered at any price in the pre-announced $11.25 to $13.00 range, Royalty may have to come back with a better offer.

VAST MAJORITY

Shares in Elan, which closed at $11.95 in New York on Friday, rose 2.5 percent to 9.1 euros ($11.90) at 0800 GMT in Dublin where the company keeps a secondary listing.

"Put simply, the vast majority of Elan shareholders believe Elan shares are currently worth more than $13," Berenberg Bank analyst Adrian Howd wrote in a note. "As we stand today, Royalty Pharma would seemingly have to offer in excess of $13 ... We see this as unlikely."

Royalty could yet improve its offer by factoring in the future performance of Elan's lucrative Tysabri drug via a contingent value right (CVR), rewarding investors should the drug hit certain sales milestones, two people familiar with the matter told Reuters.

Royalty, which wants to add the rights to Tysabri - worth hundreds of millions of dollars annually - to its large stable of royalty streams, has said that while its offer did not include a CVR, it reserves the right to include one.

Royalty's bid came after Elan in February sold its 50 percent interest in the blockbuster drug for $3.25 billion plus royalty rights to U.S. partner Biogen Idec , and said it aimed to spend the bulk of the money on acquisitions.

Elan, 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 Tysabri.

Royalty argues that Elan's management does not have a track record of deals and has urged shareholders to put pressure on the board to accept its offer.

Elan has said it has already spoken to several companies about potential deals and can move quickly. It may give further details of its strategy when it reports first-quarter results on Wednesday.

(Editing by Louise Heavens and David Holmes)

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