King will pay Elan royalties on sales of the muscle relaxant Skelaxin under a restructured agreement for Elan's primary care business.

The agreement, announced May 20, clears the way for King to purchase Elan's primary care Rx products - principally Skelaxin (metaxalone) and the sleep aid Sonata (zaleplon) - and resolves ongoing litigation between the companies.

Under the amended deal, Elan will receive a sliding scale royalty on the existing formulation of Skelaxin, starting at 5% of net sales through Dec. 31, 2005, and moving to 10% of sales over $50 mil. through Dec. 3, 2021. King will also pay $25 mil. on Jan. 2, 2004, contingent on the status of Skelaxin exclusivity.

The royalty agreement is loosely structured around Skelaxin's exclusivity status. The one metaxalone patent listed in the "Orange Book" - a method-of-use patent that covers the drug when administered with food - is being challenged by Eon Labs and Corepharma. The patent (No. 6,407,128) expires in 2021.

Elan filed suit against Eon and Corepharma Jan. 2 after the generic companies submitted Paragraph IV certifications against the '128 patent. The 30-month stay ends in July 2005, six months before the higher Skelaxin royalty stream would kick in.

In March 2002, FDA granted an Elan citizen petition requesting that generic manufacturers seeking approval of metaxalone ANDAs must conduct in vivo studies in both fed and fasted conditions. FDA recently advised Eon that its metaxalone bioequivalence study under food conditions is unacceptable for ANDA approval.

King refused to follow through on the acquisition of Elan's primary care business after the Federal Trade Commission opened an inquiry into "Orange Book" patent listings for Skelaxin (¹ Also see "King Acknowledges Medicaid Accounting Errors; Wants Out Of Elan Deal" - Pink Sheet, 7 April, 2003., p. 35). Elan sued King to force the company to close the deal. The companies were set to go to trial May 21.

FTC has since halted its patent investigation, but is continuing an inquiry into other competitive practices for Skelaxin (² Also see "Elan Skelaxin FTC Inquiry Ongoing Despite Halt To Patent Listing Investigation" - Pink Sheet, 12 May, 2003., p. 15). Despite FTC's findings, King affirmed its intent not to complete the transaction as recently as May 8.

King resumed talks with Elan a few days after the FTC announcement, however, apparently buoyed by the agency's decision to drop its inquiry. Elan expects that the remaining questions can be resolved quickly. A longer term issue for King may be whether future patent or marketing strategies for the product are flagged for closer scrutiny.

The Skelaxin royalties under the amended agreement will be offset by a lower up-front purchase price. King will now pay $750 mil. for Elan's primary care business, $100 mil. lower than the price tag of the original deal (³ Also see "No Rest For Sonata: King To Develop XR Version After Acquisition From Elan" - Pink Sheet, 3 February, 2003., p. 29).

The $100 mil. difference could be easily made up should Skelaxin's 2021 patent be upheld in court.

Skelaxin generated sales of $238 mil. in 2002, putting Elan's royalty stream at $12 mil. a year through 2005, and $25 mil. per year through 2021, assuming no sales growth. Under that scenario, royalties to Elan could total $450 mil. over the life of the product.

The price includes $40 mil. in inventory and a $218 mil. payment to Wyeth for Sonata rights. Elan licensed the sleep agent from developer Wyeth in 2001; Wyeth was expected to cease Sonata co-promotion Dec. 31.

As under the original deal, Elan will develop an extended-release version of Sonata, which will begin Phase II in the third quarter. King expects the XR version to launch in 2007, ahead of the expiration of zaleplon's composition of matter patent in June 2008.

King will pay Elan up to $71 mil. in milestone payments to develop the line extension, plus a potential $15 mil. one-time payment upon reaching a specific sales goal. In addition, King will pay a "reasonable royalty" on net sales for each new Sonata formulation.

King will also acquire Elan's 375 primary care sales reps, bringing its sales force to 1,200. With the addition of the Elan businesses, King is projecting 2003 sales of $1.6 bil.-$1.7 bil. and diluted earnings per share of $1.50-$1.65.

The agreement gives Elan much-needed cash to help overhaul its business. Shares of the company plunged last year on disclosure of off-balance sheet accounting practices (⁴ Also see "Elan Meltdown May End R&D Joint Ventures As Funding Vehicle For Biotech" - Pink Sheet, 11 February, 2002., p. 28). Total cash balances will be approximately $1.3 bil.

King/Elan Deal Proceeds; Skelaxin Royalties Will Offset Lower Purchase Price

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