The 3 Words Every Biotech Investor Wants to Hear

"Cash flow positive!" -- three little words that are music to biotech investors' ears.

I'm not sure if investors are quite as excited about "adjusted EBIDTA positive." It just doesn't have the same ring to it. Not to mention that earnings before interest, depreciation, taxes, and appreciation doesn't mean nearly as much as seeing the greenbacks in the bank account.

For now, though, that's all Elan's (NYSE: ELN  ) investors are getting. The company recorded positive adjusted EBIDTA in the third quarter and is looking for more than $150 million in adjusted EBIDTA this year. Producing more cash than it's using will have to wait until next year.

Elan is basically a one-trick pony at this point. Its share of Tysabri sales, which Elan splits with Biogen Idec (Nasdaq: BIIB  ) , made up 77% of revenue in the third quarter. There's some revenue from Elan Drug Technologies -- mainly manufacturing and royalty revenue from drugs such as Johnson & Johnson's (NYSE: JNJ  ) Invega Sustenna and Acorda Therapeutics' (Nasdaq: ACOR  ) Ampyra -- but Elan is likely to spin off EDT in due time.

At that point, it'll basically be Tysabri and the pipeline of Alzheimer's drugs. While the potential for both is huge, Elan is going to have to operate flawlessly on Tysabri to convince patients that the benefits from taking the drug outweigh the risk.

For the Alzheimer's drugs, the company just needs to get lucky. The disease has taken down many a drug -- Eli Lilly's (NYSE: LLY  ) semagacestat most recently -- and bapineuzumab, which Elan has licensed to Johnson & Johnson and Pfizer (NYSE: PFE  ) , didn't exactly have the cleanest phase 2 data. A phase 3 failure isn't guaranteed, but I would say the trio could use all the luck they can get.

Elan is headed in the right direction, but investors should be cautious here. Elan needs more than a little cash flow to justify the $3 billion market cap.

Interested in keeping track of Elan as it moves toward making money for investors? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Elan.

Elan is a Motley Fool Rule Breakers pick. Pfizer is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor selection. The Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On October 28, 2010, at 12:58 PM, persiflageur wrote:

    Elan’s bapineuzumab Ph2 data results were weak for Alzheimer’s patients who carry the ApoE4 gene. They were positive (“statistically significant and clinically meaningful“) for non-carriers (estimated by some to be 40% of the Alzheimer’s population.) See Elan’s July 28, 2008 PR re the Ph2 results.

    In terms of bapineuzumab and semagacestat, apples and oranges. Lilly’s semagacestat is a gamma secretase inhibitor and, unlike bapineuzumab, does not attack beta-Amyloid, a cause of brain neuron death in Alzheimer’s. Instead, in theory, semagacestat stops (some) beta-Amyloid production. But there have been concerns with semagacestat from almost the start. This is because it also interferes with a major protein (NOTCH) involved in the body’s ability regulate and/or promote the production of new cells. This problem was seen in at least one prior, and much earlier, semagacestat trial. So one should not have been surprised that it cropped up again in the latest Ph2.

    Bapineuzumab’s main adverse effect was vasogenic cerebral edema, a penetration of fluid into the white matter of the brain and thought to be due an inflammatory response. The edema was seen principally in the ApoE4 carriers. It has been theorized that non-steroidal drugs that suppress inflammatory responses may be an answer for ApoE4 patients receiving bapineuzumab. Who knows?

    Let me add that the vasogenic edema seen in the Ph2 was seemingly unanticipated and that in the Ph3 the trial subjects will receive bapineuzumab for a longer period. Draw your own worse case scenario.

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