Updating my rough Elan analysis. Things haven't changed much from my post 8009 of Aug 16, 2005. The main assumptions underlying the old post have been validated -- T is back and is limited to mono. The assumption that the PML risk will be substantially mitigated has yet to be tested. I didn't address the debt, drug delivery, AD, or Prialt. I have pretty much written off Prialt. It just hasn't taken off. I hoped the benefits would outweigh the hassle and side effects but maybe this was wishful thinking. Hope someone will tell me I'm wrong about Prialt.
The debt looks manageable to me. A little over $ one billion in cash. Next debt due is 2008, but is convertible at $7.42 per my notes, so all this should be converted to another 34 million shares of stock. That will bump up the number of shares used in my analysis. I forgot to consider the converts in the prior figures. Remaining debt of $613 million due in 2008; another $1,150 million due in 2011.
Drug delivery continues to ramp strongly, and the AD programs seem to be on track.
Anyway, from the quarter ended June 30, we find ourselves in pretty much a breakeven position on the business, excluding Tysabri and a little over $100 million of annual interest expense. We have a higher price for T, and some updated MS market numbers (from the conference call) that are pretty much in line with what we used before. Some of the best info from the conference call is that 15 thousand patient years on T will bring the T business to breakeven with the breakeven cost level being at $300 million (combined Biogen and Elan, if I'm interpreting the numbers correctly) and that they expect "many multiples" of the 15 thousand patients eventually. So, they have indicated a net margin of $20 thousand per patient year based on the higher price of $28 thousand. Looks about right, and safe to assume that as sales ramp higher, the margin will increase. Don't know what "many" multiples means, but I always thought that a "few" were at least 3 or 4, so I would guess we're expecting at least a 5 or 6 multiple. This is consistent with my guesses set out below. This is all MS, no other indications.
They have filed for Crohns in Europe and are talking to the FDA about the path forward to filing in the US. They are "pleased" with the progress of the talks, but won't say too much else except that they hope to file this year. I don't know what to think of Crohns. Hoping that someone who understands the Crohns issues may give us some help here. My feeling is, with the controversy on PML, it's hard to envision approval anytime soon. With MS, alot of us felt that it would be approved for sure when FDA granted priority re-review (in effect stating that there was no substitute for T). With Crohns, there is other stuff, especially Remicade, that seems to work pretty well. Maybe Crohns will be approved eventually, after the PML risk is shown to be more reasonable that currently assumed. Hoping I'm being too pessimistic about T's use in Crohns.
Okay, here we go with some numbers. From the conference call:
MS patients on one of the interferons or Copexone: 400 thousand of which 50 to 60 percent are not satisfied due to intolerable side effects or breakthru disease.
MS patients who were on one of the interferons or Copexone, and quit: 100 thousand
Never treated: a "few" hundred thousand, lets say 250 thousand
Some guesses on who will use T that I think are conservative.
1. Current patients not adequately served, around 200 thousand, say 25 percent: 50 thousand
2. Quitters: 40 percent of 100 thousand: 40 thousand
3. Never-evers: 5 percent of 250 thousand: 12 thousand
Or, about 100 thousand out of 750 thousand. That's $2.8 billion, and doesn't look at all like a stretch to me. Most projections I've seen are for peak sales in the $1 to $2 billion range. The $2.8 billion would reflect about 13 percent of the total MS pool being on T for a full year. I take the lower projections seriously, but I don't understand them. FDA has indirectly indicated that there is no substitute for T. The data indicate that T is more effective than competing drugs by far, and has fewer side effects. it also has dosing advantages over the other drugs. As an aside, of the currently satisfied patients, some portion if not most of them will become unhappy at some point and become switch candidates. The quitters look like the prime early market because they have the capability to aquire treatment but have fired their drug. My sense is that the never-evers just aren't much into the treatment thing, but my 5 percent is hopefully too low.
My last year's guess came out a little higher, and is cut and pasted below:
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MS patients. In the US, about 360 thousand: 160 thousand on therapy, 50 thousand dropouts, 150 thousand never on therapy. ROW, about 400 thousand: 150 on therapy, 50 thousand dropouts, 200 thousand never on therapy. These numbers from notes based on a detailed broker report from a couple years back.
A guess at 2009 T patient years: 119 thousand made up of 8 thousand switches from Copexone in the US (46 thousand patients); 4 thousand switches from Rebif in the US (16 thousand patients); 8 thousand switches from Betaseron in the US (27 thousand patients); 16 thousand Avonex switches in the US (72 thousand patients); 15 thousand patients out of 150 thousand in the US never on therapy; 15 thousand patients in the US out of 50 thousand who dropped out of therapy; 4 thousand new patients out of 24 thousand new patients in the US; 20 thousand from 150 thousand current patients in ROW; 10 thousand from 200 thousand patients never on therapy in ROW; 15 thousand patients out of 50 thousand patients who were dropouts ROW; and 4 thousand new patients out of 24 thousand new patients in ROW. I think these guesses are reasonable, even conservative.
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To wrap it up, using a margin of $20 thousand per patient year, Elan's share of a 100 thousand patient market in 2009 would be $ one billion. The first $250 thousand is required to reach breakeven ($150 thousand Elan's share of T costs and $100 thousand interest expense). Using 480 million or so shares (a guess) would drive a profit of over $1.50 per share before taxes ($750 million / 480 million). This ignores increases in SG&A, changes in R&D spending, and other costs that would increase the breakeven level as sales ramp up. On the other hand, it ignores the continuing progress in the drug delivery business and a possible ramp in Prialt sales.
If Elan could net around $1.25 after tax for the whole business in 2009, a PE of 25 should drive a share price of $31. Discount it back from 2009 however you like. Add some pipeline value, especially for AD. Add some value for drug delivery which seems to be just starting to breakout. Bottom line -- this is very close to my last babblings on Elan, but don't take it too seriously. It's intended to provide a frame of reference, that's all. Do comment on it where you have a different view, where I flat have it wrong, or where I forgot something important. I'd especially like hearing about Prialt's potential. Leaving for Yellowstone so won't be able to respond for awhile. Be back after Sep 1. |
