Elan Pharmaceuticals Can Get Big Boost With Crohn's Drug

| About: Elan Corporation, (ELN)

One of the first stocks I wrote about, in March 2006, was Elan Pharmaceuticals (NYSE:ELN), when it was trading at $12.68. After a recent run-up (which was predicted very nicely by the chart!) I wrote on May 21 that I had sold (at $18.73), but that I would happily get back in at some point in the future.

I missed the recent peak of just over $20 on June 1, but that’s OK. The catalyst for the recent run-up was an announcement that ELN will begin a Phase 3 clinical trial (with Wyeth (WYE)) on its AAB-001 antibody to treat mild to moderate Alzheimer's disease earlier than expected.
On May 29 Elan announced the FDA would convene an advisory panel to make recommendations about application of Tysabri to treat Crohn’s disease on July 31st. The Market seems to have been little impressed by this, as the stock closed Friday (June 8) only a penny higher than on the 29th.

On June 7 Abbott (NYSE:ABT) announced that its arthritis drug Humira had been granted approval in Europe for the treatment of Crohn’s disease. The FDA had approved Humira to treat moderate to severe Crohn’s disease in February. Remicade is also used to treat Crohn’s.

Crohn’s disease afflicts an estimated half million people in the U.S., and is a particularly unpleasant disease. There is currently no cure. At any given time half of patients with Crohn’s do not experience symptoms. Typically by ten years after diagnosis, 24% of patients have had a colectomy.

Results of a pair of clinical trials evaluating the efficacy and safety of Tysabri for Crohn’s disease were published in The New England Journal of Medicine in 2005 (2005, 353, 1912–1925). The study was done in two parts. In the first study, 905 patients received either placebo or Tysabri for ten weeks. In this trial the Tysabri groups had only a marginally better response rate than did the placebo group. The second trial was composed of the 339 patients who had responded to Tysabri (as 181 of the 905 patients received placebo, this amounts to 47%). In this trial, 61% of patients experienced a sustained response (as compared to 28% on the placebo) and 44% experienced remission (26% placebo). While these responses aren’t high, they are significant for patients suffering a debilitating incurable disease.

Another study on Tysabri as a treatment for Crohn’s (NEJM, 2006, 354, 899–910), using a different endpoint, found that responders experienced 92% fewer lesions of the GI tract than did those in the placebo group over two years.

In a clinical study on application of Humira to Crohn’s (Gastroenterology, 2007, 132, 52–65), 50% of patients receiving the drug responded. In this case, after 26 weeks 47% of responders receiving the drug weekly experienced remission, as did 40% of patients receiving a dose every second week. Only 17% of patients on the placebo were in remission. After 56 weeks, 36% receiving the drug weekly were in remission as were 41% of those receiving biweekly. At this point 12% of placebo patients were in remission. Statistically there was no difference in response in the weekly versus biweekly administration. Tysabri was administered every four weeks.
Looking at differences in safety, with both drugs roughly twice as many patients on placebo withdrew due to serious adverse events as did patients on the drug. The mechanism of the two drugs is different: Humira binds to TNF while Tysabri is an integrin binder.

So, from an efficacy and safety point of view I am confident the FDA advisory panel will recommend Tysabri for treatment of Crohn’s disease. The 600 lb gorilla in the room, however, will be the reason for the withdrawal of Tysabri from the market (it is prescribed for MS) in 2005: out of 3300 patients in clinical studies of Tysabri three cases of progressive multifocal leukoencephalopathy [PML] occurred. Now clearly the 1 in 1100 risk is small, but the downside (death) is severe. It should be noted no incidences of PML have been reported since, and the initial deaths were quite likely due to interactions with another drug. While this remains a concern, the FDA permission of the drug's reintroduction suggests the benefits outweigh the risk.

In the end an FDA panel unanimously recommended the drug be put back on the market to treat MS. Tysabri was reintroduced in July 2006 and, while sales were initially slow to pick up, based on SEC filings they are increasing quarter over quarter dramatically.

Tysabri is currently on the market to treat MS. About 400,000 people in the U.S. have MS, so greater than doubling the potential market size is substantial. In addition, use of Tysabri to treat a second indication may prompt more MS patients to take the drug, as they may view it as safer.

My take is the FDA advisory panel will recommend approval of Tysabri to treat Crohn’s, which will give a boost to the share price. With the uncertainty in the market this past week (the VIX closed at 14.8 on Friday), I think ELN will be a good stock to get into once the VIX gets closer to 12 or 13.

Another possibility here is to buy call options. Time decay of options increases dramatically as expiry approaches. As July 31 is getting close to expiry of August options, buying longer term options will minimize losses due to time decay. JAN 08 15 ELN calls are currently trading at an implied volatility [IV] of only 58%. For a company anticipating an event that could double the market size of its major product, this seems low to me. My guess is that this IV will increase significantly as the end of July approaches, which will boost the call price. To be clear, trading options is much riskier than trading stock and should not be done without an understanding of options.

ELN 1-yr chart:
eln chart

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