Elan’s 2005 Annual Report Warns Shareholders of Tysabri-Driven Financial Crisis

By Steven DiJoseph

Although Limited Number of Products, Extensive Litigation, Over-Reliance on Tysabri, and Other Major Financial Problems Have the Pharmaceutical Manufacturer in Dire Straights, Millions in Benefits and Salaries Were Paid to Corporate Officials and Deceased Former CEO

The 174-page 2005 Annual Report issued by Elan Corporation, plc, of Dublin, Ireland, is not exciting reading. That is unless you happen to be a shareholder. In that case, there are a number of alarming statements buried in the text that paint a picture of a company in serious financial difficulty.

A number of ongoing lawsuits are a concern for Elan, but the most serious ones are those connected with the controversial MS drug, Tysabri.

At pages 124 and 125 there is a discussion of a number of federal class actions by Elan shareholders “who purchased our stock prior to the announcement of the voluntary suspension of Tysabri. The action filed in California as a derivative action, purports to seek damages on our behalf. The complaints allege that we caused the release of materially false or misleading information regarding Tysabri. The complaints allege that class members were damaged when our stock fell after we and Biogen Idec announced the voluntary suspension of the marketing and dosing of Tysabri.”

The report then discusses the wrongful death action in Massachusetts state court brought on behalf of the estate of Anita Smith, “who took Tysabri and died from PML.” According to the report, “the parties have agreed to hold settlement mediation discussions on 3 April 2006 in hopes of mutually resolving this matter.”

The drug has been linked to the rare, but often fatal brain disorder known as progressive multifocal leukoencephalopathy (PML). Two deaths, and the possibility that more would occur, led to the drug being pulled from the market at the end of February 2005; only four months after it was released.

Although, the report indicated that Elan will “vigorously defend” the lawsuit if it cannot be settled this week, the company’s concern over the potential financial effects the Smith death action and other possible tort claims is obvious as the remainder of the financial report is examined.

Beginning at page 160 of the 2005 Annual Report is a section entitled “RISK FACTORS.” A reading of the subsequent entries indicates a number of significant financial problems could literally put Elan out of business. Although the introduction to this critical section of the report is carefully couched in “business-speak,” the precarious nature of Elan’s current (and future) situation is unmistakable.

The single biggest problem is that Elan is essentially a “one trick pony” that has pinned practically all of its hopes for survival on one drug, Tysabri. As a result, whether the company lives or dies will depend on what happens with that highly controversial drug.

Although the FDA designated Elan’s application (with Biogen Idec) to reintroduce Tysabri to the market for priority review, the process has been delayed unexpectedly by the agency.

Once the PCNS Advisory Committee voted unanimously to recommend that Tysabri be allowed back on the market, it was assumed the FDA would follow that recommendation and approve the application immediately.

On March 21, however, the FDA notified Elan and Biogen Idec that it “would extend its regulatory review of Tysabri by up to 90 days in order to complete a full review of the Tysabri risk management plan.” Thus, any decision concerning reintroduction will not come before the end of June.

While the FDA usually follows the recommendations of its independent advisory panels, the contentious debate surrounding the re-marketing of this particular medication has prompted the agency to hold back on any final action until it is sure that a risk-management program designed to detect adverse reactions is adequate and ready to be implemented.

While there is no assurance that any monitoring program can actually stop additional cases of PML or prevent additional fatalities once it is detected, the fact that the drug appears to work well, and the impassioned pleas from MS victims and their families to have it remain a treatment option, convinced the advisory panel that the risk/benefit analysis justifies the return of Tysabri to the market.

Elan advises its shareholders that: “The failure to reintroduce Tysabri to the market, or a substantial delay in such reintroduction, would have a material adverse effect on us.”

The report goes on to warn that: “If it is determined that PML is caused by Tysabri, if there are more such serious adverse events in patients treated with Tysabri or if we cannot obtain sufficient information to understand the risks associated with Tysabri, then we would be seriously and adversely affected. If we cannot resume marketing of Tysabri, or if we face a substantial delay in the resumption of marketing Tysabri, then we will be materially and adversely affected.”

Elan’s product-poor position is documented on pages 160 and 161 where the company admits it has but three products other than Tysabri and two additional drugs “in the early stages of clinical development.” Thus Elan states: “Our future success depends upon the successful commercialization of Tysabri and the development and the successful commercialization of additional products.”

