J&J takes on Alzheimer's disease with $1B stake in Elan

Johnson & Johnson, making a big jump into the risky but potentially lucrative field of Alzheimer's disease, is taking a major stake in Irish biopharmaceutical company Elan, investing up to $1.5 billion initially.

The two will cooperate to complete research on two injected drugs to stop progression of the mind-robbing disease and on a vaccine to prevent the buildup of plaque in the brain that causes increasing memory loss, confusion, wandering and aggression.

The agreement could reinvigorate ailing Elan eln and save the jobs of top executives who face shareholders at their July 17 annual meeting. It would make J&J jnj a major player in one of the biggest areas of unmet medical need and — if further testing is successful — bring the treatments to market faster.

"It's good news for Alzheimer's patients and their families," said Erik Gordon, an analyst and professor at University of Michigan's Ross School of Business. "For J&J, it looks like a high-risk but reasonable bet."

J&J, the world's biggest health care company with nearly $64 billion in 2008 sales, can pour far more money than Elan into the research, he said. J&J sells one Alzheimer's drug, Razadyne, with sales of just $541 million last year, but company executives last month said Alzheimer's disease is now a priority.

Several drugs help limit memory loss and other symptoms, but there are no treatments to stop or reverse brain damage caused by the disease. The market is huge — roughly 5.3 million current U.S. Alzheimer's patients, and more than 100 million worldwide are expected eventually as the population ages.

Under the deal, Johnson & Johnson will take an 18.4% stake in Elan by spending $1 billion to buy 107.3 million newly issued American Depositary Receipts at $9.32 each, a 33% premium to Wednesday's $7 closing price.

J&J plans to commit up to $500 million initially for development of bapineuzumab, the compound furthest along in testing, with both companies providing more money if needed.

J&J will get Elan's 50% stake in its Alzheimer's immunotherapy research partnership with Wyeth, and set up a joint company that will be 49.9% owned by Elan. Johnson & Johnson will gain all rights to any drugs approved; Elan will get 49.9% of the profits, plus royalty payments on sales.

Wyeth spokesman Michael Lampley would not say whether it would exercise the change-in-control provision in its contract with Elan, which allows either party to terminate the contract.

"We're looking forward to discussing this proposed transaction in detail with J&J," he said.

Portions of that provision are confidential, so its impact was unclear.

"The irony that can't be missed is the fact that J&J has a change-and-control battle going with Schering-Plough" over shared sales of arthritis drugs because Schering is being acquired by Merck for $41.1 billion, said analyst Steve Brozak of WBB Securities.

Meanwhile, Wyeth is being bought by Pfizer for about $68 billion.

A mid-stage bapineuzumab study focused on safety showed a little improvement in participants with a common genetic variation, and more improvement in those without it, said Dale Schenk, Elan's chief scientific officer. The variation, which about half of Alzheimer's patients have, is linked to earlier disease.

A late-stage study of bapineuzumab, which would be given in an infusion every three months, began last year. Results are not expected for a couple years.

A different formulation of bapineuzumab, injected just under the skin once a week, is in mid-stage testing, as is the vaccine.

All three compounds use the immune system to bind to and destroy plaque in the brain that's made by accumulation of a protein fragment called beta amyloid. The two bapineuzumab compounds are antibodies against beta amyloid and the genetically engineered vaccine stimulates the immune system to make such antibodies, Schenk said.

Elan will keep its rights to four pill-based therapies against Alzheimer's, separate from the compounds in the J&J deal. Those include pills to block two different enzymes involved in producing beta amyloid, one to prevent beta amyloid from clumping into plaques and one that works partly by blocking nerve cell damage caused by beta amyloid, Schenk said.

Elan has been struggling to stay in the black, recently cut 14% of its work force, and has been trying to soothe shareholders angry over the stock's plunge from $36 last July to as low as $5.

Elan, which sells Tysabri for multiple sclerosis and Prialt for severe pain, said the deal should make it profitable by the end of 2010, and cut debt about 70% to about $400 million. The company said it held discussions with 30 companies before reaching the deal with Johnson & Johnson.

Gordon said the choice of J&J was a surprise, as analysts watching as Elan was shopped to major drugmakers expected it to go with Novartis.

Brozak said the deal was a telling departure from J&J's norm of buying entire companies with established products, rather than experimental compounds that might not pan out.

"J&J needed to do this," he said, given the pressures on the industry from generic competition, not enough drugs being developed in-house, health care reform and the recession.

The deal is expected to close by year's end, pending approval from antitrust regulators. Boards of both companies have approved it. The acquisition will reduce J&J's profit by 2 cents to 3 cents per share this year.

Moody's Investors Service put Elan's ratings under review for possible upgrade.