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BioPharm Executive: Here's to Elan Corporation PLC (ELN): Is it a Toast or a Wake?


6/24/2013 2:05:29 PM

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June 26, 2013

Here's to Elan Corporation PLC: Is it a Toast or a Wake

"D'anam don diabhal! Do you think I'm dead?" shouts Tim Finnegan at the end of the folk song Finnegan's Wake. Elan Pharmaceuticals CEO Kelly Martin is similarly defiant, and considering what he's survived in his career, perhaps rightly so.

Elan's story is a yarn worthy of the Emerald Isle, from its humble beginnings in 1969 to a mid-1990s acquisition spree that brought revenues close to $2 billion by the end of the century. At the height of the market in 2001, Elan was Ireland's biggest business, the roar in the Celtic tiger, with a market cap of $22 billion.

Then came an accounting scandal in 2002 as concerns about off-balance sheet vehicles led to the company being called "Europe's Enron." The controversy eventually led to the ouster of them-CEO Donal Geaney. (I was but a young whippersnapper at the time, but I remember that even in the late 1990s Elan's accounting laxities were no well-kept secret).

What followed was a fight for survival, as Garo Armen, founder and CEO of Agenus, came in for an interim stint to sell off assets and simplify the balance sheet. Months later, the company was still in trouble but starting to point in the right direction.

Enter Kelly Martin, a Wall Street banker from Merrill Lynch with no pharmaceutical industry experience, widely expected to clean house and sell the company, or quickly appoint a successor. Instead, he stayed...and stayed. He oversaw the launch of the multiple sclerosis blockbuster Tysabri (itself a controversial story), and eventually brought the company back to profitability after a decade of losses.

But he also presided over a stunning decline in the company's value in late 2008--something from which the company has still only partly recovered. One major shareholder, former Abbott Labs president and COO Jack Schuler, called for Martin's termination at the time, citing a "combination of management incompetence and misuse of company resources [that] have caused Elan to lose more than $13 billion in value in...four months." He cited Martin's lack of experience, his mismanagement of the Tysabri launch and the company's relationship with Biogen Idec, and "egregious misuse of company resources"--including the use of private jets (a very odd indulgence for a money-losing biotech). That year, Martin also received the first-ever "Nance" award for worst biotech CEO from TheStreet.com.

Schuler and a fellow dissident, former Eli Lilly CEO Vaughn Bryson, eventually won seats on Elan's board but left 18 months later after they failed to implement any changes. Further controversy came in 2010 when Elan quietly entered an agreement granting buyout rights to Johnson & Johnson and Biogen Idec in the event Elan was acquired. Shareholders weren't informed of this poison pill.

Danish investor Ib Sonderby at the time complained of "deeply flawed business decisions and shameless self-dealing grows with every quarter, while shareholders and, more appallingly, patients pay the price." He pointed to what he alleged were cases of inside dealing and conflicts of interest, such as the decision to sell the pain drug Prialt at a bargain price to a privately held company run by former Elan execs. Shortly after this, Martin promised to step down in 2012...but when the time came, didn't.

All this is relevant, of course, because Elan has since February been furiously fighting off a hostile takeover bid from Royalty Pharma. Royalty came out with a bid that eventually escalated to $15.50, or $8 billion, contingent on Tysabri hitting certain sales milestones.

Elan pulled out all the stops to thwart the deal, agreeing to pony up $1 billion for a share of potential future royalties for four Theravance respiratory drugs partnered with GlaxoSmithKline; raising $850 million at 6.25% interest; entering a deal to acquire AOP Orphan Pharmaceuticals for $340 million; and taking a stake in Dubai-based NewBridge Pharmaceuticals for $40 million.

Now in fairness, arcane Irish takeover rules apparently prohibit some tactics companies might typically use to resist a takeover, incenting companies to find creative alternatives. But why that means Elan should instead resort to seemingly value-destroying transactions is beyond me. When it came time for shareholders to vote, they soundly rejected the Theravance and AOP deals. But they did vote in favor of a $200 million share repurchase program, which effectively thwarted the Royalty bid. Now that deal has lapsed and Elan is supposedly soliciting other offers.

I have to wonder if Schuler was right in an op-ed he recently penned for the Financial Times. The former board member stated that he was getting a sense of déjà vu, and that he has "no confidence that Kelly Martin or the other Elan board members will act in the interests of shareholders." Elan chairman Robert Ingram's retort, that Royalty's offer "wholly undervalues Elan," is a little weak.

We'll see who comes in with a better deal. Forest Labs, which knows a thing or two about unhappy shareholders, is being tossed around as a potential suitor. But for now Martin lives to fight another day.

-Karl Thiel

Read the BioPharm Executive online newsletter June 26, 2013.

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