ELAN CORPORATION LTD 
By NEW YORK (Reuters) - For Elan Corp Plc's (>> Elan Corporation, plc) stockholders, a proposed share buyback may not be as friendly as it appears.
The Irish drugmaker, in the middle of an increasingly bitter and complicated fight against hostile suitor Royalty Pharma, has announced a $200 million share buyback, a program that has the potential to kill a takeover by Royalty Pharma.
Royalty Pharma, a U.S. investment firm, raised its bid on Friday for the third time to as much as $15.50 per share, or around $8 billion. It has conditioned its buyout offer on a rejection by Elan shareholders of all proposals put forward by the drugmaker for a June 17 shareholder vote.
Shareholders are to vote on two of the acquisitions that Elan announced after Royalty Pharma's initial approach in February, including a $1 billion (642 million pounds) deal with U.S. biotech company Theravance Inc (>> Theravance Inc) that has been criticized by some analysts for being too expensive.
Elan shareholders, however, are also to vote on two other, seemingly uncontentious, proposals - a drug spin-off aimed at cutting operating costs and the share buyback, which is almost always considered beneficial to shareholders under normal circumstances.
Under terms of Royalty Pharma's offer, shareholder approval of any one of the four resolutions would force Royalty Pharma to walk away from the bidding, depriving shareholders of the Elan's most eager suitor as it considers a sale of itself.
The Dublin-based company, which has resisted an approach from Royalty Pharma for more than three months, on Monday rejected Royalty's latest increased offer and said for the first time it was assessing inquiries from other parties.
Elan attracted the interest of several mid-sized drug companies and would be open to a cash offer of $15.50 per share, a source with knowledge of the situation said. Royalty's third increased bid consists of $13 cash per share, plus an extra $2.50 that would be contingent on multiple sclerosis drug Tysabri's hitting certain sales milestones.
SHAREHOLDERS PLAN TO VOTE "NO"
To keep Royalty Pharma in the bidding, a handful of Elan's large institutional shareholders plan to vote against all four resolutions, including the proposed buyback, the investors said in the past few days.
The shareholders, who asked not to be named because they were not authorized to speak with the media, said they have decided to oppose the four resolutions because Royalty Pharma's bid is a better option than relying on Elan to grow through acquisitions.
Royalty Pharma and Elan declined to comment.
In May, Elan said it would pay $1 billion for 21 percent of the royalties that Theravance Inc (>> Theravance Inc) receives from GlaxoSmithKline Plc (>> GlaxoSmithKline plc) for respiratory drugs, the first in a series of defensive transactions that Elan negotiated last month to fight off Royalty Pharma.
Elan also agreed to acquire AOP Orphan, an Austrian company that focuses on rare diseases, for around $340 million. A third deal was the $40 million acquisition of a 48 percent ownership interest in Dubai-based start-up NewBridge Pharmaceuticals.
In addition to those three acquisitions, Elan has said it would spin off a drug in development for Alzheimer's disease into a new company.
Elan's chairman admitted shareholder opinions differed on the Theravance deal but said that there was unanimous support for the drug spin-off.
Royalty Pharma has been critical of the value of the acquisitions and said its offer for Elan would lapse if Elan shareholders approved the transactions.
However, Royalty Pharma worries that investors critical of the acquisitions may still vote for the drug spin-off or share buyback, effectively forcing out Royalty Pharma, according to people familiar with the situation.
Royalty Pharma is partly to blame for its own predicament.
When Royalty Pharma sweetened its offer in May for the second time, the firm stated that its then $6.4 billion bid was conditional on shareholders' voting down any of the resolutions at the June 17 meeting, even though it was just referring to the Theravance and AOP acquisitions.
Last week, the Irish Takeover Panel confirmed that if Elan shareholders accept any of the resolutions, including the drug spin-off or share buyback, Royalty Pharma's offer would be null and void. The takeover panel also ruled that Royalty cannot amend the conditions.
Proxy adviser Institutional Shareholder Services has recommended that shareholder vote against all four proposals for that reason.
"In aggregate, the inconsistent management of cash return to shareholders, the time frame over which the Theravance, AOP Orphan and NewBridge transactions were negotiated, and the lack of a fiduciary out in the Theravance transaction, don't readily support a conclusion that this was a coherent process designed to create shareholder value," ISS wrote last week.
(Reporting by Soyoung Kim and Jessica Toonkel in New York; Editing by Steve Orlofsky)
By Soyoung Kim and Jessica Toonkel
