Elan's (ELN) shares took a beating Tuesday after the Irish drug company's partners abandoned a development program for what was once believed to be a potentially promising treatment for Alzheimer's disease.

 

Elan partnered with Johnson & Johnson (JNJ), which was working with Pfizer (PFE) to develop bapineuzumab, a drug aimed at treating mild to moderate Alzheimer's. After an earlier clinical disappointment, the drug failed again in a pivotal study conducted in hopes of eventually winning U.S. approval for the treatment. The companies are giving up on the trial.

 

Even though the news was mostly expected, investors were fleeing all three companies Tuesday. Elan's U.S.-traded opened with an 11% drop at $10.01, but recovered throughout the day to close down under 1% at $11.15. Pfizer fell 2% to $23.74, and J&J dipped 0.8% to $68.29. Shares of Eli Lilly (LLY), which separately is developing its own Alzheimer's treatment, slipped more than 2% to $42.75.

 

Elan gets almost all of its revenue from Tysabri, a multiple sclerosis drug it markets with Biogen Idec (BIIB). The Alzheimer's drug represented a new source of sales in an important treatment area. So, what now for Elan?  

 

In a statement, Elan CEO Kelly Martin says his company will focus on Tysabri sales, cost cutting, and a stronger balance sheet "to provide a unique growth and value investment thesis to the marketplace while continuously reducing overall financial risk."

 

What Elan should be considering is a strategic alternative, such as a sale to Tysabri partner Biogen, RBC Capital Markets analyst Michael Yee says.

 

Yee says there's a bull case for an Elan takeover and he recommends buying the stock. (For one thing, Martin has announced that he's leaving the company and it's unclear who will run it. The executive previously said he would stay long enough to see results from the bapineuzumab studies.)

 

Leerink Swann analyst Marko Kozul doesn't think Biogen is in any rush to buy Elan, however. And if such a potential transaction should occur, Kozul predicts that it wouldn't happen until sometime next year after Elan's shares fall even further. The analyst rates the stock a hold.

 

Biogen had $2.9 billion in cash and liquid securities as of June 30. Elan's market cap was $6.2 billion Tuesday morning.

 

While Elan's shares recovered from the initial double-digit dip, the recovery may be a little premature.

 

A survey of 181 investors by ISI Group analyst Mark Schoenebaum estimated that the value of the Alzheimer's treatment was worth about $2 of Elan's stock price (before the drop on Tuesday). Elan shares fell 19% year-to-date.

 

More from Minyanville

• 9 Reasons Facebook Will Crash
• Oh, Phabulous Day! It's a Phablet
• 9 Financial Documentaries That Will Change the Way You Think About Money and Investing