Market reluctant to bet on recovery by Elan

The last thing Elan needed was more bad news - especially bad news relating to Tysabri, the "blockbuster" drug on which it was hoping to build a prosperous future, following its near-obliteration in 2003, after concerns about accounting issues in the wake of the Enron affair.

News yesterday that a third patient testing the drug had contracted, and subsequently died from, progressive multifocal leukoencephalopathy (PML), a rare neurological condition, has effectively written Tysabri out of most analysts' assessment of the company. And, without Tysabri, the question for Elan turns more to whether it can survive than how successful it can become.

Elan and its partner, Biogen, pulled Tysabri from the market at the end of February, when the first two cases of PML emerged - one of them fatal.

The shock announcement was a blow, coming just months after it had secured approval from the US Food and Drugs Administration (FDA) following a "fast-track" procedure for promising drugs that hold out the prospect of dramatic improvements in treatment.

Ongoing clinical trials of the drug as a treatment for MS, the chronic gastro-intestinal disease Crohn's and rheumatoid arthritis were all halted. The company's stock slid 70 per cent from $26.90 (€20.7) to just $8 in one day.

However, analysts and both companies hoped that the problem might lie with the combination of the drug with Avonex, an older immunosuppressant manufactured by Biogen. Both PML patients had participated in the Tysabri/Avonex trial for more than two years.

Possibly the most serious issue for Elan is that the latest case of PML - in effect a rediagnosis of a patient who died in December 2003 and was initially thought to have suffered from brain cancer - relates to a trial of Tysabri on its own as a treatment for Crohn's.

"This is a serious blow for Elan, as it highlights Tysabri as a common factor in all three cases to date," said Goodbody analyst Dr Ian Hunter. "This greatly reduces the likelihood of the drug coming to market and, given the FDA's stance on drug safety, it also implies a longer timeline to potential re-emergence on the market."

Morgan Stanley's Marc Goodman was more blunt: "Tysabri is probably dead," he said in a note on the company.

"We had previously believed the drug had a good chance to return to market as monotherapy [ not used in conjunction with other drugs]. Now we can't imagine that the FDA will allow the drug to return to the market."

Morgan Stanley was one of several US brokers to cut its rating on the stock. Only Irish house NCB, which believes Tysabri still has a commercial future and that it is an attractive takeover target at current levels, raised its rating.

Another, Piper Jaffray, which last week published a positive outlook for Elan, expressed the market's frustration at a second surprise blow in a month.

"Based upon our discussions with Elan last week, we were led to believe that all the clinical reassessments had been completed and no additional cases of PML were found," wrote analyst Dr Deborah Knobelman.

She said the latest incidence of PML "adds a a new level of risk to the possibility of Tysabri ever returning to market".

And, in a comment that highlights the scale of the problem facing Elan chief executive Kelly Martin and his team in rebuilding confidence, she added: "We no longer feel comfortable recommending Elan shares, even for the most risk-tolerant."

The one glimmer of hope for Elan is the fact that the latest PML patient had a history of treatment with immunosuppressants - the same class of drugs as Avonex. The patient, who has not been identified even by gender, was taking Azathioprine - a strong immunosuppressant usually associated with organ transplants. The patient also took Remicade, another drug in the same class. Both have previously been connected with incidents of PML.

However, that will be little consolation to Elan, whose shares more than halved in yesterday's trading to just $3.46.

The latest case emerged as the company and Biogen trawled back through thousands of patient records from clinical trials for Tysabri.

Elan and Biogen still hope to meet the FDA in July to assess the data and plot a way forward. An FDA advisory panel is likely to be convened, though it will be autumn before it meets.

Piper Jaffray's Dr Knobelman believes "years worth of additional safety trials seem like a minimum requirement at this point".

Whatever about the chances of Tysabri returning to market as a treatment for MS, where it promised dramatic improvements on existing treatments, the prospects of it ever coming to market as a therapy for Crohn's or rheumatoid arthritis are fading. Analysts argue that, even if trials were successful, the perceived risks would outweigh the advantages in these areas.

Even then, Goodbody's Dr Hunter thinks its prospects have been severely damaged. "If it is to come to the market, we believe it will be with restrictive labelling, reducing the drug to a second-line treatment at most."

That raises questions about the company's financial future. Payment of recently restructured debt was predicated on "blockbuster" sales of Tysabri. The company needs to find $1 billion in debt repayments by 2008 and a further $1.1 billion by 2011.

"Its survival prospects depend on how the executives restructure the business," said Dr Hunter. Research and development will need to be cut back, along with sales, general and administrative expenses.

"The company will have to become cash-generative and, even then, meeting the 2008 obligations will not leave them much going forward to the next deadline of 2011," he said.

Until 2002, Elan was one of the darlings of the biotech sector. The abandoning of trials on a cure for Alzheimer's after a number of patients fell seriously ill, followed by concerns over accounting issues related to off-balance sheet losses saw the stock fall from a high of almost $65 to little over a dollar.

Under new management, it rebuilt itself through rigorous restructuring, only to see the rock on which it was being built taken out from under it.

As Broker AG Edwards wrote to clients yesterday: "We realise Elan nearly collapsed and was able to resurrect itself before, but we do not like to bet that it will be able to do so again." - (Additional reporting, Reuters)