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ELAN CORP PLC 20-F 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number:
001-13896
Elan Corporation, plc
William Daniel,
Secretary
Elan Corporation, plc
Treasury Building, Lower Grand
Canal Street
Dublin 2, Ireland
011-353-1-709-4000
(Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact
person)
Securities registered or to be
registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act:
None
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report: 471,413,777 Ordinary
Shares.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days: Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this
filing: U.S. GAAP
þ
International Financial Reporting Standards as issued by the
International Accounting Standards Board
o Other
o
If “Other” has been checked in response to the
previous question, indicate by check mark which financial
statement item the registrant has elected to follow:
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act): Yes o No þ
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As used herein, “we”, “our”, “us”,
“Elan” and the “Company” refer to Elan
Corporation, plc (public limited company) and its consolidated
subsidiaries, unless the context requires otherwise. All product
names appearing in italics are trademarks of Elan.
Non-italicized product names are trademarks of other companies.
Our Consolidated Financial Statements contained in this
Form 20-F
have been prepared on the basis of accounting principles
generally accepted in the United States (U.S. GAAP). In
addition to the Consolidated Financial Statements contained in
this
Form 20-F,
we also prepare separate Consolidated Financial Statements,
included in our Annual Report, in accordance with International
Financial Reporting Standards (IFRS), which differ in certain
significant respects from U.S. GAAP. The Annual Report
under IFRS is a separate document from this
Form 20-F.
Unless otherwise indicated, our Consolidated Financial
Statements and other financial data contained in this
Form 20-F
are presented in United States (U.S.) dollars ($). We prepare
our Consolidated Financial Statements on the basis of a calendar
fiscal year beginning on January 1 and ending on
December 31. References to a fiscal year in this
Form 20-F
shall be references to the fiscal year ending on December 31 of
that year. In this
Form 20-F,
financial results and operating statistics are, unless otherwise
indicated, stated on the basis of such fiscal years.
Statements included herein that are not historical facts are
forward-looking statements. Such forward-looking statements are
made pursuant to the safe harbor provisions of the
U.S. Private Securities Litigation Reform Act of 1995. The
forward-looking statements involve a number of risks and
uncertainties and are subject to change at any time. In the
event such risks or uncertainties materialize, our results could
be materially affected.
This
Form 20-F
contains forward-looking statements about our financial
condition, results of operations and estimates, business
prospects and products and potential products that involve
substantial risks and uncertainties. These statements can be
identified by the fact that they use words such as
“anticipate”, “estimate”,
“project”, “intend”, “plan”,
“believe” and other words and terms of similar meaning
in connection with any discussion of future operating or
financial performance or events. Among the factors that could
cause actual results to differ materially from those described
or projected herein are the following: (1) the potential of
Tysabri®
(natalizumab) and the incidence of serious adverse events
associated with Tysabri (including cases of progressive
multifocal leukoencephalopathy (PML)); (2) the success of
our research and development (R&D) activities (including,
in particular, whether the Phase 2 and 3 clinical trials for
AAB-001 and the Phase 1 clinical trials for ACC-001 are
successful) and the speed with which regulatory authorizations
and product launches may be achieved; (3) our ability to
maintain financial flexibility and sufficient cash, cash
equivalents, and investments and other assets capable of being
monetized to meet our liquidity requirements; (4) whether
restrictive covenants in our debt obligations will adversely
affect us; (5) competitive developments affecting our
products, including the introduction of generic competition
following the loss of patent protection or marketing exclusivity
for our products (including, in particular,
Maxipime®
(cefepime hydrochloride), which lost its basic
U.S. patent protection in March 2007 and now faces generic
competition,
Azactam®
(aztreonam for injection, USP), which lost its basic
U.S. patent protection in October 2005 and several of the
products from which we derive manufacturing or royalty revenues,
which are under patent challenge by potential generic
competitors); (6) our ability to protect our patents and
other intellectual property; (7) difficulties or delays in
manufacturing our products (we are dependent on third parties
for the manufacture of our products); (8) trade buying
patterns; (9) pricing pressures and uncertainties regarding
healthcare reimbursement and reform; (10) the failure to
comply with anti-kickback and false claims laws in the United
States (including, in particular, with respect to past marketing
practices with respect to our former
Zonegran®
product, which are being investigated by the
U.S. Department of Justice and the U.S. Department of
Health and Human Services. The resolution of the Zonegran matter
could require us to pay substantial fines and to take other
actions that could have a material adverse effect on us);
(11) extensive government regulation; (12) risks from
potential environmental liabilities; (13) failure to comply
with our reporting and payment obligations under Medicaid or
other government programs; (14) exposure to product
liability risks; (15) an adverse effect that could result
from the putative class action lawsuits initiated following the
voluntary suspension of the commercialization and clinical
dosing of Tysabri and the outcome of our other pending or
future litigation; (16) the volatility of our stock price;
and (17) some of our agreements that may discourage or
prevent someone from acquiring us. We assume no obligation to
update any forward-looking statements, whether as a result of
new information, future events or otherwise.
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Not applicable.
Not applicable.
The selected financial data set forth below is derived from our
Consolidated Financial Statements and should be read in
conjunction with, and is qualified by reference to, Item 5.
“Operating and Financial Review and Prospects” and our
Consolidated Financial Statements and related notes thereto.
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Not applicable.
Not applicable.
You should carefully consider all of the information set
forth in this
Form 20-F,
including the following risk factors, when investing in our
securities. The risks described below are not the only ones that
we face. Additional risks not currently known to us or that we
presently deem immaterial may also impair our business
operations. We could be materially adversely affected by any of
these risks. This
Form 20-F
also contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements are not guarantees of
future performance, and actual results may differ materially
from those contemplated by such forward-looking statements.
Our
future success depends upon the continued successful
commercialization of Tysabri and the successful development and
commercialization of additional products. If Tysabri is not
commercially successful, either because of the incidence of
serious adverse events associated with Tysabri (including cases
of PML) or for other reasons, or if our Phase 2 and 3 clinical
trials for AAB-001 are not successful and we do not successfully
develop and commercialize additional products, we will be
materially and adversely affected.
While approximately 40% of our 2007 revenue was generated by our
Elan Drug Technologies (EDT) business unit, we have only four
marketed products and several potential products in clinical
development. Our future success depends upon the continued
successful commercialization of Tysabri and the
development and the successful commercialization of additional
products.
Uncertainty created by the serious adverse events that have
occurred or may occur, with respect to Tysabri, and the
restrictive labeling and distribution system for Tysabri
mandated by regulatory agencies, may significantly impair the
commercial potential for Tysabri. If there are more
serious adverse events in patients treated with Tysabri
(including cases of PML), then we may be seriously and adversely
affected.
We commit substantial resources to our R&D activities,
including collaborations with third parties such as Biogen Idec
Inc. (Biogen Idec) with respect to Tysabri, and Wyeth and
Transition Therapeutics, Inc. (Transition), with respect to
parts of our Alzheimer’s disease (AD) programs. We have
committed significant resources to the development and the
commercialization of Tysabri and to the other potential
products in our development pipeline (in particular, AAB-001).
These investments may not be successful.
In the pharmaceutical industry, the R&D process is lengthy,
expensive and involves a high degree of risk and uncertainty.
This process is conducted in various stages and, during each
stage, there is a substantial risk that potential products in
our R&D pipeline, including product candidates from our
Alzheimer’s disease research programs such as AAB-001,
ELND005 and ACC-001, will experience difficulties, delays or
failures. If our Phase 2 and 3 clinical trials for AAB-001 are
not successfully completed, we will be materially and adversely
affected.
