A buy-side and sell-side analyst say Elan's bonds are drastically undervalued, despite a Securities and Exchange Commission query into the Irish drug company's investment banking relationships, and the resignation of two top executives last week. The sell-sider argues that the company's products generate sufficient cash flow to pay off its debt, and that the $4 billion in cash on its balance sheet gives it flexibility for its near-term needs.
The buy-sider believes Elan's executives were forced to resign, as the company has been under pressure due to recent earnings revisions, and the prior management team had lost its credibility. He is encouraged by Elan's plan to sell $1 billion in assets over the next nine months, arguing that it appears, even by conservative estimates, to have enough in managed funds and equities to raise the money. He says the firm is considering adding to its holdings, but needs to learn more about its new chairman, Garo Armen, and gain some assurance that the firm's off-balance sheet investments have not impaired its ability to raise cash. Elan's 7.25% notes of '08 (Ba2/BB-) were bid at 52 last Wednesday.