A lot of investors in biotech stocks like to say that valuations in this industry are all relative, but when is a biopharma overvalued? I would argue that a company like Elan (NYSE:ELN), valued at nearly $6 billion yet with more than $200 million a year in losses, fits this bill.

Elan reported its fourth-quarter and year-end 2006 financial results this week. For the year, revenue was up 14% to $560 million, but the bottom line was more than $260 million in the red. Investors may be cheering the growing sales numbers, but there are some potentially major risks around the corner. More than 40% of Elan's revenues may be threatened by generic competition in 2008, by which time its two top-selling products will have lost patent protection.

In its second quarter back on the market, the multiple-sclerosis drug Tysabri brought in sales of $30 million worldwide. Elan's management appears a little too sure for my taste about Tysabri's future success when they say things like, "We are confident (Tysabri) will be a blockbuster drug in MS." If its sales trajectory doesn't start picking up in a quarter or two, there's no way this drug will hit the blockbuster target of $1 billion in annual revenue; and either way, Elan still has to split profits from Tysabri with partner Biogen Idec (NASDAQ:BIIB).

The balance sheet is where Elan's problems really start to reveal themselves. Even after a $600 million financing and the added dilution of changing $250 million of convertible debt into shares, Elan has only bought itself a few more years until the next round of $1.15 billion worth of debt comes due in 2011. Sure, the company has more than $1.5 billion of cash and equivalents, but this stockpile is dwindling rapidly.

Investors shouldn't be fooled by vague pronouncements about 2007 starting Elan's "drive to profitability," either. Elan expects its adjusted EBITDA loss for the year to be "less than negative $50 million," but this excludes things like the $110 million in interest expenses that Elan had to pay last year. The company's interest expense from its sizable debt load is too large to be swept under the rug in this manner.

Right now, all of Elan's hopes ride on two things: one, Tysabri increasing its market share, and two, its Alzheimer's disease compound AAB-001, which is currently in phase 2 development in collaboration with Wyeth (NYSE:WYE). Even if this compound goes on to phase 3 trials later in 2007, it is still years away from being on the market, and it won't be able to stem the oncoming tide of dilution and negative earnings in Elan's foreseeable future.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.