This morning’s share price reaction seen in Biogen-Idec Inc. (NASDAQ: BIIB) and Elan Corp. plc (NYSE: ELN) is severe.  We do not want to try to sound as though this TYSABRI news is something that isn’t of consequence and don’t want to make it sound like it is a non-event.  Last night after the close the companies released the bad news that two more PML cases had been discovered in TYSABRI patients using the drug for the treatment of Multiple Sclerosis.

Wall Street has a history of murdering companies over bad news.  Thisnews isn’t just bad, and we in now way want to sound like Dr. Panglosshere.  The companies had not disclosed this in recent communications.The problem that we have with the severity of the drop is that unlikein the first case where the company withdrew TYSABRI entirely becauseof PML cases, the drug is staying on the market this round.  Whether ornot you think this is extremely isolated or more of a routine sideeffect with formal odds of 1-in-1000 is the issue.  Technically theseodds are less considering the numbers  available, but two notificationswithin two days could lead one to deduce that there could be morenotifications.

Newly diagnosed MS cases and those who are still able to functionnormally may have their opinions or their choices affected for theirtreatments.  If you know anyone with advanced MS and know what theirfears are they would probably take a 1-in-1000 risk on top of otherside effects or issues that are known. 

Here is what the issue is that makes 2008 different from 2005.  In 2005the company decided to withdraw the drug entirely after its discoveriesof PML cases.  There was a precedent after Merck’s woes that we reallythink caused the company to act too harshly against its own intereststo avoid the same PR blunder.  The company could have left TYSABRI onthe market and done a self-imposed severe warning letter.  At the time,many patients would have still wanted the drug and that was evidencedby the sudden use that came after they re-released TYSABRI.  It wasn’teven fully released to its potential when it dropped the ball in thefirst place.  Did it impact the total number of those who would have wanted the drug? Of course.

Don’t take this as any polishing job, because that isn’t the intent.There are apparently more than 30,000 MS patients taking TYSABRI.  Thatnumber is going to likely come down on the new data, but we won’t knowhow much that is for another two weeks or even longer.  Even if atheoretical half of the TYSABRI users throw in the towel, they arelikely to return as TYSABRI users if the incidents are low and if theyrealize their treatment options elsewhere are not helping theircondition.

TYSABRI has issues, that is certain.  All drugs have issues regardlessof how severe this sounds.  It isn’t fair to draw the comparison tofood allergies so we won’t.  But TYSABRI has a place and the FDA hasalready noted that the number incidents in the past are not outweighedby the benefits of the drug.  The company isn’t making any guidancecomments of yet, which is understandable.  The drug is staying on themarket.  It will lose patients as you would expect.

This is also in no way a call that the two stocks will suddenly reboundto where they were.  In fact, massive gap downs are frequently followedby a dead cat bounce and then more selling.  But this may be the startof a great set-up opportunity that hasn’t been available forshareholders in years.

Both stocks are at new 52-week lows.  After about 30 minutes of tradingwe have seen a 25% drop in Biogen to $52.27 (52-week range $53.65 to$84.75) and seen a 45% drop in Elan to $10.88 (52-week range $17.07 to$37.45).

Jon C. Ogg
August 1, 2008

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