Highlight: Ken Kam held a conference call on Elan on August 18, 2008. Click here to listen to a podcast of the call
On July 29th, Elan (nyse: ELN) and their partner, Wyeth (nyse: WYE) presented Phase 2 trial data on their drug Bapineuzumab at the International Conference on Alzheimer's Disease in Chicago. After just a few minutes into the presentation analysts started tapping out messages to sell and Elan's stock dropped 40% in after-hours trading. Two days later, on July 31st, Elan and Biogen Idec (nasdaq: BIIB) announced that there where two new cases of progressive multifocal leukoencephalopathy, or PML with patients on their multiple sclerosis drug, Tysabri. Elan's stock dropped another 40% in after-hours trading. In just 3 days, Elan dropped from $33.75 to close at $9.93; down over 70%.
Elan was the largest position in both my Best Ideas Portfolio and my Core Equity Portfolio (much less in the Core because it is a much more diversified portfolio) so rather than start with the Market Outlook as we usually do, I've decided to give you my take on what happened with Elan, why the market reaction took me by surprise, and why I think this is a great time to buy Elan.
On July 29th, when Elan detailed the results of its Phase 2 trial for Bapineuzumab, a promising potential drug for Alzheimer's disease, I did not see much risk that Wall Street could be surprised or disappointed. After all, Elan had already announced that the Phase 2 trial did NOT succeed in proving efficacy but that the data was so compelling to them that they had decided, with the FDA's agreement, to start a Phase 3 trial (estimated to cost $300 million) before the completion of Phase 2.
Well, Wall Street analysts and journalists obviously didn't like what they heard because the stock plummeted before Elan even finished its presentation. Such a big fall might be justified if Bapineuzumab was a total failure, but after reviewing the clinical data, I honestly do not think that is the case. And, the fact that the people that knew the data and the science the best, were going to invest $300 million is much more compelling to me than what a Wall St. analyst or journalist (most of whom have no experience in clinical trials) think after a few minutes of a presentation.
In order for a trial to "prove" efficacy, the difference in patient outcomes between the treatment group and the control group must be large enough to refute the possibility that it arose solely due to randomness. Scientists have generally agreed that if the difference is big enough so that there is less than a 5% chance that it is was a fluke of luck, then the trial has proven the drug to be effective.
In Elan's clinical trial, patient outcomes were measured in two ways. Without getting technical, using one measure the likelihood the difference could have arisen by chance was 7.8%. Since that is more than 5%, it is accurate to say that the trial did not prove efficacy by generally agreed upon standards. But, boy did it come close.
It would be just as accurate to say that we can be 92.2% confident that the differences were not due to chance. In other words, we can be more than 90% confident that the drug performed better than the best available drugs currently on the market such as Aricept which, by the way, generates sales of around $4 billion a year. Is this a failure? I do not think so.
The results also show that patients who carry a gene, called ApoE4, respond differently than those who do not carry the gene. Simply put, for Alzheimer's patients that don't carry the gene ApoE4, the drug worked.
Everyone would now be celebrating that the drug worked for non-carriers of ApoE4 except for the fact that Elan did not specify at the start of the trial that they were going to separate the results between carriers and non-carriers. Instead, critics have accused the company of manipulating the numbers and of being dishonest.
In truth, clinical trial data can often be twisted until a drug shows efficacy for some subgroup. For example, it could turn out that the data shows the drug was effective for patients who are more than six feet tall. But, if it did, people would be justified in ridiculing the company because there is no reason to believe that efficacy should be related to a patient's height.
The difference in results for carriers and non-carriers of ApoE4, however, is not so easy to dismiss. This gene is suspected to be involved with Alzheimer's (we don't know exactly how), so it is not at all surprising to learn that a drug that might interfere with Alzheimer's might also affect carriers of the gene differently than non-carriers. The accusations of dishonesty that the company has endured for reporting this result are not deserved.
In the end, the Phase 2 data DOES tell us that we can be about 90% confident that Bapineuzumab is better than the best medicines currently available to treat Alzheimer's. In addition, the trial has taught us that there is a genetic marker that can be used to identify patients for whom Bapineuzumab may have an even better chance of working.
