Ken Kam's Best Ideas Blog

July 24, 2006
Closing Price: $13.43
Alert: Tysabri is Back, but Élan is Down - Time to Buy

We are issuing this alert because Élan Corporation, plc ADR (nyse: ELN) fell 5.4% last Friday when two competitors, Teva Pharmaceutical Industries Ltd. (nasdaq: TEVA) and Serono SA (nyse: SRA), joined forces and uncorked another shot below the belt.

In our March Marketscope (click here to read) I said that Élan's competitors would be pulling out all their guns to try to slow Tysabri. Last month the FDA re-approved Tysabri and today, it was re-released to the market. Now as the market is trying to figure out how profitable it will be, an article touting a new therapy for multiple sclerosis patients combining Serono's Novantrone, a cancer drug, with Teva's Copaxone, hit the newswires on Friday. The media focused on the 90% reduction in relapse rate for patients in a clinical trial, lending support to Wall Street's doubts that Élan's newly re-approved MS drug, Tysabri, will ever generate significant sales. In an already weak market, the news helped push Élan's stock price down 5.4% in an already weak market to its lowest level in months.

Élan's stock price was already down, driven by a weak market, but the actions by competitors make Élan an even better opportunity to buy.

My Take

Beyond the headlines, however, the rest of the story leads to quite a different conclusion. It turns out that the clinical trial consisted of just 27 patients. Although some of the patients experienced an improvement, one developed acute leukemia. Everyone acknowledges that a lot more work needs to be done, and it's going to take time. A three-year study is just now being launched.

I don't think many MS patients are going to hold-off taking Tysabri, which reduces relapses by 68% and is available now, in the hope that in 3 years, the combination of Novantrone and Copaxone will turn out to be better. As a result, this news should have little impact on Tysabri's launch. But, it seems to have scared a lot of people into selling their stock in Élan just when Tysabri is finally coming to fruition.

Competitors React to Tysabri's Growing Momentum

One way to tell whether a new drug is going to be a success is to look at the reaction of its competitors. It's noteworthy that this story appears first in a newswire article, not a respected medical journal. That's how you can tell that competitors, not scientists, are behind this story.

There is no doubt in my mind that both Serono and Teva are afraid of the impact Tysabri will have on their sales.

Serono generated $1.2 billion from the sales of MS drugs (primarily Rebif) almost 50% of their revenue in 2005. Copaxone generated almost $1.2 billion of revenue for Teva in 2005 -- about 25% of their total revenue and probably an even higher percentage of their profits.

But Rebif, and Copaxone are only about 1/2 as effective as Tysabri in preventing relapses. Neither drug has been shown to slow the progression of multiple sclerosis much less an improvement in disability measures as has Tysabri.

Consequently, both companies have to be concerned that they may lose significant sales now that Tysabri is cleared for sale. From their perspective, the 16 months that Tysabri was off the market was a windfall that enabled them to maintain sales of their existing drugs longer than they expected. Now that Tysabri is back on the market, Serono and Teva are acting as though they are preparing for the worse.

Last year, Serono's board essentially decided to cash out before Tysabri could significantly impact their business. The company hired Goldman Sach's to help them explore "strategic options." Pfizer (nyse: PFE), GlaxoSmithKline (nyse: GSK) and Novartis AG (nyse: NVS) were rumored to be the likely acquirers. However, the Wall Street Journal reported that in spite of Goldman Sach's efforts, Serono had received no serious offers.

In January, Teva acquired generic drug manufacturer IVAX Pharmaceuticals, financing the big acquisition through a $1.25 Billion bond offering by Lehman Brothers and Citigroup during a time when Tysabri was off the market and not considered a threat to Teva's Copaxone. Since then Teva has acted more desperately, trying to reassure investors that Tysabri's growing momentum will not steam roll over Copaxone and affect their debt payments.

Teva seems to be willing to pull out the brass knuckles to maintain Copaxone's sales. On the eve of the FDA Advisory Committee meeting for Tysabri, Bloomberg reported that Teva paid a marketing agent to publicize an unpublished article comparing Tysabri's effect on the human immune system to AIDS. That is a ridiculous comparison. If the best way to protect Copaxone sales is to try to create fear of Tysabri by drawing a ridiculous comparison to AIDS, then Teva must be desperate.

Teva's investment bankers, Lehman Brothers and Citigroup, have also been active. Both firms published research reports citing the risk of PML as justification for their low expectations for Tysabri sales. Coming as it did on the day before the FDA Advisory Committee meeting, these two firms proved that their analysis was not going to change no matter what data was presented at the meeting.

I cannot think of a reason why an analyst making an honest assessment of Tysabri would not want to consider the data that was going to be presented the very next day. I can only surmise that the folks at Teva, and their investment bankers, must believe that Tysabri is a threat to Copaxone's sales. I agree with them.

Action to Take

Competitors often hit below the belt. Whenever a new product threatens to reorder a $5 billion/yr market, you can count on it. Watching Serono, Teva, and their investment bankers take increasingly desperate steps to slow down Tysabri only increases my conviction that Tysabri will be a home-run for Élan.

Although they succeeded in taking Élan's stock price down temporarily, if you have a two-year investment horizon, these shenanigans will not have any impact on your return. Take advantage of this opportunity to increase your position in Élan.