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Vikram Parsani

ELN AT A GLANCE

P/E ► -39.5   EV/EBITDA ► -52.5   ROA ► 3.7% AVG Debt to Equity ► -5.51   Current Ratio ► 2.04 AVG Interest Coverage Ratio ► -0.974 AVG

 

 

 

 

 

 

Elan Corporation (NYSE:ELN) is a biotechnology company that makes drugs to treat Alzheimer’s disease, multiple sclerosis, Crohn’s disease and severe bacterial infections.^[1] In 2007, it had revenues of $516 million, up 3.8% from $497 million in 2006.^[2] However, in the same year, it made a net loss of $666 million owing to write downs of its intangible assets and restructuring costs from consolidating its operations in San Francisco.^[2]

Elan Corporation's two business segments are: a) Biopharmaceuticals, which makes treatments for various diseases; and b) Elan Drug Technologies (EDT), which makes systems to deliver drugs to the body.^[1] While Biopharmaceuticals generated 44.6% of the company's revenues in 2007, the segment only has four products, two of which lost basic U.S. patent protection between 2005 and 2008.^[3] The segment's future, thus, hinges on whether it can develop pipeline drugs like Tysabri (a treatment for multiple sclerosis) and Bapineuzumab (a treatment for Alzheimer's disease currently in Phase 3 clinical trials).^[4] Unfortunately, both treatments have been plagued by the emergence of potentially dangerous side effects in clinical trials patients.^[4]

In August 2008, Elan decided to spin off EDT and focus on its Biopharmaceuticals segment.^[5] The company is currently accepting first round bids for EDT and hopes to successfully complete the sale of this unit for as much as $1.4 billion.^[5] Following a successful sale of EDT, Elan Corporation will have to replace the 55.4% of its total revenues that were generated by this segment in 2007.

Company Overview

While Elan Corporation increased its revenues from $367 million in 2004 to $516 million in 2007, it made a net loss in every one of these years except for 2005.^[2] These losses cannot be attributed to one single factor, but rather a variety of factors each year, including the company's early redemption of short-term debt and loss of basic U.S. patent protection on key drugs.^[2] Given that its main revenue generators are now susceptible to generic competition and that it currently has only one product in late-stage clinical trials, the company has admitted that its future depends on whether it can successfully develop and commercialize key pipeline drugs.^[4]

Financial Analysis

Total Revenues, Net Income and Profit Margin in 2004, 2005, 2006 and 2007 for Elan Corporation.

In 2007, Elan Corporation had revenues of $516 million, up 3.8% from $497 million in 2006.^[2] However, it still made a net loss of $666 million resulting in a net profit margin of -129%.^[2] This net loss was attributed primarily to one-time losses and write downs, including: i) a $198 million impairment charge on intangible assets of Prialt due to lowered sales projections; ii) a $76.2 million impairment charge on intangible and other assets of Maxipime and Azactam due to the launch of generic formulations; iii) $32.4 million in severance and restructuring costs arising from the consolidation of the company's West Coast operations in San Francisco; and iv) $7.7 million in debt retirement costs due to the early redemption of Athena Notes.^[2]

In 2006, Elan Corporation's revenues were up 16.4% from $427 million in 2005.^[2] However, it still made a net loss of $286 million resulting in a net profit margin of -67.0%.^[2] This net loss was incurred after accounting for a number of extraordinary gains and losses, including: i) a $49.8 million gain from arbitration proceedings against King Pharmaceuticals; ii) a $7.4 million gain on the sale of Prialt's European rights to Eisai Co. Ltd.; ii) $7.5 million in severance and restructuring costs arising from the consolidation of the company's West Coast operations in San Francisco; and iv) $11.5 million in debt retirement costs due to the early redemption of Athena Notes.^[2]

Business Segments

Elan Corporation's two business segments are Biopharmaceuticals and EDT.^[1]

• Biopharmaceuticals (44.6% of total revenues and 114% of operating losses): The Biopharmaceuticals segment develops and commercializes of treatments for Alzheimer’s disease, Parkinson’s disease, multiple sclerosis, Crohn’s disease, severe chronic pain and infectious diseases.^[1] In 2007, Biopharmaceuticals had revenues of $230 million ($223 million in product revenue and $7.3 million in contract revenue) and an operating loss of $615 million.^[2] The segment currently has a total of 11 products in clinical development and 6 products that are marketed by either the company or its licensees. Its main products are Tysabri, Maxipime and Azactam (treatments for severe bacterial infection), Prialt (a treatment for sever chronic pain) and Bapineuzumab.^[1]

• EDT (55.4% of total revenues and -14.2% of operating losses): The EDT segment develops systems to more efficiently deliver drugs to the body and licenses these systems to other pharmaceutical companies.^[1] In 2007, EDT had revenues of $286 million ($269 million in product revenue and $17 million in contract revenue) and an operating profit of $76.3 million.^[2] The segment currently has a total 17 products in clinical development and 22 products that are marketed by its licensees. Its main products are TriCor (in partnership with Abbott Laboratories), Ritalin (in partnership with Novartis AG), Rapamune (in partnership with Wyeth) and Emend (in partnership with Merck).^[1]

Revenues by Business Segment and Geographic Region in 2007 for Elan Corporation.

