Elan shares continued to slide in Dublin yesterday, closing €3.50 lower at €16, as the market tried to assess the outlook for the pharmaceutical company. In New York, the primary market for the shares, Elan closed $1.05 or 7 per cent down at $13.80.
The stock fell 13 per cent before the market even opened and traded in volume once the bell sounded, hitting a session low of $12.50. More than 33 million shares traded.
In Dublin, the shares dropped 30 per cent at the opening to €14, catching up on Monday's 50 per cent drop in New York, before recovering a little at the close. At €14, the shares were at their lowest level since April 1997, and well off their January 17th high of €50.27.
Brokers in Dublin and New York cut their profits forecasts for the company following its shock disclosure that current year profits would be well down on 2001 levels. The company said 2002 earnings per share would be in the $1.55 to $1.65 range, when most analysts had been expecting earnings in a $2-$2.32 range. Analysts were not prepared to accept Elan's latest guidance because the company had included some $250 million of revenue from acquisitions not yet made. Cutting her 2002 earnings per share forecast to $1, Salomon Smith Barney analyst Ms Angela Larson said she found the inclusion of these potential acquisition earnings in the company forecast "aggressive". Ms Larson declined to make a 2003 earnings forecast because of "the lack of pipeline visibility". Noting in a research report that the company was "offering more financial disclosure than before", she said the complexity of its earnings still remained an issue vis-a-vis the other companies in the sector.
Goldman Sachs reduced its Elan rating from "market outperform" to "recommended" and cut its 2002 earnings per share forecast to $1.06. In Dublin, Elan's own broker, Davy, reduced its 2002 earnings forecast to $1.35 per share from $2.32. In a detailed report, analyst Mr Jack Gorman said: "It may take evidence of a strong Frova launch or solid quarter one numbers for the shares to narrow the sizable ratings discount to the speciality sector." Elan is on a price/earnings ratio of 10 to 11 times, compared with a sector average of more than 20.
Concerns about the robustness of the company's product sales and the strength of its product development pipeline following its webcast conference with market analysts on Monday added to earlier concerns about Elan's accounting policies.
Davy described the pipeline news as "disappointing", with delays on the introduction of some products and concerns emerging from the webcast that additional patients using AN1792 (an Alzheimer's treatment) may be suffering inflamation complications.
In London, UBS Warburg described Elan's news as "negative in the short term" but said increased accounting visibility gave investors "some hope that, over the next several years, the company can be more accurately valued based on the value of its drug portfolio".
In Dublin, some dealers said most of the bad news was probably now priced into the share price and speculated that there could be a bounce in coming days.
"There could be a short-term bounce in the shares because they have been so unmercifully dumped, particularly in the US. Given the extent of the recent falls, the shares must present some short-term trading opportunities for hedge funds.
"But in the post-Enron environment the company has a lot of work to do to build credibility. At times like this, where transparency and visibility are at a premium, investors focus their microscopes on companies like this," commented one trader, who did not want to be named.
Adding to the downward share price pressure was news that two US law firms have filed suits against the company for allegedly defrauding investors. Elan chairman and chief executive Mr Donal Geaney said he was confident Elan's accounting and business practices would stand up to any scrutiny. A company spokesman dismissed the suits as "entirely without merit".
Milbery, Weiss, Bershad, Hynes & Lerach said it had initiated proceedings in a sourthern California federal court respresenting shareholders who bought the stock between April 23rd, 2001 and January 29th, 2002. It alleged that Elan reported positive financial results while using deceptive accounting practices to inflate revenue. Wolf, Halderstein, Alder, Freeman and Herz said it had filed a class action suit in a New York federal court on behalf of shareholders who bought Elan shares between December 21st, 2000 and February 1st, 2002. It said its complaint centered around allegedly deceptive accounting practices at the company. Both suits cited the Wall Street Journal article of January 30th, which criticised Elan's accounting policies.
