Keeping Its Elan

08/21/2008 12:00 am EST


Ken Kam

CEO, Marketocracy, Inc.

Ken Kam, editor of Marketocracy Marketscope, says his Marketocracy investors are sticking with the drug stock after recent setbacks.

On July 29th, Elan (NYSE: ELN) and their partner, Wyeth (NYSE: WYE) presented Phase II trial data on their drug Bapineuzumab at the International Conference on Alzheimer’s Disease in Chicago.

Two days later, on July 31st, Elan and Biogen Idec (Nasdaq: BIIB) announced that there where two new cases of progressive multifocal leukoencephalopathy (PML) with patients on their multiple sclerosis drug, Tysabri. In just three days, Elan dropped from $33.75 to close at $9.93, down over 70%.

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 it is understandable that the uncertainty of another PML case has led to the fear that Tysabri might be pulled from the market again. 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. Tysabri came back onto the market with Food and Drug Administration (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 1:1,000 risk of contracting PML and 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.

Since the risk of getting PML has been shown to be lower than MS patients have been told to expect, and the consequences are less severe, the all-important risk/reward trade-off that MS 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 Street analysts or journalists.

The primary question 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. 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.

The much more important data for Bapineuzumab will play out over the next two years, during the Phase III trials. Then we’ll know whether Elan has another blockbuster on its hands. At around $13, a high level of pessimism is already baked into the current price.

I wish I could have foreseen this and avoided it. But for those who can add at this price, I think it’s a good time to be buying.

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