Did Elan (NYSE:ELN) give away the medicine chest? Severe painkiller Prialt doesn't yet have the same blockbuster potential that multiple-sclerosis drug Tysabri seemed to possess, but the deal the company struck with Japanese pharmaceutical Eisai for the drug may have given away too much.
On the surface, Elan did OK. It will receive as much as $100 million for the drug, for which it realized $6.3 million in revenues in 2005. That's a purchase price equal to 15 times sales. When Elan and Eisai negotiated the sale of Zonegran in 2004, Eisai agreed to pay as much as $240 million for the antiepileptic, which had revenues of $80.7 million -- a purchase price equal to three times sales. So the Prialt deal is better, right?
Not necessarily. While Elan retains the North American rights, Eisai acquires the exclusive development, manufacturing, and distribution rights for Europe. Even though U.S. sales have amounted to less than $10 million thus far, Elan has estimated that peak sales could reach $250 million. To date, Zonegran has been achieving 30% annual sales growth for Eisai and recorded first-half 2005 sales of 7.6 billion yen, equivalent to $68 million at then-current exchange rates. Furthermore, the fundamental U.S. patent on Prialt expires in 2011, while extending as far out as 2016 in Europe. Equally important for Eisai, Prialt has been granted "orphan drug status" in Europe, which grants the company 10 years of marketing exclusivity, unless another drug comes along that can be proven to be "clinically superior." That's a tough hurdle for competitors to overcome.
Prialt, derived from a tiny marine snail, is in a class of non-opioid analgesics. That's an important distinction, because opioids like morphine and codeine, while superior at shutting down pain receptors in the brain, are also highly addictive. The COX-2 pain relievers that held a lot of promise, like Merck's (NYSE:MRK) Vioxx and Pfizer's (NYSE:PFE) Celebrex, attacked pain by blocking pain-causing enzymes around joints, but they ended up causing additional problems. Prialt shows no signs of being addictive, even though it's considered far more potent at blocking pain than morphine. However, it also tends to be more toxic, which caused the FDA to limit its treatment to patients in the U.S. for whom morphine is no longer effective. That severely curtails Elan's potential market.
It's definitely not a win-lose situation. Eisai will pay Elan $50 million when the deal closes, which is anticipated to be in the first quarter of 2006. Elan then should receive another $10 million within two years' time, or when the product is launched in key markets -- whichever is sooner. A final payment of $40 million will be realized if Prialt achieves certain sales milestones, for a total of $100 million. Without similar orphan drug recognition here at home, and with a more limited U.S. market, competitors can move in on Elan's turf a lot sooner. Even so, Prialt is earning money for Elan, while it has yet to launch in Europe.
It's only one drug, and Elan is in need of revenues these days to shore up the loss of Tysabri, but it seems to this Fool that Eisai got the better side of the deal.
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Fool contributor Rich Duprey owns shares of Eisai and Merck, but does not own any of the other stocks mentioned in this article. The Motley Fool has an ironclad disclosure policy.
