Ken Kam's Best Ideas Blog

At first glance, Kelly Martin is an unusual choice to be CEO of Elan. Before joining Elan, he had worked his entire career at Merrill Lynch where he is credited with fixing up one troubled unit after another. When he left Merrill Lynch in December 2002 he was head of its international private-client group. But, before becoming CEO of Elan, he had absolutely no experience in the pharmaceutical industry.

Then again, someone with the skill to fix up a troubled unit is exactly what Elan needed. In February 2003 when Kelly Martin took over the helm, Elan was in the middle of a SEC investigation, its Alzheimer’s drug was found to cause encephalitis in some trial patients, its stock had collapsed, several shareholder lawsuits had been filed, and the CEO and chief financial officer resigned.

Much has been written about the accounting shenanigans that led to the SEC investigation. It is worth noting that when the dust settled, the SEC required Elan to pay $1 in disgorgement (which is ridiculous) and a $15 million civil penalty. I hope the SEC at least went into the investigation thinking that the amount of ill-gotten gains exceeded $1. In hindsight it looks like the SEC made a mountain out of a molehill and this settlement was a face-saving way to put it behind them. Elan was never in the same league of wrong-doing as Enron.

I do find, however, the Company’s forecasts and press releases are consistently overly optimistic and I’ve had to learn to read between the lines. A good example is Elan’s forecast in early 2005 that Prialt will reach $150 - $250 million per year in peak sales. The key word here is “peak” and they were careful not to indicate how many years in the future that might be although the intention is to make you think that it’s “soon.” The reality was that the first 9 months of sales amounted to just $4 million and indicates that “peak” sales may not be achieved for quite a few years.

Another example is the way they describe their Alzheimer’s vaccine as being in “late-stage pre-clinical trials.” The statement is factually correct but it gives people who are not familiar with clinical trials the impression that the Alzheimer’s vaccine is farther along than it is. I could cite more examples of phrases that, while factually true, give a more optimistic impression than is warranted by the facts.

The Bottom Line: I like ELN, but I would have even more conviction if I didn’t feel that I had to parse their statements so carefully. In the meantime, researching ELN will continue to require digging beyond the company press releases and reports to make our own assessments of its potential.