A somewhat lukewarm comment from The Financial Times. It seems to me as if most "people" - regardless of on whose side they are on this argument - have a lot of opinon about facts which are not known (by them or us). Hopefully Elan will straighten out the questionmarks next week and sort out what is product revenue and what is fees from companies who in one way or another are to be considered as affiliated.
Ice
Elan shares fall as concerns grow over accounting
By David Firn in London and John Murray Brown in Dublin
Published: January 30 2002 19:25 | Last Updated: January 30 2002 19:33
Shares in Elan fell 20 per cent per cent on Wednesday as concerns grew over its use of off-balance sheet transactions.
The shares fell E8.59 to E32.42 in Dublin, extending the drop in the share price of the battered Irish pharmaceutical company from a high last June of E73.80.
The stock has been hit by problems with an Alzheimer's disease vaccine and concerns about Elan's accounting practices in the wake of the collapse of Bioglan, a UK pharmaceutical group with debts of £105m.
The fall on Wednesday though was triggered by an article in the Wall Street Journal that said a string of off-balance sheet deals had distorted its earnings.
Elan, which has seen its revenues double from $878m in 1998 to $1.5bn in 2000, denied the claim, saying the deals had brought it a pipeline of promising new medicines.
Donal Geaney, chief executive, also tried to distance the company from growing questioning of corporate accounting policies in the wake of the collapse of Enron. He said there was no similarity between Elan and Enron.
"Elan has no debt that is not on its balance sheet. We have $2bn in cash. We can meet all our commitments. We have no refinancing. It is absolutely an incorrect and false comparison to make," he said.
However, it is difficult to gauge how reliant mid-sized pharmaceutical companies are on off-balance sheet transactions.
But investors are now looking closely at the accounts of speciality companies on both sides of the Atlantic for evidence of circular deals. Under such deals, a company makes investment in another drug companiy. They then receive payments from the drug company for a licence to develop a product or technology.
The original investment goes on the balance sheet as an asset, while the return payment is recorded as income which artificially inflates earnings in the short term.
Until recently, investors had been happy to trust companies that had a track record of doing deals, but the collapse of Enron has shocked them out of their complacency.
Equity analysts and auditors who might be expected to warn of potential problems are increasingly tied by corporate finance and consulting teams keen to do business with the companies.
"With the number of deals being done there are some big fees to be had," said one analyst who declined to be named.
"I don't think large cap [pharma] companies are too much involved in off-balance sheet deals, but it is different for the smaller companies."
The analyst added some smaller companies had to stretch the limits of their accounting policies because of their financial position.
"Some of them are under a lot of pressure to flatter their P&L. There are ways you can circumvent the rules without breaking them and it is very hard for the auditors to stay stop," he said.
Elan is one of a small number of so called emerging pharmaceutical companies, fast growing firms focused on niche products.
As industry leaders such as Pfizer and GlaxoSmithKline grow ever bigger, smaller companies have sprung up to focus on products too small to justify the massive efforts the major companies put behind their blockbuster medicines.
As a result of their spectacular growth, the p/e ratings of companies such as Galen, Shire, Elan and until recently Bioglan, exceed those of their larger competitors by a significant margin.
However, they require a constant stream of ever-larger product deals to maintain their growth. Analysts said it was difficult to tell how widespread the use of off-balance sheet deals was in an industry where licensing deals and marketing alliances were common.
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