Elan remains good long-term wager

Investor/An insider's guide to the market: Investors in Elan received a boost last week with the announcement that the US Food and Drug Administration had approved its new drug treatment for multiple sclerosis (MS).

There was a high degree of confidence in the market that the drug would be approved, given the very good results achieved in the Phase III clinical trials. Nonetheless, the approval of the drug, now named Tysabri, removes a small element of uncertainty and paves the way for the start of shipments of the drug in coming weeks.

Tysabri is a joint venture between Elan and the US biotechnology company Biogen Idec.

The companies have now announced their pricing for Tysabri.

Of the current treatments for MS, the highest priced is Rebif, with an annual treatment cost of $17,500 (€13,178). Market analysts had expected that Tysabri would be priced in the $18,000 to $20,000 per year range.

In fact, the companies have pitched the pricing at a much higher cost of $23,500 annualised treatment.

Given the superior efficacy shown by Tysabri compared with other drugs currently on the market it is felt that this premium pricing is justified. Also, there is a high level of awareness of the drug among doctors and patients, and therefore demand for the drug is likely to materialise very quickly.

One issue that will be important for the roll-out of Tysabri will be reimbursement agreements with insurance companies.

Given that Tysabri is a very expensive drug, there are concerns that neurologists could initially limit sales unless they are sure that watertight insurance arrangements are in place with insurance companies.

Any reimbursement problems would be short-term and do not have implications for the long-term potential of the drug.

Peak revenues are now forecast to reach $3 billion to $3.5 billion, and Elan's share is 50 per cent. Analysts are now forecasting that the successful roll-out of Tysabri will bring Elan back to profitability in 2006.

Elan's heavy reliance on the eventual success of Tysabri can be gleaned from a review of its profit and loss account. In 2003 Elan had revenue of $746 million and operating losses of $244 million.

From 2001 the company was in survival mode as it contracted its balance sheet and sold assets to meet its very large debt obligations.

Over this period the share price fell sharply, from above €60 in 2001 before stabilising around €4 in late 2003.

Elan's revenues are expected to contract again this year before growing rapidly in 2005 and 2006.

Assuming that sales of Tysabri materialise as expected, they will dwarf revenues from all of Elan's other activities. From an investment perspective Elan is now essentially a one-drug company.

However, Elan does have some other products in its development pipeline that could someday be significant successes.

These include Prialt, a treatment for intractable neuropathic pain. It could achieve approval in 2005, with peak sales in the $150 million range.

Elan is also actively engaged in an Alzheimer's disease research programme in collaboration with Wyeth. This research is still at an early stage, and it will be some time before a new drug application is made.

Although some of these pipeline products may ultimately have a significant bottom-line impact, for the foreseeable future Tysabri will drive the Elan share price.

As well as MS, Elan and Biogen are seeking approval for using the drug in the treatment of Crohn's disease and rheumatoid arthritis.

The market for the drugs for these diseases is much smaller than for MS and clinical trials are at an earlier stage. However, if Tysabri becomes the preferred treatment in these areas it will offer further significant potential upside to revenue estimates.

Elan has recently been trading in the €20 to €22 range - close to the top of its 52-week trading range of €5.40 to €23.98. It is by far the top-performing share on the Irish market this year.

Despite this massive price gain Investor takes the view that the shares still offer upside potential.

Of course, any investment in Elan is high-risk, given the company's history and its heavy reliance on Tysabri. Nevertheless, the prospects for the new drug look very good and news regarding its progress will be eagerly awaited.

The share price will be sensitive to this news flow and volatility could be high, but Investor takes the view that the upward trend in Elan's share price still has further to go.