If you've spent any time on Lower Grand Canal Street in Dublin this past year, you're probably wondering what that incessant beeping is.

Turns out

Fidelity Investments

has been backing up the truck to

Elan's

(ELN)

doors and loading up on the Irish drugmaker's shares. In January, Fidelity already owned more than 20 million shares -- a greater than 5% stake. Then, sometime in February or early March, the fund giant began to build on its holdings.

Eventually, Fidelity had accumulated nearly 61 million shares, or 14% of the company, as of Aug. 4, according to regulatory filings.

That's a far cry from early 2005, when Fidelity, like so many others, fled Elan after its multiple sclerosis therapy Tysabri was pulled from the market in February of that year. Elan had been trading in the mid-$20s at the time, but after the Tysabri withdrawal, the stock quickly fell below $9 and ultimately dropped to around $3.

During that time, Fidelity dumped about 16 million shares, leaving it with about 20 million, and that's where it stayed until the beginning of this year. The problem isn't with Fidelity's faith in Elan in and of itself but with the timing of its buying and selling.

Source: Investegate

Fidelity doesn't have a great track record in the stock. The asset manager got burned last year by the Tysabri debacle after loading up on Elan. As the price recovered from the single digits, Fidelity sat tight. Not until the stock hit the mid-teens does it appear that Fidelity became more involved. A similar pattern played out in 2002, when Elan shares cratered and Fidelity sold on the way down and picked up shares well after the recovery was under way.

History could be repeating itself. Mike Hurley, chief technical strategist at M.S. Howells & Co., says Elan is headed lower.

"The stock has been in an uptrend since April of 2005," he says. However, "the uptrend looks like it's starting to break." For the intermediate term, Hurley says the chart looks neutral to bearish, but for the short term it's decidedly bearish, with the stock making lower highs and lower lows for the past few months. The fact that the stock failed at resistance and at its 50-day moving average in the mid-$15s is meaningful, according to Hurley.

Elan trades on emotion, and that's what worries me about the stock. I don't doubt the efficacy of Tysabri, and after speaking with many people in the industry I suspect it's safer than some people fear.

Elan, along with partner

Biogen Idec

(BIIB) - Get Report

, took Tysabri off the market after its use was linked to a potentially fatal disease called PML, an infection of the brain. The companies revisited their clinical data on 3,000 patients, and all told, three cases of PML were found; this led to the nonscientific estimate that the risk was roughly 1 in 1,000. After the MS drug was unavailable for more than a year, the Food and Drug Administration reapproved it in June.

Patients who came down with PML were taking Tysabri along with other medications for MS. Additionally, doctors didn't realize the symptoms were related to PML, so patients continued to receive Tysabri. Now, Tysabri is used as a monotherapy, and physicians are on alert to look for signs of PML. Theoretically at least, patients showing signs of the infection would immediately stop taking the medication.

Keep in mind that the FDA is unlikely to take action even if new cases of PML are reported, provided the rate of infection is less than 1 in 1,000. One hedge fund manager, whose fund owns a significant chunk of Elan's stock, says the PML "incidents will be less than expected."

The fund manager, who didn't want his name used, well may be right. Still, if another case linking Tysabri to PML is suspected, I believe you'll see Elan's shares implode again. Investors who know the stock's track record will shoot first and ask questions later.

That's just fine with the fund manager, who is a long-term holder. "After one or two years, if PML incidents are fewer than expected, the drug has a 'hockey stick' projection," he declares.

He also says that the company's therapies for Alzheimer's disease, being developed in collaboration with

Wyeth

(WYE)

, could be worth more than Tysabri, should they become marketable drugs. The manager says the potential success of treating Alzheimer's isn't even priced into Elan's stock at current levels.

For investors who have the ability to put Elan away and not look at it for a few years, I suspect they will be rewarded if the fund manager's prognostications come true. However, with the emotion and risk involved in the stock, don't be surprised if the stock suffers serious damage at some point along the way.

And considering its track record in the stock, the axiom "buy when there's blood in the streets" may be especially true when it's Fidelity's blood that's spilled.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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