| To: quidditch who wrote (9386) | 5/25/2007 10:09:32 AM | | From: quidditch | of 10345 | | | Here is more text from GS report--tables deleted:
Investment view: Tysabri, tax losses and Bapineuzumab
We are initiating coverage of Elan with a Buy rating and 12-month price target of
US$25/ADR. There are three key reasons for our optimism over Elan’s outlook:
• First, in our view, investors are underestimating the trajectory of Tysabri sales and the
profit leverage to this for Elan. Although the appearance of new cases of progressive
multi-focal leukoencephalopathy (PML) would be a negative for the stock, we view the
likelihood of the withdrawal of the drug for a second time as highly unlikely. An
approval in Crohn’s Disease represents upside to our valuation.
• Secondly, in our view, Bapineuzumab could potentially create a new paradigm for the
treatment of Alzheimer’s Disease; we view the supporting evidence for this approach
as compelling. If successful, this could change the intrinsic and strategic outlook for
Elan.
• Lastly, we believe that investors are largely ignoring the group’s US$2.8 bn of
utilizable tax losses; should Elan embark on any strategic transaction in the future
(either as an acquirer or as an acquisition target), the value of these tax losses would
need to be taken into account when valuing the group
Profitability from 2008
Using our proprietary risk-adjusted DCF valuation methodology, we calculate a 12-month
price target of US$25/ADR. Should Tysabri gain an approval in Crohn’s Disease, this could
potentially add up to US$4/ADR to our valuation. On our estimates, the group will reach
breakeven at the operating level in 2008 and profitability at the net income level in 2009.
Once the group reaches profitability, tax-loss carry forwards of US$2.8 bn can be used to
reduce any income tax burden. In our view, investors are overlooking the intrinsic and
strategic value of these tax losses. Post the full utilization of these tax losses, the group’s
tax rate will be the Irish standard corporate tax rate of 12.5%; we view that as a competitive
advantage relative to many other pharma and biotech companies.
Risk of new PML cases with Tysabri are the greatest risk
In our view, the largest near-term earnings and share price driver is the trajectory of
Tysabri sales. Should this fall short of market expectations or slow significantly, it would
be viewed negatively by investors and could impact our price target. Should any further
cases of PML be reported, we would expect share price weakness. We view the risk that
Tysabri could be withdrawn from the market as low, unless there were a significant
number of PML cases over a short period of time, indicating that the rate of PML is
significantly higher than currently anticipated. As with all development stage companies,
R&D product delays or failures are a risk.
Tysabri is the major near-term earnings driver
We expect sales of Maxipime and Azactam to decline, due to expected generic competition,
and believe that Prialt will remain a niche product. As such, revenues from Tysabri and
Elan Drug Technologies are the main drivers of earnings, with Tysabri being the more
significant contributor. We estimate that the breakeven point for Tysabri will be achieved
May 24, 2007 Elan Corporation (ADR) (ELN)
Goldman Sachs Global Investment Research 5
when 15,000 patients are on therapy (on an annualised basis). As there are now over
10,000 patients being treated, with another 2,500 enrolled in the TOUCH programme (a
mandatory risk management programme for patients who are prescribed Tysabri) we are
confident that Elan will reach the breakeven run rate before end-2007.
Financial strengths and weaknesses
The group is currently loss making. However, we forecast that it will reach breakeven at
the operating level in 2008 and profitability at the net income level in 2009. The trajectory
of the recovery in profitability is highly dependent on sales of Tysabri. We forecast that by
2010/2011, the launch of Bapineuzumab for Alzheimer’s Disease will significantly lower the
group’s dependence on Tysabri. At the same time, on our estimates, Bapineuzumab will
provide significant sale and earnings leverage.
Company profile: A very focused approach to R&D
Elan is a US$8.5 bn market value biopharmaceutical company based in Dublin, Ireland. It
has been restructured and re-focused by a new management team following the end of
off-balance sheet financing that led to significant divestments and restructuring from 2000.
As the group restructured and re-focused after 2000, it was predominantly debt-funded.
The group now has around US$700 mn in cash and US$1.7 bn in debt, though this does
not mature until 2011-2013. The group now generates revenues from its Hospital
Product/Specialty Product franchise, from Elan Drug Technologies and from sales of MS
drug Tysabri. The group has also built a credible R&D pipeline presence, focusing on
Autoimmune Diseases and Alzheimer’s and Parkinson’s Diseases.
