Elan Corporation, plc
Treasury Building,
Lower Grand Canal St.
Dublin 2, Ireland
T +353 1 709-4000 F +353 1 709-4700
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1.
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Refer to your response to comment two. Please revise your disclosure to clarify that your “directly incurred costs” were reimbursed from Biogen Idec and disclose the nature of these costs consistent with your response.
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We propose that in our next Form 20-F we will amend the applicable wording in each place it appears, as follows:
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2.
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Refer to your response to the first bullet of comment three. Please elaborate as to the reason for an approximately $100 million basis difference on a $235 million equity method investment that is solely attributable to the difference in valuation of the specific long-lived assets transferred upon the formation of Janssen AI. In your response, please explain to us why the magnitude of this difference is so substantial when it appears that both you and Janssen AI are required to value these assets using inputs and assumptions that market participants would use in pricing assets under ASC Topic 820. Please explain why your estimate of future revenues from certain long-lived assets varied significantly from that of Janssen AI, since your 49.9% interest in Janssen AI presumably granted you some involvement in the estimation process.
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We had no involvement in Janssen AI’s estimation process for the recording of the initial carrying value of the specific long-lived assets in their financial statements.
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Our understanding, which resulted from enquiry of Janssen AI’s management, is that the principal source of the difference between the valuations relates to the estimated future revenues expected to be derived from the specific long-lived assets. We are not aware of the detailed assumptions made by Janssen AI in deriving their estimate of future revenues and, accordingly, are unable to provide the explanation sought by the Staff.
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3.
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In order for us to better understand your accounting for your investment in Janssen AI and your response to the second bullet of our comment three, please separately provide us with the journal entries recorded by Janssen AI as the joint venture and by you under the equity method for the following transactions:
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Formation of Janssen AI, including your asset contribution and any contribution made by Johnson & Johnson (including the contribution of $500 million in cash by Janssen Alzheimer Immunotherapy (Holding) Limited);
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$500 million loan from Janssen AI to Latam Properties Holdings;
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Accrual of $49 million in losses incurred during 2009, including $39 million for research and development activities;
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Payment of $49 million in losses incurred during 2009;
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Extinguishment of Latam Properties Holdings’ obligation to repay the $49 million spent during 2009;
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Your amortization of the basis difference arising at formation during 2009; and
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Any other material transactions.
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Please refer to Appendix I for the requested journal entries. The journals shown for Janssen AI are presented based on our understanding of the Janssen AI unaudited financial information and discussions with Janssen AI’s management. Under the Shareholders’ Agreement, we are allowed access, upon reasonable advance notice, to examine the books and records of Janssen AI and its subsidiaries, although we have not considered it necessary to exercise this right thus far.
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In accordance with ASC 323-10-35-5, we did not amortize the basis difference in our investment in Janssen AI. ASC 323-10-35-5 states:
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Upon formation of Janssen AI, we received a 49.9% equity interest in consideration for the transfer of the AIP business to Janssen AI, and Johnson & Johnson received a 50.1% equity interest in consideration for the $500 million equity subscription made to Janssen AI. In accordance with ASC 323-10-35-15, we did not record the $500 million equity subscription made to Janssen AI as an investee capital transaction because this transaction did not affect our 49.9% share of the shareholders’ equity of Janssen AI. In addition, the $500 million equity subscription did not create an additional basis difference in our equity method investment because the $500 million equity subscription has been excluded from our share of the book value of the net assets of Janssen AI, as we have no entitlement to any portion of it.
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4.
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In order for us to better understand the economic structure of Janssen AI’s business and how it relates to the accounting addressed in the preceding comment, please address the comments below. As Janssen AI is an Irish Unlimited Company, please clarify whether this form of legal entity permits the allocation and distribution of earnings on any basis other than based on ownership percentages. To the extent you allocate the first $500 million of Janssen AI development expenses to Johnson & Johnson based on contractual arrangements outside the Articles of Association, including the Shareholders’ Agreement filed as Exhibit 4(a)(7) to your Form 20-F, please address the following:
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Please explain the conditions under which the $500 million funded by Janssen Alzheimer Immunotherapy (Holding) Limited to Janssen AI are refundable. In your response, please clarify whether the repayment is dependent on Latam Properties Holdings repaying its loan from Janssen AI;
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Please explain who primarily performs the research and development activities of Janssen AI;
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Please explain how the $49 million in losses incurred during 2009 were funded, since the $500 million of funding from Janssen Alzheimer Immunotherapy (Holding) Limited was loaned immediately to Latam Properties Holdings;
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Please explain why Janssen AI granted a $500 million loan to Latam Properties Holdings;
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Please explain the conditions under which Janssen AI may demand repayment of its $500 million loan to Janssen Alzheimer Immunotherapy (Holding) Limited without board approval; and
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Please explain whether Johnson & Johnson is entitled to recoup in any way any portion of the $500 million of initial funding commitment once it is spent. Please clarify, for example, whether Johnson & Johnson is entitled to the first $500 million upon dissolution or sale of Janssen AI or to the first $500 million in future profits. If not, please elaborate why deviation from the requirement in ASC 323-10-35-4 to recognize your share of Janssen AI’s losses based on your ownership percentage is warranted given that Johnson & Johnson has no preferential interest in the underlying research and development expenditures.
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The shareholders of an Irish unlimited company can agree under a shareholders’ agreement to distribute earnings on a basis otherwise than on strict shareholding percentages. This commitment would be contractual rather than constitutional and typically (as in this case) an Irish company would be a party to the shareholders’ agreement to bind it (as well as the shareholders). Another method of “unequal” distribution would be to have separate classes of shares in the company with differing economic rights.
