Never try to catch a falling knife, right? Wrong.

Yesterday, Elan (NYSE:ELN) and partner Biogen Idec (NASDAQ:BIIB) announced that they'd found two new cases of a rare and often deadly brain disorder in patients using their multiple sclerosis drug Tysabri. Elan's shares have subsequently fallen more than 45% today as I write this. But in this Fool's opinion, that precipitous drop has plunged Elan shares firmly into "buy" territory.

Let me put things bluntly: Shares of Elan are now undervalued. I could run you through the different discounted cash flow and other models I used to make that call, but they don't play well in such a short article. Fortunately, there's a simpler way to look at this situation.

Just ask yourself: Would another large-cap pharmaceutical company, like Pfizer (NYSE:PFE), Novartis (NYSE:NVS), or GlaxoSmithKline (NYSE:GSK), pay more than Elan's current $5 billion market capitalization to acquire the company right now, even with its net debt and all the bad news it released this week? I think so.

As we've seen this year, pharma firms are snatching up biopharmaceutical assets at a blazing pace. Takeda just paid $8.8 billion to pick up Millennium Pharmaceuticals a few months ago, and even biotech giant Genentech (NYSE:DNA) hasn't been immune to takeover (or takeunder) offers from potential suitors hungry to own generic-resistant monoclonal antibody drugs. Compare Elan and Tysabri's future sales prospects to those of other biologic drugs being bought up, like Millenuim's Velcade, or potentially ImClone Systems' Erbitux, and it's pretty easy to see that some drugmaker would gladly pay more than $5 billion to snap up Elan and its pipeline.

When Elan was sporting a market capitalization exceeding $10 billion, it was way harder to argue that its assets were a steal. Today's one-day dramatic change in its stock price makes all the difference, though. I'm not arguing in any way, shape, or form here that Elan will get bought out -- just that its assets are worth more than the market seems to think at present.

I can hardly be called an Elan cheerleader over the past two years. I always thought Tysabri and its pipeline had potential, but I also felt that Elan's shares were overvalued, considering everything that might go wrong with Tysabri and pipeline drug bapineuzumab.

But now, Elan's shares are trading in the $11 range, wringing some (but by no means all) of the risk out of its shares. Even though these two new adverse events will surely lower Tysabri's new patient growth rate even further, the risk-reward proposition for Elan's shares has now shifted firmly in the opposite direction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.