Royalty Pharma received a blow in its battle to take over Irish drug firm Elan on Thursday after a ruling on conditions attached to the U.S. company's hostile bid threatened to scupper the deal.

Royalty increased its cash bid to $6.4 billion last month and made it conditional on Elan shareholders rejecting resolutions at a June 17 meeting, in a bid to stop the Dublin-based firm pushing through a series of defensive transactions.

However, after Elan said only two of the four resolutions to be put to the meeting concerned the deals, Royalty sought a ruling from the Irish Takeover Panel confirming that it would not be obliged to drop out if all four votes were carried.

The panel decided on Thursday that Royalty could not revise its terms, meaning its bid will lapse if Elan shareholders back either of the other two uncontentious resolutions - a share buyback and a drug spin-off aimed at cutting operating costs.

"In the event that Elan shareholders vote in favour of the Theravance transaction or any of the other transactions, Royalty Pharma will be obliged to lapse its revised offer," the takeover panel said in a statement, referring to one of the recent deals Elan has struck.

Elan said in a statement that the ruling would allow shareholders to properly assess each of the resolutions. Royalty Pharma were not immediately available for comment.

Elan believes Royalty's bid undervalues its future revenue stream from royalties it holds in multiple sclerosis drug Tysabri and is trying to convince shareholders that the deals it has struck will add more value.

Elan agreed last month to buy 21% of the royalties U.S. company Theravance receives from GlaxoSmithKline (GSK) and a week later announced it would buy two private drug firms. Elan's chairman admitted shareholders' opinions differed on the Theravance deal but that there was unanimous support for the drug spin-off.

Improved bid?

With some analysts believing Elan overpaid for Theravance, Royalty hoped to take advantage with its ultimatum and leave Elan's strategy in tatters, opening the door for shareholders to accept its $12.50 a share offer.

Now Elan shareholders could still reject the Theravance deal without striking a decisive blow to the company's management who have said they would present an alternative strategy if investors fail to back their plans.

"This puts Royalty Pharma in a very awkward position and maybe puts pressure on them to raise their bid," said Corey Davis, an equity analyst at Jefferies.

"Given how shareholder friendly the buyback is, it seems unlikely that shareholders would be inclined to vote it down."

Elan's last buyback, completed at $11.25 per share, was supported by 99.2% of shareholders at a meeting in April.

While Royalty has erected a barrier to the bid all of its own making, the influential proxy advisory firm Institutional Shareholder Services (ISS) did recommend on Monday that Elan shareholders reject each resolution at the key June 17 meeting.

Many institutional investors, such as mutual funds, rely on ISS to decide on how to vote in these kind of situations.

Elan also won temporary relief from a U.S District Court on Monday, stopping Royalty from closing its tender offer after Elan argued the New York-based investment firm's disclosures in its increased bid were "materially inadequate."

The court will meet again on June 11 to decide whether or not to grant a preliminary injunction against Royalty.