Elan Corp, plc (ADR) (ELN)

[written 6 Apr 07]

Élan (ELN) is a biotech company based in Ireland, and constitutes a poster child for the vagaries of speculation. At the beginning of the decade, the company had a marketcap around $20B and shares traded as high as $61 in June 2001…but then a grievous accounting scandal broke, and within 16 months, the stock was down below $2 amid strong doubts the company could recover. However, they hired a CEO from the USA, G. Kelly Martin, and he focused on moving Tysabri—a humanized monoclonal antibody that proved efficacious in the treatment of multiple sclerosis (MS) and Crohn’s disease (CD)—to market.

Élan had entered into partnership with Biogen Idec (BIIB) in 2000—BIIB is responsible for manufacturing and distribution in Europe; ELN is responsible for distribution in the USA; revs are split 50-50 up to $700MM and 65-35 in favor of BIIB thereafter unless ELN elect to make a milestone payment of $75MM, which buys them a 50-50 split up to $1.1B, after which it is 65-35 in favor of BIIB unless ELN elect to make a second milestone payment of $50MM, which buys them a 50-50 split on all revenue thereafter. After the FDA approved Tysabri for MS in late 2004, the stock reached $27. But then in February 2007, two cases of a rare and often lethal brain disease known as progressive multifocal leukoencephalopathy (PML) were found in patients given Tysabri in combination with Avonex (BIIB’s interferon beta-1a MS drug). The companies withdrew Tysabri from the market and began a safety evaluation. This review uncovered a third case of PML, in a Crohn’s disease patient taking Tysabri in conjunction with immunosuppressant agents who had died in December 2003 from what was thought at that time to be a brain tumor, but the diagnosis was subsequently re-evaluated as having been PML. This time, the stock only fell to $3, but the collapse took a lot less time (two months).

Fast forward to June 2006: satisfied with the safety review, the FDA and EMEA (European Medicines Agency) both approved the return of Tysabri to the market. The stock bounces around in the $17-to-$19 range. But enthusiasm for ELN on The Street is low. Analysts worry that there will be more PML cases. They worry that MS patients and doctors will worry about PML and won’t use/prescribe Tysabri. They worry that Biogen Idec salesmen won’t push Tysabri in Europe now that it can no longer be used in conjunction with BIIB’s old MS drug, Avonex (for whom the salesmen might be better compensated as Biogen does not have to share Avonex revenues with Élan). They might worry that folks would remember when they recommended ELN at $60 in 2001 or at $27 in 2005, except no one ever seems to track what analysts on The Street said in the past so that most likely is not a concern. Whatever, no one seems to like ELN and the stock is languishing here back down around $13.50 (marketcap of $6B).

But we like ELN here.

First of all, we are reasonably reassured that the folks at Élan have a handle on the PML issue and that the safety guidelines they have come up are likely to avert any more cases. Of course, some risk from that quarter remains—and there is always the chance that some new complication will arise, perhaps a problem that only becomes evident after some years have passed—but based on what is known now, we believe that MS patients will embrace a drug that reduces relapses 67% of the time and slows progression of the disease 42% of the time (both numbers twice as good as anything else out there).

Now from a valuation point of view, biotech companies with their first $1B blockbuster potential drug and the earning growth to match—e.g., CELG today and AMGN, BGEN, DNA in the past—typically command multiples of 15x to 20x revenues depending on how The Street regards their pipeline. (Mature healthy pharmas have marketcaps more typically in the 4x to 6x revs range.) The potential MS market for Tysabri is 500,000+ patients in the USA and Europe. To reach revenues of $1B, Tysaberi needs about 7% of the potential market—35,000 patients—currently they have just a few thousand and expect to exceed 15,000 this year. Here is how we see Tysabri sales unfolding over the next few years (barring any more catastrophes, of course; typical annual cost of treatement is $28,500):

Year End—# of Patients
2007—17,544
2008—35,088
2009—63,158
2010—101,053

So, we forsee Tysabri becoming a $1B product on an annualized basis by the end of 2008. Because ELN only get about half this revenue, it takes them until sometime in 2010 to get to $1B themselves. By the end of 2010, they will be taking in $1.4B on an annualized basis (presuming they elect to pay the milestone payments to BIIB in 2008 and 2009, as we expect). At a P/S ratio of 17.5x sales, ELN shares ought to be fetching around $58/share by then. Discount that price 25% per annum to reflect the various risk factors and we figure a fair price for ELN here is around $20 ($24.50 by the end of the year if they hit our target of 17,500 Tysabri users by then).

Therefore, presuming Tysabri meets expectations—and presuming the pipeline looks good—the stock appears to be somewhat undervalued here. So…what else they got?

What they got is the world’s leading candidate Alzheimer’s disease (AD) treatment.

