Johnson & Johnson has cut the amount it will pay for its 18.4 percent stake in Irish drugmaker Elan Corp Plc by $115 million to $885 million, setting Elan up for recriminations from shareholders and possibly even lawsuits.

The new agreement resolves a dispute between Elan and its U.S. partner Biogen Idec Inc , with which it sells the multiple sclerosis drug Tysabri in a 50-50 partnership, but it shows that the original transaction was not as favorable to Elan's shareholders as the company had originally represented.

J&J agreed in July to acquire an 18.4 percent stake in Elan for $1 billion, or $9.32 a share, and it agreed to pay $500 million for a majority stake in Elan's portfolio of experimental Alzheimer's drugs.

The premium, at roughly 33 percent, was not spectacular compared with other premiums paid in the biotech sector, which can reach 40 to 50 percent, but Elan, which is weighed down by more than $1 billion in debt, was desperate for cash. J&J, one of the biggest healthcare companies in the world, seemed like a savior.

What neither company revealed, was that Elan had given J&J an option to acquire a 50 percent share of Tysabri should Biogen be acquired.

Under their agreement, Biogen and Elan have the exclusive right to acquire full ownership of Tysabri if the other is acquired. The right cannot be transferred or assigned to a third party. Yet that is what Elan effectively did.

When news of the agreement leaked out, Biogen filed suit, claiming breach of contract. A U.S. judge agreed, saying Elan had transferred control of the right to J&J, despite its tortuous attempt to hide and deny it.

Elan tried to play down the importance of what it had done. But cutting the value of the broader transaction has shown that J&J, at least, considered the asset valuable.

If it turns out that Elan's failure to tell shareholders about the agreement was material, Elan could find itself on yet another hot seat.

Given the relative size of J&J and Elan, this omission appears to be immaterial to J&J, but may be deemed material to the shareholders of Elan, said Ron Geffner, a former SEC enforcement attorney who is now a partner at Sadis & Goldberg LLP in New York.

What constitutes a material omission is not set in stone, he said. Broadly speaking, if the inclusion of the item would have changed or influenced the judgment of a reasonable person it would likely be considered material.

A spokesman for New Brunswick, New Jersey-based J&J said, we have nothing to add to the information about Johnson & Johnson in the press release issued by Elan.

J&J thought it had walked off with a right that not only would have given it an option to acquire 50 percent of Tysabri -- which is on track to generate sales this year of $1 billion -- but would have placed it in pole position to acquire Biogen itself. Now it is not.

Moreover, in squeezing Elan for a discount to an already good deal, J&J risks tarnishing its reputation among future potential biotech partners.

(Additional reporting by Deena Beasley in Los Angeles and Ransdell Pierson in New York; Editing by Andre Grenon, Gary Hill)

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