Elan Corp., plc

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By TMFBreakerTinker
March 31, 2006

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Just to put it all in perspective, and yes the FDA delay sucks, but so be it. A lot of things suck and we go on (well not if you have MS and need the best medication available, but not going there). As an investor here are expectations.

To justify the present market cap of ELAN excluding the rest of the business which I've assumed will be EBITDA break even, with $125 million in annual interest payments and $300 million joint expenses on Tysabri, using only U.S. market of 400,000 potential patients, what Tysabri needs to do is reach 10-13% market share. Somewhere between 45-50,000 patients. I did up the price of Tysabri slightly to $24K, which is probably conservative. I did use 75% gross margin, did not include any tax as I believe there will be massive tax loss carry forwards, but otherwise Irish corporate tax is around 12.5%.

What I get to justify the present market cap of $6 billion, utilizing cash flow is between 47,000 and 53,000 patients, depending if the market gives ELAN a 30 or 40 multiple. Using a 400,000 patient addressable market we get 11-14% market share to justify the present market cap.

Is anyone here not comfortable with meeting an 11-14% market share for Tysabri? Plus, given the fixed cost nature of the marketing share and of the interest payments, the higher [the] market share, the disproportionately higher will be the profits.

There can be no assurance at all that Tysabri will even have even 5% market share. We've seen a recent peak Tysabri estimate by one of the brokerages of around $250 million or 2.6% market share; i.e., mere guinea pigs utilizing this drug that is 2x as effective as anything else on the market and likely to be on the market for at least 3-4 years. So people with MBA degrees do differ. Whether it is an honest difference or an influenced by investment banking relationship business who can say, but the difference is there. So there is no certainty, well except for Tysabri coming back to market.

All this said, absent some shocking and egregious restriction placed on Tysabri, it seems to me that on Tysabri alone, excluding all else, using cash flow metrics and a 30-40 multiple thereon, which although high in many respects is not in this field of company and product what Tysabri needs to achieve to not lose us money is 11-14% market share. Exceeding this market share should, should as again no certainty in anything we do here, but mathematically, lead to stock appreciation in excess of $1 to $1 given the fixed fee nature of the expenses to be incurred by ELAN.

If stock picking were as easy as just running numbers everyone would be rich. But I have found that understanding what is valued in your stock greatly reduces your risk. I don't like to lose money and therefore don't like to buy a stock whose stock price poses me great risk of loss even if the company executes. Herein, are what I believe are Tysabri expectations, 11-14% market share which equates to $1.113 to $1.266 billion in Tysabri sales.

Take or leave the hard-core numbers and decide for yourselves if there are better places to put your money on a risk/reward basis. I have personally found another biotech with even lower expectations versus its market potential with an approved drug just now on the market (it is a Rule Breaker stock so I will discuss that one on the Rule Breaker side of these boards) but I cannot say that I feel uncomfortable at all at this time, at this valuation, with ELAN based upon this analysis.

There is still a risk that the FDA restricts Tysabri to second tier. That would be a mistake and an overreaction, and I don't care if I'm a M.D. or not it would simply not be in the public interest to do so. But the chance exists. Nevertheless, Tysabri is going to exceed 11-14% market share I do believe, in fact I believe it will eventually be the #1 MS drug on the market which presently is $1.6 billion per annum with Avonex. Avonex is less expensive, less effective, more painful to administer, but at least better than Copaxone and Rebif in that regard as it is only a once a week injection. Further I do believe that Tysabri expands the market, further I do believe that Tysabri will have very material sales in Europe, and there are no European figures in these totals.

Kool-Aid alert again always appreciated as I feel compelled to redundantly run these sorts of numbers every few weeks until fruition.


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