ANALYSIS:They've been stung before so traders were quick to savage Elan, writes Dominic Coyle

IRISH DRUG group Elan may have a world class treatment for multiple sclerosis; it may even have prospects for a new approach to Alzheimer's disease but it also has a serious credibility problem in the eyes of the market.

Yesterday's initial 70 per cent cut in the company's share price in Dublin was savage, especially coming on top of what was widely seen as an excessively harsh market reaction to detailed data on a key Alzheimer's disease therapy trial on Tuesday.

The company has argued that, while not dismissing the significance of the two new cases of progressive multifocal encephalopathy (PML) that have now emerged, those two cases out of a patient population of close to 32,000 are significantly better than FDA risk projections of one PML case per 1,000 patients. And it is right.

However, the problem for the company is that it has trodden this path before, several times.

When Tysabri was first taken off the market, the shares tumbled 70 per cent overnight and there have also been landmark collapses over the past six years following failed trials of drugs for both Alzheimer's disease (in 2002) and chronic bowel disorder Crohn's disease (in 2003).

Worries about accounting practices in 2002, which also ended the tenure of chief executive Donal Geaney, also precipitated a prolonged drag on the shares.

Even before this latest shock, Elan stock was trading at levels well below those it hit between 2000 and early 2002.

But it did appear to have recovered some respect in the marketplace.

Chief executive Kelly Martin's tenure has been marked by understatement with the company generally working hard not to raise false expectations in what is, by its nature, a very volatile sector of the market.

But this week's setbacks make it clear that the market - be it active shareholders or short sellers - is not prepared to give the company any benefit of the doubt when it comes to adverse news.

Martin now faces two problems.

Most pressing is the need to reassure doctors not to turn their backs on what the company insists remains the most effective multiple sclerosis therapy on the market.

Confidence in the area of new medicines can be a fragile thing and there will be some nervousness surrounding the fact that the two latest cases are among the 14,000 people who have been on the drug for more than a year.

Secondly, Elan faces an uphill struggle in persuading the stock market of its value.

The Tysabri bounce of recent times has now been taken out of the price and, even in the absence of further adverse news, will only return slowly.

In its other main prospect, Alzheimer's therapies, sentiment received a setback earlier this week and it will be two years or more before solid news emerges from the phase III trials of its most advanced Alzheimer's joint venture with Wyeth."The market is not prepared to give the company any benefit of the doubt