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A number of factors could affect our ability to successfully
develop and commercialize products, including our ability to:
Even if we obtain positive results from preclinical or clinical
trials, we may not achieve the same success in future trials.
Earlier stage trials are generally based on a limited number of
patients and may, upon review, be revised or negated by
authorities or by later stage clinical results. The results from
preclinical testing and early clinical trials have often not
been predictive of results obtained in later clinical trials. A
number of new drugs and biologics have shown promising results
in initial clinical trials, but subsequently failed to establish
sufficient safety and effectiveness data to obtain necessary
regulatory approvals. Data obtained from preclinical and
clinical activities are subject to varying interpretations,
which may delay, limit or prevent regulatory approval. Clinical
trials may not demonstrate statistically sufficient safety and
effectiveness to obtain the requisite regulatory approvals for
product candidates. In addition, as happened with
Tysabri, unexpected serious adverse events can occur in
patients taking a product after the product has been
commercialized.
Our failure to successfully commercialize Tysabri and
develop and commercialize other products (such as AAB-001) would
materially adversely affect us.
At December 31, 2007, we had $1,765.0 million of debt.
At such date, we had cash and cash equivalents, current
restricted cash and current investments of $720.5 million.
Our substantial indebtedness could have important consequences
to us. For example, it does or could:
We estimate that we have sufficient cash, liquid resources and
current assets and investments to meet our liquidity
requirements for at least the next 12 months. Although we expect
to continue to incur operating losses in 2008, in making our
liquidity estimates, we have also assumed a certain level of
operating performance. Our future operating performance will be
affected by general economic, financial, competitive,
legislative, regulatory and business conditions and other
factors, many of which are beyond our control. If our future
operating performance does not meet our expectations, including
our failure to continue to successfully commercialize
Tysabri, then we
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could be required to obtain additional funds. If our estimates
are incorrect or are not consistent with actual future
developments and we are required to obtain additional funds,
then we may not be able to obtain those funds on commercially
reasonable terms, or at all, which would have a material adverse
effect on our financial condition. In addition, if we are not
able to generate sufficient liquidity from operations, we may be
forced to curtail programs, sell assets or otherwise take steps
to reduce expenses. Any of these steps may have a material
adverse effect on our prospects.
The agreements governing our outstanding indebtedness contain
various restrictive covenants that limit our financial and
operating flexibility. The covenants do not require us to
maintain or adhere to any specific financial ratio, but do
restrict within limits our ability to, among other things:
The breach of any of these covenants may result in a default
under the applicable agreement, which could result in the
indebtedness under the agreement becoming immediately due and
payable. Any such acceleration would result in a default under
our other indebtedness subject to cross-acceleration provisions.
If this were to occur, we might not be able to pay our debts or
obtain sufficient funds to refinance them on reasonable terms,
or at all. In addition, complying with these covenants may make
it more difficult for us to successfully execute our business
strategies and compete against companies not subject to similar
constraints.
The pharmaceutical industry is highly competitive. Our principal
pharmaceutical competitors consist of major international
companies, many of which are larger and have greater financial
resources, technical staff, manufacturing, R&D and
marketing capabilities than Elan. We also compete with smaller
research companies and generic drug manufacturers.
A drug may be subject to competition from alternative therapies
during the period of patent protection or regulatory exclusivity
and, thereafter, it may be subject to further competition from
generic products. The price of pharmaceutical products typically
declines as competition increases.
Our product Azactam lost its basic U.S. patent
protection in October 2005. To date, no generic Azactam
product has been approved.
In addition, the U.S. basic patent covering our product
Maxipime expired in March 2007. Maxipime became
subject to generic competition following the expiration of the
basic patent, and that has materially and adversely affected our
sales of Maxipime.
Generic competitors have challenged existing patent protection
for several of the products from which we earn manufacturing or
royalty revenue. If these challenges are successful, our
manufacturing and royalty revenue will be materially and
adversely affected.
Generic competitors do not have to bear the same level of
R&D and other expenses associated with bringing a new
branded product to market. As a result, they can charge much
less for a competing version of our product. Managed care
organizations typically favor generics over brand name drugs,
and governments encourage, or under
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some circumstances mandate, the use of generic products, thereby
reducing the sales of branded products that are no longer patent
protected. Governmental and other pressures toward the
dispensing of generic products may rapidly and significantly
reduce, or slow the growth in, the sales and profitability of
any of our products not protected by patents or regulatory
exclusivity and may adversely affect our future results and
financial condition. The launch of competitive products,
including generic versions of our products, has had and will
have a material and adverse affect on our revenues and results
of operations.
Our competitive position depends, in part, upon our continuing
ability to discover, acquire and develop innovative,
cost-effective new products, as well as new indications and
product improvements protected by patents and other intellectual
property rights. We also compete on the basis of price and
product differentiation and through our sales and marketing
organization. If we fail to maintain our competitive position,
then our revenues and results of operations may be materially
adversely affected.
Because of the significant time and expense involved in
developing new products and obtaining regulatory approvals, it
is very important to obtain patent and intellectual property
protection for new technologies, products and processes. Our
success depends in large part on our continued ability to obtain
patents for our products and technologies, maintain patent
protection for both acquired and developed products, preserve
our trade secrets, obtain and preserve other intellectual
property such as trademarks and copyrights, and operate without
infringing the proprietary rights of third parties.
The degree of patent protection that will be afforded to
technologies, products and processes, including ours, in the
United States and in other markets is dependent upon the scope
of protection decided upon by patent offices, courts and
legislatures in these countries. There is no certainty that our
existing patents or, if obtained, future patents, will provide
us substantial protection or commercial benefit. In addition,
there is no assurance that our patent applications or patent
applications licensed from third parties will ultimately be
granted or that those patents that have been issued or are
issued in the future will prevail in any court challenge. Our
competitors may also develop products, including generic
products, similar to ours using methods and technologies that
are beyond the scope of our patent protection, which could
adversely affect the sales of our products.
Although we believe that we make reasonable efforts to protect
our intellectual property rights and to ensure that our
proprietary technology does not infringe the rights of other
parties, we cannot ascertain the existence of all potentially
conflicting claims. Therefore, there is a risk that third
parties may make claims of infringement against our products or
technologies. In addition, third parties may be able to obtain
patents that prevent the sale of our products or require us to
obtain a license and pay significant fees or royalties in order
to continue selling our products.
There has been, and we expect there will continue to be,
significant litigation in the industry regarding patents and
other intellectual property rights. Litigation and other
proceedings concerning patents and other intellectual property
rights in which we are involved have been and will continue to
be protracted, expensive and could be distracting to our
management. Our competitors may sue us as a means of delaying
the introduction of our products. Any litigation, including any
interference proceedings to determine priority of inventions,
oppositions to patents or litigation against our licensors may
be costly and time consuming and could adversely affect us. In
addition, litigation has been and may be instituted to determine
the validity, scope or non-infringement of patent rights claimed
by third parties to be pertinent to the manufacturing, use or
sale of our or their products. The outcome of any such
litigation could adversely affect the validity and scope of our
patents or other intellectual property rights, hinder, delay or
prevent the marketing and sale of our products and cost us
substantial sums of money.
We do not manufacture Tysabri, Prialt, Maxipime or
Azactam. Our dependence upon collaborators and third
parties for the manufacture of our products may result in
unforeseen delays or other problems beyond our control.
