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Tysabri or Not to Be: Élan's Drug Could Make or Break the Stock

by Jack Weyland, m100 member

Shareholders of Élan Corp. (nyse: ELN) have had a wild ride this year. The stock which hovered near $28 at the beginning of the year plummeted to below $6 when Élan and its partner Biogen Idec (nasdaq: BIIB) voluntarily withdrew its multiple sclerosis drug, Tysabri, from the market in late February when two patients from long-term clinical trials developed a rare and often fatal brain infection called progressive multifocal leukoencephalopathy, or PML. After bottoming at about $3 in March, the stock has recently been trading between $6 and $8. Is this a good time to buy Élan or is it time to sell into the bounce?

Multiple sclerosis is believed to be an autoimmune disease where the immune system attacks the insulation of nerve fibers in the Central Nervous System of the brain. While it is not fatal, it significantly impacts the lives of patients and can lead to paralysis. About 400,000 people in the U.S. (2.5 million worldwide) have multiple sclerosis, and according to the Élan, existing drugs do not work for about 25% of them.

After one year of Phase III clinical trials, Tysabri treated patients had an annualized relapse rate of .25 compared to .74 in the placebo group. That equates to a 66% relative reduction rate and a significant improvement in patients' lives. On the basis of such strong clinical trial results and unmet medical need, Tysabri was given FDA fast track approval in November of 2004.

Unfortunately, after the drug was approved, two cases of PML in patients from the long-term clinical trials were confirmed in February 2005, and the drug was voluntarily taken off the market to protect patients and gather more information. Since then, one additional case of PML has been confirmed and another two possible cases have been reported. Significantly, all PML cases involve Tysabri in combination therapy with Biogen's Avonex or in combination with other immunosuppressive therapies.

Élan and Biogen are reviewing every patient that has taken Tysabri to try to establish the risk/benefit profile for the FDA. This review is almost complete. The good news for MS patients and Élan investors is that there aren't any reported PML cases associated with Tysabri monotherapy so far. This could be a nugget.

Tysabri could still become a significant MS therapy with its proven efficacy, well-tolerated monotherapy side effects, and convenient monthly injections/infusions instead of daily or weekly injections. Tysabri, in the largest MS clinical trial ever undertaken with 942 relapsing patients, reduced the relapse rate by 67% compared to placebo. Furthermore, Tysabri has proven to reduce the risk of disability progression by 54 percent compared to placebo. In late June, news showing the effectiveness of Tysabri in treating Crohn's disease was released and the stock rallied.

Even without Tysabri, Élan is a strong company. Élan has annual revenues of about $400 million and could be at breakeven EBITDA by end of year according to the Company's CFO. Élan also has other assets with good potential over the next several years in the areas of drug delivery and Alzheimer's research. Their Alzheimer's research, in collaboration with Wyeth, is a second-generation effort, currently in phase II which attempts to use the patient's own immune system to remove beta amyloid plaque.

It's not often you get the opportunity to invest in a drug after clinical trials have already proven its efficacy and a company with a great pipeline without having to pay a large premium. In our opinion, the combination of significant upside potential and good downside protection makes for great investments. It's a good time to buy Élan.

Posted by Jack Weyland at 11:00 AM | Permalink | Comments (0)