Davy Research |
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Elan Corp
(ELN US)
Bapineuzumab fails and is discontinued; investment thesis reverts to Tysabri and balance sheet strength
07 August 2012
Jack Gorman
| Closing Price: | $11.25 | Rating: | Outperform | 30/06/09 |
FACTS: All Phase 3 trials on Bapineuzumab are to be discontinued as co-primary endpoints on the non carrier trial were not met.
ANALYSIS: Announcements from PFE, J&J and Elan last night confirmed that the Bapineuzumab non-carrier trial (Study 301) did not meet its co-primary endpoints. It has thus been decided by the joint steering committee that all other related studies on the IV formulation would be discontinued, including all follow-on extension studies.
No new safety concerns were identified in Study 301. The most commonly observed serious adverse events, with an incidence of at least 1% in the combined dosage groups, were pneumonia, ARIA-E (amyloid-related imaging abnormalities-edema), syncope, hip fracture and convulsion.
J&J indicated that it will incur a $300-400m charge in Q3 to reflect the write-down of in-process R&D. Elan will record a non-cash impairment charge of $117.3m on its equity method investment in Janssen AI in Q3, representing the full carrying value of its 49.9% proportionate share of the Janssen AI AIP assets.
A more detailed analysis of the first two Bapineuzumab trials will be provided at the late breaking session of the European Federation of Neurological Societies (EFNS) meeting in Stockholm, to be held on September 8th-11th.
DAVY VIEW: This is very disappointing news for patients, investors and the Alzheimer's research community.
The investment thesis for Elan now revolves around Tysabri given the earlier stage nature of its other development and discovery pipeline. As we outlined in our July 13th research note, our base case scenario sees Tysabri grow to $2.5bn by 2015 and $2.9bn by 2019, yielding a valuation of just over $10. This assumes patient numbers run close to 93,000 by 2015 from 68,000 currently. It also assumes a very modest ($300-400m) contribution from an indication in Secondary Progressive Multiple Sclerosis (SPMS). Taking a more bullish stance on Tysabri patient growth, and adding in significant growth from a SPMS indication from 2015/2016 onwards, could add several dollars to the product valuation.
For Elan, immediate P&L implication is primarily the Q3 write-off of $117m. The funding to Janssen AI (up to a maximum $200m) will continue, albeit one must presume that the quarterly burn rate will be a lot lower given that the vaccine and Bapineuzumab subQ are in mid-stage trials today.
Elan management has responded rapidly to adversity in the past; it is unlikely to be different this time around. What is different in this instance is the quality of the Tysabri asset, the cash that it generates for Elan and the existing net cash position on balance sheet (including the ALKS stake). These factors provide support in what will likely be a volatile day for the stock price.