Elan Corporation’s (ELN) loss per share of 2 cents (excluding special items) for the second quarter of 2011 was narrower than the Zacks Consensus Estimate loss of 3 cents.
The company suffered an adjusted loss of approximately 38 cents in the year-ago quarter. The narrower loss was attributable to the higher revenues and lower expenses recorded in the quarter.
Revenues
Second quarter revenues increased 24% to $333.5 million, surpassing the Zacks Consensus Estimate of $312 million. The increase was primarily attributable to higher revenues from both segments at Elan.
Segment Details
Elan operates through two segments – BioNeurology and Elan Drug Technologies (EDT). The BioNeurology segment focuses on neurodegenerative diseases. The EDT segment is the drug delivery unit at Elan.
Revenues from the EDT segment climbed 12.3% to $62.9 million in the reported quarter. The increase was attributable to increased revenues from Ampyra as well as the timing of manufacturing orders for some other drugs.
Revenues from the BioNeurology segment climbed 27% to $270.6 million. Higher Tysabri sales led to the increase. Elan has a co-development agreement with Biogen Idec Inc. (BIIB) for Tysabri, under which Elan markets the drug in the US and books the entire sales as its revenues.
Outside the US, Biogen is responsible for distribution, and Elan records as revenue its share of the profit/loss on these sales of Tysabri. The agreement provides Elan with the option to buy the rights of Tysabri if Biogen changes hands.
In-market net sales of Tysabri, indicated for the treatment of multiple sclerosis and Crohn’s disease, climbed 31% to $389.0 million in the reported quarter. Increased demand for the drug coupled with the high Tysabri price in the US market led to the rise.
Exchange rate movements also favorably impacted Tysabri sales during the quarter. The sales of Tysabri recorded by Elan rose 29.8% to $269.3 million.
Expenses
During the reported quarter, selling, general and administrative (SG&A) expenses declined 6% to $59.7 million. The decrease was attributable to lower support costs due to the restructuring of the research and development (R&D) wing of the BioNeurology division. R&D expenses came in at $61.9 million, down 5% from the year-ago quarter.
Outlook
The company expects adjusted earnings before interest, tax, depreciation and amortization to exceed $200 million in 2011, driven by strong revenue growth. Further, the company expects its revenues to double over the next five years, from approximately $1 billion in 2011. The revenue guidance excludes contribution from the EDT segment.
EDT Segment to be sold
In May 2011, Elan announced that the EDT segment will be purchased by Alkermes, Inc. (ALKS) for approximately $960 million in cash and stock. The merger is expected to close in the third quarter of 2011. The merged entity will be known as Alkermes plc and will be headquartered in Dublin, Ireland.
Per the terms of the deal, Alkermes will make cash payment of $500 million apart from giving Elan 31.9 million of its ordinary shares. Elan will have a 25% stake in the combined company, the shares of which will be registered in the US.
The merged entity is expected to trade on the NASDAQ stock exchange. Elan intends to utilize the net proceeds from the deal for debt retirement.
Our Recommendation
We currently have a Neutral recommendation on Elan. The stock carries a Zacks #4 Rank (Sell rating) in the short run. The company is highly dependent on Tysabri for revenue generation.
In this scenario, we note that an increase in the number of progressive multifocal leukoencephalopathy (PML) cases associated with the use of Tysabri could lead to a slowdown in the sales of the drug going forward.
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