Elan, SEC negotiations narrow to single issue

Despite Elan's failure to lodge its annual report with the Securities and Exchange Commission (SEC), analysts yesterday welcomed news that discussions on its accounts with the regulator had been narrowed to one issue.

Although Elan failed to file its annual report with the SEC by Tuesday's second deadline, the stock made initial gains in New York, before going on to close slightly lower, down 0.34 per cent at $5.94 in a weak market.

In Dublin, it had a volatile day, gaining 9 per cent to €6.00 before later slipping back amid general market weakness to close 20 cents lower at €5.30.

In a statement issued yesterday, the company admitted it had failed to file its annual report within the 15-day extension period it had agreed with the SEC. Elan said it could not provide any assurances as to the timing of the filing.

But it also added that its discussions with the SEC now centred on Elan's accounting treatment of one off-balance sheet vehicle, Elan Pharmaceutical Investments 3 (EPIL3), and a related transaction. This is believed to be the repayment of $160 million of the $550 million debt outstanding under EPIL3 last June.

EPIL3 is one of a number of off-balance sheet vehicles used by Elan to keep research costs off its balance sheet. It invested in smaller drugmakers and then sold securities, known as EPILs, backed by these entities.

When Elan first announced it had run into problems filing its annual report in late June, it attributed the delay to discussions with the SEC over the appropriate accounting treatment for three special purpose vehicles, EPIL1, EPIL2 and EPIL3.

But analysts said yesterday it appeared to have made progress in resolving the issues surrounding EPIL1 and EPIL2. "The implication is that the accounting treatment of EPIL1 and EPIL2 has been left intact," said Mr Jack Gorman of Davy Stockbrokers.

"Therefore, the potential scale of restatement in Elan's US GAAP accounts looks to have been reduced. This may also weaken the hand of related class action lawsuits."

Mr Gorman estimates that if Elan had been forced to consolidate all three EPIL entities, its 2001 net income would have been reduced by as much as 40 per cent. But if it has to consolidate just EPIL3 in its accounts, the restatement would be much smaller at around $70 million, or 20 per cent of 2001 net income.

That just one set of issues remains to be resolved has also raised hopes that the company will be able to reach agreement with the SEC and file its annual report by July 30th. If the company fails to file by that date, it will breach certain debt covenants which could force the early repayment of some $2 billion of debt, leading to the drugmakers' collapse.

Meanwhile, Merrion analyst Peter Frawley also noted that the appeasement of the SEC's concerns surrounding two of the EPIL structures augurs well for the separate SEC enforcement investigation against the group.