Three Strikes for Elan
Updated from 10:49 A.M. EST
As Tysabri goes, so goes
Elan
(ELN)
.
Financial analysts say the latest setback involving the now-withdrawn multiple sclerosis drug not only imperils Tysabri's return to the marketplace but also puts the Dublin, Ireland-based drug maker's survival at risk.
"Absent Tysabri, we believe Elan effectively belongs to its debt holders," says Alex Hittle of A.G. Edwards, in a March 31 report, as he cut his rating to sell from hold. Elan, which has undergone a dramatic restructuring in recent years, has $1.6 billion in cash and $2.3 billion in debt, including $1.1 billion in debt due in 2008, Hittle says.
"Heavy restructuring may allow the company to meet interest obligation, but paying down principal will be tough," Hittle adds. He doesn't own shares and his firm doesn't have an investment banking relationship.
Elan's stock dropped $3.63, or 52%, to $3.35 Thursday, after sinking as low as $3 a share. By midafternoon, more than 83 million shares had been traded, or five times the average daily trade over the past three months.
Shares of Elan's partner
Biogen Idec
(BIIB) - Get Report
also fell. The Cambridge, Mass.-based company's stock lost $3.48, or 9.1%, to $34.87. The stock dropped as low as $33.85. Its midday trading volume of 28.8 million shares was nearly four times the average daily trade for the last three months.
The companies reported Wednesday that a third case of a rare and often fatal central nervous system disease had been detected in a patient taking Tysabri during a clinical trial.
Biogen Idec and Elan pulled Tysabri from the market on Feb. 28, after receiving a report of one death linked to a patient who had taken the drug during clinical trials for treating multiple sclerosis. A second case of the rare disease was confirmed a few days later. Both of these patients took Tysabri for more than 24 months in conjunction with Avonex, an MS drug made by Biogen Idec.
At the time, the companies pointed out that there had been no cases of this rare disease in patients who took only Tysabri or only Avonex, or in patients receiving Tysabri in clinical trials for Crohn's disease, a debilitating gastrointestinal ailment, or rheumatoid arthritis.
Elan's chief executive, Kelly Martin, said on Feb. 28 that "a realistic time line" for
Tysabri's resurrection would have been during the third quarter of this year. That prediction is now unrealistic.
This third case of the rare disease, best known by the initials PML, discourages analysts because it was detected in a patient who had taken only Tysabri for 18 months during a clinical trial for treating Crohn's disease. The patient died in December 2003. The rare illness, detected in July 2003, was originally diagnosed as brain cancer.
"Tysabri is probably dead," says Marc Goodman of Morgan Stanley in a Thursday research report that is typical of Wall Street sentiment. He cut his rating on Elan to underweight from overweight. He is one of six analysts who downgraded Elan's stock.
"We had previously believed that the drug had a good chance to return to the market as monotherapy," Goodman says. "Now, we can't imagine that the FDA will allow the drug to return to the market." He doesn't own shares of either company; Morgan Stanley has an investment banking relationship with Elan.
"We now believe that the company should explore strategic alternatives," says Goodman, using Wall Street code words that usually refer to the sale of assets or the company outright.
Elan's Shaky Future
Although the much larger Biogen Idec can absorb the Tysabri shock, Elan doesn't have much of a cushion.
Hittle points out that Elan has two anti-infective drugs, Azactam and Maxipime, whose patents expire this year and in 2007. Together, he expects them to produce about $200 million in revenue this year -- a pittance compared to the multi-billion-dollar-a-year estimates that some analysts had forecast for Tysabri during the latter part of this decade.
A recently launched pain medication, Prialt, could produce at its peak $150 million to $200 million in sales per year, he adds. Elan also will get about $100 million from making products for other companies and from royalty payments.
But are these products, plus an experimental Alzheimer's disease drug in midstage clinical testing, enough for investors?
"We realize that Elan has nearly collapsed and has been able to resurrect itself once before, but we do not like the bet that it will be able to do so again," Hittle says. The previous revival, which came after serious accounting errors were detected earlier in the decade, was achieved in part through asset sales.
Another restructuring will do little more than enable Elan "to tread water," leading to a steadily sinking stock price, he says. Shareholders, who will stand in line behind bondholders, should "look for opportunities elsewhere," he adds.
A slightly less gloomy view comes from David M. Steinberg of Deutsche Bank, who, despite cutting his rating to sell from hold, says Elan could be resilient in the face of adversity. "Unlike in 2002 and 2003, when Elan's net debt position raised significant concerns about the company's ability to stave off bankruptcy, we think today Elan is better positioned to meet its longer-term obligations, even in the absence of Tysabri," Steinberg says in a March 30 research report. He doesn't own shares; his firm is a market maker in Elan's stock.
Assessing Biogen Idec
After the companies' Feb. 28 announcement, Biogen Idec was the prime target of analysts' ire. Ten analysts cut their ratings -- and two raised ratings -- within 24 hours of the companies saying they would suspend sales of Tysabri.
On Thursday, many analysts cut their earnings estimates, but they didn't cut their ratings. They say the company will survive, albeit with more modest prospects in the near future.
"Back to the old Biogen," says Mark Schoenebaum, of Bear Stearns, in a March 31 report. That means the company must rely on its two biggest drugs -- the MS medication
Avonex and the non-Hodgkins lymphoma drug, Rituxan, which Biogen Idec sells in partnership with
Genentech
(DNA)
.
These drugs "are mature but healthy," he says. He says that Biogen Idec, which has a "clean" balance sheet, still can produce more than $2 billion in revenue this year.
"The death of Tysabri was not greatly exaggerated," says Schoenebaum, who has an underperform rating, and was one of the many analysts who downgraded Biogen Idec after the initial Tysabri announcement. Wednesday's revelation "supports our thesis that any road back to the market for Tysabri will be extraordinarily long and difficult." He doesn't own shares; his firm is a market maker in the stock and also has a non-investment banking relationship with Biogen Idec.
Like Schoenebaum, Elise Wang of Citigroup Smith Barney has removed Tysabri from her financial models. If Tysabri ever receives FDA approval, its use would be severely restricted and its label would contain a "black box" warning, the strongest notice from the FDA.
Wang, who has a buy rating on the company, sees a potential buying opportunity amid all the misery. "We believe current stock levels are attractive, given our estimate of a base valuation of $42 without Tysabri," she says. She doesn't own shares; her firm doesn't have an investment banking relationship.
Checking Patients
It will take several months for Elan and Biogen Idec to review all the data from clinical trials. On Wednesday, they said the third case of PML was detected as part of this review.
They said this patient had received eight doses of Tysabri over 18 months. The companies said the patient also had a history of taking "multiple courses of immunosuppressant agents." They didn't provide details, but such drugs are used to treat people with inflammatory diseases like MS and Crohn's disease as well as people who have received organ transplants.
The companies are working with investigators to evaluate the approximately 3,000 patients in multiple sclerosis, Crohn's disease and rheumatoid arthritis trials.
"The results of this safety evaluation will be discussed with regulatory agencies to determine possible reinitiation of dosing in clinical trials and future commercial availability," they said.