Elan's 'stabilising and fixing' project nears completion

When Mr Kelly Martin was appointed to the position of chief executive of Elan about a year and a half ago, few would have envied him the job, writes Una McCaffrey.

The company had just suffered a classic fall from grace and was facing into a massive restructuring plan littered with seemingly-unpayable debts and multiple opportunities for failure.

Mr Martin, with his 21-year history of fixing up firms at Merrill Lynch, was seen by many as a fire salesman who was simply lining up the firm's various assets for disposal so that the memory of Elan's problem was wiped from corporate consciousness.

In the event, this was not true, but Mr Martin chose to prove his commitment to building Elan back into a respected pharmaceutical force with actions rather than words. Immediately, he set about "executing the game plan" of raising $1.5 billion in disposals to meet debt payments and cutting one fifth of its workforce. The flipside of this was an effort to ramp up the development of its potentially-lucrative pipeline so that the future, as well as the present of the company could be secured.

Mr Martin, who joined Elan some months after the recovery game plan had been drawn up, acknowledges that the task was a tough one, but he points out that he had worked under equally challenging conditions in the past. The only difference was that this time he was the man in the top seat.

In the event, the challenge looks to have been met by the man, with Elan now having surpassed its money-raising targets (by raising $2.7 billion) and escaped its most pressing debt crunches.

Attention has justifiably turned to the firm's pipeline, with news of investment, such as last week's €35 million upgrade of an Athlone facility, helping to reinforce the notion that Elan is again a powerful force. Further expansionary announcements are expected to follow before the end of the year, as the firm's share price hovers some 600 per cent over the level it was holding when Mr Martin took the job.

He says his public strategy over the past year and a half was about "not surprising the market", and assuring observers that the company and its management could deliver. For him, this ability to fulfil promises has been marked by three or four clear events, all of which contributed significantly to the firm's viability.

There was the settlement of a deal to sell Elan's primary care franchise to King Pharmaceuticals around a year ago after the matter became mired in a lawsuit. The closing of the deal massively reduced the debt pressures that weighed on Elan at the time and gave the market some faith in a brighter future. "We showed that we could execute," Mr Martin said.

His next landmark was "working through" the filing of Elan's annual report with US regulator, the SEC, last summer. This was a saga that spanned about 10 weeks, from the day when Elan said it would be delaying the filing as it sorted out complicated accounting issues with its auditor, KPMG, to the date of actually presenting the report.

Holidays were put on hold, as the market became increasingly focused on the idea that if the 20-F was not filed, Elan could be in default to its debt-holders and could be driven to failure.

Better for the heart was Elan's ability to access the capital markets last November, just 16 months after the plan to drag the firm towards recovery was initiated.

"It proved that the market had faith in management," says Mr Martin. "All these things feed on each other," he remarks. As things stand, Mr Martin sees the "stabilising and fixing" project as being about 80 per cent done.

The most substantial unknown that remains on the radar is a US regulatory investigation into Elan's accounting affairs. This Securities and Exchange Commission (SEC) inquiry has been hanging over the firm for more than two years, and remains an issue that affects Elan to its core.

This is evident in numerous practical ways, such as the inability of some analysts to cover the stock because it is subject to a regulatory investigation. There is also the small matter of pension funds being precluded from investing in Elan for the same reason.

Mr Martin says this, when added to outstanding shareholder litigation against the firm, makes up the bulk of the 20 per cent of "the fixing" that remains outstanding. He expects both matters to have been neutralised by the end of the third quarter.

Elan will meanwhile continue to work on selling off its EPIL assets, or the assets contained within the off-balance sheet special purpose entities that concerned the SEC in the first place.

These EPILs are being dissolved and their assets auctioned as part of Elan's "keep it simple" strategy.

The $450 million due to the holders of securities linked to EPIL 2 will be paid off on June 28th, with a further $390 million due at the end of February 2005 under EPIL 3. A 3.8 per cent holding in Galen will be up for grabs within this second tranche.

More pressing for the market at the moment is the progress Elan has been making on its flagship drug, Antegren. Mr Martin is hopeful that Antegren will be approved for treating multiple sclerosis in late autumn with a view to a launch in January 2005.

The potential of the drug is huge, with analysts estimating the possible global market at up to $8 billion and Antegren's share of this at up to $6 billion.

Prialt, a powerful painkiller, is at an early stage in the approval process, but should also hit the shelves within the next two years. And still in the background are Elan's plans for treating Alzheimer's.

This drug development programme, which arguably holds more potential than Elan's other offerings, is still at an early stage but at least three clinical trials are due to be in place by the end of next year.

All in all, says Mr Martin, his job is "a lot of fun" at the moment, even if "not everything works perfectly". In this light, he sees himself remaining with Elan for "the foreseeable future", even after all the fixing up has been done.