Elan Corp. to Be a Blockbuster Biotech Company in 2008?

Last week, Biogen Idec Inc. (BIIB) and partner Elan Corp. (ELN) forecasted that by 2010 it would have 100,000 patients taking Tysabri, which costs $29,400 per year. Biogen believes that sales growth in 2008 will be mostly coming from Tysarbi.

They also said recently that as of the end of September there have been no new reported cases of a potentially deadly brain infection in patients taking their multiple sclerosis drug Tysabri. Tysabri was taken off the market in 2005 after being linked with three cases of progressive multifocal leukoencephalopathy, or PML. The U.S. Food and Drug Administration allowed the drug back in July 2006 because it is effective and patients asked for it to be returned. In October, the number of patients on Tysabri was reported to be 17,000. As of late December, that number rose to 21,000.

Elan is seeking FDA approval for Tysabri as a treatment for Crohn’s disease on January 13, 2008. Crohn’s disease affects an estimated 500,000 people in the US. It is a chronic inflammatory bowl disease that causes inflammation or swelling of the digestive tract.

Currently, Johnson and Johnson’s Remicade and Abbott Laboratories’ Humira are the only biologics available to treat Crohn’s disease. Back in August, an FDA advisory panel voted 12-3 to recommend approving Elan’s Tysabri for treatment of Crohn’s disease. If the agency follows the recommendation of the advisory panel, which isn’t always a given, it would no doubt assist the companies in obtaining their goals. The recent safety data would also help to ease doctors concerns in prescribing Tysabri going forward.

In a related note, Carl Icahn had been actively courting prospective buyers for Biogen Idec. However, if Biogen is ever acquired, Elan would have the option to acquire 100% rights to Tysabri. This would be a very positive development for Elan shareholders, but seems to be moot at this point after the failure to sell BIIB. If Tysarbi was excluded from BIIB’s pipeline, it would remove BIIB’s major growth driver going forward especailly in 2008.

Now the real blockbuster within ELN lies in their experimental Alzheimer’s drug.

Elan, working in conjunction with Wyeth, is entering late-stage tests for its experimental treatment bapineuzumab, also known as AAB-001 for the treatment of Alzheimer’s disease. Elan is expected to release data from this phase II study during the middle of 2008. Elan’s scientific approach to treating Alzheimer’s disease [AD] focuses on the beta amyloid hypothesis, as it is believed that blocking the generation of beta amyloid in the brain or enhancing the clearance of beta amyloid will result in the successful treatment of AD patients.

The beta amyloid hypothesis asserts that beta amyloid is involved in the formation of the plaque that causes the disruption of thinking that is the hallmark of AD. This hypothesis is also the leading approach to development of therapeutic treatments that may fundamentally alter the progression of the disease, and evidence suggests that clearance of beta amyloid may lead to improved function in AD patients. Beta amyloid immunotherapy is the treatment of Alzheimer’s disease by inducing or enhancing the body’s own immune response in order to clear beta amyloid from the brain. Active immunization stimulates the body’s own immune system to manufacture anti beta amyloid antibodies that may attach to amyloid and clear it from the brain.

This, in turn, appears to reduce the build up of beta amyloid in the brain tissue of patients. Through a monoclonal antibody approach (passive immunization), synthetically engineered antibodies directed at beta amyloid are injected into the bloodstream and are thought to help reverse beta amyloid accumulation. So far the tests have been positive in animals.

Corey Davis, analyst for Natixis Bleichroeder projects that AAB-001 will quickly reach blockbuster levels after its 2010 market debut and will hit nearly $10 billion in annual sales within five years of its launch, the proceeds of which would be split between Elan and Wyeth. Davis believes that AAB-001 could exceed $14 billion in annual sales by 2017. This would break the record set by Pfizer’s Lipitor, the top-selling drug of all time, which fell just short of $13 billion in sales in 2006. Davis based his AAB-001 projections on an annual minimum price of $25,000 for the drug as well as heavy penetration in an expanding Alzheimer’s population, assuming that “this drug can truly alter the progression of the disease.”

But UBS analyst Roopesh Patel urges caution in assigning such high expectations for AAB-001. In November, Patel said that AAB-001 could achieve $20 billion in annual sales within five years of its launch, but the chances are very slim. Patel described Alzheimer’s research as a high-risk venture “littered with failed compounds.” It remains to be seen whether there will ever be an actual cure for Alzheimer’s. Davis also said that any drug that “melts” the amyloid plaque in early-stage Alzheimer’s patients “would amount to a cure, because it would halt the disease before it starts.” According to him, early studies with AAB-001 demonstrated the ability to melt amyloid plaque in animals, but results of later-stage human studies have not yet been made public. This could be early proof of the drug’s effective biological mechanism and target theory.

With many promising catalysts going forward and strong institutional support (SAC Capital, Tudor Investments Corp), I feel confident that Elan can achieve its goals. SAC which is run by one of the best traders ever, Steve Cohen owned UTHR when it was our favorite late last year which gave returns on our options of 300%+ plus additional trending baggers after the data results. Not to mention how positive it would be for those who are aging and deserve a better life during their golden years. But this stock shouldn’t be bought by the squeamish, as it should be one of the more volatile names in the biotech space. Investors should review the data independently and objectively. As an options trader or investor, one possible strategy would be to buy leap calender spreads with front months all the way to the event lowering your cost basis.

As a bigger risk taker, I am strategizing about trying to time the data by buying the July/Aug options and strangle the event with puts but overweight the calls due to previous scientific evidence and initiate my strangle possibly before June. Another strategy to implement would be to buy the stock and sell the calls monthly going into the event to lower your cost average.

On a competition note and alert, Myriad Genetics (MYGN) is experimenting with Flurizan which also targets the amyloid plaque. They are considered the front runner in this disease space due to their lead time with completion of their Phase III by March 2008 and the data release of top-line results in late 2nd quarter, around mid 2008. The study is the largest study ever for Alzheimer’s and has nearly 1,700 patients. Since this trial is a Phase III, MYGN can file for FDA approval on positive results and a very low P-value (less than 0.001) on the results, which indicates that the data is statistically significant. Ian Sanderson, analyst for Cowen and Co., said that Flurizan will probably be the first among the next generation of Alzheimer’s drugs to go before the FDA. He believes it could reach $600 million in annual sales by 2012 and would eventually peak at $1.2 billion.

It could prove to be very profitable to strangle the events on both companies going into their Alzheimer’s data release timeframes. The moves after the data will be very volatile (could be easily over 10+, 20+ points if successful or down 10+ points if it disappoints).

For BIIB and ELN’s Tysarbi FDA decision date this Sunday Jan. 13, 2008, I will be analyzing and debating with other members in Wang’s Happy Trading forum whether or not to initiate a strangle on ELN going into the weekend. Market sentiment and technical data going into the close Friday could affect the decision to implement this strategy, and if so, which strikes and at what price, with what type of weighting, will be determined during the day and possibly near the close. I do feel that the approval is partly priced in due to the low IV premium in the front month options and BIIB’s recenttly upped 2008 guidance for Tysarbi, so approval could be a non event for the stock price but disapproval would put pressure on the shares. This would mean that strangling the event could have a higher risk than expected and should be passed on.

Disclosure: Author is long ELN.