Elan's 2Q Results in Line

Elan meets expectations, but risks remain high.

Damien Conover, CFA | 25-07-08 | E-mail Article

On Thursday, Irish biotech firm Elan (link will open in a new window) reported second-quarter results that were in line with our expectations, and we don't expect any changes to our fair value estimate. Led by robust growth from multiple sclerosis drug Tysabri, the company posted a 30% year-over-year increase in total sales. Tysabri's approximately threefold year-over-year increase easily offset generic competition to infectious disease drug Maxipime, which represents a much smaller portion of total sales relative to Tysabri. We like how the company is reducing selling and administrative expenses and reallocating the savings behind research and development efforts.

Elan is scheduled to report complete Phase II data from Alzheimer's drug bapineuzumab on Tuesday. Initial top-line data showed a significant improvement in an important subgroup of patients. If successful in late-stage trials, bapineuzumab should develop into a multi-billion-dollar drug. Given the challenges in treating the complexities of Alzheimer's, however, we project a 60% chance of approval for bapineuzumab.

Additionally, Elan is exploring strategic plans for its manufacturing division, Elan Drug Technologies. While this division brings in a steady stream of cash flow, we believe its poor growth prospects and need for a capital infusion probably sparked alternative plans. Further, we expect a possible sale of the group would provide Elan with capital to fund Phase III bapineuzumab trials.

The risks here remain high. Elan lacks a diverse portfolio, which magnifies the risk in its major product, Tysabri. While pipeline products should eventually add to the top line, the cash-burn rate will become a problem if Tysabri growth slows. Also, given the lack of scientific knowledge regarding the three cases of a rare and fatal side effect of Tysabri, the likelihood of another case remains elevated in our view.

In addition, solid financial footing remains elusive. We project the company to lose more than $150 million in cash flow from operations this year. Even though it can finance losses for several years with its $600 million in cash, the company remains in a precarious state. We project stability won't return until Tysabri reaches $2.2 billion in sales in 2012, bringing the company back into the black. Lower-than-expected Tysabri sales could ruin the company.

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