There is lots of Elan news, and at least three items could be encouraging the bears or scaring the bulls.
I’ve commented as I added on the way down. I even added another good-sized slug today in one of the taxable accounts.
That said, it’s worth sharing the bad news, and why I was still buying in spite of it.
To begin with, late last week the FDA approved an MS treatment that comes in pill form. For most MS patients, this is huge improvement. Several of the injectable drugs require intra-muscular injection, and that hurts. Even Elan’s monthly infusion at a medical center is a hassle (though my single-mother friend with the disease looks forward to an hour of dim lighting and soothing music — kind of a micro-vacation from her life with two teenagers).
The list of side effects for the new Novartis oral drug is scary, including two deaths during the experimental phase. Those two patients, killed by opportunistic herpes infections, were taking 5 times the dosage Novartis got approved by the FDA. If you’ll recall, it was an opportunistic viral infection called PML that took Elan’s Tysabri off the market for two years, just months after it had been given to patients in the US with nearly universal applause.
The second bit of “bad” news is that Kelly Martin, the former Merrill investment banker who rescued Elan as its CEO will be leaving. Unlike drug companies that lose a chief scientist when they lose a CEO, Elan will be losing a “financial doctor”. Kelly came on board when the company was on the shoals financially, with debt it couldn’t pay. He put together deals that brought in literally billions of dollars the company needed to get its first big product to market.
I personally admired how Martin defended his minnow from being swallowed by the big pharma fish, the typical end of a developmental company that gets a hit drug. What he did was to set up partnerships with Biogen Idec, Johnson and Johnson and Pfizer. That way, if any larger company tried to swallow them, they had to deal with unraveling the deals with other large companies. Martin turned Elan into a pilot fish with several protective sharks nearby.
The biggest negative, IMO, is the shift in theory for the cause behind Alzheimer’s disease. The active ingredient in Tysabri (called bapineuzumab) prevents plaque buildup on the surface of the brain. Bothe MS and Alzheimer’s sufferers show unusual plaque deposits. For the MS, currrent theory is that the plaque contributes to “episodes” where the patient loses part of their ability. This non-physician thinks of the MS episodes as being like strokes, which (so far) cannot be reversed.
There was real hope that Alzheimer’s patients might also have significant slowing of the progress of the disease through the action of slowing the plaque deposit from happening. Now the theory (theory only, mind you) is shifting toward the idea that the plaque is actually a physical defense against toxins that damage the brain. The tests are still in Phase III (human trials), and the answers are still a year or two away. Too bad. If Elan and its big partners were getting good early results, we might own a $50 or $60 stock, because an effective Alzheimer’s treatment is the Holy Grail of pharma world.
Now the positive “spin,” and why I’m staying in. I should add that I do intend to write covered calls and allow the stock to be called away, at least until it shrinks to a normal weighting in my portfolio.
First of all, Kelly Martin has done what an investment banker at the helm needed to do. He may be missed as they do deals in the future, but it won’t be an existential issue.
Secondly, I have followed the Elan/Tysabri story for years, since before it was approved the first time. I can’t think that the new treatments will take over the MS market nearly as fast as the stock price implies. After all, Teva still sells Copaxone, and it sucks (according to my friend that shifted to Tysabri).
Chances are the effects of opportunistic infection will be difficult during the uptake on Gilenia, the new Novartis drug. As Tysabri users found (the hard way) other drugs and/or a period of time on these drugs that suppress the body’s own immune system (how they treat MS) can make such infections much more likely. It’s almost as if the cumulative effect multiplies rather than adding.
As to the Alzheimer’s story, Elan is the lead developer of the compound that first showed how to interact in that crucial myelin/plaque brain/body interface. They aren’t retiring on their laurels. If this doesn’t work, they may well have the lead toward finding what does.
Now, the positive news:
“DUBLIN, April 21 (Reuters) – Irish drugmaker Elan (ELN.I), the co-marketer of blockbuster multiple sclerosis drug Tysabri, swung to a first-quarter operating profit and said it remained on target to hit a full-year profit for first the time in nine years.”
This is a big deal. They did it through increasing sales and lower costs. That doesn’t happen overnight (obviously). It also tends to continue when the profits come from a manufacturing operation, especially one with a big sunk cost of intellectual property embedded in it.
They are spinning off their drug delivery unit (more basic research paying off there), and I think they will now be able to fund some of their R&D with cash from operations, which will slow or stop the tendency to do dilutive deals or debt deals that put them in dicey operational leverage situations, as happened before Martin took over.
That’s my story, and I’m sticking to it, at least until some more information comes my way and I change my mind. That could happen any time, so stay tuned for the next exciting episode.
Now if the market gods will create a normal retracement of this whopping decline, I can sell some $5 and $6 calls.