answer of the mini case question :

1.using the sales forcast for tysabri presented in exhibitA,and using the discounted cash flow model presented in exhibit B,what do you think elan is worth?

2. what other considertions do you think should be included in the valuation of elan ?

3.what would be your recommendation to shareholders to approve managment proposals killing RPs offer or say no to the proposal prompting the acceptance of RPs offer ?

Elan and Royalty Pharma 5 We lived a long time with Elan (ELN). We always appre- Elan's shareholders (Elan Corporation, NYSE: ELN) were ciated its science and scientists, and, at times, we hated its faced with a difficult choice. Elan's management had made former management, or whoever caused it to turn from four proposals to shareholders in an attempt to defend ascending towards becoming a citadel of sciences, espe- itself against a hostile takeover from Royalty Pharma ciallyneurosciences,intoanalmostbankruptfirmwithlesseverythingvaluableinitthanwhatwasnecessaryfor(U.S.),aprivatelyheldcompany.Ifshareholdersvotedinfavorofanyofthefourinitiatives,itwouldkillRoyalty less everything valuable in it than what was necessary for favor of any of the four initiatives, it would kill Royalty its survival. What saved it at the time was the emergence Pharma's offer. That would allow Elan to stay independent of Tysabri, for multiple sclerosis, which we knew it was and remain under the control of a management team that second to none in treatment of relapsing remitting mul- had not sparked confidence in recent years. All votes had tiple sclerosis. We were certain that this drug, like Aaron's to be filed by midnight June 16,2013. cane, would swallow up all magicians' staffs. - "Biogen Idec Pays Elan $3.25 Billion for Tysabri: The Players Do We Leave, Or Stay?," Seeking Alpha, Elan Corporation was a global biopharmaceutical comFebruary 6,2013 . pany headquartered in Dublin, Ireland. Elan focused on the discovery, development and marketing of therapetitic Royalty Pharma responded publicly with a letter to products in aeurology including Alrheimer's disease and Elan's stockholders questioning whether Elan's leadership Parkinsonsdiseaseandautoimmunediseasessuchasmulwasreallyactinginthebestinterestsoftheshareholders. pany had spun-out, sold-off, or closed most of its business Contingent Value Right (CVR). The CVR was a conditional activities. By the spring of 2013 , Elan was a company of element where all shareholders would receive an addiTysabri, which it had co-developed with Biogen. The solution to Elan's problem was the sale of its interest in Tysabri to its partner Biogen. In February 2013 Elan by 2017 Royalty Pharma also made it very clear that if sold its 50% rights in Tysabri to Biogen in rerurn for 53.29 shareholders were to approve any of the Elan's four min- billion in eash and a perpetual royalty stream on Tysabri. Whereas previously Elan earned returns on only its 50% share of Tysabri, the royalty agreement was based on 100% The Value Debate of the asset. The royalty was a step-up rate structure on Elan, as of May 2013, consisted of $1.787 billion in cash. worldwide sales of 12% in year 1,18% all subsequent years. the Tysabri royalty stream, a few remaining prospective plus25%onallglobalsalesabove$2billion.TheinkhadbarelydriedonElanssaleagreementinannulexpensesassociatedwithitsbusiness.Elansleader-pipelineproducts,andbetween$100and$200millionin February 2013 when it was approached by a private U.S. ship wasted to use its cash and its annual royalty earnings firm. Royalty Pharma, about the possible purchase of Elan to build a new business. Royalty Pharma just wanted to for $11 per share. Elan acknowledged the proposal publicly, buy Elan, take the cash and royalty stream assets, and shut and stated it would consider the proposal along with other Elan down. Royalty Pharma (RP) is a privately held company value of the Tysabri royalty stream. That meant predicting (owned by private equity interests) that acquires royalty what actual sales were likely to be in the coming decade. interests in marketed or late-stage pharmaceutical products interests in marketed or late-stage pharmaceutical products. Exhibit A presents Royalty Pharma's synopsis of the sales Its business allows the owners of these intellectual products debate, noting that Elan's claims on value have been selecto monetize their interests in order to pursue additional busi- tively high, while Royal Pharma has based its latest offer Elan's leadership was now ander considerable pressure Sales woald slide, but continue, in the following years. by shareholders to explain why shareholders shoald not Second, competitive products were already entering the Sender theing tender their shares to Royalty Pharma. In May, Elan began market. In the spring. Biogen had finally received FDA to detail a collection of initiatives to redefine the company. approval on an oral treatment for relapsing-remitting forms Going forward, Elan described a series of four complex of multiple sclerosis. It was only one of several new treat- strategic initiatives that it would pursue to grow and ments coming to the market. Royalty Pharma had pointed diversify the firm beyond its curtent two-asset portfolio. to declining new patient adds over the past two quarters as Because the company was currently in the offer period of evidence that aggressive future sales forecasts for Tysabri a proposed acquisition, Irish securities laws required that may be unrealistic-,alieady. all four of Elan's proposais be approved by sharcholders. For these and other reasons Royalty Pharma had argued But fiom the beginning that appesred