ELN Under Pressure On ECTRIMS Meeting & Valuation

With Biogen-Idec’s (NASDAQ:BIIB) new multiple sclerosis (MS) treatment, BG-12, approaching a decision by the FDA (PDUFA date December 28th), enthusiasm in the medical community is building for this highly effective, safe, and orally administered treatment for the disease. As we noted in a prior article, the chance that BIIB would acquire Elan Corp. (NYSE:ELN) given the impending launch of BG-12 appears to be slim to none (see PropThink's prior story here). Importantly, the large medical conference, ECTRIMS (European Committee for Treatment and Research In Multiple Sclerosis) starts Wednesday, and we are hearing that the noise on BG-12 in the research community and on Wall Street is building significantly, with physicians indicating that most newly diagnosed patients and patients moving to alternative treatments will likely end up on BG-12 therapy given its clear benefits.

That’s a big problem for ELN, given that its lead value driver and MS treatment, Tysabri, heavily depends on new patient starts to maintain and grow its sales base. Tysabri sales are currently growing in the 13-15% range, and unlike BG-12’s oral preparation, Tysabri is administered in a hospital or clinic as a one hour IV infusion. In addition, because of the drug’s impact on the immune system, Tysabri has the potential to cause a condition called PML, which can be deadly for some patients. A test for the JC virus, which is the culprit in causing PML, is being used to help doctors and patients assess the risk of this deadly side effect. However, despite rising use of this assay, the number of “net new patients” taking Tysabri (new patient starts minus those discontinuing treatment) has been declining over the years on both an absolute basis as well as by percentage.

Number of Net New Tysabri Patients Has Been Declining



Elan continues to report the number of patients on Tysabri each quarter, and the theory is that the base of Tysabri patients is shifting to those patients at lower risk for PML, hence the slower growth. When BG-12 enters the market (expected late this year or early next year), the number of net new patients reported by ELN will remain a key metric to watch to determine whether Tysabri, Elan’s primary revenue source, will hold its ground or give way to BG-12. We note that some patients remain on Tysabri despite an elevated risk for PML, as detected by the JC virus assay, and in other patients, the test has unclear results. While most doctors do not favor switching their MS patients from one therapy to the next if a given treatment is working, we believe that once BG-12 launches, those patients ‘at-risk’ for PML or with unclear JCV test results are likely to immediately convert from Tysabri to the new therapy. BG-12’s oral regimen and its impressive safety and efficacy profile provide other incentives to switch patients, and most importantly, newly diagnosed patients could find BG-12 to be the most attractive option.

BG-12 has shown in Phase III trials that it can reduce the 2-year rate of MS relapses by about 50%, which is better than current standard of care therapies, like Avonex, Betaseron, or Copaxone (The ABC’s which reduce the 2-year relapse rate by ~30%). The safety profile for BG-12 is excellent, with only minor side effects like headache, flushing, and gastrointestinal cramping. As a result, BG-12 is expected to be very competitive in that it offers strong efficacy without the safety issues of Tysabri or other newer oral treatments like Novartis’ (NYSE:NVS) potent treatment, Gilenya, or Sanofi-Aventis’ (NYSE:SNY) recently approved, Aubagio product. Tysabri continues to boast the highest 2-year relapse reduction rate in the industry, at 68%, although patients in Tysabri’s Phase III program were sicker, therefore it may have been easier to demonstrate a larger relative reduction in the number of relapses, vs. placebo. In fact, the actual 2-year mean relapse rate seen for Tysabri in its Phase III program is similar to that seen for BG-12 and Gilenya (about 0.2 relapses per year on average). Nevertheless, Tysabri’s safety issues render it a 3rd or 4th line treatment, and BG-12 will have a major opportunity to intercept patients that have failed more conventional therapies before going onto Tysabri.

We expect BG-12’s visibility to climb to an all time high during and after ECTRIMS this year (Oct. 10th-13th), and there are likely to be several surveys and physician calls conducted by Wall St. analysts after the conference to highlight the expected strong adoption of BG-12 over the next few months prior to the drug’s launch. Given the sensitivity to Tysabri’s new patient start data, investors may realize that owning ELN here could be dangerous, and that there is a potential to re-enter the stock after BG-12’s impact is known, likely at lower levels. Because BG-12 is significantly differentiated, and that BIIB has full economics on the compound, it makes sense that BIIB focuses on maximizing the launch ramp of BG-12 even at the expense of Tysabri. With ELN shares trading at full value (ELN trades at 5.6x sales vs. 5.0x sales for more mature revenue-generating biotech companies), BIIB has the luxury of waiting to see the impact of BG-12 on the Tysabri franchise, and if the impact is large, BIIB may not be interested in ELN at all, or could be in a position to acquire ELN at a significantly lower valuation.  Bullish analysts expect Tysabri sales to grow by as much as 26% next year, and if revenues for this key product flatten or decline, the expectation that ELN could become profitable next year also is likely to disappear. At these levels, it appears that the potential risk to ELN far outweighs any potential reward, and momentum for BG-12 coming out of ECTRMS could send ELN shares south of the $10 level.