Elan needs new management and an independent review into its accounting practices if it is to regain investor confidence, according to Merrion Stockbrokers.

In a review of the company, analyst Mr Robert Perryman called for a comprehensive response from Elan management to the issues behind the sharp fall in the share price in recent weeks. The shares yesterday in New York at $14.75, were 77.3 per cent off their 12-month high of $65. In Dublin, the shares closed at €16.73, marginally better on the day but well off their 2002 high of €50.27.

Lack of accounting clarity about the recognition of income within the firm's joint ventures and elsewhere means investors have been left with the impression that Elan has employed financial engineering to inflate growth, says Mr Perryman. The firm now had a major credibility problem, he said. Because Elan management has not shown itself capable of the accounting transparency and clarity investors required, an independent review of the issues and the infusion of new manangement "is now a necessity if confidence is to be regained". Elan's accounting practices are under investigation by the US Securities and Exchange Commission.

In a detailed review of the company, Mr Perryman has forecast current year earnings per share excluding goodwill of $1.09, down from $1.91 for 2001. Elan guided earnings this year in a range of $1.55 and $1.65 when it reported its 2001 results. At that time the market was expecting earnings in a range of $2.30 to $2.32.

But the company forecast was heavily criticised for including earnings from acquisitions not yet completed.

In his "sum of the parts" analysis, Mr Perryman put a take-out valuation of $20 to $21 per share on Elan. Putting a value on Ziconotide and Antegren which have not yet reached the market could add up to about $11.50 per share - but Mr Perryman suggested an additional $6.80 was more likely using a more realistic 60 per cent probability of both products getting approval to go on the market. This would put a take-out value of $26.80 to $27.80 per share on Elan.

At $14.75, the current market price discount to his estimated take-out value is understandable and likely to persist in the absence of an independent review, Mr Perryman warned.

Elan's problems were not necessarily its complex network of joint-venture partners.

He described this as an accepted method in the bio-pharmaceutical sector of spreading the risk and cost of establishing, running and managing risk in research projects.