Wednesday, March 08, 2006

Is Elan Past Its Dog Days?

There'll be plenty of champagne-popping tonight for both Biogen Idec (BIIB) and Elan (ELN).

Late Wednesday, the FDA decided multiple sclerosis drug Tysabri was ready to come back to market. The first and second line treatment drug was yanked off the market in Feb 2005 after killing two.

Shares of Elan popped 25% in after hours trading -- look for explosive, mind numbing volume on Thursday as analysts and investors digest the news.

Piper Jaffray must be crying in their beer, considering that they said last week that Elan was a $9 stock, at best. Puh-leeze.

MS is a neurological disorder that robs people of muscle coordination and balance, sometimes leading to damaged vision and paralysis. In severe MS, people have permanent symptoms, including partial or complete paralysis. Depending on what restrictions the FDA throws on the drug, Tysabri's relaunch could ring in as much as $1B dollars in annual sales.

It seems Piper Jaffray is (over)discounting the fact that Elan's mastered the art of survival. In 2002, Elan almost fell off the face of the earth. Elan brought in a Merrill Lyncher to restructure the firm -- and it worked. While Elan has already burned through several billions of dollars in losses, and today sits under a pile of debt (Elan sports a 70% debt/total capitalization ratio), we think that Elan could become a powerhouse in the $4B multiple sclerosis market, but probably not until late '07 or, more likely, 2008.

Biogen, meanwhile, could be a buy. With 2 stellar drugs already in place (Avonex for MS and Rituxan for Non-Hodgkin's) -- as well as $2B in net cash -- Biogen is in a better position than most people want to admit. We believe Biogen will use some of its excess cash to make an acquisition in 2Q/3Q '06 and subsequently diversify its product profile.

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