WEEKEND BIG READ: The story of Elan, stranger than fiction.

THE story of Elan is so full of improbable twists that if you were to read about it in a novel, you would struggle to accept it as believable.

There are boardroom dramas, investor revolts, dazzling successes, catastrophic failures, lawsuits, hostile takeover bids, various public spats, de-mergers and a lengthy series of lay-offs and redundancies.

It all culminated last month with the sale of a hollowed out corporate shell which at one time comprised one-fifth of the value of the Irish Stock Exchange. And yet, that transaction, in which ownership of Elan moved to US generic drug maker Perrigo for $8.6bn, was hailed by the company as a success, the vindication of a corporate strategy characterised in recent months by increasingly fractious external relations.

Is management right? Perhaps a more relevant question is, does it matter? A series of sales and demergers has seen the company steadily reduced so that it now bears little resemblance to the cutting edge research-driven entity it once was. Elan once employed upwards of 5,000 people. Today, it’s less than 100. Management argues that it could not have survived as it was, and that the husk it has become is the conception of the company with the greatest hope of survival.

Elan began in Dublin in 1969 with just four employees working out of a laboratory set up in a garden shed. Donald Panoz was the man behind it. A native of Ohio with an Italian father and an Irish mother, Panoz was a serial entrepreneur, who in the early 1960s bought a condemned skating rink in Pittsburgh to found Mylan Pharmaceutical. At 25, he was the youngest pharma CEO in the US.

Pharma growth

In the late 1960s, Panoz became interested in drug delivery systems — the methods by which a compound is transported in the body to best achieve the desire effect. He was particularly interested in those which might facilitate the development of a workable cessation treatment for smoking. Panoz sold Mylan and moved to Ireland, attracted by the lower tax rates. Here, he established Elan Corporation.

The year 1969 was a signature one in the development of the Irish pharmaceutical industry. While Panoz was building Elan in Dublin, Pfizer had just opened its citric acid plant in Ringaskiddy, Co Cork. These were the opening moves in a game which has seen the country reap substantial benefits over the years. Ireland is currently the seventh largest exporter of pharmaceuticals in the world, and the largest net exporter. In 2011 the Irish pharmaceutical and chemical sector exported products to the value of €56.1bn, up 5.4% from €53.2bn in 2010.

Building on a series of successes throughout the 1970s, all of which were based on improving drug delivery systems, Elan established a research and development ¢re in Athlone in 1978. As part of the deal, Panoz managed to annex a small patch of Roscommon for Westmeath.

Back in 1978, Westmeath received its post in the morning, while Roscommon had to wait until after lunch. One of the conditions Elan attached to setting up in the midlands was that the post arrive early. The Irish solution to the Irish problem was to give the plant a Westmeath address, though it is in fact located in Roscommon.

By the early 1980s, Elan was developing pharmaceutical products for 16 different partner companies and had established Elan Pharmaceutical Research Corporation in Gainesville, Georgia.

The company’s expanding reach, together with increasing optimism about the future lead to a public offering. The US subsidiary was floated on the NASDAQ in January 1984. A year later, the company opened an Institute of Biopharmaceuticals in Athlone, and set up its first manufacturing facility here.

In 1990, Elan Corporation became the first Irish company to list on the New York Stock Exchange, listing in Dublin and London at the same time. Another first came two years later when the US Food and Drug Administration (FDA) finally approved the company’s first nicotine patch. Further acquisitions followed in the mid-1990s, by which time Panoz decided to withdraw from active management of the company. He continues to develop businesses, however, in areas as diverse as vineyards and sports cars, and has a number of philanthropic interests.

Acquisitions disaster

The path to Elan’s first and greatest catastrophe was paved with acquisitions. In 1996, the company accelerated its expansion, establishing itself as a full-scale pharmaceuticals company when it acquired Athena Neuroscience in the US, a company that came complete with its own sales force. More purchases followed: Sano Corp in Florida in 1997, GWC Health and Neurex a year later. Liposome Co and Dura Pharmaceuticals in 2000.

At this point, Elan appeared to be living out the corporate dream; it had transformed itself from a four-person research operation into a fully fledged pharmaceutical giant. Revenues mushroomed from $322m in 1995 to $1.9bn in 2001. Elan was the largest publicly quoted company Ireland had ever produced, with a market value of $22bn.

