Pharma Contractual Dispute: Biogen and Elan to See Each Other in Court
A billion dollar drug. A change of control. A collaboration agreement. And Johnson & Johnson. Sound familiar? No, we’re not talking about the Schering-Plough and J&J dispute over whether the Merck-Schering merger violates the Remicade distribution agreement. This time, Johnson & Johnson may have gone into the breach, rather than having alleged it. The case involves Massachusetts-based Biogen Idec, the Irish drug company Elan Pharma, the multiple sclerosis drug Tsyabri, and around a billion dollars in annual revenue. The question is whether Johnson & Johnson’s purchase of a minority interest in Elan violates Biogen’s and Elan’s agreement to jointly develop and market Tsyabri.
In July, a Johnson & Johnson subsidiary entered into a set of financing and cooperation agreements with Elan worth around $1.5 billion. The agreements (which are not publicly available) would give J&J a 14.8% stake in Elan along with the option to finance Elan’s purchase of Biogen’s 50% interest in the multiple sclerosis drug Tsyabri. Under the terms of a development and marketing collaboration agreement signed by Biogen and Elan in 2000, if one of the parties to the agreement is acquired by a third-party, then the other party has the option to purchase the acquired party’s rights to Tsyabri. So why has Elan offered Johnson & Johnson this option to finance a purchase that may not ever happen?
Elan, it seems, has been keeping a watchful eye on Biogen’s shareholders. Back in June, Carl Icahn – who has a 5.6% stake in Biogen – succeeded in getting two of his four nominees on Biogen’s board of directors. Icahn’s victory came after a fierce proxy battle waged over the course of six months. Although Icahn’s broader platform, which included moving the company’s state of incorporation to North Dakota, did not receive support from the board, there are no signs that the activist shareholder plans on relenting any time soon. On the contrary, Icahn has indicated that he intends to promote a sale of the company. By cozying up to Johnson & Johnson, Elan can ensure it has quick access to capital should Biogen suffer a change of control.
Biogen was clearly troubled by the prospect of a big pharma player getting too close to its Tsyabri partner. If Biogen were to lose its rights to Tsyabri under the collaboration agreement’s change of control provision, the company’s value would sink. In what can only be a signal that communication channels between Biogen and Elan have broken down, Biogen sent off a July 28 letter to Elan alleging that the Elan-J&J partnership would materially breach the collaboration agreement. Specifically, Biogen claims that Johnson & Johnson’s option to finance a change of control purchase by Elan violates the collaboration agreement’s prohibition that neither party may assign or delegate any of its rights or obligations under the agreement without the written consent of the other party. Under the agreement, a material breach would initiate a 60-day cure period, at the end of which Biogen could terminate the collaboration agreement and take over Elan’s rights to Tsyabri.
On August 6, Elan responded by filing a complaint in a Manhattan federal court seeking a preliminary injunction staying the 60-day period and a ruling that Elan’s and Johnson & Johnson’s arrangement does not breach the Tsyabri collaboration agreement. A federal judge in Manhattan has set a hearing for August 31.
Without being able to review the Elan-Johnson & Johnson agreements, it’s difficult to assess whether or not their terms violate the Tsyabri collaboration agreement. From Elan’s own description of the agreements, however, we can presume with reasonable confidence that the issue will boil down to whether Johnson & Johnson’s option to finance an Elan change of control purchase of Biogen’s Tsyabri stake is equivalent to an assignment or delegation of Elan’s rights under the collaboration agreement. After reviewing the Tsyabri collaboration agreement, it doesn’t seem that the Elan-J&J deal violates the no assignment provision.
Of course, we’ll be able to hear the opinion of a federal judge on the matter shortly.
Update: Elan Loses to Biogen in Court for Assigning Tysabri Obligations to Johnson & Johnson
Related Posts: Merck-Schering's Reverse Merger: Change of Control Provisions in Material Contracts
