Control Issues Muddy Biotech Merger Waters
The issue of control has become a controversial topic in the biotechnology industry as a web of partnerships and joint ventures has complicated several merger negotiations. Bristol-Myers Squibb had been in talks to buy a minority stake in Irish biotechnology company Elan, but debates over the value of buying a non-controlling portion of the company scuttled discussions. Due to two partnership agreements, Elan cannot sell itself outright or sell a majority stake without losing rights to its two most lucrative products.
In January, Elan hired Citigroup to conduct a strategic review of its business, which it said at the time could lead to a sale or merger of the company. A sale or merger, however, is quite difficult without jeopardizing the value of Elan, analysts said.
Biogen Idec and Elan jointly market the multiple sclerosis drug Tysabri. Drugmaker Wyeth, currently being acquired by Pfizer, and Elan are jointly developing the Alzheimer's drug bapineuzumab.
Biogen and Wyeth have change of ownership clauses that allow them to buy out the two drugs, which together make up the bulk of Elan's value.
When is change a change of control?
The issue of control or change of control has become a central point in the merger of Merck and Schering-Plough. The fight over Schering-Plough's partnership over two rheumatoid arthritis drugs may not have seemed as crucial when the pact was forged in 1998. Today, the drug Remicade generates about $2.1 billion in annual sales for Schering-Plough. Merck and Schering-Plough contend their $41.1 billion cash-and-stock deal is a "reverse merger", under which Schering-Plough would technically be the surviving corporation. Still, the combined company would have Merck's name and be controlled by Merck shareholders and management. Johnson & Johnson, which has a partnership with Schering-Plough over the two rheumatoid arthritis drugs, has asked for an arbitrator to decide whether Schering-Plough is actually undergoing a change of control. The Merck/Schering-Plough merger may meet the definition of a reverse takeover and the letter of the law, but does it meet the spirit of the agreement Schering-Plough forged with J&J?
"Arbitrators have a bit more leeway than a judge. They can look at what the parties' intention was at the time," Columbia University Law School Professor John Coffee said. The 1998 Remicade pact with J&J defined "control" as the ability of any entity to direct more than half of the voting rights of another entity; or the right to receive more than half of the profit; or to otherwise control the management decisions of the other entity. Analysts and investment bankers expect J&J to get some financial settlement that includes either a lump-sum payment or the right to buy Schering-Plough's consumer products or over-the-counter medicines at a bargain price.
