Ken Kam's Best Ideas Blog

Élan On Track For a Double

by Ken Kam

When I first wrote about Élan Corp. (nyse: ELN) on June 17, 2005 in an Advisor Soapbox at Forbes.com entitled, "Betting On Élan's Second Resurrection (click here to read)," the stock was trading below $7. Since then the stock is up nearly 50% and on track for a double and probably more.

Élan and its partner, Biogen Idec (nasdaq: BIIB) had pulled their drug, Tysabri from the market on Feb. 28, 2005 after 2 patients (one died) treated with Tysabri in combination with Biogen's Avonex in clinical trials were discovered to have contracted progressive multifocal leukoencephalopathy (PML), a rare and frequently fatal disease. ELN fell from $27 to $7 and when a third case of PML was discovered, it dropped to $3. In June, ELN was bouncing around $7 and Wall Street had significant doubts that Tysabri would return to the market.

Élan Recovering from the Fall

After the discovery of PML, Élan and Biogen undertook an extensive review of nearly all of the patients who took Tysabri and found no additional cases of PML. They submitted their data in an application to the FDA requesting approval to bring Tysabri back on the market. On November 17th, the FDA accepted their application and agreed to give Tysabri a priority review.

The stock is now trading over $10 per share -- about 50% above our initial purchase price. We haven't quite gotten a double yet, but the market is clearly starting to see things our way.

What does a Priority Review mean for Tysabri?

Granting Tysabri a priority review means the FDA has committed to making a decision in 6 months instead of the normal 10. The FDA gives priority review about a third of the time. If the FDA reapproves Tysabri, the 4 extra months of sales will have a big positive impact on Élan's 2006 revenues.

What the FDA priority review really means is that the FDA has acknowledged that Tysabri addresses a big unmet medical need. In other words, there are lots of MS patients for whom all other drugs have failed, that may benefit from Tysabri. That confirms what we've been saying and now the rest of the market thinks the chances of Tysabri returning to market next year are much higher.

Here's what I think the FDA is thinking. To decide if Tysabri should be allowed back on the market the FDA will do a risk/benefit analysis. Since no additional cases of PML were uncovered by the company's exhaustive review of practically every patient who has ever taken the drug, the risk of PML is about 0.1% for all patients (including the ones who took Tysabri in combination with other drugs) and 0.0% (yes that is a zero) for patients who took Tysabri alone. I cannot see how the FDA can justify withholding Tysabri from MS patients who are willing to use it as monotherapy when there have been ZERO cases of PML among such patients.

The FDA's decision is due at the end of March 2006. There is speculation that it could happen sooner, but my experience is that the FDA almost never makes a decision before its own deadline so we'll have to wait.

There are many on Wall Street and financial pundits who still believe that Tysabri won't be reapproved. In some ways, I would like to thank these people because they have given us an opportunity to put more money into the stock at a price that does not reflect Tysabri's prospects.

The stock is now trading over $10 per share -- about 50% above our initial purchase price. We haven't quite gotten a double yet, but the market is clearly starting to see things our way.

How Profitable will Tysabri be?

Once the market believes that Tysabri will be reapproved, we should see the double that got us into ELN below $7. The next issue that could drive ELN even higher is how profitable can Tysabri be and how fast will sales surge?

Wall Street thinks sales are likely to ramp slowly because they believe doctors and patients will be wary of using the drug until more data is gathered regarding the risk of contracting PML. They think patients and doctors won't want to be the first to start using Tysabri again. I don't think so, here's why.

PML is a risk factor for any drug which affects the immune system, and most, if not all drugs used to treat Multiple Sclerosis do. Just the heightened awareness of the risk of PML with Tysabri will cause the drug companies, your doctor, your insurance provider and probably the FDA to monitor anyone taking Tysabri more diligently for PML - at least in the beginning when it first comes back on the market. Eventually, it will revert to normal monitoring.So, patients that start using Tysabri immediately will probably have better testing for PML and should it occur, can be treated quickly before it becomes fatal. The risk may actually be higher to wait. So why wait? Many will not.

There are 400,000 MS patients in the U.S. All other existing MS drugs have already failed for about 100,000 of them. In clinical trials, Tysabri reduced the relapse rate for such patients by 67% versus a placebo group. If I were one of these patients, I would want Tysabri as soon as I could get it because the benefit is so great.

Within 3 months after Tysabri first became available there were 5,000 patients using Tysabri and 15,000 patients that were on the wait list and that was just in the U.S. Tysabri had not yet been approved in Europe and with the same number of MS patients, I expect there would have been a similar ramp.

Tysabri costs $25,000 per year per patient. If Tysabri can benefit half of the U.S. patients for whom all other drugs have failed, it would generate annual sales of $1.25 billion. Of this, $625 million (50%) would flow to Élan's top line with the other half going to Biogen.

To put this in perspective, Élan's 2005 revenues are going to be in the neighborhood of $500 million so there is more than enough potential sales just from MS patients in the U.S. who have already failed all other drugs to drive a double in the stock price over the next couple of years.

This is just the initial and most likely group of patients for Tysabri. Many, if not most of the 300,000 MS patients in the U.S. that are using existing drugs are not satisfied with their current drug. Many of them would be willing to give up their existing drug to try Tysabri. How many? In November 2004, before Tysabri was even approved, the CEO of Élan said 25,000 MS patients had already registered their intention to switch from an existing MS drug to Tysabri.

Additionally, Europe, where there are another 400,000 MS patients is likely as big a market as the U.S. and there may be 200,000 additional patients world-wide that have insurance and can afford MS treatments. Tysabri was also shown to be effective for treating patients with Crohns Disease, a potentially larger market than MS.

As Tysabri meets our near-term expectations, we will continue to research and evaluate how profitable Tysabri can be to see if it can drive another double.

Recommendation: (based on your portfolio)

If you do not already own ELN: I would buy some at the current price.

If you currently have a small position in ELN: for you I would look to add to the position on any weakness. I have found that the most profitable investment decisions I've ever made are not the first buy decisions, but the follow-on buys. From watching thousands of investors trade at Marketocracy I've learned that many people are not comfortable adding to a winning position because they don't want to pay a higher price for the 2nd block of stock. I think that's a big mistake. When the market starts to tell you that you're right about a stock, I think its smart to add to that position.

If ELN is already a big position: if ELN represents more than 10% of your portfolio you have my congratulations. You made a good buy and I would sit tight.