business

ISEQ lower-Elan split examined

The ISEQ opened lower this morning at 3,234, down 6 points as markets see further disappointing trade figures from China and await news of action from the ECB to control the fall of the Euro and the borrowing costs of Spain and Italy. Elan's announcement of a split between current products and future Potential is explained and examined by Davy Stockbrokers:

Elan has announced (August 13th) its intention to spin off the Discovery Science and Neotope Biosciences division from the company. Should the transaction get the necessary shareholder approval, it will create two independent public companies.

ANALYSIS: The companies, assuming the approvals are achieved, will be Elan plc and Neotape Biosciences. Elan plc will initially consist of three main assets: Tysabri, ELND005 and the continued interest in Jansen AI. Its focus will be generating profitable growth from the existing product pool. Elan is confident that following a successful spin-off, it can generate EBITDA in excess of $400m in 2013 and is targeting $1 per share in earnings by 2015. The company intends to explore ways to return value to shareholders through debt re-purchases, share buy-backs, dividends or a combination of all three.

Neotope Biosciences will focus on drug discovery, translating targets into potential therapies for chronic degenerative and related disease areas. If the transaction is effected, the company expects there to be a separate listing of Neotope Biosciences on a US exchange by the end of 2012. Elan Corporation will commit $120-130m of start-up capital and retain a 14-18pc minority equity position. Neotope Biosciences plc is expected to have ongoing cash spend of $50-60m per annum and will be led by Lars Ekman, Chairman, and Dale Schenk, CEO.

In order to proceed, the company will need shareholder approval and the approval of holders of its 2016 notes. It hopes to do this as soon as practicable. The company will host a conference call at 08:30 EST and will likely offer further detail on the proposed transaction.

DAVY VIEW: The separation of the two business units is an effort by management to improve the risk/return profile of the company. It follows on from the separation of Elan Drug Technologies and its subsequent merger with Alkermes, a deal which greatly transformed the balance sheet of Elan plc. The business is now entering another phase of its life cycle, becoming free cash generative, and the separation of the research operation is a logical step in de-risking the business according to Davy Stockbrokers