PropThink: Two Sales Forces Highlight ELN and BIIB Rift; No-Deal Is Negative For ELN
(Thomson Reuters ONE) -
By David Moskowitz
We continue to believe that shares of Elan Corp. (NYSE:ELN) are trading at a
premium valuation, given ongoing speculation that partner Biogen-Idec
(NASDAQ:BIIB) may acquire the company for the full economics to Tysabri. Biogen
markets ELN's primary value driver, Tysabri, a treatment for multiple sclerosis
(MS), the centerpiece of such speculation. We have written about our skepticism
on such a transaction, citing reports from other sources indicating that BIIB is
not currently moving forward with such plans - which you can read here. However,
some analysts continue to support ELN by keeping the speculation alive. In fact,
ELN rallied on October 12 after a Bernstein analyst noted the Biogen take-out
speculation. Interestingly, the arrangement between BIIB and ELN may offer
unique insights into the relationship between the two companies, and in our
view, the tactics for how both Tysabri and BG-12 will be marketed supports the
speculation that no deal is on the table, and that growth of Tysabri sales is
likely at risk when BG-12 hits the market.
Based on the agreement between BIIB and ELN, sources have told us that BIIB must
hire a separate sales force to market BG-12, and BIIB is in the process of doing
so. Under the Tysabri deal, BIIB is not allowed to use its existing salespeople
experienced in the MS segment to sell BG-12, so it had to go outside the company
to hire a new BG-12 sales team. Of course, if BIIB was interested in buying ELN,
hiring two MS sales forces would make no sense, therefore, this is a strong
indication that BIIB has made its decision not to acquire the rights to Tysabri
that it doesn't already own. Because of this arrangement, we have heard that
when existing BIIB sales reps were told they will be unable to sell BG-12 and
would have to compete with a new sales force in the field, many top performers
left to find other sales jobs. While ELN is potentially pushing this tactic to
pressure BIIB into a deal, BIIB has pushed back and is moving on with its plans
to concentrate its resources on BG-12. We believe BIIB is not going to consider
any strategic moves with ELN until it sees the strength of BG-12's real world
potential, and also sees the real world impact of this new therapy on Tysabri's
sales base.
The battleground between Tysabri and BG-12 is expected to be in the high-
prescribing segment of neurologists that specialize in treating MS, not the
academic centers where Tysabri has a strong foothold or community neurology
practices that treat various conditions and use little Tysabri because of the
risks. Importantly, MS specialists currently use Tysabri as well as Teva's
(NYSE:TEVA) Copaxone or Novartis' (NYSE:NVS) Gilenya when patients can't
tolerate first-line interferon-based treatments like BIIB's flagship Avonex
product. With BG-12 coming to the market, the fear for ELN is that the MS
specialists will have so many alternatives, including Sanofi-Aventis' (NYSE:SNY)
new treatment Aubagio, that new patients will be far less likely to receive
Tysabri than they are today, given the drug's notorious side effect profile
(read more here). With two separate sales forces being deployed at BIIB, there
could be more competition between Tysabri and BG-12 than most analysts are
factoring in.
Given that BIIB does not have to share BG-12's economics with ELN, it makes
sense that BIIB would want to get the most out of this product, even at the
expense of Tysabri. Interestingly, the "two-salesforce" model actually feeds
this internal conflict. When it comes to obtaining managed care coverage for BG-
12, BIIB has a powerful platform to encourage strong reimbursement terms out of
the gate, as the company could use the high profit potential on BG-12 and the
vast sales base for its Avonex product to cut deals on overall MS treatment
costs with health insurance companies.
ELN has been under pressure over the past few months in advance of the potential
for BG-12's launch, and even Thursday, when the FDA pushed back its decision on
BG-12 approval by up to 3 months, ELN did not react positively as expected. We
note that Bullish analysts on ELN 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 current levels, it appears that the potential risk to ELN far
outweighs any potential reward (stock trades at 5.6x sales vs. 5.0x sales for
more mature revenue-generating biotech companies). The take out premium on ELN
could unravel, particularly given the information about the two separate sales
forces selling Tysabri and BG-12 separately. We would stay away from ELN, and we
continue to believe the shares could trade sub-$10.
Read this article in its original format by clicking here.
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