Biopharmaceuticals and Elan Drug Technologies Revenue Breakdown in 2007 for Elan Corporation.

Geographic Regions

In 2007, revenues from customers in the United States amounted to $412 million or 79.9% of total revenues.^[6] The company also had revenues from customers in Ireland (11.9%) and the Rest of the World (8.2%).^[6]

Key Trends and Forces

Loss of patent protection for Maxipime and Azactam spurs generic competition

The basic U.S. patent on Elan Corporation’s second highest revenue generator, Maxipime, expired in March 2007.^[7] A few months later, in June 2007, the first generic formulation of this drug was approved for distribution by the Food and Drug Administration.^[7] Owing to generic competition, revenues from Maxipime dropped 23.4% to $123 million in 2007 from $160 million in 2006.^[7] The company expects that generic competition will adversely affect future revenues from Maxipime and, hence, it no longer promotes this drug.^[7]

In addition, the company’s third highest revenue generator, Azactam, lost basic U.S. patent protection in October 2005.^[7] However, owing to increased demand, revenues from Azactam rose 10.8% to $86.3 million in 2007 from $77.9 million in 2006.^[7] Although no generic formulation of the drug has been approved to date, the company expects that generic competition will adversely affect future revenues from Azactam and, hence, it no longer promotes this drug.^[7]

With generic competition picking off Elan Corporation's second and third highest revenue generators, the company's biopharmaceuticals portfolio is looking increasingly depleted.

Research and development efforts result in one product entering late-stage clinical trials

In December 2007, Bapineuzumab, which Elan Corporation markets in collaboration with Wyeth, became the company's only biopharmaceuticals product to enter Phase 3 clinical trials.^[8] A few months earlier, in July 2007, the company had reported mixed results in Phase 2 clinical trials of the drug when twelve patients administered with Bapineuzumab developed vasogenic edema, a build-up of fluid in the brain.^[9]

Aside from Bapineuzumab, Elan Corporation’s biopharmaceuticals pipeline consists of early-stage, unproven products, including three products in Phase 2 clinical trials, two in Phase 1 clinical trials, two in the preclinical stage and three in the discovery stage.^[3] Given that two of Elan Corporation's main revenue generators, Maxipime and Azactam, recently lost basic U.S. patent protection, the company's future could be affected if it fails to successfully develop and commercialize key pipeline drugs like Bapineuzumab and Tysabri.

Rare and lethal side effect continues to adversely affect the reputation of Tysabri

With only one product in late-stage clinical trials and the company's main revenue generators facing generic competition, the successful commercialization of Tysabri is seen as key to Elan Corporation's future. Tysabri was approved for distribution by the Food and Drug Administration in November 2004 after the company agreed to continue clinical trials of the drug for another year.^[10] However, in February 2005, it was withdrawn and shares in the company plummeted 68% after two patients developed progressive multifocal leukoencephalopathy (PML), a viral infection of the brain.^[10] Later, in March 2005, the company’s shares fell 56% after a third case of Tysabri-linked PML emerged.^[10]

In June 2006, following the instatement of a new risk-screening process, the Food and Drug Administration approved the reintroduction of Tysabri and, in July 2006, distribution of the drug was restarted across the United States and the Rest of the World.^[10] In 2007, total revenues from Tysabri, which Elan Corporation markets in collaboration with Biogen Idec, amounted to $343 million ($217 million from the United States and $126 million from the European Union).^[10] Furthermore, Tysabri's dosing regimen of one injection per month resulted in a 68% reduction in clinical relapses as compared to 33% for Merck’s Rebif and Teva Pharmaceutical’s Copaxone, both of which have dosing regimens of four to twelve injections per month.^[10]

Despite this success, in July 2008, the company reported two new cases of PML in Tysabri patients.^[11] The discovery of these two cases suggests that prolonged exposure to the drug could increase the risk of a patient developing PML.^[11]

Safety concerns over key drugs compel Elan Corporation to seek EDT sale

In August 2008, following renewed safety concerns related to Tysabri and Bapineuzumab, Elan Corporation decided to spin off EDT so as to leave the company more focused on its Biopharmaceuticals segment.^[5] EDT lists ten out of the world's top twelve pharmaceutical companies among its clients, including Merck & Co., Wyeth and Abbott Laboratories. The company is currently accepting first round bids for EDT and hopes to successfully complete the sale of this unit for as much as $1.4 billion.^[5] Following a successful sale of EDT, Elan Corporation will have to replace the 55.4% of its total revenues that were generated by this segment in 2007.

