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Biotech / Medical : Elan Corporation, plc (ELN) -- Ignore unavailable to you. Want to Upgrade?

To: James C. Mc Gowan who wrote (1521)	2/5/2002 8:20:32 AM
From: E.J. Neitz Jr	Respond to of 10345

Merrill Lynch Comments on Elan: Published yesterday after earnings release and conf call. Elan (ELN; $29.95; B-1-1-9 to B-3-1-9) 01E$1.91 02E$1.55 • We are lowering the rating on Elan from Strong Buy to Neutral in the Intermediate Term. Our long term rating of Strong Buy remains unchanged. • Elan announced full year 2001 earnings of $1.91 per share, which is two pennies behind our estimate. Management is moving to accelerate the transformation to a fully integrated pharmaceutical company by: 1) winding down external J.V. relationships, technology licensing transactions and SAB101 income, 2) ratcheting up spending on R&D by $50 million, 3) engaging in a significant expansion of its marketing and selling capabilities by adding $100 million in spending, 4) establishing a European infrastructure by adding $30 million and 5) adding biologics capability by adding $10 million. • Corresponding to these moves, management has elected to dramatically lower expectations for earnings in 2002 to $1.55 to $1.60. Street consensus was previously at $2.35 for 2002 and we were at $2.42. The company is indicating double digit earnings growth. We believe that given the fall that Elan’s stock price has taken over the last week, management has elected to significantly reduce its earnings outlook going forward and is presenting a set of numbers reflective of the core pharmaceutical business without acquisitions and benefits of the drug delivery business. • So the question is why lower the rating if the resetting process is over? • Our reasons for lowering the intermediate term rating are: 1) this news is likely to continue to be an overhang which is going to keep some investors on the side-lines, 2) with earnings growth pushed out a year, the stock may be “dead money” until visibility on 2003 earnings growth picks up later this year, 3) new product news flow will likely be minimal until this summer with clinical trial data for Antegren hitting twelve months of duration, 4) we have had the opportunity to see the company deliver on their new revenue and earnings guidance • Our long term rating remains Strong Buy, because: 1) we believe the company will make the transition to a fully integrated pharmaceutical company and that accelerating towards that goal, as announced today, is the correct albeit a very painful decision made by management, 2) we believe that Antegren will prove to be a very large revenue growth and earnings driver for Elan in the out years, 3) the company’s P/E multiple will expand as the company delivers on its stated financial goals and 4) it could now be considered a take out target at such low valuation levels. Page-2 • We would note that the company appears to be financially strong with very positive operating cash flow, and a very strong, liquid balance sheet. We have done a very preliminary sum of the parts valuation so as to establish where we see the floor price for the stock. We arrive at a value range of approximately $25-30 per share, based on: 1) a multiple of 4.5-5.0 times an estimated $1.6 billion in product revenues for 2002 ($18-21 per share), 2) placing an estimated value of $1.2 billion on Elan’s rights to Antegren ($3 per share), 3) approximating Elan’s net cash and s/t investments (net of L/T debt) at $1.0 billion ($2-3 per share), 4) using a net property plant and equipment value of $500 million ($1 per share) and 5) assigning a value of $500 to $780 million to the products in clinical development to which Elan has rights ($1-$2 per share). • So in summary, the company appears to be taking all of the hits now and is shedding its drug delivery history, however, without any earnings growth visibility over the next 12 months and significant product news flow not likely until this summer, we think the stock may tread water until later this year. (S. Tighe)