When Enron collapsed in November 2001, the lax regulatory environment that facilitated its dodgy accounting practices changed overnight. Three months later, the US Securities and Exchange Commission (SEC) knocked on Elan’s door.

Their subsequent investigation centred the voracious dealmaking that had characterised Elan’s behaviour in second half of the 1990s. It would emerge that the company had negotiated complex joint-venture agreements with 55 companies. By keeping the company’s stake in each of these vehicles below 20%, Elan was able to keep their poor results off the corporation’s income statements, while still earning revenue from each of these vehicles through licensing agreements.

At the same time, the launch of the company’s most promising new drug, Tysabri, designed for MS and Crohn’s disease sufferers, was pushed back four years as a result of disappointing clinical trials. Within six months of the SEC investigation, the value of Elan’s shares had lost almost 95% of their value and the company was at death’s door.

Elan’s response was complete corporate colonic irrigation. The old executive team departed and a new chairman, Garo Armen, was installed, followed shortly afterwards by a new CEO, Kelly Martin, formerly of investment bank, Merrill Lynch.

In an ironic co-incidence, Martin was the only Merrill Lynch executive to testify at Senate hearings into the Enron collapse. You can see detail of Martin’s grilling at the hands of senators in the 2005 Oscar nominated documentary Enron, the Smartest Guys in the Room.

Merrill Lynch was deeply involved in Enron; the SEC charged the bank and four of its executives with aiding and abetting Enron accounting fraud. It’s important to say, however, that Martin had no involvement in Enron and was never accused of any wrong-doing.

Taking the medicine

Martin had zero experience in pharma. He was banker, albeit one with 22 years experience. And while he may not have been particularly familiar with the industry he was entering, one thing in which he did have was a track record was turning failures into successes.

Shortly before taking over at Elan, he had transformed Merrill Lynch’s global debt markets group. In 1998, the group had lost $1.5bn. By the time Martin left three years later, that loss had become a $1bn profit.

It was widely believed at the time that his new role was to prepare Elan for sale, a view corroborated by the fact that his contract included a clause which promised a $5m bonus if the company was sold in 2003, and $3m if it went the following year.

These bonuses were never paid, however, and 10 years on, Martin remains at the helm of Elan.

Inevitably, his reign started off with a recovery plan, which inevitably, involved selling assets to reduce the debt and simplifying what had become an unwieldy corporate structure.

The anti-fungal treatment Abelcet was sold to Enzon for $370m.

The drugs Sonata and Skelaxin, together with a variety of Elan’s primary care products, went to King Pharmaceuticals for $850m. The 55 joint ventures were swiftly unwound and spoken of no more.

Within two months of Martin’s arrival, Elan’s share price had risen by 22% to $3.50.

It sounds impressive, but it should be noted that at its peak in 2001, the stock was trading at $60. Nevertheless, within a year, Martin had raised more than $2 billion from Elan’s divestiture programme.

Though group revenues had fallen to $746m from $1.13b a year earlier, it appeared that the new CEO had succeeded in placing the company back on a firm footing, and had given it a reasonable shot at recovering the status it had lost.

In the 10 years since that time, that divestiture plan hardly let up.

By 2011, the payroll had been cut from 5,000 employees to 450 and from 37 locations down to three. Two years later, there are less than 100 employees worldwide.

Tysabri troubles

The company’s fortunes throughout this time have been tied to its signature drug, Tysabri. Developed for use in the treatment of Multiple Sclerosis and Crohn’s disease, the drug was first approved by the FDA in 2004. In the highly risky world of drug development, the approval marked a hugely significant moment in the company’s history, the culmination of years of development and massive investment. At its launch, it was predicted that the drug would achieve $4bn of sales within the first year.

Within a year however, Tysabri had to be withdrawn from the market when it was linked with three fatalities arising from a rare neurological condition, PML. These tragedies prompted another overnight share price collapse, from $27 down to just over $5. Following a safety review, the drug went back on the US market in 2006 under what was described as a special prescription program, and while there have been several subsequent fatalities connected to use of the drug, the FDA has ruled that its clinical benefits outweigh the risks involved in its use.

