Markets

Addicted to Poison Pills: How Elan's CEO Insulated Himself From Angry Investors

By Jim Edwards

Updated on: July 22, 2010 / 12:22 PM EDT / MoneyWatch

Elan (ELN), a perennial contender for the title of least-competently managed drug company ever, is once again the target of an angry investor who wants his own slate of directors on the company's board. This time around it's Denmark's Ib Sonderby, founder of Zoar Invest, who controls about two million Elan shares, or 0.3 percent.

Sonderby faces an uphill battle: Elan's stock remains in the toilet not just because its management is an international joke, but because Elan has managed to lock up its most valuable assets (M.S. drug Tysabri and Alzheimer's treatment bapineuzumab) in two deals that both feature poison pills. Elan cannot sell these assets without virtually giving them away to either Johnson & Johnson (JNJ), Pfizer (PFE) or Biogen (BIIB).

Sonderby has started his campaign with a gossipy web site slamming Elan's management, SaveElan.com. Elan is plagued by "ineptitude and mismanagement," Sonderby says, including:

A $206 million settlement with the Department of Justice over mismarketing of Zonegran, an anti-epileptic. "This fine is greater than the cumulative sales Elan had for this product and a large multiple of any profit Elan earned," Sonderby says.
In the last two years, Elan's stock has dropped from $35 per share to $5 per share, an 85% decrease,
And CEO Kelly Martin's former colleague from Merrill Lynch, Karen Kim, "is apparently still on the payroll 18 months after the company told investors she had stepped down."

Elan told BNET:

Over the last several years, Elan's Board, including the independent directors, have met with investors frequently and taken significant steps to address concerns. In fact, many of the matters Mr. Sonderby raises in the letter have been addressed previously, and we regret that he appears seriously misinformed on others. Contrary to his assertions, we have engaged with him in the past and remain open to doing so.
We recognize that the real issue for all investors is to ensure that Elan is positioned to capitalize on its undisputed strong science for the benefit of patients and its shareholders. We remain committed to the process and to updating investors as appropriate.

This is becoming an annual tradition at Elan. In February last year Jack Schuler of Crabtree Investors launched his (now defunct) website, FixElan.com, which eventually earned him a seat on the board. Sonderby's complaints are similar to Schuler's except that now Elan's deal with J&J has made the company's situation worse than before: Elan cannot now sell itself to a company that could provide adult supervision of these drugs. Instead, Elan must rely on its own managers to realize the value of Tysabri and bapi, which everyone agrees could be huge.

So how are those managers doing? Badly. Last year, the company continued to lose money even though sales went up. CEO Martin and his team are spread across offices in Ireland, New York and San Francisco, even though the heart of the company's R&D operations are in San Francisco. And did I mention that despite a supposedly transformative deal with J&J the stock continues to trade at under $5? The company only gained cash last year because it issued more stock and debt, according to its cashflow statement.

For this lousy performance, Martin was rewarded with a doubling of his cash compensation to $1.6 million last year (see page 92). He was also granted 150,000 more options at $7.18, vesting in 2012; on top of his existing 673,797 options and 124,113 restricted stock units.

The only good news? Elan's brass no longer fly around the world on NetJets. They go commercial, according to Bloomberg. That was Schuler's major achievement in the year he's been on the board. Sonderby should expect similarly modest results.

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