Moody's downgrade eats into Elan share value

Elan shares suffered another blow yesterday as ratings agency Moody's downgraded its debt to the equivalent of high-risk junk bonds. This latest in a series of blows for the Irish-based drugmaker saw its shares lose more than 7 per cent in value.

Moody's said the downgrading reflected weak operating cash flow from core product sales together with its expectation that cash-flow generation of its core pharmaceutical product sales would remain modest relative to its high level of debt.

Although Elan holds significant levels of cash and other investments, Moody's points out that the value of certain balance-sheet investments will be volatile because they include smaller pharmaceutical and biotechnology holdings.

Moody's has a further concern that Elan may elect to use some of its balance-sheet cash to step up product acquisitions in order to boost future cash flows.

It has placed Elan's credit ratings under review for possible further downgrade because of uncertainties associated with the current Securities and Exchange Commission (SEC) investigation into the company's accounting practices. Moody's suggests that, until this inquiry is concluded, Elan's ability to access new funds for business development activities or debt refinancing could be limited.

It also cautions that a negative outcome related to the SEC's findings could have further negative repercussions with regard to the shareholder lawsuits filed against the company.

Standard & Poor's has maintained its rating for the company at investment grade, above the latest Moody's rating.

Meanwhile, Elan has disclosed further trading and financial information in fresh SEC filings. The company, headed by Mr Donal Geaney, has outlined in detail its business ventures, 46 of which were signed between 1999 and 2001.

It has also detailed the nature of the research and development involved and the associated licence fees it has received.

Elan shares have fallen from around €50 at the start of 2002. The collapse in the share price was prompted by concerns about its accounting practices following on from events at Enron. It issued a profits warning for the current year shortly after those events. Earlier this month, Elan said it was abandoning any further trials of an experimental Alzheimer's vaccine which has left 15 people suffering from brain inflammation.