Drug firm in difficult balancing act, while trying to win back investor confidence, writes Dick Ahlstrom, Science Editor

Elan has been in the wars this week as it came under severe pressure due to concerns about accounting practices and predicted revenues for 2002. The question is whether its current drug product development strategy can get the company back on track.

Elan will have to convince potential investors that its current product lines are good earners, that forthcoming products about to come onto the market will produce solid revenue and that its research efforts are generating promising new drugs for the future.

To simplify an enormously complex process, drug companies carry out a very difficult balancing act between existing sales and the cost of developing future products. They must maintain a steady sales income on existing drug lines, while enticing investors with the promise of a good "pipeline" of future products. It all comes down to good timing, with a ticking clock affecting these companies in a number of ways.

Cashflow to keep a company afloat comes from existing exclusive lines that are protected by patent. The very long lead time of a decade or more to bring a product to market, however, means that the 20-year protection afforded by a patent only leaves a few years of market exclusivity before the protection is lifted and cheaper drug copies appear.

"If [drug development\] takes half the time for the patent, that limits the amount of time available to make profits. They want a large amount of returns quickly," explains Prof Thomas J. Allen of the Sloan School of Management in the Massachusetts Institute of Technology (MIT) and co-director of MIT's Programme on the Pharmaceutical Industry (POPI).

A company cannot rest on its laurels and must keep promising that new products are in the pipeline, moving towards the market. If the market believes in the pipeline's content and the possibility of high returns, brokers will recommend a "buy" to their clients.

In particular, brokers and market analysts like to see the potential for "blockbuster" products, the kind of drug that can attract annual sales in the $1 billion (€1.15 billion) range. Pfizer's Viagra is a good example as is Elan's experimental drug against Alzheimer's disease, AN-1792.

"All of the drug companies search for what the pharmaceutical industry calls the blockbusters," says Prof Allen. "If you have an Alzheimer's drug, wow," he adds.

Such a product can easily push growth into double digits, an indicator taken by brokers that a company is doing well and is a target for investment.

The final part of the balancing act for drug companies is to ensure that no revenue gaps occur. These happen as sales of existing products weaken over time and before new products clear the pipeline to produce fresh sales.

"What a company needs is consistent income," explains Dr Sarah Stallings of MIT's POPI. A temporary revenue "drought" can occur she says if the timing is not right and this undermines investor confidence.

Elan is a participant in this juggling act and until last month maintained a high level of market confidence. Questions about its accounting procedures rocked confidence, followed this week by the wrong kind of news for a pharmaceutical company.

The company reported good growth of 35 per cent in product revenues in its 2001 financial results. It also issued a profit warning for 2002, however, with single- rather than double-digit growth projections.

Nor did investors like the news about Elan's pipeline, with the company acknowledging the 2002 downturn was in part "due to the later introduction of new products". This warning, combined with the accounting issue, sent Elan's share value plummeting.

Its potential blockbuster, on which much of Elan's growth in recent months had been made, AN-1792, remained stalled with an uncertain future. Four people receiving the drug in human trials became ill for unknown reasons, calling a halt to administration of AN-1792. An investigation is under way to see if the illness was related to AN-1792 but, even if cleared quickly, this adds delays to its future release.

The US Food and Drug Administration also agreed additional trials for two other pipeline drugs that are much closer to market. Elan must send Prialt, a specialised pain-killer, through an additional 18-month "Phase III" trial following agreement with the FDA. This will hold back any possible revenue stream for at least that long.

The company still plans to introduce its Frova migraine drug in April but will also carry out a Phase IV clinical trial so that its potential sales base can be extended.

None of this means that Elan's future is in jeopardy but timing will become very important for the company.

Elan has stated its intention to transform itself from a drug delivery company to a biopharmaceutical company. It has shed a collection of lower-earning drug products that in 2001 brought in more than $200 million and plans to acquire new joint-venture products with individual earning potential of between $100 million and $500 million each.

Some commentators have criticised the move but it was a reasonable decision according to Prof Henry Grabowski, professor of economics and director of the programme in pharmaceuticals and health economics at Duke University, North Carolina. "It seems like a reasonable strategy for a smaller second-tier company," he says.

"It wouldn't be a good strategy for a big company like a Pfizer," he adds. "These small products can often take as much R&D and sales effort as big sellers."

And the fact that Elan has yet to introduce a blockbuster doesn't matter, as long as it has steady middle-range earners.

Prof Grabowski expressed some concern about Elan's plan to gain products through acquisition given that many larger companies are also out there looking for joint ventures.

"They \ are competing with all the big guys but the big guys are doing a lot more outsourcing. I think that is fairly common but it is becoming more competitive."

An examination of patenting and the granting of New Drug Authorisations (NDAs) from the FDA are sometimes indicators of how a company is progressing. Changing formulation or dosage can often extend patents on older drugs.

The US patent office lists 79 Elan patented products and processes, many granted in the mid- to late-1990s so there is plenty of protection available for the future. Elan was granted at least one NDA, for Frova, during 2001.