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For example, if our third-party manufacturers are not in
compliance with current good manufacturing practices (cGMP) or
other applicable regulatory requirements, then the supply of our
products could be materially adversely affected. If we are
unable to retain or obtain replacements for our third-party
manufacturers or if we experience delays or difficulties with
our third-party manufacturers in producing our products (as we
did with Maxipime in 2006 and prior years), then sales of
these products could be materially and adversely affected. In
this event, we may be unable to enter into alternative
manufacturing arrangements on commercially reasonable terms, if
at all.
Our manufacturers require supplies of raw materials for the
manufacture of our products. We do not have dual sourcing of our
required raw materials. The inability to obtain sufficient
quantities of required raw materials could materially adversely
affect the supply of our products.
Our product revenue may vary periodically due, in part, to
buying patterns of our wholesalers and distributors. In the
event that wholesalers and distributors determine, for any
reason, to limit purchases of our products, sales of those
products would be adversely affected. For example, wholesalers
and distributors may order products in larger than normal
quantities prior to anticipated price increases for those
products. This excess purchasing in any period could cause sales
of those products to be lower than expected in subsequent
periods.
We are
subject to pricing pressures and uncertainties regarding
healthcare reimbursement and reform.
In the United States, many pharmaceutical products and biologics
are subject to increasing pricing pressures, including pressures
arising from recent Medicare reform. Our ability to
commercialize products successfully depends, in part, upon the
extent to which healthcare providers are reimbursed by
third-party payers, such as governmental agencies, including the
Centers for Medicare and Medicaid Services, private health
insurers and other organizations, such as health maintenance
organizations (HMOs), for the cost of such products and related
treatments. In addition, if healthcare providers do not view
current or future Medicare reimbursements for our products
favorably, then they may not prescribe our products. Third-party
payers are increasingly challenging the pricing of
pharmaceutical products by, among other things, limiting the
pharmaceutical products that are on their formulary lists. As a
result, competition among pharmaceutical companies to place
their products on these formulary lists has reduced product
prices. If reasonable reimbursement for our products is
unavailable or if significant downward pricing pressures in the
industry occur, then we could be materially adversely affected.
Recent reforms in Medicare added a prescription drug
reimbursement benefit for all Medicare beneficiaries. Although
we cannot predict the full effects on our business of this
legislation, it is possible that the new benefit, which is being
managed by private health insurers, pharmacy benefit managers,
and other managed care organizations, will result in decreased
reimbursement for prescription drugs, which may further
exacerbate industry-wide pressure to reduce the prices charged
for prescription drugs. This could harm our ability to generate
revenues. In addition, managed care organizations, HMOs,
preferred provider organizations, institutions and other
government agencies continue to seek price discounts. In
addition, certain states have proposed and certain other states
have adopted various programs to control prices for their
seniors’ and low-income drug programs, including price or
patient reimbursement constraints, restrictions on access to
certain products, importation from other countries, such as
Canada, and bulk purchasing of drugs.
We encounter similar regulatory and legislative issues in most
other countries. In the European Union (EU) and some other
international markets, the government provides health care at
low direct cost to consumers and regulates pharmaceutical prices
or patient reimbursement levels to control costs for the
government-sponsored healthcare system. This price regulation
leads to inconsistent prices and some third-party trade in our
products from markets with lower prices. Such trade-exploiting
price differences between countries could undermine our sales in
markets with higher prices.
In addition to the U.S. Food and Drug Administration (FDA)
restrictions on marketing of pharmaceutical products, several
other types of state and federal laws have been applied to
restrict some marketing practices in the pharmaceutical industry
in recent years. These laws include anti-kickback statutes and
false claims statutes.
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The federal healthcare program anti-kickback statute prohibits,
among other things, knowingly and willfully offering, paying,
soliciting, or receiving remuneration to induce or in return
for, purchasing, leasing, ordering or arranging for the
purchase, lease or order of any healthcare item or service
reimbursable under Medicare, Medicaid or other federally
financed healthcare programs. This statute has been interpreted
to apply to arrangements between pharmaceutical manufacturers on
one-hand, and prescribers, purchasers and formulary managers on
the other. Although there are a number of statutory exemptions
and regulatory safe harbors protecting some common activities
from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to
induce prescribing, purchases or recommendations may be subject
to scrutiny if they do not qualify for an exemption or safe
harbor. Our practices may not in all cases meet all of the
criteria for safe harbor protection from anti-kickback liability.
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Recently, several pharmaceutical and other healthcare companies
have been prosecuted under these laws for allegedly providing
free product to customers with the expectation that the
customers would bill federal programs for the product.
Additionally, another pharmaceutical company settled charges
under the federal False Claims Act relating to off-label
promotion. The majority of states also have statutes or
regulations similar to the federal anti-kickback law and false
claims laws, which apply to items and services reimbursed under
Medicaid and other state programs, or, in several states, apply
regardless of the payer. Sanctions under these federal and state
laws may include civil monetary penalties, exclusion of a
manufacturer’s products from reimbursement under government
programs, criminal fines, and imprisonment.
In January 2006, Elan received a subpoena from the
U.S. Department of Justice and the Department of Health and
Human Services, Office of Inspector General, asking for
documents and materials primarily related to our marketing
practices for Zonegran. In April 2004, we completed the sale of
our interests in Zonegran in North America and Europe to Eisai
Co. Ltd. (Eisai). We are cooperating with the government in its
investigation. The resolution of this matter could require Elan
to pay substantial fines and to take other actions that could
have a material adverse effect on Elan. In April 2006, Eisai
delivered to Elan a notice making a contractual claim for
indemnification in connection with a similar subpoena received
by Eisai.
Because of the breadth of such federal and state laws and the
narrowness of the safe harbors, it is possible that more of our
business activities could be subject to challenge under one or
more of such laws. Such a challenge could have a material
adverse effect on our liquidity and our operations.
The pharmaceutical industry is subject to significant regulation
by state, local, national and international governmental
regulatory authorities. In the United States, the FDA regulates
the design, development, preclinical and clinical testing,
manufacturing, labeling, storing, distribution, import, export,
record keeping, reporting, marketing and promotion of our
pharmaceutical products, which include drugs, biologics and
medical devices. Failure to comply with regulatory requirements
at any stage during the regulatory process could result in,
among other things, delays in the approval of applications or
supplements to approved applications, refusal of a regulatory
authority to review pending market approval applications or
supplements to approved applications, warning letters, fines,
import or export restrictions, product recalls or seizures,
injunctions, total or partial suspension of production, civil
penalties, withdrawals of previously approved marketing
applications or licenses, recommendations by the FDA or other
regulatory authorities against governmental contracts, and
criminal prosecutions.
We must obtain and maintain approval for our products from
regulatory authorities before such products may be sold in a
particular jurisdiction. The submission of an application to a
regulatory authority with respect to a product does not
guarantee that approval to market the product will be granted.
Each authority generally imposes its own requirements and may
delay or refuse to grant approval, even though a product has
been approved in another country. In our principal markets,
including the United States, the approval process for a new
product is complex, lengthy, expensive and subject to
unanticipated delays. We cannot be sure when or whether
approvals from regulatory authorities will be received or that
the terms of any approval will not impose significant
limitations that
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could negatively impact the potential profitability of the
approved product. Even after a product is approved, it may be
subject to regulatory action based on newly discovered facts
about the safety and efficacy of the product, on any activities
that regulatory authorities consider to be improper or as a
result of changes in regulatory policy. Regulatory action may
have a material adverse effect on the marketing of a product,
require changes in the product’s labeling or even lead to
the withdrawal of the regulatory marketing approval of the
product.
