Moody's Cuts Credit Outlook on Elan

The move comes after the Irish firm and its partner Biogen Idec recalled a key drug.
By Robert Steyer ,

Updated from 4:24 p.m. EST

Shares of

Elan

(ELN)

struggled to stay in positive territory Tuesday as Moody's Investors Service cut the Irish drug company's credit outlook to negative from stable.

Moody's acted a day after Elan and its partner

Biogen Idec

(BIIB) - Get Report

removed their multiple sclerosis drug Tysabri from the U.S. market.

They pulled the drug because of reports of

one confirmed fatality and one suspected case of a rare disease detected in clinical trials. The two patients took Tysabri and Avonex, a Biogen Idec multiple sclerosis drug, for more than two years. The companies will review test data and patients' records and consult with the Food and Drug Administration about when the drug might be able to return to the market.

On Monday, Elan's stock fell 70% to close at $8. On Tuesday, the stock stayed up most of the day but closed down 3 cents to $7.97. Trading volume Tuesday was 86.5 million shares, or 22 times the average daily trade. Monday's volume was 165.4 million shares.

Moody's lowered its outlook partly because of "greater uncertainty regarding Elan's longer-term viability if the marketing of Tysabri does not resume." Moody's announcement accompanies a series of mostly gloomy assessments from several equity analysts, although one investment banking firm, Citigroup Smith Barney, raised its rating to hold from sell.

But even that response was a sort of back-handed compliment. "The Elan investment decision is almost entirely contingent upon whether Tysabri returns to the market," said Andrew Swanson, in a research report issued Monday. "We believe Elan is worth more than $12 a share with Tysabri, but little more than $1 without it," he said.

Swanson said there is a 75% chance that Tysabri will return to the market, adding that its sales potential will be diminished because it will most likely be subject to many restrictions. Swanson once had a $25 target for Elan, due to the expected gains from Tysabri; now the target is $9.50. (He doesn't own shares; his firm is a market maker in Elan's stock.)

Moody's concerns go to the heart of Elan's ability to repay its debts. But without big-selling products, such as Tysabri, the company runs a "higher refinancing risk associated with Elan's 2008 debt maturities" as well as "heightened challenges of returning to positive cash flow."

Despite lowering its outlook, Moody's reaffirmed its ratings of several Elan debt issues, totaling $1.8 billion, at B3, which means the bonds demonstrate a "lack of characteristics of a desirable investment." The current rating is six notches below the lowest investment-grade ranking and five notches above the worst rating.

The good news is that "Moody's does not believe Elan faces a near-term default on its debt obligations," the firm said. "Elan's cash balances provide an important cushion to absorb negative free cash flow as the Tysabri data is analyzed and its fate becomes more clear."

Moody's said Elan has "good liquidity currently," with cash totaling more than $1.5 billion as of Dec. 31, adding that money would be more than enough to exceed the next 12 to 24 months of cash needs. There are no significant debt maturities until 2008.

Moody's pointed out that two key Elan products -- the antibiotics Azactam and Maxipime -- will lose patent protection in 2006 and 2008, respectively. Although Elan last month received FDA approval of Prialt for acute pain, Moody's said the drug won't be a large contributor to cash flow. "Elan's other

research pipeline products, which include potential treatments for Alzheimer's disease, are primarily early-stage efforts," Moody's said.

Moody's action follows by one day the decision by Standard & Poor's to cut its outlook on Elan to stable from positive. S&P reaffirmed its B-rating on Elan's corporate credit -- a below-investment-grade rating.

S&P's reasoning matched that of Moody's. "Elan is very reliant on the success of Tysabri to return to profitability and restore positive cash flows," S&P said. "However, the timing of a return to market for Tysabri is highly uncertain at this point."

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