Elan Becomes a Bad News Buy

Never try to catch a falling knife, right? Wrong.

Yesterday, Elan (NYSE: ELN  ) and partner Biogen Idec (Nasdaq: BIIB  ) announced that they'd found two new cases of a rare and often deadly brain disorder in patients using their multiple sclerosis drug Tysabri. Elan's shares have subsequently fallen more than 45% today as I write this. But in this Fool's opinion, that precipitous drop has plunged Elan shares firmly into "buy" territory.

Let me put things bluntly: Shares of Elan are now undervalued. I could run you through the different discounted cash flow and other models I used to make that call, but they don't play well in such a short article. Fortunately, there's a simpler way to look at this situation.

Just ask yourself: Would another large-cap pharmaceutical company, like Pfizer (NYSE: PFE  ) , Novartis (NYSE: NVS  ) , or GlaxoSmithKline (NYSE: GSK  ) , pay more than Elan's current $5 billion market capitalization to acquire the company right now, even with its net debt and all the bad news it released this week? I think so.

As we've seen this year, pharma firms are snatching up biopharmaceutical assets at a blazing pace. Takeda just paid $8.8 billion to pick up Millennium Pharmaceuticals a few months ago, and even biotech giant Genentech (NYSE: DNA  ) hasn't been immune to takeover (or takeunder) offers from potential suitors hungry to own generic-resistant monoclonal antibody drugs. Compare Elan and Tysabri's future sales prospects to those of other biologic drugs being bought up, like Millenuim's Velcade, or potentially ImClone Systems' Erbitux, and it's pretty easy to see that some drugmaker would gladly pay more than $5 billion to snap up Elan and its pipeline.

When Elan was sporting a market capitalization exceeding $10 billion, it was way harder to argue that its assets were a steal. Today's one-day dramatic change in its stock price makes all the difference, though. I'm not arguing in any way, shape, or form here that Elan will get bought out -- just that its assets are worth more than the market seems to think at present.

I can hardly be called an Elan cheerleader over the past two years. I always thought Tysabri and its pipeline had potential, but I also felt that Elan's shares were overvalued, considering everything that might go wrong with Tysabri and pipeline drug bapineuzumab.

But now, Elan's shares are trading in the $11 range, wringing some (but by no means all) of the risk out of its shares. Even though these two new adverse events will surely lower Tysabri's new patient growth rate even further, the risk-reward proposition for Elan's shares has now shifted firmly in the opposite direction.

Pfizer is an active Inside Value pick. Pfizer and GlaxoSmithKline are active Income Investor picks. Biogen is an active Stock Advisor pick Try any of our Foolish newsletters today free for 30 days.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has an A+ disclosure policy.

Read/Post Comments (4) | Recommend This Article (11)

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  • Report this Comment On August 01, 2008, at 2:51 PM, BruceInCola wrote:

    Wait a minute, is there ANOTHER Brian Lawler that writes for TMF? Because I'm pretty sure I just read an article by someone also named Brian Lawler, in which they were recommending to BUY Elan!! :)

    Interesting take Brian...but what about all those nasty provisions that Elan built in so they wouldn't get gobbled up? Poison pills, etc.?

    Would be very curious to know what number you came up with from your DCF analysis.

  • Report this Comment On August 03, 2008, at 1:13 PM, skipwils wrote:

    As a user of the drug Tysabri, I strongly concur. I know this is a very morbid statement, but I would take a much higher risk than 1 in several thousand of contracting a potentially life threatening disease for the opportunity to improve my lifestyle, and that is what I currently face. Since I use the drug and it helps me live a better lifestyle, the decision is a no-brainer. I suspect other MS patient have similar feelings about Tysabri


  • Report this Comment On August 07, 2008, at 7:42 AM, sak1996 wrote:

    Although I concur with the statement that Elan is undervalued I do not agree with the comment that this will hurt future uptake of Tysabri as the investment community does not fully understand the MS patient and doctor base. Despite the potential for PML, doctors and patients see this as their best option at maintaining a decent quality of life. For these people this drug is far too important until an equal or better treatment comes along. The investment community will once again look like fools when the third quarter patient use numbers come out as they have never accurately evaluated the potential for Tysabri.

    Although I was not happy that Biogen and Elan made the announcement they did as I see it as unnecessary since it is well within expected ranges, I think it will give more confidence to doctors and patients as it shows that PML can be managed. You may even see PML numbers remain very low as doctors may over react and take patients off of Tysabri at the first sign of symptoms, not allowing PML to fully develop.

    I would hope that Elan does get a buyout from Biogen and Wyeth as I feel that wall street will never give them the respect they have earned in the medical community.

  • Report this Comment On August 08, 2008, at 2:25 PM, BruceInCola wrote:


    "Despite the potential for PML, doctors and patients see this as their best option at maintaining a decent quality of life"

    If this were true, there would be a LOT more than 30K patients on T right now. Numbers don't lie.

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