Croesus/An Investor's View:On Tuesday, Elan Pharmaceuticals reported its first-quarter figures, which were mixed relative to expectations.
Losses for the quarter were much higher, at $93 million (€68 million) compared with $33 million in the same quarter last year. Some of the deterioration was due to a once- off charge of $18.8 million on debt retirement. Revenues of $176 million were close to expectations and comfortably higher than the $134 million achieved during the first quarter last year.
Costs, however, were about 15 per cent higher than expectations, with selling, general and administrative costs of $90 million, and research and development expenditure of $60 million.
While Elan's multiple sclerosis (MS) drug, Tysabri, remains the focus of attention, the bulk of Elan's revenues continues to be generated by its existing products and contract manufacturing.
Maxipime and Azactam generated combined sales of $73.2 million, and revenue from contract manufacturing added a further $59 million during the quarter. Revenues from other drugs were marginal.
First-quarter revenues from Tysabri were significant at $48 million, compared with virtually zero revenues in same period in 2006, although the market expected a somewhat higher out-turn.
As of mid-April, about 9,100 patients were on Tysabri and it is expected there will be in the region of 400 newly treated patients a week over the remainder of the year, so revenue from Tysabri should grow rapidly for the remainder of this year and beyond.
On an annualised basis, Tysabri revenues should reach the $450-$500 million range this year with further strong growth to follow in 2008 and 2009. These forecasts assume that Tysabri will become the leading drug in the treatment of MS.
Elan has a small pipeline of drugs in development, of which the most important are for the treatment of Alzheimer's disease. These results held no news concerning this pipeline and, in any event, it will be some time before progress in this area has a significant impact on Elan's financial performance. The key to Elan's share price performance will remain the success or otherwise of the Tysabri roll-out.
Elan is very narrowly focused. Essentially, only two of the company's drugs are generating significant revenues - Maxipime and Azactam - with Maxipime facing competition as patents run out. Contract manufacturing provides a third revenue stream, but growth is dependent on Tysabri.
At its height, Elan became one of the largest companies on the Irish Stock Exchange as measured by market capitalisation, only to fall dramatically from grace more than once. The most recent tumble came when Tysabri had to be withdrawn in early 2005. The shares plummeted from more than $30 and eventually traded below $5.
Its successful relaunch has enabled the shares to steadily improve to the current price of $14, although they have underperformed in recent months. Croesus's view of Elan is that the potential upside does not compensate for the risk inherent in its business model.
The investment case rests entirely on Tysabri. It has overcome efficacy issues and it does seem set to become the leading MS treatment. However, analysts' forecasts of revenue growth are very aggressive.
Croesus believes there is a significant risk revenues will grow slower than anticipated and that marketing and other costs may grow faster than expected.
This happened in the first quarter and, if these trends continue, the eventual upside to Elan's share price will be far lower than market forecasts.
A less risky way of benefiting from Tysabri's potential upside is to invest in Biogen Idec, Elan's partner in Tysabri. It is far bigger than Elan, with a market cap above $16 billion compared with Elan's $7 billion.
