Elan ‘Just Starting’ May Reward Investors After 10-Year Drop

After more than 40 years in business, Elan Corp. is “just starting,” says Chief Executive Officer Kelly Martin. The Irish drugmaker may prove more rewarding for investors in its second life than in the first.

Elan, which posted losses every year and a 78 percent stock drop over the past decade, is on the brink of profitability as sales soar for its only marketed product, the multiple sclerosis treatment Tysabri. Its American depositary receipts have risen 90 percent this year, the most of any European drugmaker with a market value of 500 million euros ($688 million) or more, Bloomberg data show.

Elan also has the right to a share of any profit from the experimental Alzheimer’s disease drug bapineuzumab, which has the potential to be one of the world’s best-selling medicines, said Corey Davis, a Jefferies & Co. analyst in New York. Martin, a former Merrill Lynch & Co. banker, is poised to leave the Dublin-based company next year after eliminating more than 4,500 jobs and focusing on drug development for three diseases.

“You can buy Elan stock right now and still grab the upside of Tysabri, with bapineuzumab being the lottery ticket,” Davis said in a telephone interview.

Elan’s ADRs rose 0.6 percent yesterday to $10.80, giving the company a market value of $6.4 billion. The ADRs may soar in the next year to $20, says Davis, who recommends buying the shares and has the highest price forecast among analysts. Net income this year may total $155.2 million, analysts predict, based on the average of four estimates compiled by Bloomberg.

Cutting to Survive

The Ireland-traded shares fell 3.9 percent to 7.78 euros at 9:20 a.m. Dublin time.

Martin, hired in 2003 to turn Elan around after an accounting scandal led to the ouster of his predecessor, whittled the company from 5,000 employees to 450 and from 37 locations to three and sold control of bapineuzumab. He cut debt to $800 million from more than $4 billion. Last month Elan sold its drug-technologies unit, which aims to improve the way medicines are delivered, to Alkermes Plc for $960 million to cut debt and focus on developing pharmaceuticals.

Martin, 52, plans to step down next year, leaving behind a company focused on developing drugs for Alzheimer’s, multiple sclerosis and Parkinson’s disease. The cutting had to be done or Elan wouldn’t have survived, he said in an interview.

“The Alkermes transaction was the last piece in getting the company to where it should be structurally as a business,” Martin said in an interview. “As strange as it may seem, we’re now at the starting line of what the cycle should be, it’s just taken us a long time to get here. I would say the company is just starting.”

Tysabri Sales

Elan’s Tysabri sales jumped 18 percent in 2010 to $851.5 million, and will reach $1.1 billion this year, based on the average estimate of five analysts compiled by Bloomberg. The Irish company splits sales of the treatment with marketing partner Biogen Idec Inc. (BIIB) Analysts predict further increases after the companies developed a test that shows which patients may be susceptible to a potentially fatal brain infection while taking Tysabri. The drug had been pulled from the market in 2005 because of the infection.

Elan’s next prospect is bapineuzumab, which was co- developed by Wyeth, now owned by Pfizer Inc. (PFE) Elan sold the drug along with its Alzheimer’s immunotherapy portfolio to Johnson & Johnson (JNJ) in 2009. New Brunswick, New Jersey-based J&J expects results from late-stage clinical trials in the middle of next year.

Investor Expectations

If approved, it would be the first new Alzheimer’s medicine since 2004 and may reach annual sales in the billions of dollars, said Davis, who described Elan as “a good mix of high science and high drama” when introducing Martin at a conference in June. Most analysts aren’t including bapineuzumab in their forecasts.

Tysabri sales will help fund research and development on other compounds, said Davis. Elan is conducting early-stage trials on a follow-up to Tysabri, ELND002, to which it retains full rights. Management will have to balance spending on research with investors’ expectations of profitability, he said.

Martin aims to sign further partnerships similar to one with Proteostasis Therapeutics Inc. announced in May. Elan paid $20 million as part of a collaboration to develop drugs for Parkinson’s disease, Huntington’s disease, multiple sclerosis and other illnesses. Elan doesn’t aspire to build manufacturing plants or even recruit its own sales team. It wants to be an “infrastructure-light company,” Martin said.

‘Good Science’

Even one of Elan’s biggest critics has softened a bit. Ib Sonderby, a Danish investor who criticized management, took down his “Save Elan” website after the annual shareholder meeting in May. While he still opposes some long-serving board members who were re-elected at the meeting, the sale of EDT is positive and the Tysabri franchise can be expanded, Sonderby said in a telephone interview.

“The prospects for the company are bright,” he said. “They really have good science and good products.”

Robert Ingram, the former GlaxoSmithKline Plc executive who was named chairman in January, is in the process of finding Martin’s replacement. Elan announced last year that the CEO would step down in 2012 after having “completed his commitment to the company.”

“To Kelly’s credit, what he’s done is basically rescue the company during that time of financial crisis and bring it all the way to this starting point,” Ingram said in an interview.

Elan’s ‘Journey’

The stock’s advance has partly been driven by speculation that Elan would be bought, possibly by partner J&J, which took an 18.4 percent stake in the company in 2009 when it acquired the Alzheimer’s portfolio. “If bapineuzumab does work, I can’t see how J&J wouldn’t buy Elan,” Davis said.

Ingram has experience with takeovers. He was chairman of OSI Pharmaceuticals Inc. in May 2010 when it agreed to be sold to Astellas Pharma Inc.

“If at some point in the journey somebody makes us an offer we shouldn’t refuse, we won’t,” Ingram said. “But it’s not our strategy to become an acquired company.”

A takeover may be thorny because Elan’s deal with Biogen states that if either company is acquired, the other has the option to buy its rights to Tysabri. J&J also has the right to buy out Elan’s share of the Alzheimer’s venture if the Irish company is acquired. J&J isn’t allowed to buy more shares in Elan until 2014 as part of the agreement.

Not everyone’s convinced the stock will keep rising. Tysabri, an injected drug that may account for the majority of Elan’s sales this year, faces a challenge from Novartis AG’s Gilenya, the first oral treatment for multiple sclerosis. Biogen is developing another potential competitor, BG-12.

Increasing Competition

“We remain cautious on future sales of Tysabri given increasing competition in the MS market,” Vincent Meunier of Exane BNP Paribas wrote in a July 28 report. He sees the stock dropping 36 percent in the next year.

For Martin, Elan turned out to be a longer project than he expected. When he joined in 2003, he thought it would take him three years to turn the company around, he said.

“It takes a long time to pay off $4 billion,” Martin said in the interview at Elan’s headquarters. “It doesn’t fall out of the sky in bags.”

To contact the reporter on this story: Allison Connolly in Frankfurt at aconnolly4@bloomberg.net.

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

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