Ongoing clinical tests and announcements played hell with the share price over the following two years. Further negative results following a Tysabri test in 2008 saw the share price lose nearly 75% of its value overnight. But despite all the problems with the drug, it is this horse on which Elan pinned all its hopes. As one operation after another was hived off, the company has kept faith with its flagship product.

Shareholder discontent

Not everyone was happy with the direction the company took. Jack Schuler, a former president of Abbott Laboratories and a substantial shareholder in Elan, began to rally shareholder discontent. His beef centred on the pharmaceutical expertise of management, and in particular on what he saw as their failure to maximise Tysabri’s potential. Schuler established a website, fixelan.com, which became a forum for shareholder discontent, and in June of 2009, he became a nonexecutive director of the company.

To allay this disquiet, Elan commissioned a report into the company’s corporate governance by US law firm McKenna Long & Aldridge. The company then went to the High Court in Dublin to prevent Schuler and another ‘dissident’ director, Vince Bryson, from commissioning a parallel report into how the company was being run.

As if that wasn’t enough, another disgruntled shareholder, Ib Sonderby and his website, saveelan.com became a second focus for disgruntled shareholders. Sonderby also questioned the pharmaceutical experience on the board, but his primary focus was on ethics in Elan. He alleged a range of conflicts of interest, relating to licensing agreements and sales deals the company had negotiated. Martin and Elan hotly contested the allegations, accusing Sonderby of “spreading misinformation”.

Martin weathered these boardroom storms, and by the end of that year, his focus on improving the company’s balance sheet, together with his faith in Tysabri, were finally rewarded. Sales of the drug climbed 18% to more than $850m in 2010.

In 2011, after a decade of almost unbroken losses, Elan began to establish a more profitable trend. In September of that year, the company sold its Athlone-based drug technologies unit to Alkermes Plc for $960m.

In an interview at the time, Martin said: “The Alkermes transaction was the last piece in getting the company to where it should be structurally as a business. As strange as it may seem, we’re now at the starting line of what the cycle should be — it’s just taken us a long time to get here. I would say the company is just starting.” In the first quarter of last year, the company recorded an operating profit of $22m on sales of $288m.

Look at a stock chart for the four years between 2005 and 2008 and you’ll see the price pitch from a low of $3.40 to a high of nearly $35. In five years since then, the stock has ranged from a low of $4.50 three years ago to a current high in excess of $15. Those cliff-top falls that followed the Tysabri failures are notably absent.

As Tysabri’s sales improved, prospects also began to improve for what Elan hoped would be its next big winner. Bapineuzumab is an Alzheimer’s drug which the company first discovered in 2009. As is common in these circumstances, Elan financed its development through a partnership arrangement with Johnson & Johnson and Pfizer.

Then, almost exactly a year ago, Bapineuzumab fell over. Pfizer announced that in a series of clinical trials, the drug had failed to improve either cognitive or life function. Coming so late in the development process, it was a devastating blow. Elan and its partners announced that while research into an Alzheimer’s vaccine would continue, further development of the drug as treatment would be discontinued. Elan subsequently announced that the company would be taking a $117.4m charge on its third-quarter results to account for the loss.

Martin was sanguine at the news. He told a journalists on a conference call: “We built this company to move forward with or without Bapineuzumab.”

Within a week however, the company announced that it had had enough of the risky business of drug development. Elan would now split itself into two entities, one of which would retain the name and the Tysabri revenues, while the other, to be called Neotope Biosciences, would get everything else.

With the company now boiled down to Tysabri and little else, speculation again began to mount that a sale was imminent. This, of course, was not the first time analysts had come to that conclusion, but in February, speculation reached fever pitch when the company announced a new Tysabri deal. Long-time development partner Biogen would take control of the drug for an upfront payment of $3.25bn, while Elan would continue to benefit from a highly lucrative royalties stream.

In a statement, Martin said: “Our motivation was to diversify and de-risk the company to move forward; and for the patients to continue to benefit from the profound efficacy of Tysabri.”

Hostile takeover

With the company seemingly parcelling itself for sale, it was inevitable that someone in the market place would seek first mover advantage.

