Bapineuzumab in prodromal (early) AD.
from RBC, courtesy of IV board...
RBC
Elan Corporation (NYSE: ELN)
Incremental Bapi Royalty Disclosed + Another Phase 3
Alzheimer's Study Starting
Outperform
Speculative Risk
Price: 14.77
Shares O/S (MM): 596.0
Dividend: 0.00
Price Target: 15.00
Implied All-In Return: 2%
Market Cap (MM): 8,803
Yield: 0.0%
Event
Updated thinking on Bapi and assessing our scenario analysis.
Investment Opinion
• We reiterate our Outperform based on 1) continued investor anticipation of
potential positive bapineuzumab data in H2:12, and 2) favorable upside to $25+
if data is positive on our DCF vs downside risk to $9-12 stressing though that
the middle scenario of "mixed" results probably wouldn't send the stock down
to lower end $9-10. For longer term investors as well, assuming data will be
negative, we would see ELN as great value at $9-10 because Tysabri is worth
$10-13 on our DCF, and Bapi would still have value because: 1) there are 2
more PFE studies in 2013 reading out, and 2) sustained longer term value
because we expect JNJ/PFE will keep investing in Bapi and ELN could
conceivably monetize its 25% equity stake plus newly disclosed royalty which
could potentially be worth $500M+ for shareholders.
• Based on our channel checks, we believe there is a new 1570-pt Phase III study
starting shortly for Bapi in prodromal (early-stage) Alzheimer's disease. This
study will use SubQ monthly dosing with a new primary endpoint of "time to
disease progression" (more details pg2). SubQ is new vs current IV
administration. There are two interim analyses and an analysis of biomarkers.
Bottom line is even though we realize that Bapi is most likely to not meet its
primary endpoint, we believe it's clear JNJ/PFE will keep investing in different
patient populations given that market opportunities remain very big for any
drug company.
• We also note in addition to its 25% equity profit share, ELN receives newly
disclosed royalties on WW sales: 5% on sales between $1-2B, 7% on sales
$2-5B, and 9% on the portion above $5B. ELN gets half given it sold half its
equity stake to JNJ. We est this new royalty as ~$1.50/share if Bapi is
successful in only ApoE- patients and $0.30 probability adjusted.
• ELN has commented they believe Bapi data may read out starting mid-12; they
remain blinded to any data but continue to look at scenario analyses for "best
interest" of shareholders. We think this could include monetizing their 25%
stake after the data to generate cash for shareholders, and easier for BIIB to
acquire rights back to Tysabri.
• We reiterate our Outperform based on 1) continued investor anticipation of potential positive bapineuzumab data in H2:12, and 2)
favorable upside to $25+ if data is positive on our DCF vs downside risk to $9-12 stressing though that the middle scenario of
"mixed" results probably wouldn't send the stock down to lower end $9-10. For longer term investors as well, we would see ELN as
a great value at $9-10 because just Tysabri is worth $10-13 on our DCF alone and Bapi would still have value because 1) there are 2
more PFE studies in 2013 reading out and 2) sustained longer term value because we expect JNJ/PFE will keep investing in Bapi
and ELN could conceivably monetize its 25% equity stake plus newly disclosed royalty which could potentially be worth $500M+
for shareholders.
• Based on our channel checks, we believe there is a new 1570-pt Phase III study starting shortly for Bapi in prodromal (early-stage)
Alzheimer's disease. This study will use SubQ monthly dosing with a new primary endpoint of "time to disease progression". There
are two interim analyses and an analysis of biomarkers. Bottom line is even though we expect that Bapi is most likely to not meet its
primary endpoint, it's clear to us JNJ/PFE will keep investing in Bapi in different patient populations to seek out where Bapi could
work given that the market opportunities, in our view, remain very big for any drug company.
• We also note in addition to its 25% equity profit share, ELN receives newly disclosed royalties on WW sales: 5% on sales between
$1-2B, 7% on sales $2-5B, and 9% on the portion above $5B. ELN gets half given it sold half its equity stake to JNJ. We est this
new royalty as ~$1.50/share if Bapi is successful in only ApoE- patients and $0.30 probability adjusted.
