The recent developments of two drugs in the portfolio of the Dublin-based biotech firm Elan (NYSE:ELN) have sent its shares soaring more than 70% in the past three months. The company and partner Biogen Idec (NASDAQ:BIIB) are pressing the FDA for the approval of its Tysabri drug for the treatment of Crohn's disease. Elan and partner Wyeth (NYSE:WYE) have recently announced intentions to enter phase 3 clinical testing of Alzheimer's disease drug bapineuzumab.

Should the company prove to be successful on both fronts, the recent run-up in its stock price just may be warranted. Should either of the two fail, shareholders might be giving back some of those recent gains.

Tysabri was approved last year both in the U.S. and Europe for use in the treatment of multiple sclerosis. The drug is off to a good start, with Q1 product revenue in the U.S. coming in at $35.7 million or 34% of Elan's total revenue from marketed products. While the drug has just started ramping up in multiple sclerosis, there's additional growth opportunity in Crohn's disease. The FDA's Gastrointestinal Drugs and Drug Safety and Risk Management Advisory Committees are convening on July 31 to discuss Tysabri in Crohn's. A favorable outcome would go a long way in enabling the stock to continue to trade at its current level.

Although the financial impact would not be as immediate as the decision on Tysabri, the company's development of its bapineuzumab compound could prove to be more lucrative over the long run, given the aging baby boomer population. Bapineuzumab has received Fast Track designation from the FDA, and the phase 3 trial is expected to commence in the second half of 2007.

Fools looking to cash in on Elan's recent momentum should take into consideration the following risks. Should it receive approval for the treatment of Crohn's disease, Tysabri would face an uphill battle in gaining market share away from established treatments such as Johnson & Johnson's (NYSE:JNJ) Remicade and Abbott's (NYSE:ABT) Humira. And while the progress of bapineuzumab is promising, any potential financial benefit to Elan from the sale of such a drug would be a bit of a way down the road.

For the immediate future, the company is facing the challenges posed by recurring operating losses that many young biotech companies encounter. Nevertheless, the company's highly leveraged balance sheet makes for an inherently risky investment on the surface.

The drugs that are coming out of Elan's pipeline would certainly fill areas of unmet demand. Only time will tell, though, whether these drugs can generate sales soon enough to chip away at the company's long-term debt and close its net loss position.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. Biogen Idec is a Stock Advisor recommendation. Johnson & Johnson is an Income Investor selection. The Fool has a disclosure policy.