Elan talks tough as cash flow questions proliferate

Investors are waiting for next Tuesday's conference call whenthe firm will discuss its annual report and prospects, writes JaneO'Sullivan

Elan has denied that it is bankrupt, saying it has strong cash balances and expects to meet its obligations as they fall due.

Shares in the ailing drugmaker fell by 21 per cent, on top of Tuesday's drop of 66 per cent, to a new low of $1.31 in New York yesterday as concerns about its creditworthiness persisted. They later rebounded to end at $1.71.

The latest blow to the company came when ratings agency Standard & Poor's announced it was downgrading Elan's debt to junk status. This follows a similar move by rival ratings agency Moody's earlier this year.

In Dublin, the shares closed 60 per cent lower at €1.40, having earlier touched a low of €1.10.

However, a company spokesman said Elan was not facing a liquidity crisis. It had $1.4 billion (€1.4 billion) in cash balances at March 31st and an investment portfolio worth $1.6 billion at that date.

Despite a signalled writedown in its value, it remained a strong portfolio, he said. "We have enough cash and resources and assets to move forward."

While most analysts believe Elan has enough cash to continue trading in the short term, they are uncertain about its fate over the medium to long term.

"We recognise that the company has value in its product portfolio and drug delivery business greater than its current market value," said Goodbody analyst Mr Ian Hunter yesterday.

"However, from information currently available on potential debt exposure, reduction in asset values, resultant uncertainty over ability to meet debt obligations, pressure on earnings and current market sentiment, we are pessimistic on the near-term outlook."

He has cut his rating on the stock to reduce from hold.

NCB analyst Mr David Marshall believes the company can meet its liabilities for the next 18 months.

"The issue is beyond that timeframe," he said, adding that the company needed to restructure, dispose of some of its assets and realise its investments.

Investors are now looking to next Tuesday when the company will host a conference call to discuss last year's annual report and this year's outlook.

"They need to restore visibility on the cash flow, say what the cash position is, what is the cash burn, what is the cash generation?" one analyst said.

The market is still awaiting guidance on the 2002 results but these are expected to be below previous estimates as earnings expected from yet-to-be-made acquisitions are not now expected to materialise.

The company has also to quantify the impact of the arrival of generic versions of its key Zanaflex product in the second half.

Meanwhile, some investors again questioned whether management changes were needed at the top, suggesting it would be impossible to rebuild the company's credibility without an influx of new faces.

"I don't think current management can bring it forward," said one market source. "But who will step into their place?"

The slide in the share price was triggered by the release of the company's long-awaited annual report on Tuesday.

The report, which showed that Elan's debt exposure could potentially be $4.5 billion, $1.5 billion higher than previously thought, shook the market.

Investors were particularly unnerved by the revelation that the company had sold forward royalties to raise cash. The number of product royalties sold forward and the $550 million payment needed to regain the royalties particularly surprised analysts.

"I can't see the commercial logic of sacrificing the future to meet an immediate requirement," one Dublin fund manager said yesterday.

Elan denied it had done this, however, saying it had entered risk-sharing arrangements and it had an option to buy in all these royalties at a capped price. Asked if it would, he said: "We are evaluating it. We haven't made a decision."

S&P highlighted the forward sale of the royalties as one of the factors behind its downgrade.

"Such a repurchase could well create a funding need in excess of $1 billion over the next couple of years," S&P analyst Michael Kaplan said.