Ken Kam's Best Ideas Blog

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.

Alzheimer's Fears

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.

Posted by Mark Taguchi at 5:00 AM | Permalink

The objective of a clinical trial is to see if patients treated with a new drug (the “treatment group”) do better than those who do not (the “control group”).  In most clinical trials, the control group is given a placebo so that any differences in the outcomes between the two groups can be attributed to the new drug. For this trial, however, Elan did something I think more companies should do. They gave the control group Aricept, which is the best available drug currently on the market instead of an inert placebo (which would be really cruel). This is the right thing to do for the patients in the control group, but it means the difference between the treatment group and the control group will be smaller than it otherwise might have been.

In order for a trial to be “successful”, the difference between the treatment group and the control group must be large enough to refute the possibility that it arose solely due to randomness. Scientists and regulators 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 succeeded.

In Elan’s clinical trial, patient outcomes were measured in two ways; ADAS-cog and NTB. Using ADAS-cog, the difference between the treatment group and the control group is +2.3 (p=0.078). The “p value” of 0.078 means that probability that the difference could have arisen by chance is 7.8%. On the NTB scale, the difference was +0.13 (p=0.068).

Since there is more than a 5% chance on both measurement scales that the difference could have arisen by chance, it is fair to say that the trial did not succeed by generally agreed upon standards. After the announcement of these results, Elan’s stock dropped more than 40% which would be understandable if the drug was indeed a failure.

However, I don’t think it is accurate to conclude that the drug was a failure.

Using the ADAS-cog it would be accurate to say that we can be 92.2% confident that the differences were not due to chance. Using NTB, we can be 93.2% confident. In other words, using either measure we can be more than 90% confident that the drug had a beneficial impact over the best available drug on the market. Is this a failure? I don’t think so.

The results also show that patients who carry a gene called Apoe4 respond differently than those who do not. There were 79 patients in the trial who do not carry the gene. Of these, 47 were in the treatment group and 32 in the control group. On ADAS-cog, the difference between the two groups was +5.0 (p=0.026). On NTB, the difference was +0.35 (p=0.006). In other words, for patients who don’t carry 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 being dishonest with the statistics.

In truth, clinical trial data can often be twisted and contorted until the drug shows efficacy for some subgroup of patients. For example, it could turn out that the data shows the drug was effective for patients who are more than 6 feet tall. But, if it did, people would be justified in ridiculing the results 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. Apoe4 is suspected to be involved with Alzheimer’s disease (we don’t know exactly how) so it is not at all surprising to learn that a drug that might interfere with the progression of Alzheimers might affect carriers of the gene differently than non-carriers. The ridicule that the company has received for reporting this result is not deserved.

In the end, I think investors can be a little more than 90% confident that Bapineuzumab has a beneficial impact on Alzheimer’s patients above and beyond the best available medication. In addition, I think its fair to say that we have learned from this trial that there is a genetic marker that can be used to identify patients for whom Bapineuzumab may have an even better chance of working.

The Phase 3 trial was clearly designed with this lesson in mind. 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 think Elan’s current price can be justified on the basis of their multiple sclerosis drug (Tysabri) and their drug delivery business. This means, that if you buy Elan now, you are essentially paying nothing for Bapineuzumab. That’s a bargain.

Posted by Ken Kam at 6:12 PM | Permalink

If you have had to make the decision about whether to use Tysabri, I would love to hear from you. Click on the "Comment" button to tell me your story.

Continue reading "Elan: Listening to Patients" »

Posted by Ken Kam at 11:45 PM | Permalink

I’ve been selecting stocks for the Best ideas Portfolio by looking at the model portfolios of top Marketocracy members looking for cases where the member is literally betting his track record on a stock by making it a large position. Among our top members are many full-time investors and Wall Street professionals who consider their track record to be a credential that is as valuable as their diplomas. So, when I see someone with a great track record develop enough confidence about a stock to make it a big position, I think its worth paying attention.

As Elan (ELN) has appreciated, I have felt comfortable letting it grow into the single largest position in the portfolio in part because it was the single largest position in Chris Rees’ model portfolio. Chris has an amazing track record with this stock. Although he did not avoid the drop from $30 to $3 in March of 2005, his research gave him the confidence to step in and buy at $3 when everyone else was selling. It took me another 3 months to come to the same conclusion. By the time I did, the stock had already more than doubled to $7. So when Chris Rees sells his position in Elan, as he did yesterday, it’s time to reexamine the stock.

Elan has grown to be 27% of this portfolio, a weight that requires the highest level of confidence to justify keeping. There are a number of regulatory milestones coming up and the FDA and its European counterpart (EMEA) can sometimes be capricious. Take a look at how Dendreon’s (DNDN) stock has been affected by the FDA approval process for Provenge.

