Needy Forest Labs reportedly eyeing bid for Elan

Why would Forest Laboratories buy Elan? The U.S.-based drugmaker, reeling from generic competition, is plugging away at its plan for reviving sales, but progress is slow. It's under pressure from activist investor Carl Icahn, who's been dogging Forest management for several years, saying the company is still underperforming its peers. And it's at a crossroads, with CEO Howard Solomon set to retire at year's end.

But why Elan ($ELN), as Reuters reports this morning, citing sources. The Irish biotech's only source of revenues these days is royalties, now that it has sold its blockbuster multiple sclerosis drug Tysabri to partner Biogen Idec ($BIIB). So, in the near term, Forest ($FRX) wouldn't reap much in the way of new sales.

What Elan has is cash. It reaped $3.25 billion from the Tysabri sale, and because shareholders rejected a string of deals struck by CEO Kelly Martin, there's plenty left. It also has a low tax rate, thanks to its headquarters in Ireland. And Elan has some pipeline assets, if none particularly compelling. One of those, in fact, was an Alzheimer's drug Kelly wanted to spin off, but that was one of the transactions nixed by investors.

In a recent press release, CFO Nigel Clerkin basically laid out the advantages Elan could offer: "very high net margin, multi-asset and long-term revenue streams" from Tysabri and (he thought at the time) Theravance's COPD drugs; "an orphan disease platform and a strong regional commercial presence"; a strong balance sheet; and a "highly efficient and strategically advantageous tax structure."

Since then, Elan shareholders voted down the company's plans to buy those Theravance ($THRX) royalties and its deal for AOP Orphan Pharmaceuticals. But the rest still applies. The question is whether that's enough to lure Solomon, Forest, and Forest's board, including Icahn's two members. The company isn't talking. But it's worth mentioning that Forest already has a relatively low tax rate of 22%, as Jefferies & Co. analyst Corey Davis tells Reuters, because it has an Irish subsidiary.

Forest needs new sales badly; Lexapro generics have stolen an enormous share of the brand's sales. Newer drugs such as Bystolic for hypertension and Viibryd for depression are gaining--a fact that even Icahn recognizes as positive--but those gains are slow in coming. Would Forest be willing to wait for the possible payoff from Elan's pipeline, or from spending Elan's war chest? And is it ready to pay a price Elan would accept--not to mention a higher price than other companies that might be interested, including the rejected Royalty Pharma? Stay tuned.

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