All facilities and manufacturing techniques used for the
manufacture of products and devices for clinical use or for sale
in the United States must be operated in conformity with cGMPs,
the FDA’s regulations governing the production of
pharmaceutical products. There are comparable regulations in
other countries. Any finding by the FDA or other regulatory
authority that we are not in substantial compliance with cGMP
regulations or that we or our employees have engaged in
activities in violation of these regulations could interfere
with the continued manufacture and distribution of the affected
products, up to the entire output of such products, and, in some
cases, might also require the recall of previously distributed
products. Any such finding by the FDA or other regulatory agency
could also affect our ability to obtain new approvals until such
issues are resolved. The FDA and other regulatory authorities
conduct scheduled periodic regulatory inspections of our
facilities to ensure compliance with cGMP regulations. Any
determination by the FDA or other regulatory authority that we,
or one of our suppliers, are not in substantial compliance with
these regulations or are otherwise engaged in improper or
illegal activities could result in substantial fines and other
penalties and could cut off our supply of products.
We use hazardous materials, chemicals and toxic compounds that
could expose people or property to accidental contamination,
events of non-compliance with environmental laws, regulatory
enforcement and claims related to personal injury and property
damage. If an accident occurred or if we were to discover
contamination caused by prior operations, then we could be
liable for cleanup, damages or fines, which could have an
adverse effect on us.
The environmental laws of many jurisdictions impose actual and
potential obligations on us to remediate contaminated sites.
These obligations may relate to sites that we currently own or
lease, sites that we formerly owned or operated, or sites where
waste from our operations was disposed. These environmental
remediation obligations could significantly impact our operating
results. Stricter environmental, safety and health laws and
enforcement policies could result in substantial costs and
liabilities to us, and could subject our handling, manufacture,
use, reuse or disposal of substances or pollutants to more
rigorous scrutiny than is currently the case. Consequently,
compliance with these laws could result in significant capital
expenditures, as well as other costs and liabilities, which
could materially adversely affect us.
As a condition of reimbursement under Medicaid, we participate
in the U.S. federal Medicaid rebate program, as well as
several state rebate programs. Under the federal and state
Medicaid rebate programs, we pay a rebate to each state for our
products that are reimbursed by those programs. The amount of
the rebate for each unit of product is set by law, based on
reported pricing data. The rebate amount may also include a
penalty if our prices increase faster than the rate of inflation.
As a manufacturer of single-source, innovator and non-innovator
multiple-source products, rebate calculations vary among
products and programs. The calculations are complex and, in some
respects, subject to interpretation by governmental or
regulatory agencies, the courts and us. The Medicaid rebate
amount is computed each quarter based on our pricing data
submission to the Centers for Medicare and Medicaid Services at
the U.S. Department of Health and Human Services. The terms
of our participation in the program impose an obligation to
correct the prices reported in previous quarters, as may be
necessary. Any such corrections could result in an overage or
shortfall in our rebate liability for past quarters (up to 12
past quarters), depending on the direction of the correction.
Governmental agencies may also make changes in program
interpretations, requirements or conditions of participation,
some of which may have implications for amounts previously
estimated or paid.
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U.S. Federal law requires that any company that
participates in the federal Medicaid rebate program extend
comparable discounts to qualified purchasers under the Public
Health Services pharmaceutical pricing program. This pricing
program extends discounts comparable to the Medicaid net price
to a variety of community health clinics and other entities that
receive health services grants from the Public Health Service,
as well as outpatient utilization at hospitals that serve a
disproportionate share of poor patients.
Additionally, each calendar quarter, we calculate and report an
Average Sales Price (ASP) for all products covered by Medicare
Part B (primarily injectable or infused products). We
submit ASP information for each such product within 30 days
of the end of each calendar quarter. This information is then
used to set reimbursement levels to reimburse Part B
providers for the drugs and biologicals dispensed to Medicare
Part B participants.
Furthermore, pursuant to the Veterans Health Care Act, a
Non-Federal Average Manufacturer Price is calculated each
quarter and a Federal Ceiling Price is calculated each year for
every Covered Drug marketed by us. These prices are used to set
pricing for purchases by the military arm of the government.
These price reporting obligations are complicated and often
involve decisions regarding issues for which there is no
clear-cut guidance from the government. Failure to submit
correct pricing data can subject us to material civil,
administrative and criminal penalties.
Risks relating to product liability claims are inherent in the
development, manufacturing and marketing of our products. Any
person who is injured while using one of our products, or
products that we are responsible for, may have a product
liability claim against us. Since we distribute and sell our
products to a wide number of end users, the risk of such claims
could be material. Persons who participate in clinical trials
involving our products may also bring product liability claims.
Excluding any self-insured arrangements, we currently do not
maintain product liability insurance for the first
$25.0 million of aggregate claims, but do maintain coverage
for the next $175.0 million with our insurers. Our
insurance coverage may not be sufficient to cover fully all
potential claims, nor can we guarantee the solvency of any of
our insurers.
If our claims experience results in higher rates, or if product
liability insurance otherwise becomes costlier because of
general economic, market or industry conditions, then we may not
be able to maintain product liability coverage on acceptable
terms. If sales of our products increase materially, or if we
add significant products to our portfolio, then we will require
increased coverage and may not be able to secure such coverage
at reasonable rates or terms.
We and some of our officers and directors have been named as
defendants in putative class actions filed in 2005. The class
action complaints allege claims under the U.S. federal
securities laws and state laws. The complaints allege that we
caused the release of materially false or misleading information
regarding Tysabri. The complaints seek damages and other
relief that the courts may deem just and proper. We believe that
the claims in the lawsuits are without merit and intend to
defend against them vigorously.
An adverse result in the lawsuits could have a material adverse
effect on us.
The market prices for our shares and for securities of other
companies engaged primarily in biotechnology and pharmaceutical
development, manufacture and distribution are highly volatile.
The market price of our shares likely will continue to fluctuate
due to a variety of factors, including:
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We are a party to agreements that may discourage a takeover
attempt that might be viewed as beneficial to shareholders who
wish to receive a premium for their shares from a potential
bidder. For example:
Elan, an Irish public limited company, is a neuroscience-based
biotechnology company headquartered in Dublin, Ireland. We were
incorporated as a private limited company in Ireland in December
1969 and became a public limited company in January 1984. Our
principal executive offices are located at Treasury Building,
Lower Grand Canal Street, Dublin 2, Ireland, and our telephone
number is
353-1-709-4000.
Our principal research and development, manufacturing and
marketing facilities are located in Ireland and the United
States.
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Our operations are organized into two business units:
Biopharmaceuticals and Elan Drug Technologies (EDT).
Biopharmaceuticals engages in research, development and
commercial activities primarily in the following areas:
EDT is an established, profitable and growing specialty
pharmaceutical business unit of Elan. For nearly 40 years,
EDT has been applying its skills and knowledge to enhance the
performance of dozens of drugs that have been marketed
worldwide. Today, products enabled by EDT technologies are used
by millions of patients each day.
Alzheimer’s disease is a degenerative brain disorder that
primarily affects older people. It can begin with simple
forgetfulness, but rapidly progresses into more advanced
symptoms, including confusion, language disturbances,
personality and behavior changes, impaired judgment and profound
dementia. As the disease advances, most patients will eventually
need complete skilled nursing care, and in the absence of other
illnesses, the progressive loss of brain function will likely
cause death. It is estimated that more than 5 million
Americans and more than 24 million people worldwide, at the
age of 60 years or older, suffer from some form of dementia.