May 24, 2007 Elan Corporation (ADR) (ELN)
Goldman Sachs Global Investment Research 6
Valuation and financial outlook
Risk-adjusted DCF valuation: 12-month price target US$25/ADR
Using our proprietary risk-adjusted DCF valuation methodology, we calculate a 12-month
price target of US$25/ADR. This is around 33% above the current share price. Our key
valuation assumptions include:
• Maxipime suffers generic competition in 2007, with a significant negative impact from
2008
• Azactam revenues continue to benefit from zero generic competition in 2007, but we
assume generics enter the market during 2008
• We forecast peak sales for Prialt of US$32 mn
• Revenues from Elan Drug Technologies (contract manufacturing and royalty income)
continue to grow at double-digit rates, due to the launch of several new drugs that
utilize Elan’s drug delivery technologies. However, we assume lower profitability than
in 2006 going forward
• Tysabri revenues reach US$1.4 bn by 2011; we have not included sales in Crohn’s
Disease, however, if Tysabri is approved in this indication and reached peak sales of
US$500 mn, it could add up to US$4/ADR to our valuation
• SG&A cost increases remain relatively low in 2007-2010, providing significant profit
leverage
• The group reaches operating profit breakeven in 2008 and is profitable from 2009,
although the trajectory of profit growth will depend in the near term on Tysabri
revenues
• Bapineuzumab is in phase III within the next 12 months, but could be submitted for
approval under a sub part E filing in the US. We forecast a market launch in 2010 on
the assumption that Elan and partner Wyeth will conduct a phase III safety (and
efficacy) study regardless of whether it undertakes a sub part E filing for
Bapineuzumab
• We have assumed that there is no further debt re-scheduling (debt matures in 2011-
2013), although this is an option for the group
• In line with our valuation methodology for other biotech companies, we use a discount
rate of 11%. For products in development, this is effectively compounded up by the
risk adjustments applied to each product at different stages of development. Arguably,
however, using a discount rate of 11% to value those products already on the market
is overly conservative
May 24, 2007 Elan Corporation (ADR) (ELN)
Goldman Sachs Global Investment Research 7
Exhibit 1: Elan risk-adjusted DCF valuation
12-month risk-adjusted DCF price target of US$25/ADR; technology value US$27.4/ADR
Probability to Discount rate
Drug Phase Indication reach market 9% 10% 11% 12% 13% 17% 20%
Risk-adjusted NPVs
Maxipime Launched Bacterial infections 100% 156 155 155 154 153 150 148
Azactam Launched Bacterial infections 100% 97 97 96 96 95 93 92
Prialt Launched Pain 100% 53 50 47 44 42 34 29
Contract manuf & royalties Launched N/A 100% 1599 1455 1329 1218 1120 823 672
Autoimmune disease
Tysabri Launched MS, Crohn's 100% 8273 7639 7070 6558 6095 4635 3843
ELND001 Phase I Autoimmune diseases 5% 49 43 37 32 27 15 9
Neurodegeneration
Bapineuzumab Registration Alzheimer's Disease 75% 5190 4696 4256 3862 3509 2423 1857
ACC-001 Phase II Alzheimer's Disease 10% 24 21 18 15 13 5 2
LY-450139 Phase III Alzheimer's Disease 50% 123 111 100 91 82 56 43
Elan gamma secretase inhibitor Phase II Alzheimer's Disease 10% 33 29 26 23 20 12 8
ELND005 Phase II Alzheimer's Disease 10% 25 21 18 16 14 7 4
Beta secretase inhibitor Phase I Alzheimer's Disease 5% 11 9 8 7 6 3 2
Bapineuzumab and the R&D pipeline is a free option
According to our estimates, the current share price is justified by Elan’s existing
businesses, without any value for Bapineuzumab and the R&D pipeline. The value of
Maxipime, Azactam, Prialt, Elan Drug Technologies and Tysabri is US$16.3/ADR
(US$18.6/ADR pre debt) on our estimates – not far from the current share price – though
this is predicated mainly on Tysabri’s sales trajectory being relatively conservative. On our
estimates, there is little in the share price for the value of the R&D pipeline, including
Bapineuzumab, and as such the R&D pipeline represents an almost free option. There are
very low expectations, we believe, for a sub part E filing for Bapineuzumab. Therefore,
should the drug not be filed under this designation in the coming 12 months, we would
expect limited share price impact. However, if it is filed, we would expect a positive share
price impact.
In our view, the value of the tax losses is being overlooked
As of end-2006, Elan had US$2.83 bn of tax-loss carry forwards. Of this amount,
US$2.74 bn of tax-loss carry forwards do not expire for more than five years. In our view,
the value of this asset (which amounts to around 31% of the group’s current market value,
if all tax losses could be utilized, on an NPV basis) is being undervalued by investors.
Exhibit 2: Tax loss carry forwards and expiration dates
Expiry date Ireland US State US Federal ROW Total
One year $0.6mn - - $0.6mn
Two years $2.1mn - - $2.1mn
Three years $0.9mn - - $0.9mn
Four years $0.5mn $56.2mn - $56.7mn
Five years - $37.3mn - $37.3mn
More than 5 years $1,879.2mn $206.5mn $628.1mn $23.5mn $2,737.3mn
Total $1879.2mn $210.6mn $721.6mn $23.5mn $2,834.9mn
Source: 2006 20-F report.
May 24, 2007 Elan Corporation (ADR) (ELN)
Goldman Sachs Global Investment Research 8
Corporate tax rate is also an advantage
Aside from tax losses, Elan’s base in Ireland could provide it with an attractive tax rate
going forward. Any Irish manufacturing income from Elan or its subsidiaries qualifies for a
10% tax rate until 31 December 2010. Thereafter, the Irish corporation tax rate of 12.5% is
applicable. Non-trading income is taxed at 25%. In our view, being based in a jurisdiction
where there is such a favourable tax regime (which could significantly reduce Elan’s tax
burden if it reaches profitability and after tax-loss carry forwards are utilized) is an
advantage over many other pharma and biotech companies.
Breakeven in 2008, profitable from 2009
We forecast that Elan will reach breakeven at the operating level in 2008, though this is
dependent on the trajectory of Tysabri sales. On our forecasts, the group will remain
loss-making at the net income level in 2008, due to the impact of interest payments on the
group’s debt. However, we forecast that the group will report earnings at the operating
and net income level in 2009.
We assume US$1.2 bn of debt is repaid in 2011
From a cash flow perspective, we forecast that Elan repays over US$1.15 bn of debt, due in
2011. Should this occur, rather than the debt be re-financed, it could result in a cash outflow
in 2011 of US$560 mn. Should Elan re-finance all of this debt (which, if Tysabri
continues to grow as we expect, could potentially be re-financed at a lower interest rate), it
would result in a net cash inflow in 2011 of US$635 mn, on our estimates.
Exhibit 3: |
| | Elan Corporation, plc (ELN) | Stock Discussion ForumsShare | Recommend | Keep | Reply | Mark as Last Read | Read Replies (1) |
|
