Today's stock selection:
ELN Elan
žInspired by:

Elan is way down and I'm buying

I'm buying drug maker Elan ( ELN , news , msgs ) even though it is down more than 60% in the last three days. Here's why:

Alzheimer's test results: Pass or fail?

Well, needless to say, Wall Street didn't like what it heard on Tuesday night because the stock lost over 40% of its value the next day. Such a dramatic fall might be justified if bapineuzumab was a total failure, but in my view, that is not the case.

In order for a trial to be "successful," the difference in patient outcomes between the treatment group and the control group must be large enough to refute the possibility that it arose solely due to randomness. Scientists have generally agreed that if the difference is big enough so that there is less than a 5% chance that it is was a fluke of luck, then the trial has succeeded.

In Elan's clinical trial, patient outcomes were measured in two ways. Without getting technical, using one measure the likelihood the difference could have arisen by chance was 7.8%. Since there is more than a 5% chance that the difference could have arisen by chance, it is accurate to say that the trial did not succeed by generally agreed upon standards.

However, it would be just as accurate to say that we can be 92.2% confident that the differences were not due to chance. In other words, we can be more than 90% confident that the drug had a beneficial impact over the best available drug currently on the market. Is this a failure? I don't think so.

The results also show that patients who carry a specific gene, called ApoE4, respond differently than those who do not. Simply put, for patients who don't carry ApoE4, the drug worked.

Why a single gene matters

In truth, clinical trial data can often be twisted and contorted until a drug shows efficacy for some subgroup of patients. For example, it could turn out that the data shows the drug was effective for patients who are more than six feet tall. But, if it did, people would be justified in ridiculing the results because there is no reason to believe that efficacy should be related to a patient's height.

The difference in results for carriers and noncarriers of ApoE4, however, is not so easy to dismiss. This gene is suspected to be involved with Alzheimer's (we don't know exactly how), so it is not at all surprising to learn that a drug that might interfere with the progression of Alzheimer's might also affect carriers of the gene differently than noncarriers. The accusations of dishonesty that the company has endured for reporting this result are not deserved.

In the end, I think investors can be a little more than 90% confident that bapineuzumab has a beneficial impact on Alzheimer's patients above and beyond the best available medication. In addition, I think it's fair to say that we have learned from this trial that there is a genetic marker that can be used to identify patients for whom bapineuzumab may have an even better chance of working.

The Phase 3 trial was clearly designed with this lesson in mind. Even if the Phase 3 trial results confirm efficacy for just noncarriers of ApoE4, there are so many Alzheimer's patients that this drug would still be a blockbuster. I don't see how this concern can justify the 40% drop in the stock price.

Brain disease tied to Tysabri

In 2005, Elan had to take Tysabri off the market when three patients came down with PML, and two died.

At that time, the stock, which had been trading at $30, lost 90% before finally reaching a bottom at $3. Shareholders who went through that experience will never forget it.

I originally bought Elan about three months later, in June of 2005, at $7 after I heard from about 100 multiple sclerosis patients that even if Tysabri carried a 1 out of 1,000 chance of death from PML, nearly all of them would accept that risk in order to get the improved efficacy Tysabri offers.

More than 31,000 patients have used Tysabri since it was brought back on the market a little more than two years. About 14,000 patients have been using Tysabri for more than 1 year. Even with the two new cases of PML, the actual risk appears to be much lower than the 1 out of 1,000 that is already printed on the FDA approved label. In addition, since both of the new patients who contracted PML are alive (and one is already home), PML is no longer a death sentence.

Since the risk of getting PML is lower than expected, and the consequences are less severe, the risk-reward trade-off that multiple sclerosis patients have to make seems to have improved in favor of Tysabri.

It is understandable that many investors suspect Tysabri might be pulled from the market again. If that happened, Elan would be in a dire situation. But I don't think there is much of a chance that happening unless the incidence of PML is greater than 1 in 1,000. And even then, if PML can be treated so patients can survive it, I think patients and the FDA would be willing to accept the risk in order to obtain the increased efficacy of Tysabri.

No fast recovery

But at the current price I think you are getting the most effective multiple sclerosis treatment and the most promising Alzheimer's drug candidate at a time when maximum risk is already priced in.

So I'm starting my Strategy Lab portfolio with Elan, a stock I've played in Strategy Lab more than once over the years. And, yes, for full disclosure, it's owned by my mutual fund in real life -- and we're buying, not selling.

http://articles.moneycentral.msn.com/Investing/StrategyLab/Rn...

I agree!