J&J Bets With Elan

Johnson & Johnson is paying $1 billion to acquire Elan Corp.'s Alzheimer's immunotherapy program and an 18.4% stake in the Irish company. The program, known as AIP, will be the basis of a new J&J company in which Elan keeps a 49.9% interest and a share of potential profits.

Targeting a market already worth about $5 billion per year, AIP is Elan's half of a nine-year-old collaboration with Wyeth to develop agents to treat or prevent neurodegenerative diseases. Taking on Elan's role, J&J will invest another $500 million for product development with the expectation that the partnership will continue after Pfizer completes its purchase of Wyeth this year.

Elan CEO Kelly Martin told analysts in a conference call that he's "pleased and excited" about J&J becoming the company's largest shareholder. The deal addresses all the objectives Elan laid out in January when it began looking for ways to reduce debt, cut expenses, and advance its programs, he said. The company anticipates seeing a pretax profit and positive cash flow by the end of 2010.

J&J, however, is taking a bigger gamble. The most advanced AIP candidate is bapineuzumab, the first in a new class of treatments designed to clear β-amyloid deposits from the brain. Phase III clinical trials under way are exploring whether the antibody can slow Alzheimer's disease progression. Although it's among the most advanced treatments in development—other companies' candidates have failed in recent years, and marketed products address only the symptoms—Wyeth and Elan have reported very mixed results from earlier studies.

In a report to clients, Citigroup stock analysts called the deal high risk but possibly high reward. Phase II bapineuzumab data and the history of other products suggest that Elan's Alzheimer's portfolio is "far from a slam dunk," the analysts wrote.

Nevertheless, J&J has the cash to spend and gets to bet on a leading late-stage Alzheimer's candidate after its own Alzheimer's product, Razadyne, lost patent protection last year. The total investment, Citigroup concludes, "could be more than worthwhile if bapineuzumab makes it to the market."

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