The board of drugmaker Elan has unanimously rejected a formal bid from Royalty Pharma , saying the US investment firm's offer of $11.25 a share grossly undervalues the company.

Royalty last week lowered its bid for Elan to $11.25 a share from an earlier $12 per share offer, pricing in the result of a $1 billion share buyback by Elan.

The $12 per share offer had valued Elan at up to $7.3 billion, and had been sweetened from an initial proposal.

Elan, which claimed last month that most of its shareholders did not view Royalty's original proposal as worth consideration, said shareholders were strongly advised to take no action in relation to the bid.

"The offer from Royalty Pharma grossly undervalues Elan's current business platform and our future prospects. As a result the Board unanimously and without reservation rejected the offer," Elan chairman Robert Ingram said in a statement.

Royalty's offer is conditional upon it receiving the backing of no less than 90 per cent of Elan shareholders. Those odds were complicated last week when US healthcare firm Johnson & Johnson cut its stake in Elan to 4.9 per cent from 18 per cent after it accounted for over 90 per cent of all shares purchased in the buyback.

Analysts were divided as to whether the buyback result signaled confidence in Elan's plans to reinvent itself through a series of acquisitions, or speculation that Royalty would eventually return with a higher bid.

Elan sold its 50 per cent interest in lucrative multiple sclerosis drug Tysabri for $3.25 billion plus future royalties to US partner Biogen Idec in February, and wants to spend the bulk of the money on acquisitions.

Royalty argues that Elan's management does not have a track record of deals, and has urged shareholders to put pressure on the board to accept its offer.

It wants to add the royalty rights to Tysabri - worth hundreds of millions of dollars annually - to its large stable of royalty streams.

Elan, left with just one experimental drug in its pipeline following the Tysabri deal, improved the terms of its own plan last month by offering shareholders up to 20 percent of future royalties from the blockbuster MS drug.

However, Royalty could also factor in Tysabri's future performance via a contingent value right (CVR) that would reward Elan shareholders should Tysabri hit certain sales milestones, according to sources.