As much as I like Elan’s prospects for the rest of this year, I must admit that I cannot justify keeping 27% of the Best Ideas portfolio in this stock. That’s why I’ve decided to sell about one-third of this position. After the sale, Elan will still be about 20% of the portfolio — a level that better reflects my confidence in the stock.

I’m not going to put the cash to work right away. I’m looking for a stock outside of the energy, natural resources, or biotech areas, to give the portfolio more diversification.

Posted by Ken Kam at 5:31 PM | Permalink

Last week, Elan (ELN) announced that its Alzheimer’s drug was going to progress to Phase 3 trials. After the stock jumped over 20%, Citibank’s analyst upgraded Elan from “Sell” to “Hold” and raised his target price 75% from $12 to $21. In my experience, there are not many occasions when something so dramatic happens that my estimate of a stock’s value increases by 75%. When it happens, it usually means I was just plain wrong about my previous estimate and that in itself makes me doubt my current assessment, so I would be very reluctant to advise clients who want to know what to do about the stock.

Wall Street doesn’t seem to feel the same way. Since March of 2005 when the stock bottomed at $3 Elan is up more than 600%. For much of this time Citibank rated Elan a Sell, and they reiterated their opinion just before every major milestone in Elan’s recovery. Having completely missed all the major turning points on this stock for the past 2 years, I see no reason to pay much attention to Citibank’s current opinion.

Nevertheless, Citibank’s opinion will affect the investment of billions of dollars of their client’s capital so it will have a far bigger impact on Elan’s stock price than my opinion which drives the far smaller capital base of our mutual fund and managed account clients.

As Warren Buffet likes to say, in the short run the stock market is a voting machine, but in the long-run its a weighing machine. In the short-run Citibank and their clients have a lot more votes (capital) than Marketocracy and its clients. But, as we’ve seen over the past 2 years with Elan, in the long-run, the people with the most capital aren’t always right.

I think the people who are most likely to make the right decisions about Elan’s future turning points are the people who’ve been right about Elan in the past. If you want to know what to do about Elan, the person whose opinion I think should matter most is Chris Rees. Of all of our members, he is the one who has made the most money in Elan over the past 5 years. Elan is currently the single largest position in his portfolio so I’m comfortable keeping Elan eventhough it has grown to be the largest position in my Best Ideas portfolio.

If Elan is a now a big portion of your portfolio, stay tuned. Between now and the end of the year, there are a number of major turning points coming up. In July, an FDA advisory panel will make a recommendation on whether Tysabri should be approved for Crohn’s disease. I also expect to hear that Tysabri sales for Multiple Sclerosis patients will continue to accelerate. In the 4th quarter we’ll hear the results of the Phase 2 study for AAB-001 (the Alzheimer’s drug). I think the odds are high that the results will be good because the company has already started the Phase 3 trial. There is a chance that the results will be strong enough to justify an FDA approval before the Phase 3 trial is finished.

As each milestone comes up, I’ll do my best to help you decide what to do in each case. But, if you would rather have your portfolio set up so it automatically does whatever Chris Rees decides to do, I can do that for you as well. Click here for more information.

Posted by Ken Kam at 7:40 PM | Permalink

Last week Friday, Elan (nyse: ELN) shares gained over 7% on the rumor that Biogen (nasdaq: BIIB), Elan’s 50% partner for its multiple sclerosis drug Tysabri, is interested in acquiring the company. Today, Elan is up another 14% on news that the company’s Alzheimer’s drug (AAB-001), which is partnered with Wyeth (nyse: WYE), is being advanced to Phase 3 trials.

When a stock makes a big move in a short period, there is a tremendous temptation to sell and “lock in profits.” However, when then price move is accompanied with good news, the initial bump may be the start of a major move up. If you are too quick on the trigger, you may miss the bigger, longer-term, move which in my view is the main reason to make an investment in the first place. So, before we decide what to do, lets take a look at the news.

The Biogen rumor

There are lots of rumors on Wall Street and most of them turn out to have nothing to them. If the rumor is true, there are some on Wall Street who know and they are driving the price up. I never have this kind of information advantage so I don’t trade just because of a rumor. The rumor has to make sense.

The majority of Biogen’s sales comes from Avonex, a multiple sclerosis drug that competes with Tysabri. Last year, Biogen’s impressive overall sales growth was lead by higher sales of Avonex. However, as I read the numbers, it seems to me that Avonex sales increased less than the price increase that Biogen put through last year. This implies that the number of MS patients using Avonex probably went down last year! Since Biogen probably cannot keep raising the price of Avonex at last year’s pace, they are going to have a hard time maintaining their sales growth this year especially if Avonex is losing patients.

Biogen gets 50% of Tysabri sales but Tysabri’s price is just about double that of Avonex. Therefore, as things stand today, whether an MS patient uses Avonex or Tysabri, Biogen gets the same revenue. For Biogen, sales growth from the MS market depends on Tysabri taking market share away from other competitors.

