Elan Corp.
Still a Great Company

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By FreeBear
February 8, 2002

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For what it is worth, (zip), I like this company and its prospects going forward. The big problem is not their accounting as much as it is Enron. Were it not for the Enron debacle we would still be enjoying the 30's right now. But, the President's friend Ken Lay and the other Merry Pranksters from Texas apparently stole a gajillion dollars in the stock market -- and on top of that they manipulated the California energy market, rigged the President's new "Energy Plan" and generally made asses of themselves. That is my spin on Enron/Lay/Bush and the ensuing witch hunt/lynching of Elan.

Back in the good old days -- the 40's -- we always cheered every time Elan announced a new partnership. Sure the deals were complex, but they made sense. They allowed Elan to license its technology, including the Nanocrystal technology they paid a ton to Kodak for, and were able to diversify their biotech interests widely without taking undue risks.

You cannot just sit on your patents, like a dog in the manger, like Geron Corp., watching them expire. They must be used while they are still young enough to be worth commercializing. Who could Elan license its technology to beside the large cap pharmas? Obviously, the answer is: the cash poor biotech companies, nearly all of whom desperately need advanced drug delivery technology, especially for their poorly-water soluble molecules and non-pill delivery needs (many promising substances are not suitable for ingestion and need something a little more high tech.)

The deals generally something like:

- form a JV, Elan to have 19.9% with an option to go to 50% - retain marketing rights - loan the cash poor biotech company money for their stake in the JV, BUT structure the loan as convertible bonds redeemable in either the shares of the licensee or the JV - extend credit to the licensee for the JV, again as convertibles - buy stock in the licensee at a premium to the market.

By having ownership interests in the JV and the licensee, Elan was able to have some guarantee against loss or shifting of property, intellectual or otherwise, from the JV to the licensee. If the JV didn't work out, ok, Elan still held stock in the parent. If the parent's stock tanked and they used more of the credit lines, then Elan acquired large amounts of their stock -- or cash, at their discretion. If everything went beautifully, Elan would have up to 50% ownership in the JV, a stake in the successful licensee's shares, and marketing rights.

Using these partnerships, Elan acquired huge positions in companies that were later recognized as Worthy by the "analysts". Isis, Ligand, Amarin, and other companies are partly owned by Elan as a result of the so-called "shenanigans". (And by the way, the off-balance sheet partnerships are detailed -- along with the accounting differences -- in Elan's last annual report.)

I am stunned at the magnitude of the losses in recent days, and shocked by the lawsuits filed by specialty law firms. But I have seen things happen before where the company actually did do something wrong and after a year or two they were flying high again.

Remember McKesson Corp. and their fraudulent accounting debacle? Stock really cratered but now it is doing well.

The same with these lawsuits. Often they go nowhere, and even when they do get settled it is likely for pennies on the dollar. For example, assuming you bought great companies like Orbital Sciences or Security Dynamics at the right time, you might have received a few dimes for each hundred shares purchased, though those dimes could grow if the stock recovered. Basically, the lawsuits are just part of The Game. Personally, I don't think there is much to them, at all. It all boils down to perception, and everyone put on piss-colored glasses after Enron blew up.

Another thing to remember is that biotech companies have been tanking right and left lately, and so have the large pharmaceutical companies. SGP is $30, MRK is $59, and BMY is $43. Those are stunning prices! Even more stunning is the comparison of other biotech companies to Elan. With a market cap of $5 billion, Elan is either a ridiculous bargain or many of those biotech companies are ridiculously overpriced -- or both.

Let us not forget that part of Elan's problems have resulted from delays at the FDA. Their Morphelan, Prialt and Frova were delayed ridiculously, and the Bush administration has been openly hostile to both the pharmaceutical and biotech industries, if not in words (which are worthless), then for sure in their actions. Note that BMY and SGP have been nearly run into the ground by the FDA in the last 12 months, though each bears partial responsibility. It just is not a piece of cake to submit a 500 or 700 thousand page NDA and get those bureaucrats to accept it in a timely manner! They claimed they weren't doing a slowdown, but the reality is that the FDA has been playing word games and instead of approving or denying in 12 months, they wait 12 months and then issue an "Approvable Letter". It is really quite criminal, especially with respect to important new treatments for cancer patients. Bottom line is, what Elan and the biotech companies and ethical drug companies are trying to do is incredibly challenging, and the bureaucrats, politicians and regulators are part of the problem, not the solution. Give me a break, the Feds were on the side of tobacco and alcohol manufacturers for decades and now all of a sudden they're concerned about your health? Haw! Follow the money and you will learn the truth about those government idiots -- sold their souls or were unable to find honest work, or something! Haha.

This post is not intended as investment advice, and your opinions are perhaps more trustworthy than mine, but I have done my homework and know what this company is worth. We will all look back on this in a year or two, laugh nervously and change the subject after possibly sighing about what a great buying opportunity ELN was at $12.

I am holding ELN until they pry my dead fingers from my keyboard and lay me to rest. In fact, I added more shares today. Slam dunk, IMO.


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