ANALYSIS: Elan's move to to solely focus on science offers greater growth potential

THE SALE of its drug technology unit to Alkermes was a fundamental rupturing of Elan’s links with its origins but management at Ireland’s largest indigenous biotech company has no regrets.

The move to become a “pure play focused on science, particularly neuroscience” is seen as presenting much greater opportunities for growth, and the cash the $960 million deal delivered gave it the freedom to pursue new interests.

That became evident this week with the investment of up to $50 million over the next five years in a small privately held US drug discovery business Proteostasis Therapeutics.

As chief executive Kelly Martin describes it, the Proteostasis deal allows Elan to extend its focus from treating neurodegenerative diseases as they emerge to much earlier in the process.

“As we structure ourselves properly for the long-term generation of more science, we needed to move to the next generation or two of science and what you are seeing now is that. Proteostasis is piece of that,” says Martin.

Proteostasis is examining how corruption of proteins due to aging or other factors such as disease, genetics or environmental influences can lead possibly years down the line to the emergence of conditions such as Alzheimer’s, Parkinson’s and Huntington’s disease.

But, befitting the chairman of a company that has seen more than its far share of unwelcome surprises, Elan chairman Bob Ingram is determined to keep a tight rein on costs.

“One of the mistakes we have seen in this industry is that when you have success, you start to add people and grow your infrastructure. There’s an absolute commitment not to let that happen and to invest what will always be finite resources in really good bets in science. The key with making those good bets on sciences if to measure them,” he says.

The Proteostasis Therapeutics is a case in point. Aside from the 24 per cent shareholding for a $20 million cash payment, the deal is structured to allow research support of up to $30 million over five years, with an option to extend the provisions for a further five years.

“I think Proteostasis is a great example of a small investment that will be measured in terms of its progress,” says Ingram, who works on the maxim that if you’re going to fail, the key thing is to fail early.

Martin says Elan expects to know “in the first two to three years, whether it will have a lot of traction and, if it does, the board will extend it”.

If the Alkermes deal – which Martin sees as the last big structural element of the remaking of Elan – provided the cash to give the company wriggle room by paying down debt, it is the new certainty about the prospects of Elan’s blockbuster multiple sclerosis drug Tysabri that was the catalyst.

Elan and its US partner Biogen this year produced a test that lets MS patients know if they have antibodies for the JC virus. Crucially, no one testing negative for the virus has gone on to develop progressive multifocal leukoencephalopathy (PML), the sometimes fatal side effect of the MS drug.

Developing and getting approval for the test has given the drug’s prospects a boost.

“Until there was this comfort with Tysabri, with its risk profile and now the resulting revenue projections, we probably would not have done this [Alkermes] deal,” says Ingram. “Three years ago, we would not have done this deal.”

Martin adds: “Implicitly or explicitly, what we are saying to the market is that we are exceptionally comfortable with Tysabri as an asset . . . We are very comfortable with it being our major revenue driver.”

Already delivering $1 billion a year in revenues, the company has guided compound growth of at least 15 per cent per annum in the future.

“I think growth of Tysabri can accelerate if you look at the dynamics of the markets. We’ve always thought that Tysabri should have at least a 20 per cent market share [it currently has 10 per cent] because, logically, if you have the most efficacy, would more than one in five patients take the drug? I’ve always thought it was more than logical.

“So I think the growth rate over the next few years, even with competition, could be quite robust. We did officially tell the market a few weeks ago that we would grow revenues by 15 per cent compounded and I think it could be higher than that.”

From the investors’ view, he believes the key thing will be for the market to see over the next two or three reporting quarters that the patient figures in the US have bottomed out and are beginning to trend steadily upwards.

And, while Tysabri patents expire in 2017 and 2018, Elan believes its risk profile is such that the “biosimilars” markets will leave it alone to concentrate on easier targets.

Both Ingram and Martin argue that the company’s commitment to Ireland remains as strong as ever, even though the bulk of its Irish staff in Athlone will now move to Alkermes.

Neither denies that Ireland’s corporate tax regime is important but they also emphasise its importance for a company whose major growth areas are outside the United States. In percentage terms, Martin points out, Alzheimer patients numbers in the Middle East and north Africa are projected to grow fivefold over the next 20 years against 80 per cent n the US, albeit the numbers are smaller.

“Ireland is a window to the rest of the world and if you are going to build a company that is going to have activities over time in these other places it’s a fantastic place to do that with the right people and the right skills,” he says.

With its promising pipeline and an industrywide drought of new drugs, becoming a target is always an issue but Ingram is determined the company must not be distracted.

“We should focus on building this business to the best of our ability and make it as successful as we possibly can,” he says. “If, because we are successful, we become such a target that someone comes knocking on the door with a very attractive offer, we will do what is right for shareholders.”

Regeneration is likely at both executive and board level as the company concentrates on new challenges.

Chief financial officer Shane Cooke departs as part of the Alkermes deal and Martin is scheduled to step down in May 2012.

“I think Elan is now a much more attractive opportunity both for people to consider serving as a director and from a CEO standpoint,” Ingram says. “I have no doubt we will attract high-quality directors and have a process that will be an orderly transition when it comes to the leadership.”

Martin, who Ingram notes, came to the company when it was close to collapse still sees work to do.

“You need to have a business structure that can last, you need to be profitable, you need to grow, create shareholder value, access to funds,” he says. “Over the years, all the stuff we’ve been doing is to try to clear away the clutter, so we can get back to that and that’s where we have arrived. So this is actually the beginning of the true biotechnology vision that [chief scientific officer] Dale Shenk and Dennis Selkoe [founder of Athena Neuroscience, source of much of Elan’s current science] and others had years ago.

“Our goal [now] is [to develop] more molecules, translating science into molecules and then moving them forward. If we can own that space, particularly for neurology, this company will go down in history as an exceptional company, not just financially, but for the industry and for what it delivers for patients.”