LOCAL NEWS: Geaney ready to defend Elan accounts
By Michael Murray
Dublin, Ireland, 3 February, 2002
The Sunday Business Post n7
Embattled Elan boss, Donal Geaney, has admitted the company has not done a good job in explaining some of its activities to the market.
But when he faces the media and the investment community at a briefing tomorrow, Geaney will defend his company against accusations of inadequate disclosure and scepticism as to the way in which the company accounts for contract revenues.
Already the Elan chairman has rebutted many of the allegations contained in last week's Wall Street Journal report which took issue with the Athlone company's accounting practices.
With investor nerves about accounting policies and off balance sheet transactions heightened in the wake of Enron's collapse, companies which undertake significant activity through joint ventures and partnerships are inevitably coming under the microscope.
The investor focus on Elan's business ventures, partnerships and quoted and unquoted investments is partly explained by the fact that its balance sheet at the end of 2000 had more than $1.5 billion tied up in financial assets of this kind, including some 55 business ventures and substantial securitised investments. This sum represented more than 25 per cent of total shareholder equity.
Geaney points out that the partnerships and business ventures do not have significant third party borrowings. That is because they are biotech companies which, by their nature, are lowly borrowed. The outstanding funding for these ventures will be met principally by investment from Elan and its partners.
One of the main concerns centres on the way in which profits are taken as revenues from licence agreements.
Part of these revenues are funded from equity and loans which Elan itself makes available to the licensees. But Geaney points out that the contracted revenue stream is of diminishing importance to Elan's revenue growth.
Nevertheless, he will have to convince investors tomorrow as to the quality and sustainability of this revenue stream.
Speaking about the way in which the company accounts for revenues from the sale of its non-core product portfolio, which is being sold as part of its rationalisation programme, Geaney told The Sunday Business Post that Elan's practice of including these sales as revenue rather than as exceptional items was consistent with many of its competitors.
But he pointed out that he was constrained by stock exchange rules from elaborating fully until the announcement of the full year results tomorrow.
He promised that at that stage he would give full details of the company's product sales programme and future plans.
"Elan hasn't done a good job explaining what the programme is and what the plan is," he said. "The idea is to get rid of small product lines and to become a leader with key therapeutical franchises."
The other issue relates to the value of the company's minority investments in partnerships and other entities. While the value of the publicly quoted investments, which represent 50 per cent of the portfolio, can be ascertained by reference to current market prices, the balance is in private companies where valuation is more difficult -- although values are independently reviewed by investment banks on a half yearly basis.
The company points out that it writes down those investments whose value has fallen, but it does not book surpluses on those whose value has risen.
This aspect of the company's accounting policies leans on the conservative side of the fence and the surpluses are currently estimated at $300 million.
As far as the company's joint venture funding is concerned, Elan has stated that there are contractual arrangements for funding the business joint ventures by both them (15-19 per cent of funding) and the partner company.
The current level of these commitments will be something Geaney is likely to be asked more about tomorrow.
Geaney's responses to the Wall Street Journal last week, followed up with answers to further queries from The Sunday Business Post this weekend were forthright and comprehensive.
There is no evidence or suggestion whatever of non-disclosure of issues or entities where accounting rules would require such disclosure.
Any comparison therefore with Enron appears very unfair.
Geaney's task over the coming days will not be easy given the complexity of Elan's accounts and the nature of the company's research and development and licensing activities.
For that reason he needs to be as detailed as possible about the joint ventures and partnerships, and to convincingly defend once again the method of booking licence income -- some of which is flowing from capital which Elan itself has provided to the licensee or its parent.
If he does that job convincingly, the prospects of a strong recovery in the share price look good.
Ronan Wallace of stockbrokers Dolmen Butler Briscoe believes that the criticisms of the accounting policies are not tangible to the current earnings growth story.
He believes the product portfolio is strong with revenues spread over a large number of products, and a strong balance sheet to bolster the product pipeline. |
