The Pot of Revenue at the End of Elan's Rainbow
By Herb Greenberg
Senior Columnist
11/06/2001 12:20 PM EST
URL: thestreet.com
My interest in a company is easily piqued when one or two analysts veer
from the herd and don't rank the stock a buy. Such is the case with Elan
(ELN:NYSE - news - commentary) -- at least three of more than 15 analysts
have holds on the stock.
And not just mundane holds based on something like valuation. These are
holds that raise serious questions about the quality of Elan's sales and
earnings. It kind of reminds me of the analyst action in Lucent (LU:NYSE -
news - commentary) the year or two before its fall.
Elan is no stranger to this column or to controversy: The Irish drug
company was mentioned here back in 1998 because of joint-venture deals that
appeared to involve money coming off Elan's balance sheet and into the
coffers of joint-venture partners, who then fed it back to Elan in the form
of licensing payments. The SEC subsequently ruled that the company should
improve its disclosure regarding joint-venture deals, which it did for one
or two years before abandoning the disclosure altogether!
Since then, there have been numerous articles and reports questioning
Elan's accounting -- all of the criticism sliding off what appears to be a
classic teflon stock. But even the best teflon eventually shows scratches,
and this is why Elan is worth mentioning yet again.
This time the focus is on Elan's revenue recognition policy, which is
described in its last annual report (which is available only electronically
on Elan's Web site, because, as a foreign company, it doesn't have to file
any reports electronically on the SEC's Edgar site). In the annual report,
Elan's revenue recognition policy was updated to include "sales of
inventory and related product rights." That means Elan is lumping proceeds
from the sale of product lines under "product sales" -- hardly what you'd
call high-quality product revenue from a company that has been boasting
about the rising quality of its income.
That's especially true when you consider that revenue from divestitures is
almost 100% profit, which makes gross margins look higher than they really
are. In a report last week, an analyst from ABN Amro, trying to counter
negative criticism on this issue, said Elan is accounting for divestitures
in a way that won't help or hurt earnings. (Won't hurt or help them
relative to the product not being sold, maybe, but since when does revenue
not help earnings?!) The analyst then gave the example of how Elan will
book the revenue from the sale of one product line over "a defined period."
Great, so they'll get the pop over several quarters to boot!
Such low-quality revenue joins revenue from research projects and
royalties, licensing and fees, which have also been higher over the past
two years than analysts had expected. What's more, Elan appears to be
making stock-financed acquisitions to offset the slower-than-accepted
growth and launching of new products. (In the process, of course, it is
diluting shareholders.) Non-internal growth is so weak, in fact, that the
company has "filled this gap ... with any device it could find -- poor
acquisitions, product divestitures booked as sales, circular joint-venture
fees, R&D revenues, out-licensing, etc.," says CS First Boston analyst
David Maris, a longtime Elan critic, in a report to clients.
Maris would not respond to my inquiries. Elan, meanwhile, didn't respond to
my written questions submitted in the middle of last week. As usual, I'll
pass along any comments after I receive them. |