Elan’s
Approach to Alzheimer’s Disease
A hallmark pathology of Alzheimer’s disease is the
formation of plaques made of beta amyloid that are formed
through a process known as the beta amyloid cascade. Beta
amyloid is actually a small part of a larger protein called the
amyloid precursor protein (APP). Beta amyloid is formed when
enzymes called secretases “clip” (or cleave) APP. It
is becoming increasingly clear that once beta amyloid is
released, it exists in multiple physical forms with distinct
functional activities. It is believed that the toxic effects of
these forms are likely responsible for the complex mental
disruption characteristic of Alzheimer’s disease.
Our scientific approach to treating Alzheimer’s disease
focuses on the beta amyloid hypothesis, as it is believed that
blocking the generation of beta amyloid in the brain or
enhancing the clearance of beta amyloid from the brain will
result in the successful treatment of Alzheimer’s disease
patients. Our efforts are focused on three distinct aspects of
the beta amyloid cascade:
Our scientists are investigating three key therapeutic
approaches that target the elimination and prevention of
production or aggregation of beta amyloid. In collaboration with
Wyeth, we are developing beta amyloid immunotherapies.
Separately, we have research programs focused on small molecule
inhibitors of beta secretase and gamma secretase, enzymes whose
actions result in the over-production of beta amyloid in the
brains of patients
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with Alzheimer’s disease. In collaboration with Transition,
we are developing a small molecule therapeutic that acts by
breaking down and preventing the aggregation of beta amyloid
fibrils.
Beta amyloid immunotherapy pioneered by Elan involves the
treatment of Alzheimer’s disease by inducing or enhancing
the body’s immune response in order to clear toxic species
of beta amyloid from the brain. In collaboration with Wyeth, our
scientists have been developing a series of monoclonal
antibodies and active immunization approaches that may have the
ability to selectively clear a variety of beta amyloid species.
These new approaches have the potential to deliver
immunotherapies with robust and specific therapeutic activity.
The first candidate from the collaboration with Wyeth, AN-1792
(an immunoconjugate vaccine), showed great promise but was
discontinued in 2002 when a small subset of patients (6%)
developed a type of brain inflammation. The AN-1792 program
played a major role in advancing the understanding of the
relationship between beta amyloid and Alzheimer’s disease,
and contributed to a growing body of scientific evidence
pointing to the promise of immunotherapies as potential
treatments for Alzheimer’s disease. Long-term
follow-up
data presented in 2007 evaluated participants from the AN-1792
Phase 2 clinical trial and found that 4.5 years after
dosing had stopped, patients who had responded to treatment
continued to show significantly slower decline, compared to
placebo patients, on two key measures of patient function: the
Disability Assessment for Dementia and the Dependence Scale.
Based upon the proof of principle established by work on
AN-1792, four distinct new programs emerged that seek to build
upon the promising efficacy signal, including bapineuzumab
(AAB-001), which is generally viewed as one of the most advanced
programs with disease-modifying potential in the field, and
ACC-001.
Bapineuzumab (AAB-001) is an experimental humanized monoclonal
antibody delivered intravenously that is being studied as a
potential treatment for mild to moderate Alzheimer’s
disease. Bapineuzumab is thought to bind to and clear beta
amyloid peptide in the brain. It is designed to provide
antibodies to beta amyloid directly to the patient, rather than
requiring patients to mount their own immune responses.
Bapineuzumab has received fast-track designation from the FDA,
which means that it may receive expedited approval in certain
circumstances, in recognition of its potential to address the
significant unmet needs of patients with Alzheimer’s
disease.
In May 2007, Elan and Wyeth announced the decision to initiate a
Phase 3 clinical program for bapineuzumab. The Phase 3 program
encompasses studies in North America and the rest of the world
(ROW). In December 2007, we announced that the first patient had
been dosed in the studies taking place in North America. It is
expected that the ROW studies will begin enrolling patients
during the first half of 2008.
The Phase 3 program includes four randomized, double-blinded,
placebo controlled studies across two subpopulations, which are
designed to total approximately 4,000 patients with mild to
moderate AD at approximately 350 sites. The treatment duration
for each patient is 18 months with patients to be equally
distributed between North America and the rest of the world. The
studies stratify patients by ApoE4 genotype, and all studies
have co-primary efficacy end points — one cognitive
and one functional.
Two Phase 2 studies of bapineuzumab remain ongoing and are
expected to be completed in 2008. Both studies are randomized,
double-blind, placebo-controlled, multiple ascending dose
studies with four dose cohorts. The main Phase 2 study enrolled
approximately 240 patients, and the other enrolled
approximately 30 patients and included a beta amyloid
imaging component. Both studies are being conducted in patients
with mild to moderate Alzheimer’s disease. The patients are
being followed for 18 months. Data from the Phase 1
clinical study presented in 2006 showed a statistically
significant improvement, compared to placebo, on a key measure
of cognitive function: the Mini-Mental State Examination.
In addition to the intravenous formulation of bapineuzumab, a
subcutaneous formulation of this antibody is in Phase 1 clinical
trials, and AAB-002, a
back-up
compound to bapineuzumab, is in the preclinical phase.
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ACC-001 is a novel beta amyloid immunoconjugate that leverages
the innovative conjugate technology that Wyeth has used in some
of its vaccine products. ACC-001 has also been granted fast
track designation by the FDA and is in Phase 2 clinical trials.
The ACC-001 approach is intended to induce a highly specific
antibody response to beta amyloid. The goal is to clear beta
amyloid while minimizing side effects such as inflammation of
the central nervous system.
In 2006, we entered into an exclusive, worldwide collaboration
with Transition for the joint development and commercialization
of a novel therapeutic agent for Alzheimer’s disease.
The molecule, ELND005, is a
beta-amyloid
anti-aggregate that has been granted fast track designation by
the FDA. Based upon preclinical data, by blocking the
aggregation of beta amyloid, clearance of amyloid occurs and
plaque build up is prevented. Daily oral treatment with this
compound has been shown to prevent cognitive decline in a
transgenic mouse model of Alzheimer’s disease, with reduced
amyloid plaque load in the brain and increased survival rate of
these animals.
In December 2007, Elan and Transition announced that the first
patient had been dosed in a Phase 2 clinical study. This study
is a randomized, double-blind, placebo-controlled, dose-ranging
study which evaluates the safety and efficacy of ELND005 in
approximately 340 patients with mild to moderate
Alzheimer’s disease. The patients are being followed for
18 months.
In 2007, it was also announced that multiple Phase 1 clinical
studies had been completed that further evaluated the safety,
tolerability and pharmacokinetic profile of this compound.
ELND005 was found to be safe and well-tolerated at all doses and
dosing regimens examined. No severe or serious adverse events
were observed. ELND005 was also shown to be orally bioavailable,
cross the blood-brain barrier and achieve levels in the brain
and cerebral spinal fluid shown to be effective in animal models
of Alzheimer’s disease.
Beta and gamma secretases are proteases (enzymes that break down
other proteins) that appear to clip the APP, resulting in the
formation of beta amyloid. This is significant because if the
clipping of APP could be prevented, the pathology of
Alzheimer’s disease may be changed. We have been at the
forefront of research in this area, publishing extensively since
1989, and have developed and are pursuing advanced discovery
programs focused on molecule inhibitors of beta and gamma
secretases.
Beta secretase is believed to initiate the first step in the
formation of beta amyloid, the precursor to plaque development
in the brain. Our findings concerning the role beta secretase
plays in beta amyloid production, published in Nature in
1999, are considered a landmark discovery. Today, we continue to
be at the center of understanding the complexities of beta
secretase. Our ongoing preclinical drug discovery efforts in
this area focus on inhibiting beta secretase and its role in the
progression of Alzheimer’s disease pathology.
