Only way is down for Elan
Unless the group can find a way back quickly, analysts see its days as numbered
In the wake of the announcement of a third death linked to the MS drug Tysabri, Elan chief executive Kelly Martin has seen the company’s shares fall 56% on Thursday to $3.18 from a peak in 2001 of $65.
EVEN the most optimistic are beginning to doubt Elan’s ability to bounce back at this stage, following another shock announcement that a third patient died after using the MS drug Tysabri.
Shares fell 56% on Thursday to €2.40 and to $3.18 in the United States where most of the stock is traded.
Markets saw a 13.3% bounce on Friday to €2.72, but the recovery is marginal and has no significance for the group’s long-term future, analysts said.
In 2001 Elan was flying high, one of the drug companies of the future and the share price peaked at $65.
By 2002 after serious questions were raised about its accounting practices the share price was rocked to its foundations and fell all the way from its high of $65 to $1.05 as the Securities and Exchange Commission in the US called the Irish-based drug group to account.
Having sold off $2.5 billion in assets in the meantime and cut its debt substantially, in 2008 $1.1bn of the debt falls due, but for Elan-watchers that is no longer the issue.
Before Wednesday’s shock announcement, market analysts thought Tysabri was likely to return to the market because of its effectiveness in treating Multiple Sclerosis.
It was also helpful in treating Crohn’s disease, but its major potential was as the new wonder drug to help MS suffers.
Studies showed the combination of Tysabri with Avonex, the Biogen Idec drug, was hugely helpful in the treatment of MS and Crohn’s Disease.
The latest death is linked to the use of Tysabri alone.
The other two deaths that triggered the latest crisis were linked to the combined drug use.
It was hoped that Tysabri on its own might be benign and that it could be cleared in a few months to come back to the market, even if on a restricted basis.
This latest death is linked solely to Tysabri however, and was also being used in this instance for the treatment of Crohn’s disease.
The cause of death in each of the three cases was progressive multifocal leukoencephalopathy (PML), a rare brain disorder that occurs in one out of every 200,000 of the world’s population.
At this stage PML has been caused in three out of 3,000 patients taking a combination of Tysabri and Avonex, as well as to Tysabri on its own.
For Peter Jackson, analyst with Bloxham Stockbrokers, the crux of the matter now is whether Tysabri will be cleared ever to get back to the market.
At this stage it is possible “the company could be ordered to run a complete retrial and that could take three years to complete,” he said.
That decision will not be known for some time and in the meantime the future is beginning to look increasingly bleak.
By the end of three years Mr Jackson reckoned the window of opportunity could be well gone for Tysabri.
“Elan had bet the farm on it and it looks as if it is about to lose the bet,” he said.
Potentially Tysabri stood to be a €4bn-plus market which Elan and its partner Biogen confidently expected to capture by 2009.
For chief executive Kelly Martin, the latest news is a body-blow.
The new case is highly significant in that the patient, who died in 2003, had been using Tysabri alone.
Investors had hoped that the disease was being triggered by an unexpected negative interaction between Avonex and Tysabri, rather than by Tysabri.
But the news this week has scuttled that hope and raises real fears about the ability of the group to survive as an independent group.
Elan said previously it expected to turn the corner to profitability by the end of 2006, largely on the sales of Tysabri.
The drug was expected to have peak sales of about $4bn in 2009, with Elan and Biogen sharing equally in the profits.
According to a note released by Smith Barney, profitability will now be delayed until 2009.
Meanwhile, Elan continues to operate in the red.
In 2004 it reported a loss of $376m, or 96 cents a share, on revenue of $481.7m.
The company has three other products, Maxipime, Prialt and Azactam, on the market and receives royalties on several others. Most of its pipeline focuses on such neurological diseases as Alzheimer’s.
The Irish drug-maker’s financial picture is also clouded by its recent $1bn bond offering, which will come due in 2008. But the company has said it has $1.5bn in cash.
Elan agreed to pay a $15m fine to the Securities and Exchange Commission over charges stemming from its handling of a past joint venture.
It has also set aside $55m to cover costs associated with that case. It also has had several shareholders suits filed against it over Tysabri.
G Kelly Martin walked into the Elan crisis on February 3, 2003 after the shake-up suffered by the company following the SEC investigation into its highly aggressive accounting practices.
For some he was an unusual choice, having spent all of his working life with the financial heavy hitter Merrill Lynch.
He had no experience in the pharmaceutical industry and knew little of Elan when approached about the job.
He was 44 at the time and had never held the post of chief executive prior to that.
He spent his time at Merrill Lynch & Co. fixing up one troubled unit after another.
When he left in December 2002, he was head of its international private-client group.
During his time there he was responsible for turning round the firm’s global debt market from losses of $1.5bn in 1998 to profits of over $1bn by 2001. And Martin had been one of the few executives willing, or able, to defend Merrill publicly.
It was he who testified for the firm in the Senate hearings on Enron Corporation in the summer of 2002.
Why then did Martin select such a troubled group for his first try as CEO?
Elan was once Ireland’s biggest public company.
It was home-grown, innovative, and seemed to be making the difficult transition from biotech to fully-fledged pharmaceutical before being rocked by the SEC revelations in 2002.
It was around the same time that Elan’s highly-anticipated Alzheimer’s drug was found to cause brain inflammation in some trial patients and had to be kicked back to the lab.
By July 2002, the drug-maker’s stock had collapsed, several shareholder lawsuits had been filed, and the CEO and chief financial officer resigned.
Since Martin took over as CEO on February 3, 2003, his experience as a trouble-shooter has given rise to the widespread suspicion that his job is to clean up Elan and sell it.
“People are sceptical he’s in it for the long haul,” said Peter Frawley, an analyst for Merrion Stockbrokers, at the time.
The fact that Martin’s contract includes a promise of $5m if Elan is sold this year and $3m if it goes next year only adds to the doubts about the company’s survival, he said.
Defenders of the deal said he was here because he believed in the group.
The bonuses were simply there to attract him to the job, given his high standing in Merrill Lynch and his potential to climb further up the corporate ladder.
Whatever about that speculation, the third successive failure of Tysabri is a real body blow.
Unless the group can find a way back quickly, most analysts now see its days as an independent pharmaceutical group as numbered and whether Mr Martin gets his generous bonus or not is a side issue.
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