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Elan's Alzheimer's-Fueled Run Means Investors Are Forgetting the Past

BOSTON ( TheStreet) -- "@adamfeuerstein Wonder how all those folks you encouraged to short ELN are feeling lately?"

Ah, this smug tweet Friday brought back fond memories of the spring and summer of 2008. The Elaniacs -- my term of endearment for the cult-like followers of the Irish drug maker Elan (ELN) -- could not shut up about the millions of dollars they were going to pocket on the inevitable moon launch of Elan's stock price. Bapineuzumab was about to be crowned the king of all Alzheimer's disease drugs; the Elaniacs were going to be rich.

Anyone who dared question this outcome by suggesting bapineuzumab might not work was deemed by the Elaniacs to be an idiot or a short-selling criminal. In the spring of 2008, with Elan's stock price on a steady march through the teens, the $20s and into the $30s, I wrote a series of columns raising doubts about bapineuzumab and the approach Elan was taking to test the drug in Alzheimer's patients.

Elaniacs weren't pleased and let me know it.

"You are wrong on Elan," wrote J. Birk in March 2008. "I'm in for a ride that will separate me from being rich into being super rich… You obviously are lost when it comes to Elan. You will be proven wrong and be left to watch the most successful Alzheimer's approach and potentially the biggest drug in pharma history."

Around the same time, another reader with the pseudonym PGD4you wrote, "You do realize that you are looking like an idiot on this subject, don't you? I hope some hedge fund is lining your pockets well because your credibility is sure to be shot and you will need to find a new career soon!"

Three years is a long time but I hope no one has forgotten what happened. Bapineuzumab flopped, demonstrating no improvement in cognition or function compared to placebo. The much-ballyhooed phase II study was a failure. Elan's stock price plunged from the $30s into the single digits. My skepticism (and others, too) about bapineuzumab's role as an Alzheimer's therapy was proven right; the Elaniacs didn't get super rich.

I'm not here to gloat about a four-year-old stock call but to serve notice (perhaps a warning) that bapineuzumab mania is making a comeback. Instead of shelving bapineuzumab, Elan and its partners Pfizer (PFE - Get Report) and Johnson & Johnson (JNJ - Get Report) chose to forge ahead with large and expensive phase III clinical trials. Results from these studies will start emerging later this year, perhaps as early as July.

Like clockwork, Elan shares are once again rising in anticipation of the bapineuzumab data -- up 6% year to date and 20% since the stock's recent low in February. Jefferies drug analyst Corey Davis, one of the most vocal bapineuzumab bulls in 2008, is back again, writing in a Friday research note that Elan's share price has started to move in advance of bapineuzumab results and that the drug still has a 75% chance of being approved.

The passage of time makes it easy to forget just how badly the bapineuzumab data were received when they were presented in front of a packed house of Alzheimer's researchers and Wall Street investors in July 2008. For those that don't remember, I suggest re-reading a column I wrote at the time dissecting the bapineuzumab study results. Most importantly, the column highlights the rule-bending and statistical hocus-pocus Elan was forced to rely upon just to spin anything positive from the study. [The apoE4 non-carrier group of Alzheimer's patients that supposedly benefited from bapineuzumab did so only because the status of the placebo patients dropped off sharply at the end of the study.]

For another skeptical perspective on bapineuzumab, read investor (and now TheStreet contributor) Nathan Sadeghi-Nejad's account of what it was like to be short Elan in the spring and summer of 2008. He makes the case for shorting Elan again into the upcoming Alzheimer phase III trial results.

About 900 participants in my Biotech Stock Live Chat last week were asked to assess the odds for positive results from the upcoming bapineuzumab phase III studies. Thirty-percent gave the drug less than 10% chance of working, while another 24% gave the drug between a 10% and 50% chance for success. Almost 40% of respondents called the bapineuzumab studies a toss up while just 6% gave the drug more than 50% odds of working.

At Friday's close of $14.54, Elan's market value approaches $9 billion. "Bapi bulls" like Jefferies analyst Davis are pushing investors to buy Elan because he believes bapineuzumab is baked only minimally or not at all in the company's current valuation.

"We find few who think bapi will succeed," writes Davis.

With good reason.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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