Elan's warning puts investors to flight

Elan shares plummeted in New York and Dublin after the company warned yesterday that profits would fall this year and revenue growth would be "slower than anticipated".

Following a 25 per cent fall last week, Elan shares dropped more than 35 per cent at the opening in New York yesterday, losing more than $10 to just under $20 in early trading.

By the close in New York a little more than $5 billion had been wiped off the value of Elan with the share closing at $14.95, just off its low of the day of $14.25 and down from Friday's $29.95 close.

In Dublin Elan's market capitalisation dropped to €6.5 billion (£5.1 billion) from €11.5 billion, reducing its status as the once largest Irish company on the market to the fourth largest company after the two big banks and CRH.

Announcing fourth-quarter and full-year results for 2001 in line with expectations, Elan said it expected net income this year to be between $570 million (€656 million) and $610 million, a fall of about 15 per cent on the net income of $696.5 million before "other charges" for 2001 announced yesterday. Earnings per share are expected to be down from $1.92 to $1.55-$1.65 this year.

Elan warned that the late introduction of new products, additional costs to position the company for future growth and the absence of the 2001 once-off $238 million revenue boost from non-core product sales would mean revenue growth this year would be slower than anticipated.

The company said it expected to generate revenue of $2 billion to $2.1 billion this year, just 8 per cent up on the 2001 revenue of $1.86 billion announced yesterday.

Elan said additional costs of some $225 million would be incurred this year to "position its pharmaceutical business for future growth and complete its transition from a drug delivery company to a biopharmaceutical company".

These costs include:

Chairman and chief executive Mr Donal Geaney said the company was "making the difficult decision to incur the necessary expenditure" to achieve its plan to become a high-quality fully integrated biopharmaceuticals business with one operating structure. Elan needed to keep "an eye on the forest not just the trees", he commented.

Although 2002 would be "a tough year", the company was taking the necessary decisions for the future, he said.

In the future earnings per share growth would be driven only by product revenue and the fruits of the product pipeline, he said.

Expressing confidence that he would deliver his 2002 forecasts, he maintained that the changes being made would create a base for faster growth in earnings in 2003 and beyond.

The 2002 forecasts include revenue from anticipated acquisitions during the year. Elan said it had some $2.4 billion to spend on suitable product acquisitions and to build its pipeline. In a live webcast - during which journalists could listen in but could not ask questions, Mr Geaney, along with executive vice chairman Mr Tom Lynch, was asked why acquisitions not yet completed were included.

Mr Geaney said he had "a high degree of confidence" that deals would be closed over the next few months because Elan was in discussions with several companies on products which "meet our criteria". He forecast revenue and earnings growth in the "mid-teens" for 2003.

But market sources, who did not wish to be quoted, said the latest figures suggested that as well as product delays the company products were not doing as well on the market as expected, explaining the need to increase its marketing spend."It is being squeezed on the revenue front because of product problems, and squeezed on the costs line because of having to increase marketing and research and development spending. And the news on the AN-1792 product [the Alzheimer's drug] is not good, Frova has not reached the market yet and Prialt has to go into phase three trials which could take about 18 months before it starts to generate revenue," he commented.

Mr Geaney said the composition of Elan's revenue was changing in line with its target to generate 90 per cent of revenue from product sales.

Contract revenue which fell 5 per cent in 2001 to $450.3 million was expected to fall 12 per cent this year and would be eliminated by 2004.

Product revenue which increased by 35 per cent to $1.4 billion in 2001 would rise by another 15-20 per cent this year despite the sale of a number of non-core product lines which generated sales of about $300 million in a full year. In the current year products would generate 80 per cent of total revenue he forecast.