Elan's future was again thrown into doubt yesterday after the company warned that a delay in filing its 2002 annual report could lead it to default on its debt.
Elan has applied to the US Securities and Exchange Commission (SEC) to extend the filing date for the 2002 report until July 15th.
The delay in filing the report, due to be lodged by Monday, is the result of ongoing discussions between Elan and the SEC regarding the appropriate accounting treatment of some off-balance sheet special purpose vehicles.
However, the delay could cause Elan to breach certain debt covenants which, in a worst case scenario, could trigger the early repayment of some $2 billion (€1.73 billion) in debt, leading to the collapse of the company.
Shares in Elan plunged by nearly 30 per cent in Dublin on the news, closing €1.85 lower at €4.35. In New York, where they are mainly traded, they lost 29.05 per cent to $5.08.
Elan's debt covenants require it to provide audited financial statements to the holders of two series of bonds, known as the EPIL 2 and EPIL 3 series of notes, by July 30th. Failure to provide the figures allows the creditors to demand immediate repayment of their debt, which amounts to about $840 million.
But if one set of creditors demand early repayment, other covenants allow other creditors to do the same, including the holders of $650 million of loan notes due 2008 and the holders of the outstanding $450 million of the company's convertible bond, which is due in December.
Elan said it would not be able to satisfy the acceleration of a significant amount of its outstanding debt.
However, the company is working with the SEC to resolve the accounting issues that have arisen. "Elan is fully co-operating with the SEC and is pursuing all available options for quickly resolving the SEC discussions and for addressing the impact of those discussions on Elan's outstanding debt," chief executive Mr Kelly Martin said.
The main issue concerning the SEC is the way Elan accounts for special purpose entities, which were a feature of the collapse of energy trading giant Enron and were used by companies to raise money off balance sheet.
Elan formed these off-balance sheet partnerships by investing in smaller drugmakers and then selling securities, known as Elan Pharmaceutical Investment Ltd (EPIL), backed by these entities.
Analysts said yesterday's news increased Elan's risk profile although most believe the worst-case scenario, where the company defaults on its bond payments, will not come to pass.
Mr Peter Frawley, analyst at Merrion Stockbrokers, said Elan may be engaged in a bit of brinkmanship with the SEC. The company was caught between a rock and a hard place with the SEC seeking a restatement of its accounts to consolidate the EPILs which, if carried out, would fuel the fire of shareholder litigation against the group.
"I can't see the SEC giving in. The most likely course of action is that Elan will restate and avoid the debt acceleration and take its chances with the shareholder litigation which is ongoing," he said.
Goodbody analyst Mr Ian Hunter believes that even if Elan and the SEC fail to resolve the accounting issues over the next fortnight, Elan is likely to try to reach agreement with the EPIL holders not to recall their debt.
This would give the company until September 14th, when accounts must be provided to the holders of the $650 million of senior notes, to reach agreement with the SEC.
