Biogen offers safer option for investing in Tysabri

Investor: Elan is probably the stock with the most volatile share price record on the Irish stock market.

It has scaled the peaks on a number of occasions, only to subsequently fall dramatically from grace. In the good times it vied with CRH and AIB for the top slot on the Irish exchange as measured by market capitalisation, but now it is languishing with a market capitalisation of approximately $3.3 billion (€2.71 billion).

This is still a substantial market cap, equivalent to just under 5 per cent of the overall Irish index. The shares had a good run over the summer, rising by 25 per cent and are now trading at around $8.50 (most trading in Elan occurs on the US market).

However, this represents only a partial recovery from the precipitous decline earlier this year, when the shares lost two-thirds of their value after trading above $30 on expectations that the company's multiple sclerosis (MS) drug Tysabri would become a blockbuster in its market.

However, all bets were off when it was revealed that a patient on Tysabri (in combination with another drug) had died from a rare condition called PML. Elan and its partner Biogen Idec voluntarily removed Tysabri from the market and have since been conducting detailed safety evaluations on Tysabri.

Elan and Biogen are hoping to get approval from the US Food and Drug Administration to relaunch Tysabri later this year or early next year. The success or otherwise of any relaunch will have an enormous impact on Elan's share price.

Despite the restructuring of recent years Elan remains a highly indebted, loss-making company. Tysabri had the potential to bring the company into substantial profitability if it had become the leading treatment for MS. It is now widely accepted that the best that can be achieved for Tysabri is that it will achieve a small market share in its market segments. Even this more modest relaunch of the drug has the potential to push Elan's shares into the $10-$15 range. However, a rescaling of the peaks of earlier this year is out of the question.

As an investment, Elan is a highly speculative situation, which has significant upside if Tysabri gets back onto the market in a meaningful way. However, there is still a significant chance Tysabri may not get back onto the market, which would mean Elan's share price would fall sharply.

In Investor's view, the potential upside is not sufficient reward for the risks involved in investing in Elan. However, there is a lower risk way of benefiting from any successful relaunch of Tysabri, which is by investing in Elan's 50/50 Tysabri partner, Biogen Idec. Biogen's shares are trading at $40, which is well below their peak of $70. The company is capitalised at around $14 billion and has a number of successful drugs on the market. Unlike Elan, it is generating substantial profits.

If Tysabri returns to the market the shares will benefit, although by a much smaller percentage than would Elan. On the other hand, if the worst case outcome for Tysabri occurs, Biogen's share price would only suffer a modest decline given the strength of its other drugs.