• ELN has commented they believe Bapi data may read out starting mid-12; they remain blinded to any data but continue to look at
scenario analyses for "best interest" of shareholders. We think this could include monetizing their 25% stake after the data to
generate cash for shareholders, and easier for BIIB to acquire rights back to Tysabri.
• For Q1:12, we note that Tysabri trends remain solid as docs are working through the JCV+ discontinuations and should stabilize this
year driving net adds higher than consensus. In US, Tysabri sales have been steadily growing and may be +9% QTD and higher than
cons modeling only 5%, given new JCV label and marketing effort. In EU, JCV+ pts have been coming off in last two quarters and,
like the US experience, could stabilize later this year or perhaps even sooner. Based on all our doc survey work and diligence calls,
we have high confidence Tysabri cons peak sales could be $2.5-3.0B vs consensus only $2B+.
New Phase III Prodromal Alzheimer's Study Initiating Soon
A new Phase III study may be starting within the next few months in prodromal Alzheimer's disease. The study will use
bapineuzumab 20 mg/month administered subcutaneously vs placebo to pAD patients to determine benefit as measured by time to
disease progression, defined as either (1) progression to dementia due to AD using National Institute of Neurological and
Communicative Diseases and Stroke/Alzheimer's Disease and Related Disorders
Association (NINCDS-ADRDA) criteria by central adjudication or (2) confirmed deterioration of ³2 points on Clinical Dementia
Rating Sum of Boxes (CDR-SB) from baseline, whichever occurs first.
Primary Endpoint:
Time to disease progression as defined by a composite event: 1) progression to dementia due to AD using NINCDS-ADRDA criteria
by central adjudication or 2) confirmed (ie, measured at 2 consecutive visits) deterioration of ³2 points of CDR-SB from baseline,
whichever occurs first.
Biomarkers:
• Change from baseline to Month 24 in brain amyloid burden as assessed by the 18F-flutemetamol positron emission tomography
(PET) Global Cortical Average (GCA) Standard Uptake Value ratio (SUVr).
• Change from baseline to Month 24 in cerebrospinal fluid (CSF) phosphorylated tau (p-tau).
• Change from baseline to Month 24 in brain volume on volumetric MRI (vMRI) as measured by brain boundary shift integral
(BBSI).
Exploratory Endpoints (Clinical):
• To explore the divergence of effect between bapineuzumab and placebo in the slopes from Month 12 to Month 24 in subjects with
pAD, using the CDR-SB and ADAS-Cog/13.
• Change from baseline to Month 24 and study termination in Rey Auditory Verbal Learning Test (RAVLT).
Interim Analyses
Interim Analysis 1: The IA1 will be conducted when 80 subjects/treatment arm have a PET scan available after 12 months of
treatment and 50 subjects/treatment arm have a CSF assessment available after 12 months of treatment.
March 26, 2012 Elan Corporation
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Interim Analysis 2: The IA2 has the following objectives:
i. To evaluate whether continued treatment with bapineuzumab SC is potentially beneficial based on prespecified clinical futility
decision rules.
ii. To demonstrate treatment benefit based on pre-specified stopping rules for efficacy. The IA2 will be conducted when approximately
574 disease progression events (70% of the total events planned in the study) are observed or two years after approximately 75%
(1180) of subjects are enrolled, whichever comes last. Based on current assumptions, IA2 will take place approximately 54 months
after study start.
For superiority, the O’Brien-Fleming #-spending function will be used as the efficacy stopping boundary. For futility, the Independent
Data Monitoring Committee (IDMC) may use the futility stopping boundary in the statistical method section as a guideline.
