With pressure mounting on Elan, increasingly directed towards chief executive Kelly Martin, to make some significant structural changes to address serious concerns as to how the company will meet debt repayments of $1.77bn, starting in 2011, the Irish group started the ball rolling today with a fairly modest cost-saving plan to close offices in New York and Tokyo, resulting in 114 job cuts and annual cost-savings of $20m – $25m.

Whilst this attempt to minimise cash burn is likely to be welcomed by investors as a step in the right direction, it is unlikely to appease many increasingly vocal and disgruntled shareholders who have seen Elan’s shares crash 82% in the last five months following renewed safety fears over MS drug, Tysabri, and disappointing phase II data for Alzheimer’s disease hopeful, bapineuzumab. With the credit crunch putting paid to Elan’s main strategy to meet its debt obligations by selling-off its drug delivery unit for $1bn – $1.5bn, the company may now be forced to renegotiate the commercial rights to its crown jewel, Tysabri.

Step one – reduce current cash burn

Today’s announcement will see a 7% reduction to Elan’s global workforce of 1,700 employees and comes in the wake of recent criticism that the company simply has too many operations in too many countries, vastly out of proportion to what  Elan really needs from an operational perspective.

According to consensus forecast data from EvaluatePharma, Elan is not expected to make a profit until 2011, when the first $1.15bn in debt repayment is due. A further $615m is due in 2013.

With such a high cash burn rate, today’s plans are much-needed, but considering even big pharma companies have initiated some pretty dramatic restructuring and cost-saving efforts this year, shareholders will be hoping for further measures over the next 12 months.

Step two – improve liquidity

In the current economic climate, companies with excessive levels of debt on their balance sheet are subject to increasing scrutiny and harsh treatment by investors which, along with the setbacks to Tysabri and  bapineuzumab, has no doubt been a factor in Elan’s shares touching a three-and-a-half year low of $5.36 last month.

With $1.77bn in debt and a forecast cash balance of $470m by 2011, clearly something fairly dramatic needs to be done.

Indeed, Garo Armen,  Elan’s chief executive between 2002 and 2005, this week suggested the group may have to sell off its entire commercial rights to Tysabri for around $2bn in order to retire this overhanging debt.

Tysabri is currently commercialised through essentially a joint venture agreement with  Biogen Idec with the two companies splitting profits on  Tysabri equally. A $2bn price tag for  Elan’s rights to Tysabri looks about right given that EvaluatePharma’s NPV Analyzer values the drug at $1.94bn.

Whilst the sale of Tysabri would certainly cover these debt repayments, and some, the problem is it would leave  Elan with a fairly high-risk product pipeline, led by  bapineuzumab, currently in phase III trials and not expected to reach the market until 2011 at the earliest.

With a complete sale of Tysabri seen as a last resort, it appears more likely  Elan will first attempt to renegotiate some of the terms of their existing deal with  Biogen Idec, such as seeking a lump sum payment in return for a reduced profit share in the future.

When Biogen Idec put itself up for sale a year ago a lot of talk focused on the possibility of a buyer having to renegotiate the terms of the  Tysabri deal with  Elan; as such, there is no reason why such discussions could not be entered into by Elan and  Biogen Idec.

Refinancing a possibility, but not just now

In 2006 Elan faced a similarly dangerous debt repayment situation with around $900m owed by 2008, but the company, run by the same management team as is in place today, successfully paid off parts and re-financed the remainder of this debt.

However, the credit and debt world today is a lot less forgiving than it was in 2006, therefore the prospects of the company pulling off a similar feat any time soon look slim. Nevertheless, November 2011 when the first debt is due remains a fair way off and the financial climate could well become more favourable by then, which would also mean the spin-off of Elan’s drug delivery business becomes an option again.

The problem for Elan though is that shareholders are unlikely to be impressed with a “wait and see” approach to dealing with this issue and as such will be looking for further cost-saving initiatives and even more dramatic moves over the next year.