While the company concedes it has committed (and will commit) substantial resources to “our R&D activities,” it points out that: “We cannot assure you that these investments will be successful.”

At page 161, Elan reveals its precarious financial position. Debt of over $2 billion and cumulative cash-based assets of only about $1.1 billion forced the company to admit: “Our substantial indebtedness could have important consequences to us.”

After listing all of the serious potential consequences, the company again stresses that, to a great extent, Elan’s future depends on reintroducing Tysabri in the foreseeable future.

Elan sums up this financial crisis by stating: “We have substantial future cash needs and potential cash needs and we may not be successful in generating or otherwise obtaining the funds necessary to meet our other future and potential needs.”

Elan also has a number of “restrictive covenants” in its debt instruments that “restrict or prohibit our ability to engage in or enter into a variety of transactions which could adversely affect us.”

In addition, Elan explains that it may be adversely affected by any inability to enforce patent rights or obtain new patents and that its reliance upon “collaborators and third parties” for the “manufacture of our products” could adversely affect the company if those collaborators cause delays in the manufacturing process or fail to comply with regulatory requirements or good manufacturing practices.

Other “Risk Factors” of which shareholders were advised included: officers and directors being named in a “putative class action” alleging “we caused the release of materially false or misleading information regarding Tysabri;” Elan’s “share price is volatile, which could result in substantial losses for investors purchasing shares; and certain “provisions of agreements to which we are a party may discourage or prevent a third party from acquiring us and could prevent shareholders from receiving a premium for their shares.”

Interestingly, nowhere in the Annual Report is there any mention of Elan being concerned about the people that will die if Tysabri is reintroduced to the market. The company’s only “concern” is for the “commercialization” of the drug as quickly as possible.

Lost in all of this is the estimate by experts that PML remains a risk and will probably strike one in every 1,000 Tysabri users. The monitoring program and enhanced warnings are hoped to make that risk clear to MS patients who opt to take the drug and to detect any cases of PML in time to discontinue treatment and prevent any serious consequences or death.

The estimate of one death for every 1,000 Tysabri users may not be quite accurate, however, since half of the people taking part in the clinical trial were taking a placebo. Thus, the 3 cases of PML in 3,000 are actually 3 cases in 1,500. Thus, death may occur in one in every 500 Tysabri users or even more frequently if deaths are more carefully examined and not mistakenly attributed to other causes.

Even Elan admits in its Annual Report that at least one death from PML (December 2003, after 8 infusions of Tysabri) had been “originally reported by a clinical trial investigator as malignant astrocytoma.” (p. 160). Anita Smith’s death too was not immediately believed to have been from PML.

In fact, at the FDA panel hearing last month, the members spent considerable time discussing what the risk management plan “checklist” should look like and that any indication of an exacerbation of symptoms will be treated as if it is PML and evaluated.

The FDA will need to determine what that additional evaluation will entail. There was discussion as to submitting the checklist monthly, in advance of each patient’s infusion – reported to a central location – and, if it doesn’t arrive, a red-flag goes up for that patient.

One committee member was concerned that it would be difficult, if not impossible to “recognize” PML and to differentiate it from MS based on a checklist.

There was also a long discussion on how frequently to monitor patients with MRI studies, and doing scans in the absence of clinical symptoms for monitoring purposes.

Biogen’s position was that there was no data to indicate that screening MRI’s will detect PML in the absence of clinical symptoms, since all the MRI’s that diagnosed PML in the three known patients were taken subsequent to the onset of clinical symptoms.

Thus, the 1 death in 1,000 may actually be no more than wishful thinking.

Despite all of the gloomy predictions and warnings, however, Elan managed to pay some hefty salaries, benefits, and settlements to current and former company officials.

Elan’s 21 directors were paid $8.5 million in “emoluments” in 2005. A settlement of $4.3 million was reached with a deceased former CEO. The current CEO was paid $1.8 million in salary and bonuses. The CFO received almost $750,000, while the company secretary took home $668,265.

Elan’s head of R&D was paid $775,881 and had a loan of $240,000 forgiven. The company’s chairman (a part-time position) received $300,000.

Thus, while the Annual Report outlined in painful detail all of the ways in which Elan is on the brink of financial collapse, none of the company’s directors and officers seems to have shared in the pain.

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