Elan stock plunges on accounting worries

By Reuters News Service

Posted 1:46PM on Wednesday 30th January 2002 ( 22 years ago )

DUBLIN - Shares in Irish drugmaker Elan Corp lost a quarter of their value and hit a two-year low on Wednesday as concerns over its accounting practices came sharply into focus in the wake of the Enron affair. Elan, which was knocked earlier this month by a setback in clinical trials of its ground-breaking Alzheimer's vaccine AN-1792, was trading down 24 percent in Dublin at 31.31 euros by 1530 GMT. In New York, where the bulk of the shares are traded, the stock was off 25 percent at $25.65. With Elan's weighting making up around a fifth of the ISEQ index of leading Irish shares the Irish market as a whole was off more than 5.5 percent in mid-afternoon. The main accounting issue centres on research and development joint ventures, of which the company has more than 50, and the practice of investing money in such operations and then taking back a large chunk as licensing fees which are booked as revenues. ``Prior to Enron and the caution flag raised over AN-1792 investors were on balance willing to look through some of the near-term earnings quality issues because the pipeline was quite attractive,'' said analyst Ian Sanderson at SG Cowen Securities, in New York. ``Now that equation has changed somewhat...I can see if it were done in a few cases but they've got a total of almost 70 joint ventures on the books and it was used by their own admission as a way to manage the earnings.'' The latest sell-off in Elan shares, which have been under pressure in recent days, came as the Wall Street Journal Europe published a lengthy article highlighting the concerns. ``There's nothing particularly new about this, but it has sharpened the knife,'' said one Dublin dealer. ``Accounting issues are very much to the fore at the moment because of the Enron affair, and clearly with regards to Elan there is a demand in the market for more transparency.'' ``OSTRICH MENTALITY'' A London-based fund manager said the allegations of accounting irregularities in the Enron affair had focused attention on practices at Elan which some analysts had glossed over. ``There seems to be an element of ostrich mentality in the case of some sell-side analysts who have ignored the issue because Elan has been such a great EPS growth story,'' she said. A spokesman for Elan in New York said the Wall Street Journal report ``ignores the growth in our pharmaceutical business'' and the ``strong growth in marketed products, new product launches and corporate and product acquisitions''. ``The business venture strategy is only really of historical interest, and has been comprehensively discussed and disclosed before,'' he added. ``This is old news, no new ventures have been entered into since mid-2001 and the SEC reviewed the accounting comprehensively in 1999.'' On Monday, the company issued a statement saying it knew of no reason why its stock had been declining recently, and that it was comfortable with analysts estimates for its fourth-quarter financial results, due next Monday. Analyst Orla Hartford, of Dublin's NCB Stockbrokers, said the market would be looking for greater disclosure when the company reports. ``There's a lot of non visibility there,'' she said. In a research note Merrill Lynch highlighted the accounting issue, and also the temporary suspension of phase IIa clinical trials of Alzheimer's drug AN-1792 after four patients fell sick, as reasons for the recent stock price falls. U.S. energy giant Enron fell from being America's seventh-largest company to bankruptcy in a matter of weeks after admitting it overstated its earnings dating back to 1997 by almost $600 million.

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