The “Top Five” Events That Could Lead to Maximum Shareholder Interest and More Upside to
the Stock in 2012-2013…Even if Bapi Fails
Certainly we see a highly binary event this year for Bapi in Alzheimer’s, which if positive could significantly increase the value of the
company (if it were positive, we conservatively estimate a potential of at least $5B in enterprise value for its 25% stake, or almost a
doubling of the stock price). However, given that we don’t expect the study to meet the primary endpoint, we think ELN shareholders
and the Board should consider what to do following this event, if it comes to pass, in order to maximize value. We believe there are at
least five possible events that we believe would lead to more value for shareholders. These five events are:
• A likely CEO transition in mid-2012 (see next page) that forces uncertain leadership and more likely a goal of strategic alternatives
for the assets.
• Phase III Bapi data misses the primary endpoints but has potential signals of efficacy in mild patients, which leads to a potential
FDA filing.
• JNJ wishes to run more studies for Bapi and continues to invest in the program, which ELN cannot afford, which in this scenario
then forces ELN to sell its final 25% stake in Bapi to JNJ and monetize the asset.
• This would leave ELN with only the 50% stake in Tysabri, which would then be easier to sell back to BIIB after assuming ELN has
no more interest in Bapi development.
• ELN could completely sell the remainder of its 25% stake in ALKS over the next few years, thus monetizing its equity investment
on the balance sheet. ELN has already sold three-quarters of its 25% stake for $381M and can monetize the rest for potentially
another $90 to $100M this year.
ELN remains a top mid-cap biotech idea because we see very limited downside as Tysabri continues to beat expectations and is
increasing in value, and we see the stock moving higher into the Phase III Bapi data. Even if this data is negative, which we see as
highly likely, we see scenarios where ELN shareholders can still maximize value after the event.
Thinking About ELN as an Entity Today
Rather than being a truly active R&D-based drug development company like other mid-cap biotechs, ELN has theoretically developed
over time into a holding of “equity interests” in three different but valuable assets that, in our view, should be consolidated back to its
current partners and/or sold off and the value given back to shareholders, because we believe the value is much greater than the current
stock price. We currently value the sum of these parts at least $15, and although the stock has had a strong rally recently, we prefer
buying on pullbacks.
In short, we see ELN as basically a combination of:
1. A 50% stake in Tysabri, which BIIB should acquire back for $3B because it is $0.40–0.80 accretive to BIIB’s 2012 EPS, based on
our estimates;
2. A 25% stake in Bapineuzumab, which could eventually be sold to JNJ, which we can easily see acquiring it for $1B and growing
its stake to 50% (on par with Pfizer’s 50%) and continue to run more studies for the drug, which ELN can’t afford; and
3. A 25% passive equity stake in Alkermes stock, which it simply holds as an equity investment on the balance sheet and is currently
worth roughly $500M.
March 26, 2012 Elan Corporation
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What Could Happen in 2012?
We lay out the following 2012 potential events as reasonable scenarios that could happen, which would be positive for ELN
shareholders, and explain why we believe it makes sense for ELN shareholders to break the company up and derive a value higher
than the current market price. The net result is that we see these scenarios as leading to increased shareholder value and a higher stock
price in 2012–2013:
1. CEO Transition in Mid-2012 Could Force More Interest in Strategic Alternatives
It is important to note that these scenarios are all within the important context of public disclosure that CEO Kelly Martin’s
employment contract ends in May 2012, and there has been some public commentary from the company already that he plans to likely
transition out of the position, leaving the spot open. However, our channel checks suggest that it hasn’t been easy for the Board to
complete a “transition plan” and find a potential replacement CEO. Part of the reason may be because by mid-year 2012, a new CEO
would be facing significant binary Phase III data from Bapi in H2:12 that has a high likelihood of not meeting the primary endpoint,
thus leaving a new leader with a stock price that could fall after the failure of the Phase III data that we anticipate (particularly since
we believe the stock is likely to go higher toward $15+ in H1:12 before the data, as it is an inexpensive call option at $11–13/share, in
our opinion). Accordingly, we would advise buying more aggressively in pullbacks. If this were to become the case, it’s possible CEO
Martin could stay on temporarily while a search for a replacement theoretically remains outstanding.
