Strong showing by Elan buoys up ISEQ Index

In recent weeks the ISEQ index has been one of the better performing European stock markets and has thus recouped at least part of its under-performance of the past year.

At first sight this may suggest that Irish shares are finally about to make a comeback.

Unfortunately, a glance at the chart of the Elan share price - that has risen by 130 per cent so far this year - shows that, in fact, it is the stellar performance of Elan that accounts for all of this strength in the Irish market in recent weeks and indeed in the year-to-date.

Elan now accounts for approximately 25 per cent of the total capitalisation of the ISEQ. As a result, daily moves in the index are now dominated by the Elan share price.

Despite its Irish roots, Elan has always attracted US investors to a far greater extent than Irish and European investors. The company is listed on the Dublin and London stock exchanges and has ADR status on the New York exchange. The bulk of trading in the shares occurs in New York, and the Dublin price is generally a function of the price in New York.

Despite being the largest Irish quoted company, with a current market capitalisation close to €20 billion (£15.75 billion), Elan is still a minnow in a global context. Giants such as Glaxo Wellcome, Novartis and Merck are capitalised at between $90 billion and $160 billion (£98 billion - £175 billion).

Elan is a speciality pharmaceutical company focusing on the development of drug delivery systems and on treatments for neurological and acute care/pain management disorders.

Over the past decade, a steady flow of large-scale mergers and acquisitions has created ever-larger pharmaceutical companies. This has been driven by the need to spread ever increasing research and development spending across a wider range of products. For many of these mergers, cost cuts and greater synergies have been somewhat slower than expected to materialise. This has led to some swingback in market sentiment towards the smaller specialist stocks such as Elan.

For its own part, Elan has been active in developing joint ventures and alliances with other pharmaceutical companies. Two recent such announcements have been very well received by investors resulting in new highs in the share price.

On August 9th, it was announced that Elan and Pharmacia of the US had entered into a research collaboration focussed on the discovery of small molecule inhibitors of betasecretase for the treatment of Alzheimer's disease.

Under this agreement, Elan and Pharmacia are to pool their scientific resources and intellectual property and share all costs and revenues associated with any potential new drugs developed and marketed.

On August 17th, Elan announced that it was to collaborate with Biogen with regard to treatment for multiple sclerosis and Crohn's disease. Biogen is a US-based biopharmaceutical company principally engaged in discovering and developing drugs for human healthcare through genetic engineering.

The companies are to collaborate on developing and commercialising Antegren, a compound discovered by Elan as part of its focus on neurological disorders.

At the beginning of this year Elan was trading on a price-earnings ratio of approximately 24, which represented a significant discount to its peers.

Typically, pharmaceutical companies trade on significant premiums to other stocks reflecting their higher growth prospects. The strong relative performance of the Elan share price this year has meant that Elan is now trading at a premium to other pharmaceutical companies.

Those Irish investors who took the risk of investing in Elan at an early stage have been amply rewarded and the prospects for the company seem sufficiently attractive to warrant continuing to hold the shares.

For investors in the rest of the Irish market, monitoring overall trends using the overall ISEQ index will continue to be distorted by sharp swings in Elan's share price.