If Biogen were to acquire Elan, however, a patient that switches from Avonex to Tysabri would generate twice as much revenue for Biogen. And, patients who switch to Tysabri from any other drug would have double the impact on Biogen’s sales than they do now. In short, this acquisition can make a lot of sense for Biogen especially if its done before Tysabri sales ramp up.

The main problem I see is that it would be a big acquisition for Biogen whose market cap is $16 billion — roughly double Elan’s. But, interest rates are low, and capital seems to be available to do deals of this size. If a deal is done, however, I suspect that it will involve Wyeth because of its involvement with Elan’s Alzheimer’s drug. That’s why today’s news on AAB-001 is so interesting.

Alzheimer’s drug (AAB-001)

Today’s announcement that Elan and Wyeth are going to start a Phase 3 trial for AAB-001 even before the Phase 2 trial is finished speaks volumes. Phase 2 trial results have not yet been announced, but I infer that both companies must believe that the results are going to be positive or they would not be willing to spend the millions of dollars its going to cost to run the Phase 3 trial.

A successful Alzheimer’s drug would be a home run for Elan. About 18 million people worldwide currently have Alzheimer’s compared to 2 million who have multiple sclerosis. Judging just from the number of patient’s, AAB-001’s potential may be almost 10x bigger than Tysabri’s. That’s why I think that if a deal to acquire Elan is in the works, it probably involves Wyeth as well as Biogen.

A deal in which Wyeth ends up with 100% of AAB-001, and Biogen ends up with 100% of Tysabri makes a lot more sense than Biogen acquiring all of Elan on its own.

Bottom Line

I cannot be sure, but there may be some truth behind the rumors. In the next few days, I suspect that many people will decide to sell to lock in the gains of the past 2 trading days. I would not be surprised if the stock gave back half of its recent gains. If it does, I’ll be buying.

The Marketocracy member who has made the most money on Elan is Chris Rees (view track record) and Elan is currently his biggest position.

The things I’ve discussed above are based on facts that are readily available to anyone. However, interpreting the facts to come up with the right investment decision requires judgment that is not common. I trust Chris’ judgment because of his Marketocracy track record which is now over 5 years long. Chris is the mFOLIO Master I use to manage separate accounts for clients who have a large position in Elan. For information about this program click here.

Posted by Ken Kam at 7:47 PM | Permalink

Factors That Can Drive A Double

When I first recommended Elan Corporation (nyse: ELN) in an Advisor Soapbox at Forbes.com on June 17th, the stock was trading below $7 and I said the main issue that would determine whether it would double is, "Will Tysabri Be Back?" Since then the stock has doubled.

Based on Marketocracy’s collaborative research process, I believe ELN could double again in the next 2 years.

The issue that will drive the next double is, "How Profitable Will Tysabri Be?"

Wall Street does not expect Tysabri to be a strong competitor to existing drugs. Based on the feedback we've received from MS patients, Wall Street is in for a big surprise.

Tysabri has to win over just 18,000 MS patients to generate $500 million in revenues. In the next 12 months, we think Tysabri could surpass Wall Street's estimates for peak sales in 2012.

Looking For Nuggets: The Rest of the Company

Elan is not a one trick pony. In addition to Tysabri, Elan has:

• 3 drugs already on the market: Maxipime, Azactam, and Prialt
• A research program to develop drugs for Alzheimer’s Disease in partnership with Wyeth
• Drug Delivery Technlogy: The Hidden Gem

Although ELN is highly dependent on Tysabri in the near-term, there is significant value in the rest of the company and at least one opportunity that could be as big (or bigger) than Tysabri in the longer-term.

Other Issues

Management Credibility
Competitors Hitting Below The Belt

Summary

ELN has doubled since we first wrote about it in June 2005 and we think it could easily double again within the next year or two. Additional research into the profitability potential of Tysabri looks like it could yield another double from Tysabri alone. Elan’s drug delivery technology needs more collaborative research but it looks like it could be the springboard to make Elan a major player in the pharmaceutical industry.

Previous Articles/Reports/Alerts by Marketocracy on Élan

Marketocracy Alert: Élan 7/24/06 (click here to read)
Marketocracy Alert: Élan 6/5/06 (click here to read)
Marketocracy Alert: Élan 3/8/06 (click here to read)
Marketocracy Alert: Élan 2/28/06 (click here to read)
Marketocracy Alert: Élan 1/23/06 (click here to read)
Marketocracy Alert: Élan 1/04/06 (click here to read)
Marketocracy Report: Élan 12/16/05 (click here to read)
Élan on track for a Double - 12/01/05 (click here to read)
Monotherapy will Double Élan's - Forbes 9/28/05 (click here to read)
Betting On Élan's Second Resurrection - Forbes 6/17/05 (click here to read)

Posted by Ken Kam at 12:10 AM | Permalink