Why I'm Invested in Tysabri and Elan

Drug stocks can be volatile. Chart squiggles will rise and fall on unpredictable events like FDA approvals, fresh phase 3 trial data, or sudden outbreaks of deadly drug reactions. But Mr. Market eventually takes his Valium and settles down. That's the case with Motley Fool Rule Breakers recommendation and drug developer Elan (NYSE: ELN  ) nowadays.

Elan gets more than half its revenue from the field of multiple sclerosis, through the powerful but risky MS medication Tysabri that it markets alongside American partner Biogen Idec (Nasdaq: BIIB  ) . Back in 2005, the newly FDA-approved Tysabri was linked to several cases of the often fatal brain infection progressive multifocal leukoencephalopathy (PML). The drug was pulled, and Elan's stock dropped like a rock.

I've had a longstanding interest in MS because of family friends who have long suffered from the disease. Traditional therapies like Teva Pharmaceutical Industries' (Nasdaq:  TEVA  ) Copaxone and Rebif from Pfizer (NYSE: PFE  ) and EMD Serono typically slow the disease down, but Tysabri can actually reverse symptoms for some patients. Unless PML turned out to be a common side effect, Tysabri's rewards outweighed the risks, and its return to market seemed almost certain. So that's when I bought my first batch of Elan shares. 

And it's been a rocky ride ever since. Elan's stock has melted down to $3 and change, and then soared to $35. The PML cases have been dropping in regularly since Tysabri returned to market, but investors don't spook as easily anymore:

PML Report Date

Elan Change

Biogen Change

July 31, 2008

(50.5%)

(28.3%)

Oct. 29, 2008

(11.1%)

(3.9%)

Dec. 15, 2008

(3.6%)

6.4%

Feb. 6, 2009

4.3%

(0.6%)

April 17, 2009

(6.2%)

(3.5%)

May 22, 2009

(0.4%)

1.7%

June 12, 2009

(6.9%)

(2.3%)

June 19, 2009

(4.6%)

(5.0%)

June 26, 2009

(5.6%)

(5.5%)

Sept. 16, 2009

(2.3%)

(2.1%)

Market data from Yahoo! Finance, showing next-day share price change after each PML event report.

There have been 13 Tysabri-related PML cases since the reintroduction -- including three new cases in the Sept. 16 announcement --  but that's a vanishingly small portion of the more than 40,000 patients who take Tysabri worldwide. Investors have started to take these announcements in stride, because they don't appear to pose any long-term threat to the Tysabri business.

I've got a somewhat unique view of Elan: As a longtime Elan investor, I've poked and prodded the business model behind the medicine. Then -- irony of ironies -- I got the dreaded MS diagnosis this year and studied up on all forms of MS medication. My Copaxone isn't helping much, and Tysabri might be the next step.

Tysabri won't be Elan's golden goose forever, of course. There are enough MS patients to justify lots of research, and there are promising new therapies on the way from Teva, sanofi-aventis (NYSE: SNY  ) , and Merck (NYSE: MRK  ) . The competition is coming. But Tysabri may still be the strongest MS drug on the market for a few more years.

And that's why I'm holding on to my shares, despite that string of PML incidents.

Agree? Disagree? Let me know in the comments section below.

Elan is a Motley Fool Rule Breakers recommendation. Pfizer is an Inside Value choice.

Fool contributor Anders Bylund owns shares in Elan, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (12) | Recommend This Article (28)

Comments from our Foolish Readers

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  • Report this Comment On October 01, 2009, at 4:21 PM, conesnail wrote:

    Two things missing from your article:

    1. you should talk about how Elan's partner Biogen chose to market PML, rather than Tysabri, in an effort to protect sales of Biogen's own Avenox

    2. you should note that only ONE of these PML cases resulted in death, and that patient refused treatment.

  • Report this Comment On October 01, 2009, at 4:25 PM, Deserthorse wrote:

    I agree entirely with your assessment but I dont undestand why the market does not see it the way you have analysed.

    There is general feeling that Elan has no funds and it is struggling to make its end meet so it looks like it is not the propect of the drugs that the market is assessing but it is the ongoing concern of Elan that is the limiting factors.

    What is your assessment of the upside and when can you forsee the stock ticking up???

  • Report this Comment On October 01, 2009, at 5:21 PM, Paulson545 wrote:

    I finally threw in the towel today and sold all my Elan stock. I hung in thru the Biogen lawsuit which Elan lost; i stayed even thought the CEO borrowed 600 million more dollars when he promised to use the JNJ money to lower debt, but i can not hold this stock any longer when the S E C is ordering Elan to produce records. I don't want to wait up and find that Elan may have been involved in wrong doing. Not to mention the new pill being tested for MS.

