Markets

Drugmaker Elan Tempts the SEC to Investigate Its Tangled, Undisclosed Deals

By Jim Edwards

Updated on: August 20, 2010 / 12:37 PM EDT / MoneyWatch

Elan (ELN), the barely competent Irish drugmaker, appears to be tempting the SEC to investigate it after dissident investor Ib Sonderby revealed on his Save Elan blog that the company failed to disclose it bought an epilepsy drug, lorazepam, from Amarin (AMRN), another Irish drugmaker, for $700,000. Although both companies are European, Elan's shares are traded on the NYSE and Amarin's are on the Nasdaq, which could give the SEC jurisdiction.

Elan says the transaction was not disclosed because it was not large enough to be material, but that explanation only sounds reasonable if you don't know the history that connects the management of Elan to the management of Amarin.

Amarin disclosed that it sold lorazepam to Elan on July 22, 2009. Amarin also disclosed the sale in its 2008 annual report:

Mr. Shane Cooke, chief financial officer of Ã‰lan is a connected person to Mr. Alan Cooke, our president and chief operating officer, and under Nasdaq rules this transaction was deemed to be a related party transaction.

The two are brothers. And it wasn't just a simple sale. Amarin agreed to pay Elan up to $5.2 million plus royalties, Amarin said.

That was just the latest in a string of complicated transactions between Elan and Amarin. If you dig around in Elan's 2001 annual report, you'll find on page 89 that Elan executive vice chairman Thomas Lynch and Elan director John Groom served on Amarin's board. And Amarin COO Michael Coffee, Amarin CFO Nigel Bell, and Amarin EVP Donald Joseph were all previously employed by Elan.

That year, Amarin acquired a purchase option on Zelapar, a drug for Parkinson's Disease, from Elan. In Amarin's 2008 annual report, the company said Amarin paid $17 million to Elan, gave Elan a $5 million loan note, and gave Elan 50,000 warrants at $19 each exercisable through 2009, to settle its purchase of Zelapar. In addition, Amarin said:

Ã‰lan sold its remaining interests in Amarin to Amarin Investment Holding Limited, an entity controlled by Amarin's Chairman and Chief Executive Officer, Mr. Thomas Lynch. These interests included Ã‰lan's equity interest, the $5,000,000 loan note and the 50,000 warrants.

Also that year, Amarin agreed to pay Elan for the rights to Permax, a Parkinson's Disease drug, and recorded a $5 million "consideration" for that deal. The deal was a complex one dependent on the sales performance of the drug.

Note how Lynch's name keeps cropping up. While he may now be the CEO of "Amarin Investment Holding Limited," back in 2002 he was VP/corporate strategy for Elan.

Don't worry if you don't understand all this -- the SEC didn't either, which is why Elan was investigated by the U.S. regulator in 2002 for allegedly recycling its own funds to inflate sales by booking license fees from Elan-funded joint ventures.

But all that's in the past. Surely Elan shouldn't be investigated for a mere undisclosed $700,000 expenditure when it has annual revenues of more than $1 billion?

It depends on how you define "material." I'd say taking possession of a marketable drug product was material if, say, you're a drug company in the business of selling drugs. But that's just me. Under Irish law, that may not be the case.

The Irish financial regulator requires only that companies disclose "a true and fair view of the assets" and that "the interim management report shall also include major related parties transactions." I look forward to Elan's explanation of how lorazepam is not an asset.

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Image by Stephen Edgar, CC.