Investors call for heads as Elan tumbles:
But the stricken pharmaceuticals group looks to rebuild
its crumbling share price, write Patrick Jenkins and David Firn:
Financial Times; Feb 6, 2002
By DAVID FIRN, PATRICK JENKINS and JOHN MURRAY BROWN
Shareholders are preparing to call for director sacrifices at Elan, the
fallen-star of the Irish stock market, following this week's smoke-and-mirrors
revelations from the pharmaceutical group.
One UK fund manager said: "I fully expect a Marconi-style purge. There are
three accountants running this company. They obviously know what they
are doing."
However, Thomas Lynch, executive vice-chairman, said resignations were
not on the agenda. "We see our responsibility (as) being to knuckle down
and rebuild the share price," he said.
Elan issued a profits warning on Monday and admitted that its US
accounts, which did not take account of off-balance sheet business, had
flattered earnings by more than a third.
The shares continued to fall yesterday, closing 225p lower at 995p. Elan
was worth just Pounds 3.3bn at the close, compared to Pounds 8.3bn a
week ago and a peak of Pounds 14.3bn last summer.
Elan's fall is the latest to hit the Irish market and comes after the share
price collapse of Parthus and Baltimore Technologies.
Brokers' ardour for the stock has cooled markedly, with Bank of America
and Goldman Sachs both announcing downgrades.
Even Elan's peers, several of which have close working relationships with
the company, have begun deserting it. One said: "We just want to keep our
heads down and distance ourselves from the company. That relationship will
have to be evaluated."
Nonetheless, European shareholders - who make up about a third of the
investor base - dismissed the idea that there would be US-style litigation
against Elan on this side of the Atlantic.
Two US law firms filed suits against the company on Monday, dismissed by
Elan yesterday as being without merit.
There were even signs that the worst could be over, as shareholders began
to speak of buying opportunities.
"If you look right back to the prescription data, then the business has
foundation," said one. "There is no comparison with Enron. Big shareholders
are having a look at whether this could be a good time to buy."
Analysts agreed, but insisted much remained to be done. David Marshall at
NCB in Dublin said: "There are still a lot of questions about strategy. A
focused cost-cutting programme is vital."
Elan has come a long way in the past few years. After starting out as a
small drug delivery company, it grew rapidly from the mid-1990s through
acquisition - and through the use of the kind of accounting methods that
have got it into hot water over the past week.
"While it lasted, it was great," said the finance director of a rival company.
"These accounting methods are perfectly legal. But they are pushing illusion
to the limit and investors don't like that."
Many fast-growing biotech and pharmaceuticals companies were
approached in the mid-1990s by bankers - predominantly by DLJ, now part
of of CSFB, Citibank and Merrill Lynch, Elan's adviser - with clever
accounting ideas.
Off-balance sheet vehicles were perfect for growing life sciences companies,
the banks argued, because they stopped costly R&D spending pushing
core earnings into deficit. Mr Lynch said they allowed Elan to buy products
and technologies without having to return to shareholders for funds.
Elan was not alone in being seduced. "These products were widely
marketed to companies by investment banks," said Mr Lynch. "Everyone
was pushing them."
Alza, bought by Johnson & Johnson last year, and Dura, bought by Elan 18
months ago, were among companies to use the technique.
But Mr Lynch acknowledged that the climate had now changed. "In good
times people don't look at your earnings too closely."
Whatever the excuses, Elan - Ireland biggest company by market
capitalisation until a week ago - has fallen clumsily and quickly from grace.
The damage done to business confidence in Ireland - both among domestic
and foreign investors - may be far-reaching.
Despite listings in New York and London, Elan's spiritual home remains the
Dublin stock market. The country's first homegrown high-technology
company, it was founded as a campus entity by Don Panoz, a US chemist
studying at Dublin's Trinity College.
Yesterday, as Elan struggled to explain itself to angry shareholders, it was
looking increasingly vulnerable to takeover, analysts said.
"If we got a bid, management would not stand in the way," said Mr Lynch.
Additional reporting by John Murray Brown
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