Élan already back in 2002 were testing the first (and up to now, still the only) AD drug—AN 1792, a synthetic form of the beta amyloid peptide—that succeeded in reducing beta amyloid plaque in patients’ brains! Unfortunately, the stimulation of the patients’ immune system AN 1792 induced in order to mobilize the body’s defenses against the plaque also apparently engendered encephalitis, so the Phase II test was halted. Well, actually, they continued the study but switched everyone over to placebos; the results indicating the efficacy of AN 1792 were reported in 2004 based in part on autopsy reports.

But that was then, and now Élan have a new AD treatment in Phase II testing: AAB-001. Unlike AN 1792, AAB-001 is not designed to stimulate the body’s immune system to fight the beta amyloid peptide, but rather provides antibodies itself. According to Élan’s website, “Animal studies have shown that this approach is equally effective in clearing beta amyloid from the brain as traditional active immunization methods” such as AN-1792…but absent what we know know to be the risky tactic of stimulating the patient’s immune response to beta amyloid.

Now it is only Phase II, and their last AD Phase II ended badly, and even if the these results show both efficacy and safety, it’s a long way from there through Phase III to approval…and while AN 1792 is still the only treatment proven to reduce brain plaque in humans, other companies are not standing still and that distinction won’t last indefinitely: competition is coming. But…having said all that…AAB-001 is right now the best hope there is for AD and if it lives up to its promise, the potential annual market could be anywhere from $2MM to $10MM+…anywhere from blockbuster to humongous and beyond.

So ELN is not a one-trick pony. Aside from Tysabri and AAB-001, they have some other stuff under development…and they actually have some real products and real revenues (unlike Dendreon, our other biotech investment): $560MM worth or revenue in 2006 with no help whatsoever from Tysabri. Not enough to generate black ink, but it ain’t hay. For more details, check out their website.

Bottom line: a $6B company that should be worth $9B here, likely will be worth $20B in 21 months or so, and has a reasonable shot at a $40B+ valuation in the next five years or so.

As of close of business on 2/20/08, this was a 1-star Morningstar stock trading at more than double its Morningstar fair value.

The stock was a little overpriced, but a 40% drop on OK news from its phase 2 trial for bapineuzumab puts it right back in the 'reasonably valued' class, and although the chances of gigantic success from bap have taken a baby step backwards, there is stille lots to look forward to, including natalizumab and its brilliant trajectory so far, and its safety profile which keep looking better with every passing month.

tysabri uptake, alzheimer's pipeline

They have taken away a lot of the financial risk with the JNJ deal so now its all about Tysabri and Alzheimers. I think that the benefits of Ty outweigh the risks as they are learning how to manage the drug so this one should do very well.

Elan's Tysabri is only the tip of this Iceberg and a large chunk of ice it is. If Tysabri reaches full potential an absolutely conservative estimate is $30 a share. In addition to Tysabri are two other aspects to this business;
1- Alzheimers Drug soon to be in phase 3 and possibly fast tracked by the FDA
2- Nano crystal technologies which are slowly ramping up in the background with many joint venture deals being signed.

ALL THREE OF THESE ( EXTREMELY CONSERVATIVE) = $60

The year 2007 started of greatly for Elan with the drug Tysabri bringing in close to $26 million in the first quarter. This figure is phenomenal when compared to the $28 million sales of the same drug during the half year of 2006 (it was introduced in July 2006). As of April 2007, close to 7000 patients has been put on therapy using this drug, thus opening a long-term revenue stream. Of the total patients starting Tysabri, three- quarters are doing it at the expense of their existing therapies. Thus the momentum of acquiring and converting patients has been strong. Going forward Elan expects to position to make Tysabri as the leading choice for Multiple Sclerosis treatment. And with the U.S FDA agreeing for a review of Tysabri for Crohn’s disease, the prospect of the drug looks even brighter.

The product pipeline of the company also looks very encouraging. The company’s leading candidate AAB-001 to treat Alzheimer’s disease will be entering final stage of clinical trials in the second half of this year. Alzheimer’s research, which has been the graveyard of many, failed drugs have proved to be helpful for the company. Elan is also planning a potential filing of an Investigational New Drug application (IND) for AAB-002 in 2007, while its third candidate ACC-001 that is currently in its Phase I study is cruising smoothly.

With the performance from Tysabri expected to increase in the coming months and backed by the consistent performance of severe chronic products like Maxiprime and Azactam, the revenue of the firm is set to go up. This factor backed by positively performing drug candidates who can add on to the product portfolio gives the firm the much-needed diversity. Thus, the scrip is all set to go up in the coming months.

With the additional time being added on to their ongoing clinical trial for AD, the mounting debt becomes increasingly problematic. Additional delays or unanticipated safety issues could end up bringing ELN down.

