Elan Corporation may have mounted an angry and detailed rebuttal of the contentious article in the Wall Street Journal, but the company's share price is set to remain weak as long as US investors sell shares like Elan which they believe have question marks over their accounting policies, writes Brendan McGrath, Markets Editor

Since the Enron collapse, a host of companies in this category has been aggressively sold by the market. "It's the Enron factor, the market's having a go at anything that they think might have questionable accounting," said one Dublin dealer. He added that Elan, in particular, was suffering from the fact that its fourth-quarter results were as close as next Monday and that investors who wanted to sell before any possible unpleasant surprise should do so quickly. "If the results were a month away, the selling might be a bit more structured," he added.

And while the selling of Elan shares after the suspension of testing of its Alzheimer's treatment last week involved short-term investors like hedge funds, dealers said yesterday's heavy selling involved long-term investors such as pension funds. "Funds are going through their portfolios, seeing which stocks have possible accounting risks and dumping them. They don't want to end up in a position where they have to go through the hoops with trustees on an issue like this," said a dealer.

The main plank of Elan's detailed defence to the Journal allegations is that the criticisms relate to a network of some 50 joint ventures, which now form only a small portion of Elan's business. Elan also stated no new joint ventures of the type criticised by the Journal had been entered into since mid-2001.

"Elan's total revenues since 1998 are up $1 billion. Contract revenues increased by $70 million over this period. Thus, virtually all of the revenue growth in the recent years is from our pharmaceutical business. The Wall Street Journal has not mentioned the strong growth in the marketed products, new product launches, and the corporate and product acquisitions in the period," Elan stated.

The company also pointed to the success rate of the joint ventures where three products are now in phase III trials (the final phase of testing before looking for FDA approval), 16 are in phase II and eight phase I, with another 26 products in pre-clinical development. Elan added that other pharmaceutical companies Eli Lilly, GlaxoSmithKline, Pfizer, Sanofi and Abbott have recognised the worth of these joint ventures by entering into agreements.

Elan has taken particular issue with being linked with Enron. "Any correlation between Elan and Enron is without foundation. Elan is highly solvent, with $2 billion in cash, and all its debt is disclosed on its balance sheet." Elan's debt is primarily long-dated (due after 2004). The pharmaceutical group has also emphasised that its growth in 1998-2000 has been driven by its pharmaceutical business and cites analyst estimates, which state that only 5.2 per cent of growth in overall revenues in the past three years is derived from contract revenues.

The main criticism from the Journal is that, by using more than 50 research and development joint ventures, Elan has been able to book revenues from these joint ventures long before they have even developed any products while at the same time shifting the R&D costs off Elan's own balance sheet. In response, Elan claims that it accounts for its share of the joint ventures' losses on its own income statement, that payments for the licensing of its own drug delivery technology is deferred and amortised over the R&D period in line with accounting conventions. "If we were booking revenues from joint ventures, it would be a charade, but we're not," Elan chairman Mr Donal Geaney stated.

This accounting treatment is in line with USGAAP accountancy practices, Elan vice-president Mr Tom Lynch said and emphasised that Elan's accounting had been reviewed comprehensively by the SEC in 1999 when Mr Lynn Turner was the SEC's chief accountant. Mr Turner, who headed the SEC's accounting function at the time of that review, is highly critical of Elan and said in the article: "Elan is too fast for the regulators and too fast for their own good. They appear to have gotten around the accounting rules and around the system."

Mr Lynch said the Wall Street Journal piece has been in the pipeline since last May and that in that period Elan had responded to "literally hundreds" of questions submitted by WSJ reporter Mr Jesse Eisinger.