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Elan Shares, Alzheimer's Hopes Take Hit

Shares of Irish drugmaker Elan (ELN) took a hit Friday along with hopes for a new Alzheimer's treatment, as four patients in a French study came down with potentially serious symptoms.

"While the vaccine represents a potential breakthrough treatment approach if successful, last night's disclosure raises legitimate concerns about the viability of the program, which is very important to the long-term outlook of Elan," said David Steinberg, an analyst at Deutsche Banc Alex. Brown, in a research note. He lowered his recommendation on Elan to market perform from buy, cutting his price target to $42.

Elan said it would temporarily halt patient dosing in a Phase 2A study of its Alzheimer's vaccine candidate after four of 97 patients in France were reported to have clinical signs consistent with inflammation in the central nervous system. The cause of the symptoms remains unknown.

Elan ended down $6.15, or 13.7%, to $38.65; it was the fifth most active stock on the New York Stock Exchange. Other firms to downgrade Elan included SG Cowen and RBC Capital Markets.

Standard Approach

"Our decision to temporarily suspend further dosing, pending the results of our evaluation, is a standard approach to protect the safety of patients in clinical trials," said Dr. Ivan Lieberburg, chief scientific and medical officer at Elan, in a written statement Thursday. "A decision will be made on resumption of dosing pending the outcome of this investigation."

Elan and Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products (AHP), are conducting clinical trials for the drug, AN-1792, in the U.S. and Europe in patients with Alzheimer's disease. American Home Products shares ended down 38 cents, or 0.6%, at $61.92.

According to Steinberg, the Alzheimer's drug is one of the reasons people own Elan's stock and was a basis for his maintaining a buy rating until now. "We've always been excited about the prospects of this product, but this puts a cloud over the situation," Steinberg said. If it got to market, he said, the drug could be a billion-dollar product.

"It's important to say the study is ongoing, and the dosing schedule should allow enough time to conduct the investigation without imperiling the study," said Max Gershenoff, a spokesman at Elan.

Final Straw

Still, Steinberg said the announcement was the "final straw" and led him to downgrade. He said delays and disappointments in four separate products, worries about generic competition for the company's two largest-selling products, and questions about the quality of the company's earnings were also factors.

From a valuation standpoint, Elan looks inexpensive, Steinberg said. The company is currently trading at a price-to-earnings ratio pricetoearnings of 20, using forecasts for earnings of $2.27 in 2002.

Nevertheless, he said, the quality of the company's earnings remains a lingering question: "Net income has largely grown through a combination of purchase acquisitions, numerous circular joint ventures and other sources of lower quality revenue," Steinberg said in his note.

Elan declined to comment on the Deutsche Banc Alex. Brown note.

Several analysts defended Elan. Freidman Billings Ramsey, Gruntal, Banc of America Securities and A.G. Edwards all reiterated their recommendations of the stock.

Defenders

Andrew Forman, an analyst at Friedman Billings Ramsey, said in a research note that the fact that viral infections, which can cause inflammation, were found in some of the patients could mean the reaction wasn't related to the drug. He also noted that the cases were isolated to one clinical center.

Even if the reactions were related to the drug, Forman said: "This is a vaccine where immune responses are expected. And Phase 2 trials are inherently dose-ranging studies, which often result in side effects, usually at the higher levels."

Forman also noted Elan's other Alzheimer's programs and touted the stock's valuation: "Given that any revenue form this program is unlikely before 2006 and that the stock was already trading at 20 times our 2002 earnings-per-share estimate before this news, we believe Elan shares are now extremely undervalued."

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