At The Motley Fool, we poke plenty of fun at Wall Street analysts, and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stock pickers, too. (And we're not always impressed with how Wall Street does its job.)
Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
RBC Capital Markets just upgraded biotech company Elan (NYSE: ELN) from hold to an outperform, also known as a buy. The one-year target price is $10 per depositary share, which would leave room for a 28% upside from current prices. RBC has warmed up significantly to Elan of late, having moved the stock from a sell to a hold as recently as January.
RBC sees high demand for Elan's Tysabri drug over the next few years. The market for multiple sclerosis, or MS, treatments caters to 2.5 million patients worldwide and has become a focal point for drug developers and investors alike in recent years. sanofi-aventis (NYSE: SNY) structured its blockbuster $20 billion takeover of Genzyme (Nasdaq: GENZ) around the expected success of Genzyme's Lemtrada drug for MS. This market is a very, very big deal.
Moreover, RBC thinks that Tysabri is making a takeover target out of Elan as well. Given the wave of consolidation in the biotech market in recent years, that wouldn't be a terribly surprising endgame for the Irish drug developer, nor even a remarkably large buyout these days.
Tale of the tape
So should we listen to RBC's advice here? Well, the firm as a whole is an All-Star in our CAPS system thanks to a knack for picking more big winners than big losers. As for consistency, the picture becomes murkier: RBC boasts a middling 54% accuracy rate overall. In the pharmaceuticals sector, the success rate drops to 50% and the correct-picks ratio in the biotech sector is an underwhelming 47%. That includes the following mixed bag of recent picks:
|
Company |
RBC Rating |
CAPS Rating (out of 5) |
RBC's Picks Beating S&P by |
|---|---|---|---|
| Impax Laboratories | Outperform | *** | 27% |
| Spectrum Pharmaceuticals | Outperform | ***** | 5% |
| AVEO Pharmaceuticals | Outperform | * | (37%) |
As it turns out, RBC's impressive CAPS score stems from impressive results in oil and gas, real estate investment trusts, and software stocks. If you zoom in on Elan itself, the stock lost 4% of its value while RBC rated it a sell while the broader market gained about 50%. Elan has gained 15% since moving off RBC's sell list, but most of that was yesterday's jump on this very upgrade -- a self-fulfilling prophecy if there ever was one.
In short, RBC's track record isn't terribly impressive in this sector, though the company is getting Elan sort of right most of the time.
Foolish final thought
As an MS patient myself, I see real value in what Elan is doing. In fact, I think there's a serious upside to Tysabri sales as everyone gets used to the risks of progressive multifocal leukoencephalitis (or PML) infections. Elan is working with Tysabri partner Biogen Idec (Nasdaq: BIIB) to develop an early warning system for that potentially lethal side effect, and the drug label has been updated to show just how common the infection is -- 102 cases have led to 21 deaths in a population of more than 56,000 patients worldwide. With better prescreening programs and early warning tests, I'd expect that rate to drop over the years.
I'd be on Tysabri myself if PML didn't scare my family so badly. At the moment, nothing comes close to the efficacy and -- excepting PML risks -- pleasant side effect profile of this drug, and it'll be years before Tysabri is made obsolete by further advances. That gives Elan investors and potential buyout partners a long window of high growth as the drug moves closer to the mainstream CRAB drugs (Copaxone, Rebif, Avonex, and Betaseron, for the uninitiated) in popularity.
Given all of this, I'm predisposed to agree with RBC's upgrade here. Elan's history of operating losses keeps many investors on the sidelines, including Foolish biotech guru Brian Orelli. Even Brian agrees that the money-burning troubles seem to be behind Elan.