Elan Corporation's dependence on collaborators like Biogen Idec and Wyeth

In the development and commercialization of its treatments, Elan Corporation collaborates extensively with other pharmaceutical companies, many of which are its competitors.^[4] In fact, the company manufactures none of its four highest revenue generators under the biopharmaceuticals segment.^[4] In the case of Bapineuzumab, the company shares all of its research and development costs with Wyeth.^[4] In the case of Tysabri, Biogen Idec manufactures and distributes the drug in the European Union and the Rest of the World while Elan Corporation buys it from Biogen Idec and distributes it in the United States.^[4] Because the company shares both costs and revenues in all of these partnerships, it is bound by and susceptible to changes in the terms of each partnership agreement.

Competition

Biogen Idec makes drugs to treat autoimmune diseases, cancer and neurological diseases. In 2007, it had revenues of $3.2 billion, a net income of $638 million and a net profit margin of 20.1%.^[12] The company's most important products are Avonex (a treatment for multiple sclerosis) and Rituxan (a treatment for non-Hodgkin's lymphoma), which together accounted for $2.8 billion in revenues or 87.8% of total revenues in the same year.^[12]

Merck & Co. is the seventh largest pharmaceutical company in the world by revenue. In 2007, it had revenues of $24.2 billion, a net income of $3.3 billion and a net profit margin of 13.5%.^[13] Although the company makes a wide range of drugs, the bulk of its revenues come from blockbuster products like Singulair (a treatment for asthma), Cozaar (a treatment for hypertension), Fosamax (a treatment for osteoperosis), Gardasil (a vaccine for the human papillomavirus) and ProQuad (a vaccine for measles, mumps, rubella and chicken pox), which together accounted for $13.5 billion in revenues or 55.8% of total revenues in the same year.^[13]

Novartis AG is the fifth largest pharmaceutical company in the world by revenue. In 2007, it had revenues of $38.9 billion, a net income of $11.9 billion and a net profit margin of 30.7%.^[14] Although the company makes a wide range of drugs, the bulk of its revenues come from blockbuster products like Diovan (a treatment for hypertension), Sandostatin (a treatment for acromegaly), Gleevec and Zometa (treatments for certain types of cancer), which together accounted for $10.4 billion in revenues or 27.3% of total revenues. In addition, Novartis AG is unique by virtue of its strong presence in the generic drugs market, which accounted for $7.2 billion in revenues or 18.8% of total revenues in the same year.^[14]

Teva Pharmaceutical Industries is the world's largest generic drugs manufacturer by revenue. In 2007, it had revenues of $9.4 billion, a net income of $2.0 billion and a net profit margin of 20.8%.^[15] The company also filed more patent challenges than any other generic drugs manufacturer in the same year. Successful challenges gave the company exclusive rights to make patented products, like Zocor and Pravachol (cholesterol-lowering treatments) along with Zoloft and Wellbutrin XL (treatments for depression), for a period of six months.^[15]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6} "Operating Review", Page 10, Annual Report (2007), Elan Corporation
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11} "Financial Review", Page 31, Annual Report (2007), Elan Corporation
3. ↑ ^{3.0 3.1} "Biopharmaceuticals - Products and Pipeline", Page 20, Annual Report (2007), Elan Corporation
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} "Risk Factors", Page 144, Annual Report (2007), Elan Corporation
5. ↑ ^{5.0 5.1 5.2 5.3} "Elan seeks fast sale of drug delivery unit-sources" (12 August 2008), Reuters
6. ↑ ^{6.0 6.1} "Geographical Segments", Page 96, Annual Report (2007), Elan Corporation
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6} "Maxipime and Azactam", Page 19, Annual Report (2007), Elan Corporation
8. ↑ "Alzheimer's Disease", Page 11, Annual Report (2007), Elan Corporation
9. ↑ "Elan and Wyeth Alzheimer drug results mixed, shares fall" (29 July 2008), Reuters
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5} "Development and Marketing Collaboration Agreement with Biogen Idec", Page 128, Annual Report (2007), Elan Corporation
11. ↑ ^{11.0 11.1} "Elan, Biogen dive on MS drug safety scare" (31 July 2008), Reuters
12. ↑ ^{12.0 12.1} "Selected Financial Data", Page 46, Annual Report (2007), Biogen Idec
13. ↑ ^{13.0 13.1} "Selected Financial Data", Page 49, Annual Report (2007), Merck & Co.
14. ↑ ^{14.0 14.1} "Selected Financial Data", Page 2, Annual Report (2007), Novartis AG
15. ↑ ^{15.0 15.1} "Selected Financial Data", Page 3, Annual Report (2007), Teva Pharmaceutical Industries