Elan banking on big debt paydown using asset sale proceeds, sees $800 million debt target

By Paul Deckelman

New York, June 7 - Elan Corp. plc will hit a historic milestone when its sale of a key unit to pharmaceutical sector peer Alkermes Inc. closes and it uses the cash portion of the proceeds to bring its debt below $1 billion, a goal that at one time would have seemed virtually impossible for a company that was staggering under more than $4 billion of debt just a decade ago.

Since then, the Dublin-based biopharmaceutical company has "worked very hard" on reforming its capital structure, Kelly Martin, Elan's chief executive officer, said during a presentation at the annual Jefferies & Co. Global Healthcare Conference in New York on Tuesday. From north of $4.5 billion of debt in 2002-2003, "we've worked that down steadily over the years."

As of the end of the 2011 first quarter on March 31, Elan's balance sheet showed not quite $1.3 billion of long-term debt: $460 million of outstanding 8 7/8% notes due 2013 and $825 million of 8¾% notes due 2016.

Martin, who came aboard as CEO in 2003 to turn the company's fortunes around after it was rocked by an accounting scandal earlier that decade, said, "As we have tried to do for most of my time here, we have kept a lot of cash on the balance sheet," bringing the company's net debt down to around $800 million.

More debt-cutting ahead

Martin said that the debt-cutting will continue once the sale of its Elan Drug Technologies drug formulation and manufacturing unit to Alkermes for just under $1 billion of cash and stock is completed, which he expects to take place some time in the third quarter or, perhaps, early in the fourth quarter.

He said that the unit "has been a great business for us - very steady cash flow, diversified, and it has allowed us, frankly, over the last seven or eight years to survive as an entity, given its cash flow and diversification." That steady cash flow helped corporate parent Elan to get over some rough bumps, such as the unexpected delays in the introduction of what would become the company's most important drug, Tysabri, in the middle 2000s, when the multiple sclerosis and Crohn's Disease remedy jointly developed by Elan and Biogen Idec, Inc. had to be pulled from the market until serious safety concerns were addressed.

But once Tysabri's problems were essentially solved to the satisfaction of regulators and when the right opportunity came along, Elan jumped at the chance to monetize the valuable asset. It announced on May 9 that EDT will be merged into Waltham, Mass.-based Alkermes. Elan will receive $500 million in cash and 31.9 million shares of common stock in the merged company, which is to be known as Alkermes plc, making it the largest single stockholder.

Martin told the conference that the $500 million cash portion of the proceeds will be used to retire all of the 2013 notes. Then, he said, the equity stake in the reformulated Alkermes will be monetized over time.

No desire to stay stockholder

"There's a structure that we can do that," he said, noting that the two companies could work together to monetize that stake sooner, "if opportunities present themselves."

He said that the proceeds of the sale of its Alkermes stake could be used to continue to work on the capital structure, "either debt or equity," to invest in the business or some combination thereof.

Martin stressed that Elan's goal would be to sell that new stake in Alkermes. "We're not a venture capital company. We're not a private equity company. We do not intend to have a long-term investment on our balance sheet," he said.

He said that Elan's Alkermes stake "could be $500, $600, $700 or $800 million, so we will monetize that over time and in the right way, in a way that doesn't negatively impact the Alkermes shares."

The retirement of the 2013 bonds using the sale proceeds will reduce the company's debt by about one-third, dropping the gross debt level to the $800 million level.

Martin said Elan's cash and investments would total between $1 billion and $1.2 billion, combining its current cash with the anticipated stake in the new Alkermes. He said that this would be "the first time since our team has been together where we would have net cash and investments versus net debt, and as a science-based biotech company, it's fundamental - something that both myself and the board [of directors] have been striving to get to for any number of years."

With debt expected to fall by a third, interest expense will see a similar reduction of around $40 million from current interest levels of around $125 million to $130 million.

The result of the EDT transaction, Martin said, will be the transformation of Elan into "a very focused biotech company with a proper capital structure and balance sheet."

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