Bringing life-improving therapeutics to market is about as noble a cause as there is for a public company. Over the years, drugmaker Elan (NYSE: ELN ) has brought several of these products to market, and its research in neurodegenerative diseases has had some very impressive results.
So, with so much going right for Elan, what's wrong with it? Well, in the dog-eat-dog world of stock investing, a company that makes life-changing products is only worth investing in if the price is right. At today's $5.6 billion valuation, shares of Elan are just too pricey, considering the risks embedded in it and the potential of its two lead drug programs.
Elan is best known nowadays for its multiple sclerosis treatment Tysabri and the saga of bringing it to market. Elan and marketing partner Biogen IDEC (Nasdaq: BIIB ) resumed marketing of the drug in the U.S. in July of last year. After almost six months of sales, U.S. revenues were $23 million in the fourth quarter, which is tracking in the middle of Merck Serono's (NYSE: SRA ) MS therapy Rebif, with $18 million in U.S. sales, and Biogen's own Avonex, with $28 million in U.S. sales after the same amount of time.
While this initial sales trajectory might make the Elanites excited envisioning its blockbuster sales potential, there are several reasons why sales may ultimately disappoint and why the launch of Tysabri may not be comparable to that of the other MS therapies. First, Elan had an extra year to develop patient awareness and create pent-up demand, as those who were set to begin therapy before it was pulled from the market waited to get on the drug again. Second, Elan has gotten the benefit of using Biogen's experienced and large sales force, whereas Avonex and Rebif were launched in much more difficult conditions (and, in the case of Avonex, during a time when MS was still considered to be an orphan indication affecting far fewer people).
The biggest reason why the Tysabri launch looks to have gotten off to a better start than it has is the fact that the drug is priced so much higher than the other MS therapies. The number of patients on the drug after two quarters of marketing is much fewer than were on Rebif or Avonex after their launches, with only 5,000 patients having taken Tysabri, compared to more than 8,000 on Rebif and at least 10,000 on Avonex after their launches. This is based on Biogen's estimate of a minimum of 2,500 patient adds per month after its launch. Unless Tysabri patient adds start improving, its U.S. sales will struggle to reach blockbuster status.
Even if Tysabri does eventually go on to bring in the $1.5 billion that Rebif did last year, it won't be enough to make Elan profitable, since it has to split sales of the drug with Biogen. Not to mention, there was a GAAP net loss of nearly $270 million in 2006 alone. Even worse, this loss occurred despite the benefit of $240 million in drug sales that will mostly disappear in the next two years as Elan loses patent protection on its top two other marketed products, Maxipime and Azactam. With more than $1.8 billion in debt, there will either be loads of share dilution in the future as Elan falls into even deeper arrears, or more refinancing of its exorbitant amount of debt, possibly at higher interest rates.
Unfortunately, I don't have enough room to fully discuss Elan's lead compound in development, AAB-001. While the drug does have some promise for an indication (Alzheimer's disease) that brings in billions, the discount rate applied to any cash flow analysis of the drug has to be based on the minimum 70% rate of failure for drugs in phase 2 trials. The rate is possibly even higher, since the drug's being tested in an indication that is notoriously difficult for FDA approval. Phase 3 results of the drug won't be out for years if the drug continues in development without solid clinical trial results, so any bet on AAB-001 is a gamble at best.
How do you bring an Elan bear out of hibernation? Combine a crushing debt load, a huge cloud of uncertainty over its lead developmental drug program, and the launch of a new product that won't bring in enough revenue to sustain the current valuation, et voila! A bear is born.
You're not done yet!
Biogen Idec is a Stock Advisor recommendation.