• However, if there is no clear CEO succession and Bapi fails in 2012, the Board would most likely be forced to look at “strategic
alternatives” given the lack of a clear business plan, in this scenario, to build a fully-fledged pharmaceutical/biotech company
beyond just Tysabri and also because shareholders may want to monetize the Tysabri asset, which we maintain is in their best
interest.
2. Phase III Bapi Alzheimer’s Study “Misses” in H2:12 – But Are There Some Positive Signals of
Efficacy?
As has always been our base case, we think there is an 80–90% likelihood that the Bapi Phase III data in H2:12 “misses” the primary
endpoint. However, we think it’s also possible that post-hoc analysis may show some interesting positive efficacy signals in sub-group
analysis, such as in mild patients, where more scientific evidence suggests blocking beta-amyloid may be more effective, and JNJ
already has a number of clinical trials continuing to study Bapi including subcutaneous administration, biomarker studies, amyloid
imaging studies, etc.
• Although we continue to think blocking beta-amyloid may not be the best mechanism for improving cognition/Alzheimer’s disease,
it is clear that big pharma such as Pfizer, Lilly, JNJ, and many others continue to want to explore the science because of the massive
pharmaceutical market opportunity of an Alzheimer’s drug. For example, even Genentech issued a press release in October 2011
touting data for its Phase I A-beta antibody (gantenerumab or RG1450) and its dose-dependant brain amyloid lowering capabilities.
3. This Leads to JNJ Acquiring the Remaining 25% of the Equity Stake that ELN Still Holds –
Positive for Shareholders by Monetizing the Asset
Because we think JNJ and PFE will want to continue studying Bapi and not terminate the program because of the significant sunk cost
investments and potential for the drug to work in a subset of patients, we believe JNJ would be interested in simply buying back the
last 25% from ELN. Recall that JNJ acquired the first 25% stake in Bapi overall (i.e., 50% of ELN’s share) when it paid ELN
approximately $1B in cash and purchased ELN stock, so that JNJ now actually holds 18% of ELN shares. However, this led to a
situation where JNJ was paying the first $500M in expenses related to Bapi but then ELN and JNJ will share expenses 50/50 when the
$500M is spent, which we estimate is starting in roughly Q2:12 ($126M of the budget remains). As a result, ELN may need to pay up
to $100M in cash during 2012 or 2013, by our estimate and based on the current R&D spend on Bapi ($50M per quarter).
• Importantly, we don’t think ELN wants to keep funding the very expensive R&D program post-2012 while additional studies
with Bapi are still ongoing. We also don’t think ELN shareholders want management to keep funding this program, so it makes
sense to us for ELN to sell the remaining 25% to JNJ and raise cash for shareholders. Within this hypothetical transaction, ELN
could maintain a small royalty stake or economic interest in Bapi, or some sort of CVR (contingent value right) that preserves some
upside for ELN shareholders in the long term.
March 26, 2012 Elan Corporation
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• There could be some probability that JNJ/PFE consider filing Bapi to FDA/EMA even if Phase III missed the primary
endpoint…If Bapi missed statistical significance on the primary endpoint but showed something such as 1) a positive, statistically
significant trend in Phase III in the mild subgroup, or 2) benefits in combined, pooled sub-group analysis across the Phase III
studies, or 3) positive “bio-marker” data or brain atrophy data further supporting biological activity, we think there’s a 25–50%
chance that JNJ/PFE could even consider filing the data with the FDA because there could be some political pressure to offer a
therapeutic to the millions of Alzheimer’s patients. In this scenario, we would expect that the sponsors would want a full regulatory
review around the totality of the dataset, especially while including “bio-marker” data, and, with the drug is unlikely to harm
patients, therefore the risk/benefit could give some low probability of getting approved, especially because the potential upside to an
approved drug is so significant ($5–10B opportunity) versus minimal downside.