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The $500 million funded by Janssen Alzheimer Immunotherapy (Holding) Limited (“Janssen Holding”) to Janssen AI is non-refundable; however, Section 6.3 of the Shareholders’ Agreement provides that any unrepaid portion of the $500 million loan to Latam Properties Holdings (“Latam”) is the “Priority Dividend Amount” and Section 7.1(b) of the Shareholders’ Agreement provides that any Priority Dividend Amount will be paid to the shareholders of the Janssen AI Class O-J shares which are held by Johnson & Johnson entities. Through this mechanism any unused portion of the $500 million capital contribution will be retained by Johnson & Johnson.
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Employees of Janssen AI’s wholly-owned subsidiary, Janssen Alzheimer Immunotherapy, Inc., employees of other subsidiaries of Johnson & Johnson, and contractors (including those employed at clinical trial sites) primarily perform the research and development of Janssen AI. Elan has no ongoing involvement in the research and development program.
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Section 6.3 of the Shareholders’ Agreement provides that Latam is to repay the loan at the times and in the amounts required by a majority decision of the Board of Janssen AI. Thus, Janssen AI funds its operations by making demands for repayment on Latam.
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It is our understanding that Janssen AI granted the loan to Latam, so that any interest income amounts earned on the underlying cash loaned to Latam would not be attributable to Janssen AI.
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As noted above, under Section 6.3 of the Shareholders’ Agreement, until the Positive Cash Flow Date (as defined in the Shareholders’ Agreement), the Board determines the times and amounts of demands for principal repayments of the loan by Latam (we assume the Staff meant to reference Latam and not Janssen Holding).
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Johnson & Johnson is not entitled to recoup any portion of the $500 million of initial funding commitment once it is spent. Aside from the repayment of any unspent amount of this initial funding, Johnson & Johnson is not entitled to the first $500 million upon dissolution or sale of Janssen AI or to the first $500 million in future profits. Following repayment to Johnson & Johnson of any unspent amount of the initial $500 million, then under Section 7.1 of the Shareholders’ Agreement cash, if any, then available is to be distributed, in general, on a pro rata basis to the holders of Janssen AI shares in accordance with their respective Sharing Percentage. Additionally, sections 7.1(e & f) of the Shareholders’ Agreement provide that after such time as aggregate payments received by Johnson & Johnson shareholders equal $500 million (or, if less, such portion of the initial $500 million that was actually spent), Elan is entitled to receive tiered royalty payments under the Royalty Agreement dated 17 September 2009 among Elan Pharma International Limited, Janssen AI and Janssen Pharmaceutical.
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5.
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We note that Exhibit 4(a)(7) refers to a number of exhibits which do not appear to have been provided. Please be aware that when you file an agreement pursuant to Item 19 of Form 20-F, you are required to file the entire agreement, including all exhibits, schedules, appendices and any document which is incorporated in the agreement. Please file a full and complete copy of Exhibit 4(a)(7), including any exhibits, schedules and appendices which may have been previously omitted.
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We acknowledge the Staff’s comment. We do note that Item 601(b) of Regulation S-K does not require the filing of schedules and exhibits “unless such schedules contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document.” Although we do not believe the Shareholders’ Agreement’s exhibits which are: Exhibit A—Memorandum and Articles of Association, Exhibit B—Form of Contribution Agreement, Exhibit C—Form of Deed Poll of Adherence, Exhibit D—Initial Contribution Agreement, Exhibit E—Loan Agreement and Exhibit F—JNJ Universal Calendar contain any material information not otherwise disclosed in the Shareholders’ Agreement or in our disclosure documents, per the Staff’s request we undertake to refile the Shareholders’ Agreement with the referenced exhibits with our 2010 Form 20-F.
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Formation of Janssen AI, including your asset contribution and any contribution made by Johnson & Johnson (including the contribution of $500 million in cash by Janssen Alzheimer Immunotherapy (Holding) Limited):
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Janssen AI
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$m
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$m
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Intangible assets - In-process research and development
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679
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Goodwill
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4
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Additional paid-in capital
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683
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To record the transfer of the AIP business from Elan.
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Cash
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500
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Additional paid-in capital
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500
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To record the capital contribution from Janssen Holding.
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Elan
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Equity method investment
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235
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Intangible assets
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68
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Property, plant and equipment
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41
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Transaction and other costs
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17
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Net gain on divestment of business
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109
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To record the equity method investment in Janssen AI and the divestment of the AIP business, including the related impairment of property, plant and equipment.
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$500 million loan from Janssen AI to Latam Properties Holdings:
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Janssen AI
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$m
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$m
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Note receivable (Latam)
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500
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Cash
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500
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To record the loan to Latam.
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Elan
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No entries.
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Accrual of $49 million in losses incurred during 2009, including $39 million for research and development activities:
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Janssen AI
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$m
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$m
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Research and development expenses
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39
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Selling, general and administrative expenses
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10
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Accrued liabilities
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49
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To record the accrual of operating expenses incurred during 2009.
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Elan
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No entries.
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Payment of $49 million in losses incurred during 2009; and
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Extinguishment of Latam Properties Holdings’ obligation to repay the $49 million spent during 2009:
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Janssen AI
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$m
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$m
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Cash
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70
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Note receivable (Latam)
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70
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To record the repayment of $70 million of the loan to Latam.
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Accrued liabilities
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49
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Cash
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49
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To record the payment of operating expenses that were accrued during 2009.
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Elan
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No entries.
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Your amortization of the basis difference arising at formation during 2009:
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Elan
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No entries.
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Any other material transactions:
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Janssen AI and Elan
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There were no other material transactions during 2009.
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