This is a very anxious week for patients afflicted with multiple sclerosis, as well as employees and investors in Elan ( ELN). On Tuesday and Wednesday, an FDA advisory committee will evaluate the safety report and clinical trial results of Tysabri, an MS drug that is a joint partnership between Elan and Biogen Idec ( BIIB).

I can foresee a situation in which Elan's shares could run after this meeting, but this is a convoluted story that won't resolve easily.

Tysabri is widely expected to gain approval at the end of the month and be back on the market as early as next quarter.

The drug had been available for a few months in early 2005 when it was voluntarily recalled after three patients came down with a rare brain disease, and two of the patients died. The three were being treated with Tysabri and another medication, both of which suppress the immune system. The condition, PML, was not detected in any patients who were treated solely with Tysabri. However, most experts don't rule out that it could occur even if Tysabri is the only therapy given.

A recent two-year study showed Tysabri was twice as effective in reducing relapses as other available therapies. There are some former Tysabri users who are demanding that they be allowed to continue with the drug. For example, MSpatientsforchoice.org was created to lobby the FDA to approve Tysabri and get it back on the market. The organization believes that the risks should be clearly defined, but that ultimately patients should be able to choose whether Tysabri is right for them.

If Tysabri is approved, it will likely have a restrictive label with warnings about PML. This could limit the number of doctors who are willing to prescribe the drug due to cautiousness or even fear of lawsuits should a patient contract PML, for which there is no cure.

Another potential constraint on prescriptions is the amount of testing that will be necessary to ensure that a patient isn't at risk for PML. The two most likely methods of testing are an MRI or spinal tap. Richard Silver of Lehman Brothers cites an expert who was on the Tysabri steering committee who suggested that "anything less than a monthly (MRI) evaluation would be inadequate as a screening tool for early signs of PML." However, an MRI may be impractical. It is unlikely that insurance companies will willingly foot the bill for a monthly MRI. Elan is an investment banking client of Lehman Brothers.

That leaves spinal taps, which are considered the most diagnostic analysis for the virus that can lead to PML. But as anyone who's ever had a spinal tap will tell you, it can be extremely unpleasant. While there will no doubt be a segment of the MS population who will be willing to endure a spinal tap in order to obtain the benefits of Tysabri, there will be plenty who won't.

Elan and Biogen's stock will be halted during the hearing. But most of Wall Street is not forecasting good things for Elan's shares despite expectations of an approval. Many on the Street believe an approval is already priced into the stock, because Elan has rebounded from a low of $3 a year ago to its current price above $12.

But there are a few bulls on the stock. Howard Rosencrans, chief research analyst with Capital Growth Financial, believes the Elan shares could pop on the news of an approval. Although short interest has come down over the past few months, Rosencrans suspects that some of the 6.5% of the float that is short will bail out of positions on the news, driving the stock higher. Rosencrans does not own the stock and his firm has no investment banking relationship with Elan.

Competitors Strike Early

While there seems to be a lot of valid concern surrounding the risks associated with the drug, some of the makers of competing drugs are apparently quite distressed. Last week Teva Pharmacecuticals ( TEVA) circulated a research paper that compared Tysabri's effect on the immune system with that of AIDS'. It's important to realize that Tysabri is effective because it is an immunosuppressant. The suppressed immune system is less likely to attack the nervous system, which is the cause of MS. The paper, by researchers at the University of Texas, has not yet been accepted for publication in a scientific journal.

Teva has reason to be worried. Its MS drug, Copaxone, racked up $1.18 billion in sales in 2005, nearly 25% of the company's $5.3 billion in total sales. If Teva is feeling enough of a threat to its billion-dollar drug to engage in this type of PR smear campaign -- especially before the panel review -- this tells me Tysabri could be a blockbuster.

The National Multiple Sclerosis Society estimates there are 400,000 people afflicted with MS in the U.S. and 2.5 million worldwide. If just 10% of the domestic patients are treated with Tysabri, which is what several Wall Street analysts assume, the annual revenues generated would be over $900 million (at a cost of roughly $23,000 per year). The cost would likely be lower outside of the U.S., but you can clearly see Tysabri has potential to be a $1 billion or even $2 billion drug someday. Elan splits the revenue from Tysabri evenly with Biogen.

So, what happens with the stock? I could see Rosencrans' scenario playing out and Elan getting a lift on positive news. However, I wouldn't be surprised to see it come back in after the bears try to knock it down with their research reports. Only one analyst rates the stock a buy, while six have it as a hold and another six recommend selling it. Don't forget, the Street already assumes that Tysabri will get approved, most likely with a restrictive label. So that news should be priced into the stock already.

However, this is an emotional issue for patients as well as investors. I'm not thrilled with Elan's fundamentals outside of this story. But considering all of the negative sentiment built in, I wouldn't be shocked to see it go on a run if it can get a little momentum going.
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; click here to send him an email.