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After drug's collapse, all eyes on Elan

by Ben Fidler | Published August 8, 2012 at 9:08 AM

One of the pharmaceutical sector's most closely watched Alzheimer's disease candidates has failed in clinical trials, not only marking a research setback, but also stirring rumblings that one of its developers, Elan Corp. plc, may now become a takeout target.

Late Monday, bapineuzumab, an intravenous Alzheimer's compound being developed by Dublin-based Elan, Pfizer Inc. and Johnson & Johnson, failed to improve cognitive and function performance compared to a placebo, failing the second of four Phase 3 trials. With bapineuzumab now striking out on two successive major clinical studies, New York-based Pfizer and New Brunswick, N.J.-based J&J have announced that they are scrapping development of the drug, and discontinuing the remaining studies.

While news of the drug's failure isn't necessarily a huge surprise -- bapineuzumab was always treated as a high-risk/high-reward proposition given the numerous failed Alzheimer's compounds, and as such, many analysts shied away from modeling sales forecasts for it -- Elan is still taking a big hit, even though Pfizer owns the biggest stake in the drug at 50%. That's because at this point, Elan is essentially a one-drug entity, compared with Pfizer and J&J, which are each mammoth drugmakers with massive portfolios. Elan, which focuses on neurodegenerative disorders and autoimmune diseases, has a market capitalization of roughly $6.23 billion, which it largely owes it to blockbuster multiple sclerosis treatment Tysabri.

Initially, Elan's stock tumbled far more than Pfizer's and J&J's on Tuesday, but began to recover somewhat as takeover speculation began to heat up. In midafternoon trading, Elan shares were down 25 cents to $11, a loss of 2.25%. They had been as low as $9.84 earlier but closed at $11.14. Johnson & Johnson traded down 0.75%, while Pfizer shares fell 1.75%. With Elan's stock price hitting its lowest levels since December, buzz has begun circulating that the company is now a ripe takeout target for Biogen Idec Inc., the Cambridge, Mass.-based collaborative partner on Tysabri. The drug brought in $1.51 billion in worldwide revenue in 2011 and now accounts for all of Elan's revenue and cash flow following the 2011 divestiture of the company's drug formulation business to Alkermes plc, also of Dublin.

Drug collaborations often lead to M&A, because they allow drugmakers to bring the economics of a drug under one umbrella. Most recently, for example, the U.K.'s GlaxoSmithKline plc bought out its longtime business partner Human Genome Sciences Inc., giving it full rights to three separate drug programs that it had been splitting with the Rockville, Md.-based biotech.

Analysts generally believe that Biogen and Elan are going to follow the same path. Like GSK with HGSI, Biogen appears to be Elan's natural suitor. The biotech giant could theoretically take over Elan, jumping in during a trough in share price, to claim full rights of Tysabri and the rest of the company's early-stage pipeline, which includes compounds for Chron's disease, ulcerative colitis and another, preclinical compound to treat Alzheimer's.

"I think [Elan] has a strategy in place, which is probably to see if Biogen wants to consolidate the Tysabri asset," speculated Ian Sanderson, an analyst at Cowen and Co. LLC.

Sanderson noted that Elan's longtime CEO, Kelly Martin, was going to step down in March, but extended his stay to run the company until the bapineuzumab data was released. And on a conference call Tuesday morning, Elan, when asked what Martin's plans were now, indicated that "the board views him as the best person to deliver shareholder value in the near term."

"[That] says to me that they're looking to probably do some sort of transaction here," Sanderson said.

Should Elan head in that direction, it could make for an interesting game between Biogen and J&J, which owns 18.4% of Elan's stock and has poured $1.9 billion into bapineuzumab's development. Sanderson pointed out that Biogen has the right of first refusal on Elan's ownership of Tysabri should a third-party emerge, meaning J&J could potentially put in a bid for Elan that Biogen could top simply to prevent J&J from competing in multiple sclerosis.

"It's a nice way for J&J to realize a quick return," he said.

Though Elan is seen as Biogen's asset to lose, Sanderson pegged Switzerland's Novartis AG and Israel's Teva Pharmaceutical Industries Ltd. as potential suitors given their presence in multiple sclerosis.

"If a third party comes in and puts some pressure on Biogen, then I could see [a] $13 to $14 per share [buyout price]," he said, estimating that Elan could be worth $7 billion to $8 billion in a takeover.

That isn't to say that analysts believe a transaction will take place right away. Despite the potential share price, significant synergies between Elan and Biogen and $2.5 billion in attractive, Irish-domiciled net operating loss carryforwards in a takeover scenario, Leerink Swann LLC's Marko Kozul doesn't believe M&A activity is likely to materialize between the two "at least" until the second half of 2013.

"We believe that if interested, [Biogen] may wait for a more attractive M&A entry point," Kozul wrote in a research note.

Kozul thinks Biogen is likely to wait because it wants to see how the market will react to BG-12, a new multiple sclerosis treatment it is developing that may be approved next year. BG-12 is an oral treatment, whereas Tysabri is administered through an IV infusion. But though the compound appears to be a long-term threat to Tysabri, Sanderson said that it will more likely impact early-stage multiple sclerosis agents such as Teva's Copaxone. Tysabri is typically given to patients with a much more active form of the disease.

Meanwhile, bapineuzumab's failure has placed a significant dent in the future of Alzheimer's treatments. Along with Eli Lilly and Co.'s solanezumab, bapineuzumab represented the pharma world's latest shot at one of its holy grails -- a drug that, if successful, would have been a surefire megablockbuster. With bapineuzumab now shelved, however, expectations have been tempered even further for Eli Lilly's drug. Indianapolis-based Eli Lilly will soon release Phase 3 data for solanezumab.

"It would be very surprising at this point if ... solanezumab is successful in its [Phase 3's]," wrote Jefferies & Co. analyst Corey Davis in a research note. "And if we're right, we are still many many years away from any new approved drug for Alzheimer's patients, unfortunately."

Eli Lilly's stock slipped by 2.2% during trading Tuesday to close at $42.75.

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After drug's collapse, all eyes on Elan

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Ben Fidler

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