UPDATE 4-Elan offers special dividend to fend off Royalty

* Elan offers "unique" dividend on top of share buyback

* To pay 20 pct of royalties on m/s drug Tysabri

* Says Royalty Pharma $6.6 bln approach not credible

* Elan can prove that they can create value -investor

* Elan shares already above price of indicative approach

(Adds investor comment, analyst estimate)

DUBLIN/NEW YORK, March 4 (Reuters) - Irish drugmaker Elan has sweetened the terms on offer to shareholders under a $3.25 billion disposal plan to try to stave off an approach for the company from U.S. investment firm Royalty Pharma.

Elan said on Monday it would give shareholders 20 percent of future royalties from multiple sclerosis drug Tysabri, in which it holds a 50 percent interest that it plans to sell to its U.S. partner Biogen Idec.

The Irish group had unveiled the restructuring a month ago, saying it would gain flexibility to buy new assets. It has already said it would also return $1 billion to shareholders.

Those plans were put under question when New York-based Royalty made its $6.6 billion approach last week.

Royalty's indicative approach, worth $11 per Elan share, could scupper Elan's plans to spend the rest of the proceeds from the Tysabri deal on a series of acquisitions, effectively reinventing itself as a company.

But Elan said on Monday most of its shareholders did not view Royalty's idea as worth consideration.

"We simply don't view the Royalty indication of interest as credible. The vast majority of our investor base simply don't view Royalty's indication as worthy of any discussion," Chief Executive Kelly Martin told Reuters in a telephone interview.

"I wish Royalty well, they can do what they need to do, but we're not in any discussions with them at all on any topic and we don't see any need to have those discussions," Martin said.

The CEO said he was referring to Elan's outside investors and had not discussed the approach with Johnson & Johnson , which owns 18 percent of the group.

Investor Larry Feinberg, founder and president of Greenwich, Connecticut-based Oracle Investment Management, backed Martin's plan and has bought 2 million shares of Elan since the Tysabri deal was announced.

"I think Elan is signalling that they are going to be not just a development stage company and that they are really looking for commercial stage businesses," Feinberg, whom Elan has not contacted about the deal, told Reuters.

"I think the Royalty Pharma bid puts a floor on the stock now. The management has to prove that they can create value and I believe they will."

TYSABRI UPSIDE

Royalty, which buys royalty streams of patented drugs, said last week it had not received a formal response from Elan and planned to spend the next few weeks calling Elan shareholders, according to a source familiar with the offer.

Elan shares are up more than 10 percent at $11.48 since Royalty made their deal public, a signal that the market believes the New York firm will have to increase its offer.

Martin dismissed Royalty's criticism that Elan's senior management had little experience making acquisitions. He said potential deals the group was looking at included some assets worth more than $1 billion.

The Tysabri deal should close in the coming month or two, Martin said, adding Elan would provide further clarity on its plans in coming days and weeks.

Once the deal closes, the Dublin-based company said shareholders could expect the first of twice-yearly dividend payments on the drug in the fourth quarter of 2013.

In the deal with Biogen, Elan's royalty payments on future Tysabri sales, which rose 8 percent to $1.63 billion in 2012, will be 12 percent for the first year, 18 percent after that, and 25 percent when annual sales rise above $2 billion.

Martin said shareholders would therefore get 5 percent of any income on the drug above $2 billion. Biogen aims to increase patient numbers over time to 100,000 from the 72,700 at the end of last year, a level that would make Tysabri a $2 billion drug.

Using its Tysabri sales and share buyback assumptions, analysts at Berenberg Bank said the dividend equates to $68 million in 2014 and increases to $175 million in 2023.

"This news reduces Royalty's options and, if serious in its intentions, increases the need for a higher formal offer that more fairly reflects Tysabri upside," Berenberg said in a note.

No one at Royalty could immediately be reached for comment.

(Editing by David Holmes and Jane Merriman)