Opinion: What a punter's share: $40, $60, $20, $1.03, $30, $3, and then over $6 earlier this week on the New York Stock Exchange. Elan, which is about to pay $40 million (€30.9 million) - its insurers paid a further $35 million - in settlement of the 2002 class actions following final court approval in the US last month, has seen these see-saw bursts in its share price in less than four years. It was an investor's nightmare (with the wrong timing) or his nirvana (if the timing was right).
On that record, and on the performance of some previous years, it would have provided an ideal platform for the quick in/out investors, but not for institutional shareholders. Yet institutions and mutual funds hold 54 per cent of the company (the largest, with 9.45 per cent is Fidelity Management and Research), according to the latest filings. Following the withdrawal of the Tysabri drug used for MS sufferers, and the subsequent drop in the share price from $30, they are substantial losers. Yet judging by the tone of last week's conference call on the internet, from institutional investors and brokers who put their clients into the shares, the questions were very tame indeed.
In contrast, the smaller shareholders have been very vocal through their message board. On Monday, for example, there were over 800 messages by 6pm. While most of the comments were inconsequential, it does reflect the degree of interest in the company by these punters, and the vast bulk are optimistic.
So what are the prospects?
What is certain is that there is a great deal of uncertainty. Some brokers are very negative, others are positive. These divergences are understandable.
Tysabri was meant to transform the company. In the first three months of this year, revenue from the initial product launch amounted to $14.9 million or 14.5 per cent of the total group revenue. But according to notes with the accounts, it was larger as this figure was net of $16.4 million for sales returns related to the product recall. The adjusted ebitda (earnings before interest, tax, depreciation) was a negative $60.1 million and, significantly, that accounted for 63 per cent of the group loss.
The real loss is even bigger as Elan did not allocate general and corporate costs to Tysabri.
But that is history for the moment. In the meantime, it would be more prudent to look at Elan ex-Tysabri.
The group's balance sheet is a little scary. It has shareholders' funds of just $91 million compared with net loans (loan notes minus cash) of $900 million. The real position could be worse, because some of the intangible assets of $755.9 million might have to be cut to take the problems at Tysabri into account.
But there are no immediate pressures on the balance sheet. A clever financial restructuring led to bank debt being converted into loan notes - the first batch amounting to $1.1 billion is not due until 2008. The second batch of $1.15 billion is due in 2011. However, with cash of $1.36 billion, there are no immediate cash flow pressures. Indeed, it has a good deal of flexibility at the moment. And ironically, the suspension of the drug will reduce the group's cash burn by $100 million to $250 million in 2005.
Even without the Tysabri problems, Elan's first-quarter results to March 31st, 2005 were disappointing. The revenue fall from $148.3 million to $102.7 million was worse than expected.
However, funds from disinvestment were higher than expectations and interest charges were lower, leading to a fully diluted loss per share of $0.29, in line with some forecasts.
Its main products, Maxipime and Azactam, recorded a fall in revenue, but better results are now expected.
Overall, Elan is targeting a break even on ebitda by the end of the year, with a loss range of $50 million to $70 million for the full year. No targets have been made for 2006 or after and, considering the uncertainty, that is not surprising.
Kelly Martin, who took over the helm of Elan in early 2003, after a meritorious career in the US (including the transformation of Merrill Lynch's global debt markets side from losing $1.5 billion in 1998 to a profit of $1 billion in 2001), has given Elan more stability, and he has more scope to reduce costs. Expect more.
When he joined, he was faced with the prospect of Elan breaching covenants and delayed accounts. But he sorted out these problems. On balance, it will be surprising if he does not overcome the present problems.
While Elan can continue without Tysabri, it will lose its - up-to-now - pearl. Tysabri is the first MS drug for over a decade, and trials showed it to be twice as effective as the older interferon-based drugs, with far fewer side effects. Tysabri blocks invading immune cells from entering the brain, but two patients who took the drug in combination with an older MS treatment, and one who took it on its own, exposed the brain to a common virus called JC.
Most drugs that target the immune system leave the body susceptible to infections.
However, the infections often don't become apparent until the patients are on them for a long time. This is a problem facing Elan and its partner Biogen Idec as they reassess the drug over the summer. They are expecting some sort of conclusion before the end of the year.
Patients with negative prospects are often prepared to take risks in the hope of success. It seems inconceivable that Tysabri (which was FDA -approved) will not be relaunched in some format in the future, perhaps with a strong warning that it can prove fatal in some cases. However, the lawsuits alleging that Biogen (also being sued for alleged insider trading) and Elan disregarded safety problems to win fast-track FDA approval is bound to inculcate a more cautious approach.
The uncertainties are reflected by the US analysts' forecasts for the group. Projected revenue for this year has a range of $450 million to $757 million, for example, with an average of $538 million.
The range for 2006 is even wider: $520 million to $1.26 billion.
With such diverse views, Elan's shares, which are also traded on the Dublin and London exchanges, are likely to continue to be among the oscillating variety.
