Elan Now 1-Trick Pony

Watching the 5% + plunge today, you’d think there was terrible news.  Hardly.

Though some would say they’ve given up the future by selling the developmental Alzheimer’s drug, they did that last week.  That certainly lowers my excitement about the future of this company.  So why the plunge now?

Today’s news is unabashedly positive.  Even Standard & Poors, a company deathly afraid of sounding too optimistic, affirmed its rating on a $200 million debt add-on floated yesterday.  That rating was a single-B given last October during a corporate bond bull market stronger than any we’ve seen for decades.

Additionally, in its press release today, S&P gave the company a “positive” credit outlook, noted their $900 million cash on hand, their positive cash flow three of the last four quarters, and the ease with which they will pay off the $300 million in corporate bonds coming due in November of 2011.

That leaves only the dependence on Tysabri for MS as a reason to doubt this company.  As I’ve pointed out before, neurologists tend to be a conservative bunch, since few things are harder to deal with than problems inside the brain.

I can come up with no other explanation for the annual sales for Copaxone from Teva and Avonex from Biogen Idec, both of which sell basically as well as Tysabri does right now.  Those treatments are more than ten years old, not nearly as effective, and have occasional scary and  immediate side effects to the daily painful intramuscular injection.

This is the period when the time and money invested in a developmental drug pay off big time.  Sales are ramping up at double digit percentages, and costs are declining even faster.  If other treatment replacement cycles give any guidance to us poor investors, it seems reasonable to assume Tysabri will have the potential to keep and  grow its market share for years to come.

If the naysayers on Tysabri were correct about the new oral drugs replacing it in short order, those other two drugs should have disappeared years ago, but they haven’t.  On that basis, I think I have time to enjoy the result of this company printing a billion dollar profit next year or the year after.

That’s not to say they don’t ways to screw it up, as they’ve shown multiple times in the past.  Still, refinancing your debt more than year before maturity should count for something. So should positive cash flows.

That said, I’ve sold covered calls at $5 and $6 scattered over the next five months’ maturity, and I don’t plan at this point to replace those shares if they get called away.

Elan no longer rates a place in my top three holdings because it sold an important piece of its development pipeline.  I’ll probably have seller’s remorse when they announce their first full year of positive cash flow, but I’ll probably still see it in my top ten holdings at that time.



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