This is a biotech company with a drug for multiple sclerosis which caused a few deaths a year or two ago. Horrible as that sounds, the drug cut down on MS lesions in the brains of test subjects by 96%, something unehard of with other drugs. While it may not be a first line drug at this point, it may well be better than other even more toxic drugs used to treat severe MS cases. It is now back for use in the more severe cases, and I think will be used more and more in the future. The complications came about mainly when it was used with other MS drugs, something which will obviously not be done now.

Also, the company has tested the first Alzheimer's vaccine. Preliminary studies is that it stops (yes, stops) the abnormal areas called neurofibrillary tangles, in the brains of Alzheimer's sufferers. While still some time off marketing, the vaccine would be nothing less than a phenomenal medical and financial coup for the company. In the short term (six to twelve months), I see the MS drug (Tysabri) doing better and better (the stock was at around sixty when the drug first came out and dropped to three when the trouble came about) over the next six to twelve months. When and if the Alzheimer's vaccine comes out, I believe the result to the company's value will be phenomenal.

Tysabri (marketed MS blockbuster drug), Alzheimers program/treatments, Nanotechnology/Drug Delivery, Clear balance sheet, Great business model now being implemented

Elan Corporation is a biotech company with products in development and some on the market. It is best know for the multiple sclerosis drug Tysrabi that was pulled from the market because of a rare adverse neurological reaction then reinstated. The true worth of this company, though somewhat of a gamble, is in its drugs for Alzheimer's Disease, based on the latest science , that could revolutionize the treatment of the disease. There is a reasonable chance of success for their Alzheimer's pipeline and if the company is successful, the payoff will be enormous. The company has a lot of debt but sales of a successful Alzheimer's treatment could rapidly pay that down.

Elan not only has Tysabri for MS, they have a monster Alzheimer's program. If all goes well, they will be first to market with one or two dominating therapies. This is a 100 billion market. They will own the space.

On top of MS and AD, look for developments in Chrones, RH, and Parkinsons. Icing on the cake, a fast-developing nano program with dozens of drugs in development. Elan currently makes just under 5% royalties on these partnerships. Look for that percentage to increase as the benefits of nano delivery become evident over the next several years.

recovering from bad publicity last year with confusion over their new drug Tysabri now poised to take off in Canada and US, not to mention a myrid of other drugs with proven success. As one close to the medical world, I say this one is a winner in the long run and don't let their debt scare you away. It is costly to research drugs but the gain will be well worth on this one. This is a strong co with excellent management and fundamentals!.

MS is such a terrible disease and the current treatments just aren't effective enough. Tysabri isn't really effective enough either (as it's not a cure) but it's tremendously better than the alternatives currently available. Once the MS community starts using Tysabri and hearing how much better the treatment is, how the side effects are fewer, and the treatment is monthly instead of daily...they're going to start demanding Tysabri. It will probably take a year for this to really roll into place but when it does Elan will be rewarded. I'll withhold comment on the other drugs in the pipeline at this time.

I can't help it, BIO is the next big thing, and ELN has a drug that will prove out to be blockbuster IMO. Tysabri, and Alzheimers will propel this stock by the end of the year.

Elan is being played by too many people who are just looking for a 'pop'. They're likely to continue to be disappointed; but ELN is in the middle of a number of important discoveries and their work in neurobiology (MS, Altzheimers, Parkinson's, Crohns -- yes, I know that's not a real area of neurons, coupled with their work in nano-technology related to drug delivery systems gives them a broad palate.) They are limited by the people they partner with -- such as Biogen with Tysabri. That's a partnership that appears to be made in hell relative to being able to exploit the advantages of T for MS sufferers, but over the long run the use of partnerships is going to pay dividends. They've partnered with Lilly, Wyeth, and a number of smaller firms. That'll diversify their product offerings and risk.

Their debt is worisome if the product line doesn't develop as planned, but it does appear to being developed as planned.

Historically poorly run company. One product which causes death all too often/terrible press. No products on horizon, including Bap, worth anything other than being money pits for underachievement. What R&D there was, has been all but killed off due to debt load, which is overwhelming and coming due in the near future. Convoluted ownership of company parts precludes any sale.

Currently Tysabri sales are supressed due to restrictions by the FDA. As patients respond favorably, which they are, the FDA will loosen the restrictions and the sales will meet and then exceed expectations. The drug is so effective, MS patients have stated they would rather live a better quality life with risk, then live in the confines of MS.

Especially those patients who were on the drug and had to stop.

This is longer term play biotech stock. With MMS medicine out and sales ramping up, and growing back to profitability. Risk is company current depends on Tysbari to get back quick profits. Some risk but should be good for long haul.