Investors focus on opportunity rather than risk as Elan soars

Two years ago, Irish pharmaceutical company Elan couldn't buy friends. Growing doubts about its accounting policies in the aftermath of the Enron debacle and fears for its drugs pipeline after an abrupt halt to trials on a pivotal drug for Alzheimer's sent the share price into freefall.

Hopes that group management might be able to stem the tide faded when management issued a profit warning just days later. A comment by chairman and chief executive Mr Donal Geaney that he would welcome scrutiny of Elan's books cut little ice with investors.

Before its collapse, Elan was the dominant share in the Irish market, but it traded predominantly in the United States. In a post-Enron world, transparency was the watchword for company accounts and Enron's financials were notoriously indecipherable, even for trained accountants.

Two years on, the company finally seems to have turned the corner. Ironically, the resurgence in its fortunes came in the week that former Enron chief executive Mr Jeff Skilling was finally indicted by a New York court on charges of fraud, insider trading and lying to investigators.

The catalyst for this week's 60 per cent rise in Elan's share price was news that the company will apply for approval from the US Food and Drug Administration (FDA) for the use of Antegren as a treatment for multiple sclerosis (MS).

Elan has decided to file on the basis of just one year's Phase III data following meetings with the FDA in a move described by Goodbody analyst Dr Ian Hunter as "unprecedented".

"Although the \ data cannot be released, the action of the naturally conservative FDA implies the compelling nature of the results," he said. The FDA has only had sight of the data for six or seven weeks and the decision to proceed with an application came just hours after a meeting of the two parties.

The Antegren announcement is just the latest bit of good news from the company. Elan announced at the end of last week that it had completed a $2 billion (€1.6 billion) asset-disposal programme central to the group's recovery.

The 20-month operation, which has seen the group flog non-core assets and restructure its myriad joint venture arrangements, raised $500 million more than projected and has given the group a $1 billion cash pile.

The pharmaceutical company, which still has a substantial manufacturing presence in Athlone, Co Westmeath, has also announced positive interim results in trials of Antegren for the treatment of Crohn's disease and the start of trials for the drug as a therapy for rheumatoid arthritis.

The company has also filed for an updated approval for chronic pain treatment Prialt, following further positive test results.

While the news flow on Antegren for inflammatory conditions other than MS is positive, it is its ability to succeed in treating MS that will ultimately determine the company's short-term fortunes, according to Mr Peter Frawley, analyst with Merrion Stockbrokers. "If you are looking at Antegren, you are looking at Antegren and MS."

There are few existing treatments in the market and those that exist are expensive and have pronounced side-effects, he says.

Elan chief executive Mr Kelly Martin estimates the size of the market for MS treatment at $4 billion. Goodbody's Dr Hunter says that, at present, just 28 per cent of the US patient population and 14 per cent of European sufferers are being medicated.

"This week's announcement increases our confidence that Antegren will provide such an effective therapy that it will trigger significant patient switch from existing treatments, plus drive market expansion," he said.

He estimates that, if Elan can grab a market leading position with its partner Biogen Idec, it could mean sales of between $500 million and $1 billion for Elan alone in 2006.

While the future looks increasingly rosy, the company is not out of the woods entirely yet. The Securities & Exchange Commission (SEC) took Mr Geaney up on his invitation to scrutinise the company's books and accounting practices and has yet to come back with its findings.

Current chairman Mr Garo Armen and Mr Martin expect the SEC investigation to conclude in the early part of this year and hope to hear from the regulator by the end of the first quarter or early in the second period.

More important in the short term is the increasing conviction that Elan will require a further refinancing to see it through to its projected return to operating profit some time in the second half of 2005.

The firm continues to hedge its bets, with Mr Martin saying only that the company will "look at all options to maximise the value of our various assets".

He made clear, however, that the company would not pennypinch on the launch of what it sees as the drug that will finally restore its fortunes. "We will make sure, given the significance of the science and the products from a breakthrough point of view, that we have sufficient funding to ensure a successful product launch."

Analysts say the launch costs for Antegren combined with cash needed to run the group over the next 18 months and repayments of $840 million of loan notes by mid-2005 will force its hand.

Merrion's Mr Peter Frawley says the firm will press for an upgrading of its debt from the rating agencies before it looks to extend its financing.

For now investors are in no mood for caveats. As Mr Jack Gorman, analyst at company broker Davy puts it: "The share price reaction suggest that the focus is currently on opportunity rather than risk."

As one Dublin dealer said yesterday, the stellar showing of Elan's share price this week might seem overdone, but Biogen Idec's stock has added more to its market capitalisation on the same news and Antegren is, if anything, more important to Elan.