Elan's shares have yet to recover all the ground they lost since their first major collapse in 2002, writes Dominic Coyle

INVESTORS IN Irish drug firm Elan could be forgiven for casting a somewhat sceptical eye at news this week that the group's share price had hit a five-year high following a series of positive announcements for the stock.

Better-than-expected headline figures from phase II clinical trials of a therapy for Alzheimer's disease that Elan is developing in association with US biotech giant Wyeth have seen the shares nudge $30 - a rise of 50 per cent in the past three months. And, despite the risks inherent in human drug development, analysts expect further gains in the share price over the rest of the year.

Elan is no stranger to false dawns and, even at this week's elevated levels, the company's shares have yet to recover all the ground they lost ahead of their first major collapse in 2002.

Alzheimer's disease has become something of a holy grail for the pharmaceutical industry, with as many as five million Alzheimer's patients in the US alone and an estimated 26 million worldwide.

More significantly, as the baby-boomer generation ages and modern medicine succeeds in keeping people alive for longer, scientists say that as much as half the population over the age of 85 will suffer from Alzheimer's.

Elan's pursuit with Wyeth and others of an effective treatment for the disease - and for other serious ailments such as multiple sclerosis - has seen its share price endure a rollercoaster ride, particularly over the past seven years.

To make matters worse, several of the share-price collapses have occurred just as the company has gained or regained credibility on the stock market.

Elan started life in 1969 as a drug-delivery business established by Don Panoz to facilitate the development of the technology behind the nicotine patch.

But it was during the stewardship of accountant Donal Geaney that the company was transformed. Geaney joined from KPMG in 1987 and, by 1995, he had become chief executive.

In March 1996, Geaney acquired a small Californian biotech company called Athena Neurosciences in an all-stock deal. Crucially, it was research being undertaken by Athena that provided the starting point for both the multiple sclerosis (MS) and Alzheimer's programmes on which Elan has since built its name.

However, for its shareholders, that path has been anything but smooth.

In January 2002, Elan had to stop a clinical trial for an Alzheimer's drug on which it and the market had pinned great hopes after signs of inflammation of the brain in some patients.

The shares had been falling back in line with the rest of the market in the wake of the bursting of the dotcom bubble, descending from from an all-time high of $65.

The adverse news knocked 14 per cent off the stock in one day and the shares continued to drift over the following fortnight.

By the end of January, they were down by 33 per cent since the Alzheimer's trial had been pulled.

Bad as that was, much worse was to come. On January 30th, 2002, the Wall Street Journal published an extensive piece raising questions about the accounting practices at Elan.

It wasn't the first time Elan's "aggressive" accounting had been queried. In 1999, the US regulator, the Securities and Exchange Commission (SEC), had raised a series of issues about Elan's numbers, especially in the area of research and development, where the company operated myriad joint ventures.

But by 2002, in the wake of the failed Alzheimer's trial and, more significantly, the collapse of US utilities giant Enron on the back of accounting irregularities, the market's reaction was severe.

Overnight, the value of Elan stock more than halved to $14.85. Geaney and his executive team tried to work through the crisis but investor sentiment was shot. By the time he resigned in the second week of July, the shares were trading at less than $2 - $63 below the level of just one year earlier.

Non-executive director Garo Armen stepped in as executive chairman and, with a new senior team, set about restructuring the business. Armen realised early on that any future the company had rested on a drug called Antegren, a prospective treatment for MS and, in the longer term, the group's Alzheimer's programme. Resources were concentrated on Antegren.

In early 2003, Armen hired Merrill Lynch banker Kelly Martin, a man with a track record in turning around troubled companies, to lead the group. Just six months later, more bad news emerged from a clinical trial - this time on use of MS drug Antegren as a treatment for the chronic bowel disorder, Crohn's disease.

Crohn's was always a secondary target for Antegren but, with investors scarred by previous adversity at Elan, the shares were hit hard, dropping more than 30 per cent in just two sessions.

In January 2004 the company and its US partner, Biogen, announced that results from clinical trials of Antegren as an MS treatment were sufficiently strong for them to file an application for approval of the drug a full year ahead of schedule.

The shares jumped by a third overnight and within a month had doubled to almost $20 - a level not seen in two years.

But within weeks of the drug, now called Tysabri, going on sale following US Food and Drug Administration (FDA) approval in November 2004, evidence of a potentially fatal brain disease had shown up in two patients. The drug was pulled from the market immediately.

Unsurprisingly, given Elan's history, the market was unforgiving and the shares fell overnight from $26.90 to $8. Among the losers was Patricia Martin, the Dublin-based widow of one of the earliest investors in Elan and the largest single retail investor in the business at that time. The value of her stock plummeted from €30.5 million to €7.25 million in a matter of hours.

But with fervent patient backing, Tysabri succeeded in getting the FDA to convene an advisory panel of experts in March 2006 to review the drug and, three months later, made history in becoming one of just a handful of drugs to return to market.

News in May 2007 that Elan was moving a series of Alzheimer's treatments to clinical trials saw shares jump again by a third to almost $20 - a level at which they were still trading in April 2008.

Expectations of good news on the Alzheimer's programme, together with strong sales of Tysabri, had already helped the stock advance in recent weeks.

The latest news on the success of one of those trials in treating a significant proportion of Alzheimer's patients sees its stock trading around the $30 level.

But long-term investors in Elan will be slow to count their chickens. Drug development remains 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.