Shares of the neuroscience-based biotechnology company look cheap Print E-mail
By Nicholas DeCesare   
Friday, 10 July 2009 04:07
Any long term holder of Elan Corporation, plc (NYSE: ELN) can’t be happy with the stock price over the past year.  In fact, shares have gone from the mid 30’s in the summer of 2008, to around $7 a share.  Since announcing a deal with pharmaceutical giant Johnson and Johnson, in which J&J agreed to pay one billion dollars for an 18.4% stake in Elan, the share price has had little upside.  Elan shares closed at $7.24 on Wednesday, this was only a little more than 3% higher since announcing the deal. This after Elan shares hit an intra-day high in the $8.50 range the day the deal was announced on July 2nd.  Why such lack of movement for Elan after such a big deal was announced?  Shareholders have been voicing their concern over the stock price movement in the past week, or lack there of, however, Elan could be well positioned for a bright future and a large move up in their price per share.

One of the bigger issues facing Elan is its lack of credibility on Wall Street.  Their reputation was tarnished after current CEO Kelly Martin promised the world to investors last year about their current Alzheimer’s drug, bapineuzumab.  But, when Phase II data was released in 2008, the results were mediocre and the stock price collapsed.  Many shareholders were calling for his ouster, and some still are, despite his efforts to begin looking for a buyer for part or all of the company in January of this year. 

After months of searching for a suitor and with help from Citigroup, who was hired by Elan to review their business, they found a buyer for part of the company in Johnson and Johnson.  The deal gives Johnson and Johnson an 18.3% stake in Elan, it will spend one billion dollars 107.3 million newly issued American Depository Receipts at $9.32 each.  More importantly for Elan, Johnson and Johnson will spend up $500 million right off the bat for the development of Elan’s blockbuster Alzheimer’s drug, bapineuzumab.  Also, J&J will get Elan's 50 percent stake in its Alzheimer's immunotherapy research partnership with Wyeth, and set up a newly formed company, that will be 49.9 percent owned by Elan. Johnson & Johnson will gain all rights to any drugs approved while Elan will get 49.9 percent of the profits, plus royalty payments on sales.

Perhaps the most important piece of the puzzle is that Elan will now be able to significantly reduce its heavy debt load.  In fact, Elan now believes it can turn a profit in 2010.  The main goal of their strategic review that began in January, was to find a partner who could reduce their balance sheet risk and eliminate a large portion if not all of their debt.  Martin has succeeded in finding perhaps the best pharmaceutical company, if not one of the best, in the world to partner with.  Johnson and Johnson has a team of unbelievable researchers, marketers, and scientists.  However, what investors have been concerned with, is what Martin will do with the money from Johnsons and Johnson.  Rather than pour boat loads into further R&D, it is the debt load that investors would like to see get first priority.  Elimination of a millions of dollars in debt is what Martin says is a priority and it remains to be seen if this in fact will be done.  Moody’s Investor Services has placed Elan under review for a possible upgrade.  Once the deal was announced with Johnsons and Johnson, Moody’s immediately released a statement saying that:

"The transaction is expected to have a very favorable impact on Elan's capital structure and liquidity profile, prompting the rating review for possible upgrade," stated Moody's Senior Vice President Michael Levesque.  Moody's rating review will focus on Elan's uses of the equity proceeds, and the impact of the collaboration on Elan's earnings and cash flow over the next several years. The rating review will consider the progress of the Alzheimer's program and the sales trends of Tysabri—factors which will also influence Elan's cash flow in the coming years.

Should Elan get a Moody’s upgrade in the coming days, have some good news at the International Alzheimer’s Conference from July 11th – 16th, and have decent news on the           earnings front when they report on July 21st, the stock could be in for a nice move up.  Elan is set to showcase their research in Alzheimer’s disease with a focus on their blockbuster drug bapineuzumab, which they currently have completed Phase III enrollment for.  With the help of Wyeth, bapineuzumab looks promising, with Phase III probably due out in the second half of 2010.  However, since the debacle last summer, recent Phase II reports from the companies look solid, and investors are anxious for updates on how Phase III trials are proceeding. 

Finally, Elan also has a strong partnership with Biogen Idec, they both co-market the multiple sclerosis drug, Tysabri which has recently been making headlines.  Tysabri is a huge money maker for both companies, however, recent reports of a brain infection known as: progressive multifocal leukoencephalopathy, or PML, in patients who have been taking Tysabri for an extended amount of time have pressured shares of both companies.  Just last week, Biogen announced the tenth case of PML, and have been giving updates every Friday on new cases of the brain infection.  The last update on July 3rd stated that there were no new cases.  Even with ten cases, the incidence of PML in patients taking Tysabri for an extended period of time is low, much lower than the 1 in 1000 that the FDA required be stated on the Tysabri label when they allowed it to be reintroduced in 2006.  In fact, according to Biogen researchers and scientists, the incidence is more along the lines of 1 in 4000.  Investors still fear that such occurrences will cause doctors to remove patients from the drug after a shorter amount of time on it, thus cutting into Biogen and Elan’s profits.  However, when Biogen stops releasing their reports of PML cases on July 24th, we will have a better update on the safety of the drug.  Biogen has also stated that they are working on a PML related test that should be ready by year’s end.  This test will allow for early detection of the possibility of developing PML by finding a virus in the patient’s body that could lead to the brain infection.  Biogen is reporting earnings on July 16th, and will give an update on the increase in revenue from Tysabri, which could have a positive impact on Elan shares as well.

With so many positives for Elan, it is almost impossible to justify a $7 share price.  Such a price barely factors in the huge deal with Johnsons and Johnson which could and should eliminate a huge part of Elan’s debt, something investors and Wall Street love.  With the potential for upgrades, positive news from the Alzheimer’s conference, and some decent earnings news, Elan shares could be in for a solid ride up in the short term.  Longer term, with the help of Johnson & Johnson, bapineuzumab could have unbelievable potential.  Also, Tysabri could continue to generate millions more in revenue if more and more patients continue to use it, despite the possible small percentage of patients that have acquired PML.  Finally, with so many interested parties in Elan throughout the strategic review, the long term possibility of an outright takeover is more and more likely. 

Position:  Long Elan

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