Gamma secretase is an unusual multi-protein complex that is
thought to play a significant role in the formation of beta
amyloid. We have played a critical leadership role in the
increased awareness of how gamma secretase may affect
Alzheimer’s disease pathology. Our finding, published in
the Journal of Neurochemistry in 2001, that functional
gamma secretase inhibitors appear to reduce beta amyloid levels
in the brain, was an important step in this area of
Alzheimer’s disease research. We continue to progress our
gamma secretase discovery program.
In addition to internal programs, we retain certain rights to an
Eli Lilly and Company (Lilly) LY 450139 compound, which arose
from a collaborative research between the two companies that
began in 1988 and ended in 1998. In January 2008, Lilly
announced that it has commenced preparatory work for Phase 3
trials for LY 450139
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for mild to moderate AD patients, with estimated enrollment of
1,500 patients. Each patient’s participation is
expected to last approximately two years.
PARKINSON’S
DISEASE
Parkinson’s disease is a progressive degenerative
neurologic movement disorder that destroys nerve cells in the
part of the brain responsible for muscle control and movement.
This creates problems walking, maintaining balance and
coordination in patients diagnosed with the disease. It is
estimated that 1.5 million Americans currently have
Parkinson’s disease, with 60,000 new cases diagnosed each
year. The condition usually develops after the age of 65, but an
estimated 15% of sufferers are diagnosed before the age of 50.
Parkinson’s disease is believed to be a result of misfolded
proteins in the brain. Parkinson’s disease is characterized
by the accumulation of aggregated alpha-synuclein, or Lewy
bodies, in degenerating neurons in particular regions of the
brain.
Elan’s early discovery efforts in Parkinson’s disease
were guided by our expertise and leadership in Alzheimer’s
disease research. Our scientists have made significant
scientific progress to date in identifying unusual modified
forms of alpha-synuclein in human Parkinson’s disease brain
tissue. These unique forms have led us to a series of
therapeutic targets that will be a focus of our small and large
molecule drug discovery efforts over the next few years.
Our scientists are also studying parkin, a protein found in the
brain that has been genetically linked to Parkinson’s
disease. Parkin may be involved in the elimination of misfolded
proteins within neurons. Some familial forms of Parkinson’s
disease have been linked to mutations in parkin, and we are
actively studying the relationship between parkin activity and
neurodegeneration. This research is in the drug discovery stage.
In autoimmune diseases such as MS and CD, the immune system
mistakenly targets the cells, tissues and organs of a
person’s body, generally causing inflammation. Inflammation
is a response of body tissues to trauma, infection, chemical or
physical injury, allergic reaction or other factors. It is
usually characterized by a collection of cells and molecules at
a target site. Different autoimmune diseases affect the body in
different ways. For example, in MS, the autoimmune reaction is
directed against the brain, and in Crohn’s disease, it is
directed against the gastrointestinal tract. Autoimmune diseases
are often chronic, affecting millions of people and requiring
life-long care. Most autoimmune diseases cannot currently be
reversed or cured.
Our therapeutic strategy for treating autoimmune diseases is to
identify mechanisms common to autoimmune diseases and develop
novel therapeutics that stop the underlying causes of disease.
Alpha 4 integrin is a protein expressed by immune cells that
allows those cells to leave the bloodstream and invade target
tissues. Blocking alpha 4 integrin stops immune cells from
entering tissues.
Tysabri is an alpha 4 integrin antagonist. Tysabri
is designed to inhibit immune cells from leaving the
bloodstream and to prevent these immune cells from migrating
into chronically inflamed tissue where they may cause or
maintain inflammation. Tysabri was developed and is now
being commercialized by Elan in collaboration with Biogen Idec.
In June 2006, the FDA approved the reintroduction of Tysabri
as a monotherapy to treat relapsing forms of MS. Approval
for the marketing of Tysabri in the European Union was
also received in June 2006. The distribution of Tysabri
in both the United States and European Union commenced in
July 2006. Tysabri currently is approved in
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more than 30 countries worldwide, including the United States,
the countries of the European Union, Switzerland, Canada,
Australia, New Zealand and Israel.
In the United States, Europe and the ROW, provisions are in
place to ensure patients are informed of the risks associated
with Tysabri therapy, including PML, and to enhance
collection of post-marketing data on the safety and utilization
of Tysabri for MS. PML is an opportunistic viral
infection of the brain that usually leads to death or severe
disability. Three cases of PML were detected in clinical trials
with Tysabri among patients who were also taking other
therapies, leading to a temporary marketing suspension of the
product in the United States in February 2005.
As of late December 2007, there were approximately
21,100 patients receiving Tysabri in either clinical
or commercial settings, with 12,900 patients on Tysabri
in the U.S. commercial setting, 7,500 on Tysabri
outside of the United States in the commercial setting, and
700 patients in global clinical trials. The safety data to
date continue to support a favorable benefit-risk profile for
Tysabri. There have been no new reports of confirmed
cases of PML since the U.S. reintroduction and EU launch in July
2006. Global in-market net sales of Tysabri totaled
$342.9 million for 2007 (2006: $38.1 million), with
global net revenue reported by Elan of $231.7 million for
2007 (2006: $17.5 million).
CROHN’S
DISEASE AND OTHER AUTOIMMUNE DISEASES
An estimated 500,000 people in the United States have
Crohn’s disease, a chronic and progressive inflammatory
disease of the gastrointestinal tract that commonly affects both
men and women. Approximately 170,000 patients suffer from
moderate to severe forms of the disease.
The disease usually causes diarrhea and crampy abdominal pain,
often associated with fever and, at times, rectal bleeding. Loss
of appetite and weight loss also may occur. Complications
include narrowing of the intestine, obstruction, abscesses,
fistulas (abnormal channels connecting the intestine and other
organs, including the skin) and malnutrition. Most patients
eventually require surgery, which has both risks and potential
short- and long-term complications.
Crohn’s disease can have a devastating impact on the
lifestyle of patients, many of whom are young and active.
Currently, there is no medical or surgical cure for CD. Many
patients fail to respond to current therapies, including
biological therapies such as agents that inhibit tumor necrosis
factor alpha (TNF-alpha). Due to this failure of current
therapies in CD, therapies that have alternate biological
targets provide patients and physicians with therapeutic options.
We evaluated Tysabri as a treatment for CD in
collaboration with Biogen Idec. The safety and efficacy of
Tysabri as both an induction and maintenance therapy were
evaluated in 11 clinical studies, including three pivotal,
randomized, double-blind, placebo-controlled, multi-center
trials.
On January 14, 2008, the FDA approved the supplemental
Biologics License Application (sBLA) for Tysabri, for
inducing and maintaining clinical response and remission in
adult patients with moderately to severely active CD, with
evidence of inflammation, who have had an inadequate response
to, or are unable to tolerate, conventional CD therapies and
inhibitors of TNF-alpha.
In January 2008, we were notified by the European Commission
that it had denied marketing authorization of Tysabri as
a treatment of Crohn’s disease.
Elan and Biogen Idec continue to explore additional indications
for Tysabri, including oncology and ulcerative colitis.
An Investigational New Drug (IND) application was filed for
Tysabri for multiple myeloma in 2007 and a proof of
concept study is planned for the first half of 2008.
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Our ongoing research in autoimmune diseases is primarily based
on cell trafficking and focuses on discovering disease-modifying
approaches to treating a wide range of autoimmune diseases,
including MS and CD. Tysabri emerged from this research
program. In 2007, we continued our research exploring novel
anti-inflammatory approaches through our collaboration with
Archemix Corp. (Archemix) in addition to our core alpha 4
integrin programs.