Getting approval is going to require additional proof of efficacy and that is what the Phase 3 trial is clearly designed with to demonstrate. Even if the Phase 3 trial results confirm efficacy for just non-carriers of ApoE4, there are so many Alzheimer's patients that this drug would still be a blockbuster.
I don't see how this could justify the 40% drop in the stock price. So uncertainty is a fertile environment to cause fear, but an over-reaction creates opportunities.
PML Fears Leads to a Tysabri Redo
The second big drop for ELN came on July 31st, after the market closed. Two new cases of PML, a brain disease, were announced to have appeared among multiple sclerosis patients taking Tysabri. Investors suffering from dj vu shot first and many didn't even ask questions later. It is understandable that the uncertainty of another PML case has led to the fear that Tysabri might be pulled from the market again or that MS patients may decide not to take Tysabri, so investors sold. I think there is a strong case that instead, this is a great buying opportunity to invest in Tysabri, again.
In 2005, Elan took Tysabri off the market when three patients came down with PML, and two died. The stock dropped from $26.90 to $8 overnight and then fell to $3 over the coming weeks, losing 90% of its value. Shareholders who went through that experience will never forget it.
That's when ELN came on my radar screen. Two of our mFOLIO Masters, Chris Rees and Jack Weyland started buying Elan as it dropped to $9 and continued buying as it dropped to $3 (that's a loss of over a 60%), making Elan the largest position in their portfolios. So, I started doing research, leveraging the Marketocracy community.
I heard from countless multiple sclerosis patients and care-givers that even if Tysabri carried a 1:1,000 chance of death from PML, nearly all of them would accept that risk in order to get the improved efficacy Tysabri offers. MS patients on Tysabri have between 33% and 50% fewer relapses than patients on other drugs. I started buying our Elan position about three months after the drop at $7.
Tysabri came back onto the market with FDA approval in 2006 with very explicit warning of the risks of PML and programs meant to warn and monitor for PML. Since then, over 31,000 MS patients have accepted the 1:1000 risk of contracting PML that is already printed on the FDA approved label and used Tysabri. About 14,000 have been on the drug now for more than a year.
Even with the two new cases of PML, the actual risk appears to be lower than expected. The risk may be closer to 1 out of 5,000 instead of 1 out of 1,000. But more importantly, contracting PML may no longer be a death sentence. Both of the new PML patients are alive after receiving transfusions. One is already back home and the other is expected to be going home soon too.
I don't think there is much of a chance of Tysabri being pulled unless the incidence of PML is greater than 1:1,000. And even then, if PML can be treated, I think MS patients and the FDA would be even more willing to accept the risk in order to have fewer relapses.
Since the risk of getting PML has shown to be lower than MS patients have been told to expect, and the consequences are less severe, the all important risk-reward tradeoff that multiple sclerosis patients have to make has actually improved in favor of Tysabri not against it. And in the end, it is the MS patients' use of Tysabri that will determine the value of Elan not my opinion, nor the opinion of Wall St. analysts or journalists.
Going forward with Elan
Because of Elan, it was a tough 3 days for my Core and Explore Portfolios. I am not expecting a quick bounce but a great opportunity to invest.
The primary question going forward is whether this new information on the risks of PML causes MS patients to change their behavior and use Tysabri less or even more. We'll all know more when Elan announces results at the end of the quarter but in the meantime, I welcome any feedback or insights you can provide, especially if you're from the MS community. Based on the data so far, if you conclude like me that MS patients will continue to use Tysabri then, this is a great opportunity to invest in a potential ELN double just as a Tysabri redo.
The much more important data for Bapineuzumab will play out over the next 2 years, during the Phase 3 trials. Then we'll know whether Elan has another blockbuster on its hands.
At around $11, a high level of pessimism is already baked into the current price. Long-time subscribers who bought Elan 3 years ago when we first wrote about it still have profits. But recent subscribers have suffered a loss. For these subscribers, since I don't expect a quick bounce, I suggest that you consider selling to recognize a short-term loss so you can recover part of your loss through tax-savings. Then, after waiting 30 days, consider repurchasing Elan if nothing has changed.
I wish I could have foreseen this and avoided it. But, I think this will turn out alright even for recent subscribers who have a 2 year investment horizon. And, for those who can add at this price, I think it's a good time to be buying.
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