4. With All of the Bapi Out of the Way, Biogen Could Finally Consolidate the Last 50% of the
Very Profitable Tysabri Franchise
With Bapi out of the way, we would expect this to lead to BIIB acquiring the remaining stake in Tysabri by YE:12 or later in 2013 for
potentially up to $15/share, or $9B in cash, but more likely convertible debt. We estimate an acquisition under this scenario results in
an immediate $0.40–0.80 accretion to BIIB’s 2012–2013 EPS based on our estimates (NASDAQ:BIIB, $120.96; Outperform, Above
Average Risk).
We would expect debt to be very inexpensive (we estimate 2.5–3.0%) for a large cap biotech like BIIB with projected FCF of $1.8B in
2012, and with BG-12 by 2014–15, BIIB could have strong FCF of $2.2–2.5B and up to $2.6–3.0B after Tysabri is brought back in.
• Importantly, the other reason we believe BIIB should acquire the Tysabri rights back is because of the massive tax benefits that
could result from consolidating an Ireland-domiciled company, which could have tax rates of 15% or less and drop Biogen’s tax
rate, particularly on the Tysabri portion of profits. More clearly, BIIB could simply reap the majority of NOL’s that ELN maintains.
Indeed, we currently utilize minimal taxes on our ELN portion of the Tysabri DCF because ELN has $2–3B of net operating loss
carry forwards, which should hypothetically transfer over to BIIB.
• We note that:1) JAZZ Pharmaceuticals recently acquired Azur Pharmaceuticals based in Ireland and will realize significant tax
savings; 2) Alkermes acquired the EDT business from ELN and then lowered its tax guidance to 15%; and 3) BioMarin acquired the
Irish bulk biologics manufacturing factory (in Cork, Ireland) from Pfizer in June 2011 for $49M, noting significant tax benefits.
5. ELN Could Sell Its 25% Stake in ALKS Stock, Yielding Cash to Shareholders in an Organized
Public Offering
The sale of the EDT business resulted in Alkermes paying roughly $1B to ELN, including $500M in cash and roughly $500M in
equity stock, or 31.9M of ALKS shares outstanding. This is currently a liquid investment on ELN’s balance sheet and the company
has already started selling stock as an organized offering. However, while it’s interesting to maintain an equity position in another
specialty pharmaceutical company, if all these events above played out and Bapi was sold back to JNJ and Tysabri was sold back to
BIIB, shareholders could realize the rest of the monetization of assets by offering the shares to the public market such as in an
organized sale to the market (thereby potentially limiting any downward pressure on ALKS current market price).
Valuation
Our $15 price target is a sum-of-the-parts 12-month target that assumes $12.66 for Tysabri, $1.52 for bapineuzumab, and $0.55 netting
out the market price of debt, ALKS equity stake, and YE:12 cash. Our DCF uses a 7.5% discount rate on Tysabri and a 15% discount
rate on bapineuzumab (but 80% probability adjusted for failure and $0 value and value for success, assuming $6B peak sales), in line
with similar therapeutic programs for comparable biotech franchises.
Price Target Impediment
Our price target is significantly dependent on the commercial success of Tysabri in multiple sclerosis. In addition, Elan is leveraged to
the clinical risk associated with bapineuzumab, in Phase III for Alzheimer's disease. We are assuming failure of the program but
successful Phase III results would lead to major upside in the stock. Also, a sale of assets or monetization of its pipeline could generate
cash to pay down debt, which would reduce the risk of its debt and increase confidence in the long-term viability of the company. New
oral drug competition could also hamper future Tysabri growth.
Company Description
Elan Corporation is a biotechnology company focused on developing, manufacturing, and commercializing drugs to treat neurological
diseases. Its primary value driver is Tysabri, for multiple sclerosis, which is partnered 50/50 with Biogen Idec. The company also runs
the Elan Drug Technologies (EDT) group, which licenses and helps companies utilize various drug delivery technologies to enhance
the properties of drugs, upon which it receives royalties on partner sales. The company's pipeline is primarily focused on Alzheimer's
disease, where it is developing bapineuzumab in Phase III with partner Wyeth, and ELND-005, a small molecule a-beta blocker in
Phase II partnered with Transition Therapeutics.
