For several weeks, a rotation has been underway in the U.S. market, with money moving away from some...
Wall Street Surprise?
01/13/2006 12:00 am EST
"We look for stocks that could double in two to three years," Ken Kam, who oversees the ground-breaking Marketocracy investor Web site. Although his top pick for 2006, Elan, has already doubled since he first recommended it, he still feels that could happen again.
"My top pick for 2006 is Elan (ELN NYSE). In my strategy, the secret to good stock research is to frame the right questions and then ask the people best qualified to answer them. At Marketocracy, our m100 members—those with the 100 best investment track records— help us pick stocks, identify the issues, and frame the right questions. Recently, I asked the broader Marketocracy community if they could help me understand the investment puzzle on Elan and Tysabri. I heard back from members that were physicians, multiple-sclerosis patients, nurses, lab technicians, industry executives, scientists, etc. Together, they made me comfortable making Elan the largest position in the portfolio."
"As background for those who are new to this story, Elan and its partner, Biogen Idec, had pulled their drug, Tysabri from the market last February after two patients treated with Tysabri in combination with Biogen’s Avonex in clinical trials contracted 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. Since then, an extensive review of nearly all of the patients showed no additional cases, and no cases of PML have turned up in patients who took Tysabri alone. In November, the FDA accepted their application and agreed to give Tysabri a priority review.
"There are 400,000 MS patients in the US and 300,000 are using competing drugs. But, those drugs have already failed to help another 100,000 who have stopped using them. For the 100,000 that are not on any MS medication right now the choice boils down to this: Tysabri can cut the risk of a relapse by 50%, but there is a 0.1% risk of contracting PML if using Tysabri in combination with other immuno-suppressive drugs. To put this risk in perspective, a recent study showed the mortality risk for aspirin is 0.2%. So an MS patient, who is comfortable with the risks of taking aspirin, ought to be comfortable with the risk of taking Tysabri. If 25% of this group starts to use Tysabri, they would generate over $600 million a year of sales, 50% of which would go to Elan.
"Citibank, Bank of America, and Merrill Lynch reiterated sell ratings on Elan recently. All three cited a belief that even if the FDA reapproves Tysabri in March, MS patients and doctors will not rush to use the drug until more is known about the risk of PML. But I think Wall Street is underestimating the potential by forgetting to look at the other 300,000 MS patients who are now using other drugs. One of the common side effects of competing drugs is constant flu-like symptoms. Tysabri does not seem to give MS patients these same flu-like symptoms.
"For this reason alone, even if Tysabri were no more effective than other drugs, some of the 300,000 MS patients may switch. MS patients who are on another drug may have to go off their meds for several months so their bodies will be clear of the old drug before they can start on Tysabri. So, one early indicator that Tysabri may be bigger than Wall Street expects is if you start to hear of MS patients going off their existing drugs.
"And, that is exactly what I am starting to hear about; MS patients are going off their meds—against their doctors advice— so that they will be able to start on Tysabri as soon as its available again. This tells me that Tysabri sales are going to ramp faster than Wall Street expects. If 10% of these patients switch to Tysabri, it would mean the potential US market may be more than twice as big as Wall Street expects. Good things happen to stocks that surprise Wall Street to the upside. If I'm right in this assessment, then Wall Street is in for a big upside surprise."
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