When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's look at Elan
Founded in 1969 and based in Ireland, Elan is a biotech company focusing on neuroscience and primarily targeting Alzheimer's disease, Parkinson's disease, and multiple sclerosis.
Elan is appealing for many reasons. Like other biotech companies, it's developing treatments to fight diseases, and its successes will both better the world and enrich its shareholders. But unlike many biotechs, it actually has an approved, and profitable, treatment on the market.
Tysabri primarily treats MS, and not only is it on the market, but it's also reached "blockbuster" status, with sales topping $1 billion. That helped Elan report a net gain for 2011, versus a net loss in earlier years. Tysabri sales have been growing at a good clip as well, recently rising 23%.
In collaboration with Biogen Idec
Many bulls like the company's strategic thinking. In 2011, it sold its extended-release drug-delivery technology to Alkermes
Also auspicious is that President Obama has pledged to boost spending on Alzheimer's research considerably.
Finally, you might like Elan for its resilience. Its Tysabri hit a roadblock a few years ago, when it was discovered that some patients were developing a rare and potentially lethal brain infection. Its scope of use was thus narrowed. But things are looking brighter for the drug (and patients) now, as it has been approved for wider use among those who have been tested to see whether they have a lower risk of developing the condition.
Of course, investing in Elan is not a surefire road to riches. Its upsides are accompanied by downsides. The boost in spending on Alzheimer's research is a plus, of course, but so far a lot of money has been spent developing treatments for the disease with relatively meager results. In fact, the history of some would-be treatments for the disease serves as a good reminder of how risky biotech companies can be: Eli Lilly
You might also want to avoid Elan if you're not sufficiently impressed with its financials. Its revenue growth has recently been slowing, free cash flow is negative, and gross margins have shrunk some. (Many other measures look good, though. Net margins are up, as are returns on equity and invested capital.)
You might also just want to wait. You could wait for Elan to have more successes emerge from phase 3 trials. You could wait for it to post more quarters or years of net gains instead of losses, establishing more reliability. You could wait to see whether Elan emerges as an Alzheimer's powerhouse.
Or, you might just decide that the benefits outweigh the risks.
I'm going to hold off on Elan for now. There's a lot to like about it, and it holds a lot of promise, but there are plenty of compelling stocks out there.