difficult given public that a conservative 5ales forecast was critically important. perception that the initiatives were purcly defensive. management or Royalty Pharma's offer. Royalty Pharma's The result was a base valuation of $10.49 or $10.17 per valuation, presented in Exhibit B, used this sales forecast share, depending on the terminal value decline assumpfor its baseline analysis. Royalty Pharma's valuation of tion. As typical of most valuations, the top-line total sales Elan was based on the following critical assumptions: was the single largest driver for all tuture projected cash 35 Tysabri's worldwide sales, the top-line of the valuation, flows. The shares outstanding assumption, 518 million - The discount rate would be 7.5% per year up until going off-patent in 2017 , and rising to 10% after that. Market Valuation = Perpetuity value (terminal value) would be based on Despite the debate over Elan's value, as a publicly traded year 2024 's income, discounted at 12%, and assum- company, the market made its opinion known every single ing an annual growth rate of either 2% or 4% as trading day. On the day prior to receiving the first indicaTysabri's sales slide into the future. There were 518 million shares outstanding as of interest from Royalty Pharma, Elan was trading at S11 per share. (In the days that follow, the market is factorMay 29, 2013, according to Elan's most recent ing in what it thinks the effective offer price is from a suitor communications. like Royalty Phatma and the probability of the acquisition . Elan's cash total was \$1.787 billion, according to Elan's occurring.) Elan's share price history for 2013 is shown in EXHIBIT B Valuing Elan: Prospective Royalties on Tysabri Plus Cash Notes. Valustion based on that presertad h 'Royaty Prama's Response to Elaphe Tysater Wovation," Moy 29, 2013, p. 12. Royalties paid for the first 12 morehs, approxamately 2013 in lenget are at 12%. Ferpetuty vatue (leminal veloil astumas net revences "grow" at 2% par annum ndefinitey and ase from 7.505 sto 10.0% bepinning in 2020 when Tysabe goes ot -patent. Elan's management had made their case to shareholders since Mr. Schuler's departure. The board and manageThe collection of initiatives that Elan's leadership wished ment team remain wholly focused on continued value to pursue had to be approved, however, by shareholders. creation and will continue to act in the best interests of The Extraordinary General Meeting (EGM) of sharehold. our shareholders." ers would be held on Monday. June 17th. At that meeting Shareholders had to decide-quickly. the results of the shareholder vote (all votes were due by the previous Friday) would be announced. Mini-Case Questions other Elan board members will act in the interests of shareholders. I hope the Elan shareholders realise that 3. What would be your recommendation toshareholdersbidder." Elan's current non-executive chairman then to approve management's proposals killing RP's. responded; "I note that Elan's share price has trebled = _ ing the acceptance of RP's offer? Elan and Royalty Pharma 5 We lived a long time with Elan (ELN). We always appre- Elan's shareholders (Elan Corporation, NYSE: ELN) were ciated its science and scientists, and, at times, we hated its faced with a difficult choice. Elan's management had made former management, or whoever caused it to turn from four proposals to shareholders in an attempt to defend ascending towards becoming a citadel of sciences, espe- itself against a hostile takeover from Royalty Pharma ciallyneurosciences,intoanalmostbankruptfirmwithlesseverythingvaluableinitthanwhatwasnecessaryfor(U.S.),aprivatelyheldcompany.Ifshareholdersvotedinfavorofanyofthefourinitiatives,itwouldkillRoyalty less everything valuable in it than what was necessary for favor of any of the four initiatives, it would kill Royalty its survival. What saved it at the time was the emergence Pharma's offer. That would allow Elan to stay independent of Tysabri, for multiple sclerosis, which we knew it was and remain under the control of a management team that second to none in treatment of relapsing remitting mul- had not sparked confidence in recent years. All votes had tiple sclerosis. We were certain that this drug, like Aaron's to be filed by midnight June 16,2013. cane, would swallow up all magicians' staffs. - "Biogen Idec Pays Elan $3.25 Billion for Tysabri: The Players Do We Leave, Or Stay?," Seeking Alpha, Elan Corporation was a global biopharmaceutical comFebruary 6,2013 . pany headquartered in Dublin, Ireland. Elan focused on the discovery, development and marketing of therapetitic Royalty Pharma responded publicly with a letter to products in aeurology including Alrheimer's disease and Elan's stockholders questioning whether Elan's leadership Parkinsonsdiseaseandautoimmunediseasessuchasmulwasreallyactinginthebestinterestsoftheshareholders. pany had spun-out, sold-off, or closed most of its business Contingent Value Right (CVR). The CVR was a conditional activities. By the spring of 2013 , Elan was a company of element where all shareholders would receive an addiTysabri, which it had co-developed with Biogen. The solution to Elan's problem was the sale of its interest in Tysabri to its partner Biogen. In February 2013 Elan by 2017 Royalty Pharma also made it very clear that if sold its 50% rights in Tysabri to Biogen in rerurn for 53.29 shareholders were to approve any of the Elan's four min- billion in eash and a perpetual royalty stream on Tysabri. Whereas previously Elan earned returns on only its 50% share of Tysabri, the royalty agreement was based on 100% The Value Debate of the asset. The royalty was a