Challenging prognosis for Elan need not be terminal

BUSINESS OPINION:IRISH DRUG developer Elan spent much of last week accusing the stock markets of jumping to conclusions in their assessment of announcements from the company on the efficacy of a proposed treatment for Alzheimer's and safety issues with its multiple sclerosis drug Tysabri.

They're quite right, but that's what markets do. Timing is everything for those looking to maximise profits or limit losses.

That is especially true in an area like biotechnology, where Elan operates. The rewards for success in discovering breakthrough treatments for intractable disease that affect substantial numbers of patients - like Alzheimer's disease, cancer and multiple sclerosis - are exponential, both for the companies themselves and their investors. But the flipside is that the loss of confidence when such drug programmes fail can be catastrophic.

There is also a certain herd mentality, which, combined with the growth of derivative instruments like contracts for difference and short-selling, tends to exacerbate trends. Modestly good news, such as the release of initial headline figures on the phase two bapineuzumab (AAB-001) trial released by Elan and its US partner Wyeth in mid-June, saw Elan shares add 20 per cent over the following weeks - a jump that was never justified in light of figures that, among other things, acknowledged that the trial had failed to meet its primary targets.

Equally, there seems little doubt that the 40 per cent collapse in the value of the company's shares following the release of detailed data on that same trial was overdone.

The same is true of the news on Friday that two more MS patients had contracted a generally fatal brain disease progressive multifocal leukoencephalopathy (PML) after spending more than a year on the company's Tysabri drug. There had been a certain market euphoria in recent weeks surrounding rising patient numbers on Tysabri - 31,800 at the end of June, according to Elan and its US partner Biogen Idec - and a growing belief that the drug might become a blockbuster treatment, achieving annual sales of more than $1 billion.

Amid the success of Tysabri, investors quickly forgot that the US regulator, the Food and Drug Administration (FDA), had expressly stated, in approving its return to the market in June 2006, that patients on Tysabri had as much as a one in 1,000 chance of developing PML - a risk it decided was acceptable at that time.

Patients using the drug are evaluated at three and six months after the first application and every six months after that. Doctors must also notify the company each time the drug is administered. Those restrictions are understood to have been important in the early diagnosis of the two most recent PML cases.

But, for all that, the bottom line was that investors felt the company was in trouble with its two most significant drug programmes. The precipitous decline in the share price should have come as little surprise.

Elan's partners, Wyeth and Biogen, have also paid a significant price for last week's perceived disappointments. If Elan's pain was worse, it was only because the company is seen in the market as a serial offender.

These are difficult times for Elan, but they need not be terminal. Despite the potentially fatal side-effects, the issue with Tysabri, ironically, is more straightforward.

The last time PML emerged, the drug came off the market and the company was plunged into crisis. These are the first occurrences since it returned two years ago. The market is understandably nervous as to how medical practitioners and, just as significantly, the FDA will react.

As of the weekend, there is no sign of the FDA pulling the plug. If Elan can persuade sufficient numbers of practitioners to continue prescribing, Tysabri has a potentially strong future. MS is a debilitating condition and Tysabri remains a therapy that has proved positive to those unresponsive to other drugs.

If Tysabri does survive this crisis, investors will be more confident of its potential to do so the next time PML emerges.

The Alzheimer's programme is more complicated, even if the side-effects that emerged in the phase two trial and scared the market are significantly less serious than PML. Elan concedes that the drug has shown no benefit in patients with a specific gene - ApoE4 - that is present in half the Alzheimer's population.

And by the time you take those patients and those on a placebo out of the phase two trial - bearing in mind that there were four different dosage levels in the exercise - there was always going to be doubt about the real statistical significance of any positive finding.

Elan and Wyeth point to the complicated nature of the disease and note that the short time available for presenting detailed trial results did not do justice to the full findings - even before the markets jumped on certain negative buzzwords.

The company and the man leading the trials, chief scientific officer Dr Dale Shenk, are notably upbeat about the effects of bapineuzumab on people not carrying the ApoE4 gene - almost half the Alzheimer's population - and they say they have not given up on ApoE4 carriers.

Dr Shenk has been involved in Elan's approach to the disease since his time at Athena Neurosciences, which Elan bought in 1996. The phase three trials into the drug, now under way, have been designed in accordance with the phase two findings - with the concentration on non-ApoE4 carriers.

Until some hard evidence on efficacy and safety emerges from those trials over the next couple of years, investors are likely to remain somewhat sceptical of the market prospects of the drug.

Back in June, I noted that drug development remained a high-risk business and there is no certainty that the Alzheimer's programme will deliver. Even if it does, Elan faces intense competition from rivals chasing the same market. That remains the case.