Elan's Armen: 'We will survive'
By Michael Murray, Markets Editor
Dublin, Ireland, 27 October, 2002
Elan's chairman and acting chief executive, Garo Armen, is putting on a brave face.
Armen believes that outside of the three core areas on which the company now intends to concentrate -- neurology, pain management and auto immune therapy -- surplus assets have the potential to yield up to $1 billion more than the targeted asset disposal programme of $1.5 billion over the next 15 months. Hence his convention that there is no impending cash crisis at Elan.
Armen said that the recent assets disposals, including Abelcet for $370 million, were achieved at sums in excess of book value and negotiations are proceeding for the sale of further assets over coming months. He couldn't say if these would be completed by the end of the current year and refused to identify which assets would be involved.
Asked about the rate at which the company was currently burning cash, Armen said that, on an ongoing basis, it will have product revenues of $500 million with a gross margin of 75 per cent before the new drugs pipeline kicks in. Against this, there will be research and development expenditure of $250 million. But over the next 12 months, there would be substantial exceptional costs, including legal costs, and rationalisation and redundancy costs.
Against that background, it is impossible to give guidance on earnings or cash burn. He stressed, however, that their asset disposal programme was "robust" because the priority at present was to remove the uncertainty about the company's future which was dragging down the share price. That price did not reflect the prospects of the company arising from the late stage of its drugs pipeline. It reflected fears on the part of investors that the company would not survive to "harvest the delicious fruit from the pipeline".
Armen said that there would be no "fire" sales of assets. Elan had one third of its disposal programme completed and he was "very confident" it would reach its target with bigger realisations than anticipated and sooner than anticipated.
On the drugs pipeline: "Amidst all the problems we have a very impressive pipeline -- real science." The development risk was low because of the late stage of development of its two key drugs: Antegen, which treats Crohn's disease and multiple sclerosis, and its Alzheimers drug. Elan had the most advanced Alzheimers programme in the world, he said.
Armen rejected suggestions that the problems at the company were leading to an outflow of key scientists. "The people in charge of the pipelines for Alzheimers, MS, and Crohn's disease are not leaving, they have devoted their lives and careers to these products and they are not walking away now. It is their life and their passion," he said. He remains optimistic about the outlook for the success of Elan's Alzheimers drug even though it was withdrawn last January because of problems of inflammation suffered by patients.
"The great majority of patients who showed inflammation of the brain following vaccination have now recovered," he said.
"If plaque building in the brain is responsible for Alzheimers -- as our scientists believe -- and our product removes that plaque as it does, then cognitive improvement in patients should be evidenced within a period of 12 months from initial vaccination. So by the end of the year patients who were dosed in the November-January period 2001/02 should be demonstrating cognitive improvement."
Armen said it takes time for the immune system to kick in after vaccination and chew up plaque -- and, after it has been cleared out, for the surrounding cells to migrate to replace those which have been removed.
On the redemption of the company's "poison put" bonds, Armen said he wasn't going to show his hand.. He would not comment on speculation that the company would conduct a "Dutch auction" and buy back the bonds at the price demanded by the lowest bidders. But he said that whatever route was chosen it would not cause a liquidity crisis.
The company has the option to redeem the bonds in cash or shares, or could buy some of them back in the secondary market. Armen's present strategy appears to be to ensure that the company's survival prospects are assured so that it can capitalise on the potentially highly lucrative late stage development programme.
It seems likely that Elan will adopt a variety of tactics in dealing with bondholders. This could include the buyback of some of the bonds in the secondary market at a discount over the next six months as liquidity generation permits.
The remaining bondholders could be then offered a restructured package whereby, in return for some dilution of 2003 redemption or conversion rights, they are given incremental upside via equity warrants. These would be valuable if the development pipeline delivers to the extent expected. The current market price of the poison put bonds offers a yield to the "put" date next year of over 70 per cent.
This suggests bondholders remain sceptical about the ability to redeem the bonds in full next year.
Armen would not be drawn into criticism of the former chief executive Donal Geaney or his finance director Tom Lynch. He said that if they had not come up with some of the creative financing structures that have caused such controversy, they could never have financed the pipeline for Alzheimers and autoimmune drugs. Armen did, however, admit that the more recent risk sharing agreements they had entered into created incremental financial exposure for Elan that was not commensurate with the potential reward arising from that exposure.
The company continues with its search for a chief executive but is remaining tight-lipped on both the progress being made and the identity of the headhunter. It is understood that the search is being conducted primarily in the US and that the new CEO will be based there.
On Elan's commitment to Ireland, Armen said that while the company would not do anything that didn't make business sense, it was inconceivable that after retrenchment the company would not have substantial operations in Europe and that Ireland would almost certainly be the preferred place.
Elan's share price has continued to decline in recent weeks to reach a low of €1.23 on October 9 there has been a modest recovery over the past week. The extent to which investors have been dumping shares has reflected the depth of investor concern about future prospects.
The risk they run is that in the event that Elan is able to confirm that it can proceed with the commercialisation of its Alzheimers drug, the volume of short positions on their shares is so great relative to the daily trading volumes in the shares that hedge funds and other bear traders may face a savage squeeze.
Elan still has much to prove, but at least, under Armen, transparency is improving and the company has begun to adopt a more coherent approach towards communicating with the market.
His steady hand and focused approach certainly enhances Elan's mid-term survival prospects.
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