step-up rate structure on Elan, as of May 2013, consisted of $1.787 billion in cash. worldwide sales of 12% in year 1,18% all subsequent years. the Tysabri royalty stream, a few remaining prospective plus25%onallglobalsalesabove$2billion.TheinkhadbarelydriedonElanssaleagreementinannulexpensesassociatedwithitsbusiness.Elansleader-pipelineproducts,andbetween$100and$200millionin February 2013 when it was approached by a private U.S. ship wasted to use its cash and its annual royalty earnings firm. Royalty Pharma, about the possible purchase of Elan to build a new business. Royalty Pharma just wanted to for $11 per share. Elan acknowledged the proposal publicly, buy Elan, take the cash and royalty stream assets, and shut and stated it would consider the proposal along with other Elan down. Royalty Pharma (RP) is a privately held company value of the Tysabri royalty stream. That meant predicting (owned by private equity interests) that acquires royalty what actual sales were likely to be in the coming decade. interests in marketed or late-stage pharmaceutical products interests in marketed or late-stage pharmaceutical products. Exhibit A presents Royalty Pharma's synopsis of the sales Its business allows the owners of these intellectual products debate, noting that Elan's claims on value have been selecto monetize their interests in order to pursue additional busi- tively high, while Royal Pharma has based its latest offer Elan's leadership was now ander considerable pressure Sales woald slide, but continue, in the following years. by shareholders to explain why shareholders shoald not Second, competitive products were already entering the Sender theing tender their shares to Royalty Pharma. In May, Elan began market. In the spring. Biogen had finally received FDA to detail a collection of initiatives to redefine the company. approval on an oral treatment for relapsing-remitting forms Going forward, Elan described a series of four complex of multiple sclerosis. It was only one of several new treat- strategic initiatives that it would pursue to grow and ments coming to the market. Royalty Pharma had pointed diversify the firm beyond its curtent two-asset portfolio. to declining new patient adds over the past two quarters as Because the company was currently in the offer period of evidence that aggressive future sales forecasts for Tysabri a proposed acquisition, Irish securities laws required that may be unrealistic-,alieady. all four of Elan's proposais be approved by sharcholders. For these and other reasons Royalty Pharma had argued But fiom the beginning that appesred difficult given public that a conservative 5ales forecast was critically important. perception that the initiatives were purcly defensive. management or Royalty Pharma's offer. Royalty Pharma's The result was a base valuation of $10.49 or $10.17 per valuation, presented in Exhibit B, used this sales forecast share, depending on the terminal value decline assumpfor its baseline analysis. Royalty Pharma's valuation of tion. As typical of most valuations, the top-line total sales Elan was based on the following critical assumptions: was the single largest driver for all tuture projected cash 35 Tysabri's worldwide sales, the top-line of the valuation, flows. The shares outstanding assumption, 518 million - The discount rate would be 7.5% per year up until going off-patent in 2017 , and rising to 10% after that. Market Valuation = Perpetuity value (terminal value) would be based on Despite the debate over Elan's value, as a publicly traded year 2024 's income, discounted at 12%, and assum- company, the market made its opinion known every single ing an annual growth rate of either 2% or 4% as trading day. On the day prior to receiving the first indicaTysabri's sales slide into the future. There were 518 million shares outstanding as of interest from Royalty Pharma, Elan was trading at S11 per share. (In the days that follow, the market is factorMay 29, 2013, according to Elan's most recent ing in what it thinks the effective offer price is from a suitor communications. like Royalty Phatma and the probability of the acquisition . Elan's cash total was \$1.787 billion, according to Elan's occurring.) Elan's share price history for 2013 is shown in EXHIBIT B Valuing Elan: Prospective Royalties on Tysabri Plus Cash Notes. Valustion based on that presertad h 'Royaty Prama's Response to Elaphe Tysater Wovation," Moy 29, 2013, p. 12. Royalties paid for the first 12 morehs, approxamately 2013 in lenget are at 12%. Ferpetuty vatue (leminal veloil astumas net revences "grow" at 2% par annum ndefinitey and ase from 7.505 sto 10.0% bepinning in 2020 when Tysabe goes ot -patent. Elan's management had made their case to shareholders since Mr. Schuler's departure. The board and manageThe collection of initiatives that Elan's leadership wished ment team remain wholly focused on continued value to pursue had to be approved, however, by shareholders. creation and will continue to act in the best interests of The Extraordinary General Meeting (EGM) of sharehold. our shareholders." ers would be held on Monday. June 17th. At that meeting Shareholders had to decide-quickly. the results of the shareholder vote (all votes were due by the previous Friday) would be announced. Mini-Case Questions other Elan board members will act in the interests of shareholders. I hope the Elan shareholders realise that 3. What would be your recommendation toshareholdersbidder." Elan's current non-executive chairman then to approve management's proposals killing RP's. responded; "I note that Elan's share price has trebled = _ ing the acceptance of RP's offer