At $7.28 a share, Elan is valued at $2.8 billion. It has $2.3 billion in long-term convertible debt, but that won't come due until 2008 or later. Meanwhile the company has $1.5 billion in cash, operating cash burn of $220 million a year and sales of $482 million. Dreams that Tysabri will sell $4 billion a year appear to have gone forever. But if the drug returns it could hit $500 million annually. After costs, Elan would get around a third of that straight through to the bottom line.
This would be a speculation rather than an investment. But any good news on Tysabri could be expected to produce a sharp rise in the stock price. Market observers note there are plenty of bears out there who would be forced to buy in stock quickly to cover their position if that happened. That would send the price up further. The stock was $27 before the bad news.
Those looking for action might chance their hands at Elan options rather than stock. Options are a way of betting that a share price is going to move a long way quickly. A two-year $7.50 ``call'' option on Elan gives you the right to buy Elan at $7.50 a share at any point over the next two years.
If the stock doesn't rise, or it collapses, you just throw the option away. You lose nothing more than the cost of the option itself, currently just $3.20.
But if the stock were to rise to, say, $15 you've booked a $7.50 profit. Of course, you have to deduct the cost of the option, but you've still more than doubled your stake ----------------------------------------------
There is another easier more foolproof way. Buy the stock for $7.30, put up $3.65 consisting of .45 cents your money, and $3.20 of SOLD two year calls at $7.50.
$3.20/.45 is a seven banger, not "double". The guy in the Boston Herald knows something about options, but not enough eigth grade math.