Tysabri, Elan, and a Prayer

Investors seemed impressed with Irish drugmaker Elan's (NYSE:ELN) third-quarter results, announced this morning, but it's going to be hard for the company to grow into the lofty valuation they've prescribed for it.

Thanks to partner Biogen Idec's (NASDAQ:BIIB) earnings release earlier in the week, the sales numbers for Elan's top drug, multiple sclerosis treatment Tysabri, were already known. For the quarter, it brought the partners $93 million in revenue.

By the end of the quarter, 16,000 patients were taking Tysabri commercially, giving Elan and Biogen a $448 million annualized run rate for the compound, compared with a run rate of only $361 million at the end of the previous 11 weeks. Not bad growth, and the companies are benefiting from some U.S. insurers giving Tysabri equal or preferred scheduling on their formularies relative to other top multiple sclerosis treatments.

The rest of the Elan statement doesn't look as good, although things are slowly improving. The net loss was $30 million lower in the third quarter compared with last year, but Elan still burned through $41 million in cash in the quarter.

Elan has some valuable intangible assets, with its Alzheimer's disease collaboration with Wyeth (NYSE:WYE) and the Tysabri partnership, but shareholders sticking with Elan for the Alzheimer's program are speculating rather than investing, because the data from the program has been minimal.

Let's put Elan's $11 billion market capitalization in perspective. It's equal to the combined market caps of Cephalon (NASDAQ:CEPH), Endo Pharmaceuticals (NASDAQ:ENDP), and MGI Pharma (NASDAQ:MOGN), yet those specialty pharmas combined for more than $3 billion in revenues last year.

Even if Tysabri hits Elan's 100,000 on-drug patient goal by the end of 2010 and the average wholesale cost for a course of therapy inches up to $30,000 annually by then, it would contribute less than $1.5 billion annually to Elan's top line, considering the profit split with Biogen. It's hard to see how $3 billion in revenue today could be worth the same as $1.5 billion in the future.

Of course, this isn't anything close to a perfect comparison between Elan and these three pharmas, because the valuation for every drugmaker is a composite of its pipeline, marketed drugs, and their patent lives (plus, Elan has other revenue sources). But it exemplifies how it takes a heavy dose of hope and fingers crossed for the future to consider Elan undervalued at these levels.

Biotech investors can get burned if they don't leave themselves much margin of safety, and if Elan's Alzheimer's program isn't successful, this may be one of those cases. Call me conservative, but I'd rather invest in a drugmaker like this one, with fewer unknowns about its pipeline.