  • Report this Comment On October 01, 2009, at 6:44 PM, LovesJohnDory wrote:

    Thank you for your piece on Elan and Tysabri. I have been a large retail shareholder for over a decade, through thick and thin, $65 and $1.03. I have a three comments:

    1) In your chart, you missed an entry for the first trading day after the July 24, 2009 PML report date, July 27, 2009. I can email you Biogen’s last weekly report if you like.

    2) More importantly, while many in the media and the analyst community still refer to Tysabri-associated PML as “deadly” or something similar, since Tysabri was reintroduced in the US and approved in the EU in July 2006, there has been just one reported PML fatality, and Biogen noted in that instance that the patient’s family declined to follow the recommended treatment protocol (PLEX, mefloquine, and treatment for IRIS). While the remaining patients have a range of remaining disability from their PML, ranging from similar to a typical severe MS relapse to significant disability, as more experience is developed in rapidly diagnosing PML and treating the patients appropriately, it is likely that very few fatalities will occur from Tysabri-associated PML.

    3) Finally, when evaluating the risk of any drug such as Tysabri, it is imperative to evaluate the benefits from the drug. Given Tysabri’s significant efficacy for most of the patients who take it, in terms of reduced relapse rate, delay of disability progression, reduced hospitalizations, and in many cases improvements in patients’ quality of life (including decreased disability over time), the risks (PML and otherwise) are acceptable to most patients. Indeed, assuming the severity of most of the rare PML cases continues to be closer to typical severe MS relapses, the fear of PML should subside. Looking at this from the other side, if 100,000 to 200,000 or more MS patients are not taking Tysabri because they or their neurologists are fearful of PML, one can calculate the approximate number of avoidable relapses, disability progression, hospitalizations and deaths if those patients had taken Tysabri. Then compare those unfortunate, avoidable events to the rare cases of PML, particularly should the experience with PML continue to be less than “deadly,” and the fuller more accurate context begins to emerge.

    The life of an Elan shareholder is not an easy one, but those like you who are unfortunate to have MS as well as being Elan shareholders deserve our prayers and respect.

    Regards,

    LJD

  • Report this Comment On October 01, 2009, at 6:51 PM, LovesJohnDory wrote:

    I recommend anyone not familiar with views of MS patients about Tysabri to do a little research, on Youtube and elsewhere. Here is a link to a survey a prominent MS patient has undertaken about Tysabri patients' evaluation of the drug:

    http://wwwmsviewsandrelatednews.blogspot.com/2009/09/unoffic...

  • Report this Comment On October 02, 2009, at 12:15 AM, chantezblue wrote:

    Your article was somewhat brief regarding ELAN. The biggest problem with ELAN has been its debt overhang, and the inability for the ELAN executives to deliver on promises and to firmly manage towards profitability. What's worse is that CFO Shane keeps moving forward his target date as to when Elan will show a profit. The other issue is that these executives seem to consistently fail in understanding risk and the need to plan for contingency in all aspects of their business.

    You also didn't mention that ELAN has a leading candidate in phase 3 trials for Bapinazumab (bapi). This has been the main driver for Elan's stock appreciation and the price of Elan stock has not recovered since ICAD (where the CEO Kelly 'Wimpy' Martin botched the messaging behind the phase 2 trial results to the media).

    Not to say that Tysabri wasn't a driver, but the market discounted Tysabri after it was pulled from the market in 2005. Many biotech analsyts swore that this med would be niche and not draw than more than 250 million in revenue.. and it would take till 2010 to do so. On the other hand Biogen Chief Mullen said there would be 100k patients on Tysabri by 2010. The truth is somewhere in between but the med is already a blockbuster generating over 1billion in annual sales.

    The shame of it is that Tysabri is only given to the patients who are in the worst condition, often with stressed immune systems and in frail health. Some of these people (search YOUTUBE) have literally thrown away their wheelchairs! Now that truly amazes me, yet I have never seen one journalistic ariticle espousing the incredible benefit that Tysabri has had on some MS patients. Why I can't understand. Imagine if Tysabri was given as a primary med to patients before their disease progressed to the point of having 60 lesions on the brain!?

    The side benefit of Tysabri is relatively that soon, in my opinion, PML will be conquered as it is in the interest of many biotechs to remove PML from the equation so paitients using monoclonal antibodies like Tysabri can fully benefit from long term usage without any worries or concerns.

