Elan Corporation (ELN) recently received a subpoena from the US Securities and Exchange Commission (SEC) regarding the company’s disclosure of two brain disorder cases (in July 2008), often fatal, tied to the use of its drug Tysabri for the treatment of multiple sclerosis.

Elan has a marketing agreement with Biogen Idec (BIIB) for Tysabri. In addition, the subpoena asked for detailed information regarding clinical trial data on bapineuzumab, a drug for the treatment of Alzheimer’s disease. Recently, Johnson & Johnson (JNJ) paid $885 million for an 18.4% stake in Elan in addition to $500 million for a majority stake in the company’s Alzheimer’s disease pipeline.

As a reminder, in July last year, both Elan and Biogen announced the occurrence of two cases of brain infection, progressive multifocal leukoencephalopathy (PML), in patients taking the drug. Meanwhile, 11 such cases have been reported by the companies through July 2009. Since then, the companies stopped informing public about the infection. The drug was withdrawn from US markets in 2005 due to the PML concern but was reintroduced after one year with a strict warning regarding the occurrence of PML.

The occurrence of this infection is believed to be related to the prolonged usage of the therapy (in the last reported case, the patient took 29 doses of the drug). The break in therapy, if advocated by doctors, would hamper sales of the drug, hitting the company’s financials.

Despite this, the drug continues to post strong sales. Total Tysabri sales increased by a healthy 27% to $254 million during the second quarter of 2009 compared to $200 million in the year-ago period. For 2009, we see total worldwide sales of more than $1 billion.

Initially, Biogen predicted about 100,000 patients would be taking the drug by 2010. But the current level of 43,300 at the end of June is way below the mark. Though the company is hopeful of achieving its target in due course (not within the 2010 timeframe) we think the PML incidence will be a major roadblock. Physicians and patients continue to have faith in the drug even with the risk of PML due to its effectiveness. We maintain our Neutral recommendation on Biogen.
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