Biotech no longer a safe haven: Elan (ELN) falls on hard times

Posted Dec 12th 2008 3:01PM by Jamie Dlugosch
Filed under: Pfizer (PFE), Newsletters, Merck and Co (MRK), Stocks to Sell

It's been a tough year for many industries -- there's no denying it. Retailers of all stripes, oil companies, construction firms, financials, basic materials companies -- you name it, it's down.

So, are there any safe havens?

Historically, in times of economic uncertainty the pharmaceutical industry, along with consumer staples, is often the "go to" place where, at a minimum, you can count on a nice dividend yield to shield your portfolio from gigantic losses. Not anymore.

In this downturn even stalwarts such as Merck (NYSE: MRK) and Pfizer (NYSE: PFE) trade near their multi-year lows, despite offering generous yields.

What about biotechs? That sector has performed much better.

However, one of my favorite biotech names, Elan (NYSE: ELN), is struggling.

At the start of the year, ELN was looking strong. Its stock was up by 50% by mid-summer. Since then shares have collapsed and now trade in the mid-single digits.

I profiled the company on July 2, with one caveat: If late-stage testing of a new Alzheimer's drug called bapineuzumab doesn't go as planned, then ELN will trade lower.

About a month later, the company announced that the results of a Phase II clinical study showed the drug does safely treat the symptoms of Alzheimer's disease, but the results were not statistically significant, and the 234-person Phase II study would have to be broadened to a much larger Phase III study to be considered for FDA approval.

The shares fell 17% on the announcement, but that was just the start. As is often the case, when it rains, it pours.

A couple of days later, the shares tumbled an additional 70% over a two-day period after two cases of a generally incurable brain disease were reported in patients taking Elan's Tysabri, a multiple sclerosis (MS) drug.

As more patients reach the two-year stage of treatment with Tysabri, it is feared more cases of progressive multifocal leukoencephalopathy, or PML, could surface.

Currently, there are about 36,000 MS patients being treated with Tysabri. Elan and its partner on the drug, Biogen Idec (NASDAQ: BIIB), have a goal of 100,000 patients under treatment by the end of 2010.

Biogen Idec's CEO James Mullen told analysts in an Oct. 21 conference call that by early next year more will be known about Tysabri's safety and efficacy over long periods of time.

Any further cases of PML could have a substantial negative impact on share value.

In fact, the recently reported cases of PML have already scared some potential users away. The rate of new patients using Tysabri has slowed, and the number of patients discontinuing treatment since the cases surfaced has risen.

The Irish drugmaker also has other issues to deal with, including trying to placate irate shareholders who are steamed about some corporate governance issues and an approach to cost-cutting they consider to be lax. The shareholders contend that the use of private jets for a company not making money sends the wrong signal, as we have seen lately with the Detroit Big Three.

They also argue the company is too spread out and, thus, unable to react to problems quickly. Elan's CEO is based in New York, its CFO in Ireland, and research and corporate communications in San Francisco.

There is also the small matter of cash. The company currently has about $500 million, but if Tysabri sales plummet, cash could run out in two years. Elan CEO Kelly Martin wants to improve the balance sheet by selling the rights to some of the company's experimental products.

Elan did try to sell off its technology business earlier this year, but the credit crisis put an end to that, and now a sale is not expected for at least a year. It's tough out there for companies not making a profit.

So, what do you do now?

If you own ELN, I'd continue to hold tight, but I would not be a new buyer at these levels. There is simply too much uncertainty.

Jamie Dlugosch is a contributor to InvestorPlace.com.

Tags: big pharma, BigPharma, BIIB, biogen idec, BiogenIdec, biotech, biotech stocks, biotechnology, BiotechStocks, Elan, ELN, inthenews, pharmaceutical stocks, pharmaceuticals, pharmaceuticalstocks