Elan sales stronger than expected

ELAN’s ongoing problems with the US Securities and Exchange Commission over its accounting procedures is the main inhibitor to investors after the company posted stronger than expected sales’ growth yesterday.

Elan net loss narrowed to $91m, or 26 cents a share, from $996.4m, or $2.85. Revenue shrank to $174.7m from $331.7m as a result of sell-offs, but the former stock market high-flier posted a 31% jump in revenue from retained products to $119.5m in the third quarter, compared with $91.1m. Elan shares gained 15 cents, 3.37%. Chief executive Kelly Martin said he expects the company to break even mid-2005 and become profitable after that.

He expects gross margins to improve to around “70%-plus” after it has had a full year of its simplified business plan. This would be from about mid-2004, he said.

The value of Elan, once the biggest on the Irish Stock Exchange with a market value of $22bn, plunged by 90% last year after the US Securities and Exchange Commission launched an investigation of its accounting procedures regarding off-balance-sheet entities.

It is expected these investigations will be completed by the first quarter of 2004, but remain a major problem for investors. Dolmen Securities’ Stuart Draper said resolution of the SEC investigation is all that remains to be solved before investors can go back to focusing on the major pipeline upside.

“In conjunction with Elan’s recent AGM, a strong indication was given that the investigation of the enforcement division of the SEC will be concluded by year end, with a final opinion expected by the end of Q1 2004,” he said.

Goodbody analyst Ian Hunter said: “legal risk aside, Elan can now be evaluated as a pure play biotech company. As such, its share performance is dependent on pipeline news flow.”

Merrion Stockbrokers Peter Frawley says the outcome of the SEC investigation remains an area of risk for investors. “However, the risks of having to significantly restate prior-year accounts has probably diminished somewhat. That said, while we acknowledge the upside, we will retain our speculative rating on the shares until there is greater clarity on the issue,” he cautioned.

Mr Frawley said that following the results, “we have reduced our ‘sum of the parts’ valuation from $6.50 to $6.35 a share, reflecting lower than expected cash balances and investment values.

“However, if Antegren and Prialt eventually gain approval and reach their peak revenue potential, our valuation increases to close to $10 a share, suggesting significant upside from current levels,” he emphasised.

The company said its Alzheimer’s drug development programme was on track to move into a trial stage before the end of the year.