Since first publishing the hypothesis concerning the therapeutic
potential of blocking alpha 4 integrin in 1992, our scientists
have been expanding and refining our understanding of how cells
enter tissues. Through this deep understanding, we have
developed small molecules that can selectively block particular
alpha 4 integrin interactions. We have advanced two compounds in
this area, with ELND002 currently in Phase 1 and ELND004
expected to enter Phase 1 in the first half of 2008.
Our commercial activities related to meeting the needs of pain
specialists addressing severe chronic pain involve Prialt,
a new type of therapy for patients that we launched in the
United States in January 2005.
On December 28, 2004, the FDA approved Prialt for
the management of severe chronic pain in patients for whom
intrathecal therapy (IT) is warranted, and who are intolerant of
or refractory to other treatments, such as systemic analgesics,
adjunctive therapies or intrathecal morphine. Prialt is
approved for use only in the Medtronic
SynchroMed®
EL,
SynchroMed®
II Infusion System and
CADD-Micro®
ambulatory infusion pump.
Prialt is administered through appropriate programmable
microinfusion pumps that can be implanted or external and that
release the drug into the fluid surrounding the spinal cord.
Prialt is in a class of non-opioid analgesics known as
N-type calcium channel blockers. It is a synthetic equivalent of
a naturally occurring conopeptide found in a marine snail known
as Conus magus. Research suggests that the novel mechanism of
action of Prialt works by targeting and blocking N-type
calcium channels on nerves that ordinarily transmit pain signals.
Prialt has been evaluated as an IT infusion in more than
1,200 patients participating in chronic pain trials. The
longest treatment duration to date is more than eight years.
This combined number of patients represents the largest IT
analgesic safety database ever complied for any IT treatment.
Prialt is used in a variety of severe chronic pain
patients, including patients with failed back surgery, complex
regional pain syndrome, cancer, AIDS and other non-malignant
causes.
In January 2005, we launched Prialt in the United States.
We believe Prialt represents an important therapeutic
option addressing an unmet need and that it has the potential
for significant patient impact in the area of severe neuropathic
pain. In October 2007, the revised Polyanalgesic Consensus
Guidelines were published and recommended Prialt as a
first-line alternative to morphine and hydromorphone for the IT
infusion treatment of severe chronic pain. Revenue from sales of
Prialt totaled $12.3 million for 2007 (2006:
$12.1 million).
In March 2006, we sold the Prialt European rights to
Eisai.
Severe bacterial infections remain a major medical concern. We
distribute two products that treat severe bacterial infections,
each designed to address medical needs within the hospital
environment.
We licensed the U.S. marketing rights to Maxipime
from Bristol-Myers Squibb Company (Bristol-Myers) in January
1999. Maxipime is a fourth-generation injectable
cephalosporin antibiotic used to treat patients with serious
and/or
life-threatening infections. Revenue from sales of Maxipime
totaled $122.5 million for 2007 (2006:
$159.9 million). The basic U.S. patent on Maxipime
expired in March 2007. On June 18, 2007, the first
generic formulation of cefepime hydrochloride was approved by
the FDA. Generic cefepime hydrochloride has, and we
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expect it will continue to, materially and adversely affect our
revenues from, and gross margin for, Maxipime. While
Maxipime is available through distributors, we no longer
promote this product.
We licensed the U.S. marketing rights to this injectable
antibiotic from Bristol-Myers in January 1999. Azactam is
a monobactam and is principally used by surgeons, infectious
disease specialists and internal medicine physicians to treat
pneumonia, post-surgical infections and septicemia. Azactam
is often used in these infections for patients who have a
known or suspected penicillin allergy. Revenue from sales of
Azactam totaled $86.3 million for 2007 (2006:
$77.9 million). The basic U.S. patent on Azactam
expired in October 2005. No generic Azactam product
has been approved to date. While Azactam is available
through distributors, we no longer promote this product.
Please refer to Item 5.A. “Operating Results” for
additional information concerning our revenue by category for
2007, 2006 and 2005.
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EDT is an established, profitable and growing specialty
pharmaceutical business unit of Elan. For nearly 40 years,
EDT has been applying its skills and knowledge to enhance the
performance of dozens of drugs that have been marketed
worldwide. Today, products enabled by EDT technologies are used
by millions of patients each day.
EDT is focused on using its extensive experience, proprietary
drug delivery technologies and licensing capabilities to develop
innovative products that deliver clinically meaningful benefits
to patients. EDT’s product development capabilities span
formulation development, clinical trial management, analytical
development, clinical trial material manufacturing, product
scale-up,
product registration and commercial manufacturing.
EDT has manufacturing and research facilities in the United
States and Ireland.
EDT generated $295.5 million in revenue in 2007, and an
operating profit of $85.2 million. EDT generates revenue
from two sources: from royalties and manufacturing fees from
licensed products, and from contract revenues relating to
R&D services, license fees and milestones.
Typically, EDT receives royalties in the single digit range as
well as manufacturing fees based on cost plus arrangements where
appropriate. More recently, EDT has brought product concepts to
a later stage of development before out-licensing and as a
result has been able to retain an increasing proportion of the
economics. There are currently 22 products marketed by EDT
licensees, with eight of these having been launched since 2001.
EDT has a broad pipeline, with 17 products in clinical
development, including three filed, four in Phase 3, five in
Phase 2 and five in Phase 1. These marketed and pipeline
products and EDT’s technologies are protected by an
extensive intellectual property portfolio, with approximately
1,700 patents and patent applications.
22 products that incorporate EDT technologies are currently
marketed by EDT licensees, and on which EDT receives royalties
and in some cases manufacturing fees, including:
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EDT’s current pipeline spans a range of therapeutic
classes, routes of administration and licensee profiles, as
outlined below. In addition, EDT has a large number of projects
at the preclinical or formulation development stage.
Technologies
EDT’s proprietary NanoCrystal technology is a drug
optimization technology applicable to many poorly water-soluble
compounds. It is an enabling technology for evaluating new
chemical entities exhibiting poor water-solubility and a tool
for optimizing the performance of established drugs.
NanoCrystal technology involves reducing crystalline
drugs to particles under 400 nanometers in size. By reducing
particle size, the exposed surface area of the drug is increased
and then stabilized to maintain particle size. The drug in
NanoCrystal form can be incorporated into common dosage
forms, including tablets, capsules, inhalation devices, and
sterile forms for injection, with the potential for substantial
improvements to clinical performance.
The potential benefits of applying the NanoCrystal
technology for existing and new products include:
EDT’s NanoCrystal technology has now been
incorporated into 4 commercialized products, with more than
30 other compounds at various stages of development.
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OCR technologies provide significant benefits in developing
innovative products that provide meaningful clinical benefits to
patients. EDT has developed a range of OCR technologies, which
it applies to help overcome many of the technical difficulties
that have been encountered in developing oral controlled-release
products. Oral controlled-release products are often difficult
to formulate, develop and manufacture. As a result, significant
experience, expertise and know-how are required to successfully
develop such products.
EDT’s OCR technologies are focused on using advanced drug
delivery technology and its manufacturing expertise to
formulate, develop and manufacture controlled-release, oral
dosage form pharmaceutical products that improve the release
characteristics and efficacy of active drug agents, and also
provide improved patient convenience and compliance. The drug
delivery technologies employed, coupled with its manufacturing
expertise, enable EDT to cost-effectively develop value-added
products and to enhance product positioning.
EDT’s suite of OCR technologies has been incorporated into
many commercialized products. EDT’s OCR technology platform
allows a range of release profiles and dosage forms to be
engineered. Customized release profiles for oral dosage forms
such as extended release, delayed release and pulsatile release
have all been successfully developed and commercialized.