Royalty Pharma, a privately owned investment management company, made its first approach to the company in February. It was not well received. While initial exchange between the two companies were full of polite rebuttals, the entire process quickly degenerated into open warfare as Royalty attempted a full scale hostile takeover.

Martin described that initial proposal, which offered $11.25 per American Depository Receipt (ADR) as not credible, while Royalty retorted that the failure of Elan’s board to engage with the offer was effectively denying shareholders the right to decide on its merits.

In April, Royalty upped that offer and a war of words began. Royalty CEO Pablo Legorreta raised that old chestnut, the experience of the Elan board. Elan chairman Robert Ingram responded: “The offer from Royalty Pharma grossly undervalues Elan’s current business platform and our future prospects. As a result the board unanimously and without reservation rejected the offer.”

Elan’s next step was a blocking move. Its coffers now full of Tysabri cash following the Biogen deal, the company landed out $1bn to buy 21% of the royalty that US drug company Theravance was getting for its respiratory drugs. “The Theravance transaction is an important next step in the implementation of our strategy,” Martin said at the time. The company also said it would pass on 20% of all royalties from the Theravance deal to shareholders.

Royalty’s response was to up its offer to Elan shareholders to $12.50 per share, but it made this offer conditional on shareholders rejecting the Theravance transaction. The rival drug company alleged that the transaction was pursued in haste, and accused Elan’s board of being highly irresponsible.

Elan’s response was remarkable. In marked contrast to the measured way in which the company had been managing its cashflows in previous months, Elan now went on a massive, defensive spending spree, acquiring, among other things, an Austrian drug company AOP Orphan for €263m, as well as substantial stake in a Dubai-based drug company. Elan argued that those acquisitions further widened the gap between what the company was worth and the paltriness of the Royalty offer.

In June, Elan went to the High Court, seeking an emergency order preventing Royalty from distributing a proxy statement to Elan shareholders. Though the lawsuit was later withdrawn, Royalty reacted with disgust. Their statement said: “The Elan Board’s behaviour in filing these lawsuits is deplorable.”

Now, the board’s old adversary Jack Schuler suddenly rode into the debate. He wrote to the Financial Times in the middle of the controversy agreeing with the Royalty view that Elan’s recent purchases were “value destructive and not in the best interest of Elan or its shareholders”. Ultimately, the Royalty bid failed, due in no small part to the conditionality that Royalty had attached to the offer. The company had committed to withdrawing that offer if Elan shareholders voted to accept a range of unconnected measures, including a substantial share buyback. But while the shareholders accepted the buyback at an Extraordinary General Meeting on Jun 16, they also rejected three other resolutions the board had put before them.

So, while the vote scuppered the Royalty bid, it was also a clear signal that shareholders were not happy with the company’s sudden spending spree.

Sale agreed

When, in advance of the EGM, it became clear that most of its proposals would be rejected, Elan said in a statement to the Irish Stock Exchange that it was proceeding with a formal sale process. The company added that it was doing so in the light of expressions of interest received to date. Within six weeks, Elan Corporation had found a buyer.

Michigan-based Perrigo, a maker of over-the-counter pharmaceutical products, has a market value of $12bn and will pay $16.50 per share for Elan, a total of $6.4bn.

The attraction for Perrigo, apart from those lucrative Tysabri revenues, is of course that increasingly contentious Irish tax rate. As news of the deal went round the world, Irish authorities squirmed as a spotlight was once again shone on the contentious 12.5% corporation tax. The purchase now allows Perrigo to transfer their HQ, thereby escaping the 35% rate paid by US corporations.

But, as far as Martin is concerned, this is vindication. Here is evidence of Elan’s contention that Royalty was undervaluing the company, and that there was a workable plan B out there.

In a statement announcing the purchase, Martin said: “The Elan platform has been constructed over the years to provide a unique and compelling investment thesis for our shareholders. This transaction underscores the tremendous value of Elan’s platform. The new combined company should deliver value, growth and diversification to shareholders for many years to come.”

The new combined company will also deliver value to Mr Martin, though he will not have to wait for many years to see it. Under the terms of his contract, the former banker is set to enjoy a €41m bonanza between bonuses and various stock options. It is, perhaps, the ultimate vindication.

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