    Getting back to Bapi however, due to the debt overhang the future of ELAN rests with AD. The fact that JNJ just invested 850 million in ELAN for 18.4% of the company, and has now become the 50.1 percent owner of Bapi for another 500 million, speaks a lot to the future of ELAN and AD.

    Elan has a promising pipeline, including an oral MS medication and a parkinson't program. I don't believe that anything will come close to the gold standard in MS treatment for quite some time (that being Tysabri), as from what I read many of the current therapies also have some very severe side effects, and the efficacy will not be better than Tysabri.

    At 7 dollars I think the stock looks pretty cheap, but right now the future lies in the hands of Tysabri revenue as that is the main growth driver. Elan does have new royalty sterams kicking soon as well, as their EDT division will be seeing more revenue from some recently approved meds that they partner in.

    Until the revenue picture is clear, and the Ty growth curve is predictable, I don't expect to see a huge rise in price (hope I'm wrong of course). This is due to the fact that the AD program has not been factored into the ELAN equation since ICAD (Thank you Wimpy). Bapi appears to be a real sleeper even with the 500 million dollar investment by JNJ. The fact that ELAN will no longer have to fund the phase 3 trials also seems to have made no dent in the pps, even though this will save them over 100 million dollars a year in expense! I'm not sure what's wrong with this stock's pps, maybe the market considers that a wash with the 18.4% dilution?

    With Elan, you have to always be prepared for the worse, as management is always caught with their pants down. I don't suspect any criminal activity, unless you could call being dumber than carrot a crime. Perhaps in 3 months we will see the cloud start to drift off ELAN as the revenue picture clears up and maybe some comments from JNJ on the new Jansen AIP joiint venture (ie Bapi phase 3 peeks).

    There is still potentially a huge upside for ELAN if they can show steady growth, profit and then good bapi news... lets line that one up boys.

    And yet, there is even more to the ELAN saga...such as what is jack schuler doing now that he is on the BOD? Two ELAN dissidents were elected to the BOD this past year.. they may be in the dungeon becuase we haven't heard from them since their appointment!

  • Report this Comment On October 02, 2009, at 10:28 AM, Neurodelinquent wrote:

    There is no such thing as "somewhat unique."

  • Report this Comment On October 03, 2009, at 5:28 PM, 4924 wrote:

    Why is a possible JNJ takeover of ELN reason to buy the latter? After 18% ownership of the ELN and 50 % share of Bapi are there other promising drugs that would justify attempting a takeover? Wouldn't this pose additional risk of legal responsibility for past and future PML cases?

  • Report this Comment On October 06, 2009, at 1:00 AM, Fool wrote:

    One fact never presented is that over 80% of the population has the PML virus right now but a healthy immune system prevents its surfacing. Every one of the PML cases had compromised immune systems.

  • Report this Comment On October 06, 2009, at 8:47 PM, Fool wrote:

    People with MS DO have a comprised immune system.

  • Report this Comment On October 20, 2009, at 1:23 AM, mijomar wrote:

    Lets see....13 incidents of PML out of 40,000 is about 0.000325 to one, mathamatical chances of being the 14th. One has to ask, as we always must, what are the alternatives to NOT taking Tysabri?.. the odds are a hell of a lot worse as to the effects of not taking the drug. To answer your original question.

    As for the stock, which I also own, with everything we currently know, and if we knew everything we dont know...its still a gamble, regardless, but an educated gamble. ELN will go back up in time, predicated ONLY on the effacasy of its current marketable drugs. Obviously, its at seven and change, despite it's current financial and political situation...the proof is in its pudding...and I'll continue to own the stock.

  • Report this Comment On January 03, 2012, at 3:03 PM, AZErnie wrote:

    Assuming you are as you say, an MS patient, I am surprised that you are reluctant to take Tysabri. You must know that MS is the result of an over-active immune component, in fact the very immune component that controls PML. Which is to say that it is impossible to have MS and PML at the same time.

    It is strongly suspected by some, that so-called MS patients who acquired PML during treatment with Tysabri, never had MS at all. The symptoms of MS and PML are very similar and few doctors have ever seen PML. However, if one has PML and is treated with Tysabri, the suppression of the immune component that controls the PML virus, is most likely to result in a more virulent PML infection.

    Check it out, Tysabri is by far, the most effective treatment for MS. In fact, it is most often the end of active MS in most patients.

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