EDT’s business strategy is focused on profitably growing
its business as a specialty pharmaceutical business unit of
Elan, underpinned by its product development capabilities and
drug delivery technologies. In the near to medium term, EDT will
continue to drive growth through its existing approved licensed
products and pipeline of 17 products in clinical development. In
addition, EDT will seek to generate new pipeline opportunities
by entering into further licensing arrangements with
pharmaceutical companies, and identifying and developing
proprietary products as EDT evolves its specialty pharmaceutical
business model.
EDT’s strategy, based on its comprehensive product
development and proprietary technology platforms, involves two
complementary elements:
Development of PPCs involves lower risk, reduced costs and
faster development timelines compared to traditional new
chemical entity drug development. PPCs are based on existing
drugs with known safety and efficacy profiles.
EDT intends to implement its strategies in the following manner:
1. Progress EDT’s existing pipeline to generate future
revenues and value;
2. Continue to build and develop EDT’s product
pipeline;
5. Enhance and expand its technologies, products and
capabilities.
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The U.S. market is our most important market. Refer to
Note 30 to the Consolidated Financial Statements for an
analysis of revenue by geographic region. For this reason, the
factors discussed below, such as “Government
Regulation” and “Product Approval,” place
emphasis on requirements in the United States.
The pharmaceutical industry is subject to significant regulation
by international, national, state and local governmental
regulatory agencies. Pharmaceutical product registration is
primarily concerned with the safety, efficacy and quality of new
drugs and devices and, in some countries, their pricing. A
product must generally undergo extensive clinical trials before
it can be approved for marketing. The process of developing a
new pharmaceutical product, from idea to commercialization, can
take in excess of 10 years.
Governmental authorities, including the FDA and comparable
regulatory authorities in other countries, regulate the design,
development, testing, manufacturing and marketing of
pharmaceutical products.
Non-compliance
with applicable requirements can result in fines and other
judicially imposed sanctions, including product seizures, import
restrictions, injunctive actions and criminal prosecutions. In
addition, administrative remedies can involve requests to recall
violative products; the refusal of the government to enter into
supply contracts; or the refusal to approve pending product
approval applications for drugs, biological products or medical
devices until manufacturing or other alleged deficiencies are
brought into compliance. The FDA also has the authority to cause
the withdrawal of approval of a marketed product or to impose
labeling restrictions.
In addition, the U.S. Centers for Disease Control and
Prevention regulate select biologics and toxins. This includes
registration and inspection of facilities involved in the
transfer or receipt of select agents. Select agents are subject
to specific regulations for packaging, labeling and transport.
Non-compliance with applicable requirements could result in
criminal penalties and the disallowance of research and
manufacturing of clinical products. Exemptions are provided for
select agents used for a legitimate medical purpose or for
biomedical research, such as toxins for medical use and vaccines.
The pricing of pharmaceutical products is regulated in many
countries and the mechanism of price regulation varies. In the
United States, while there are limited indirect federal
government price controls over private sector purchases of
drugs, it is not possible to predict future regulatory action on
the pricing of pharmaceutical products.
In June 2001, we received a letter from the Federal Trade
Commission (FTC) stating that the FTC was conducting a
non-public investigation to determine whether Brightstone
Pharma, Inc. (Brightstone), Elan Corporation, plc or others may
have engaged in an effort to restrain trade by entering into an
agreement that may restrict the ability of Brightstone or others
to market a bioequivalent or generic version of Naprelan.
In October 2001, our counsel met informally with the FTC staff
to discuss the matter. No further communication from the FTC was
received until December 2002, when we were served with a
subpoena duces tecum from the FTC for the production of
documents related to Naprelan. We have voluntarily
provided documents and witness testimony in response to the
subpoena and continue to cooperate with the FTC relating to this
investigation. We do not believe that it is feasible to predict
or determine the outcome of the investigation and any possible
effect on our business, or to reasonably estimate the amounts or
potential range of loss, if any, with respect to the resolution
of the investigation.
In January 2006, we received a subpoena from the
U.S. Department of Justice and the Department of Health and
Human Services, Office of Inspector General, asking for
documents and materials primarily related to our marketing
practices for Zonegran. In April 2004, we completed the sale of
our interests in Zonegran in North America and Europe to
Eisai. We are cooperating with the government in its
investigation. The resolution of this Zonegran matter could
require Elan to pay substantial fines and to take other actions
that could have a material adverse effect on Elan. In April
2006, Eisai delivered to Elan a notice making a contractual
claim for indemnification in connection with a similar subpoena
received by Eisai.
Preclinical tests assess the potential safety and efficacy of a
product candidate in animal models. The results of these studies
must be submitted to the FDA as part of an IND before human
testing may proceed.
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The clinical trial process can take three to 10 years or
more to complete, and there can be no assurance that the data
collected will demonstrate that the product is safe or
effective, or, in the case of a biologic product, pure and
potent, or will provide sufficient data to support FDA approval
of the product. The FDA may place clinical trials on hold at any
point in this process if, among other reasons, it concludes that
clinical subjects are being exposed to an unacceptable health
risk. Trials may also be terminated by institutional review
boards, which must review and approve all research involving
human subjects. Side effects or adverse events that are reported
during clinical trials can delay, impede or prevent marketing
authorization.
The results of the preclinical and clinical testing, along with
information regarding the manufacturing of the product and
proposed product labeling, are evaluated and, if determined
appropriate, submitted to the FDA through a license application
such as a New Drug Application (NDA) or a Biologics License
Application (BLA). In certain cases an Abbreviated New Drug
Application (ANDA) can be filed in lieu of filing an NDA.
There can be no marketing in the United States of any drug,
biologic or device for which a marketing application is required
until the application is approved by the FDA. Until an
application is actually approved, there can be no assurance that
the information requested and submitted will be considered
adequate by the FDA. Additionally, any significant change in the
approved product or in how it is manufactured, including changes
in formulation or the site of manufacture, generally require
prior FDA approval. The packaging and labeling of all products
developed by us are also subject to FDA approval and ongoing
regulation.
Whether or not FDA approval has been obtained, approval of a
pharmaceutical product by comparable regulatory authorities in
other countries outside the United States must be obtained prior
to the marketing of the product in those countries. The approval
procedure varies from country to country. It can involve
additional testing and the time required can differ from that
required for FDA approval. Although there are procedures for
unified filings for EU countries, in general, most other
countries have their own procedures and requirements.
Once a product has been approved, significant legal and
regulatory requirements apply in order to market a product. In
the United States these include, among other things,
requirements related to adverse event and other reporting,
product advertising and promotion, and ongoing adherence to cGMP
requirements, as well as the need to submit appropriate new or
supplemental applications and obtain FDA approval for certain
changes to the approved product, product labeling or
manufacturing process.
The FDA also enforces the requirements of the Prescription Drug
Marketing Act, which, among other things, imposes various
requirements in connection with the distribution of product
samples to physicians. Sales, marketing and
scientific/educational grant programs must comply with the
Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the
False Claims Act, as amended, and similar state laws. Pricing
and rebate programs must comply with the Medicaid rebate
requirements of the Omnibus Budget Reconciliation Act of 1990,
as amended.
Each manufacturing establishment, including any contract
manufacturers, used to manufacture a product must be listed in
the product application for such product. In the United States,
this means that each manufacturing establishment must be listed
in the drug, biologic, or device application, and must be
registered with the FDA. The application will not be approved
until the FDA conducts a manufacturing inspection, approves the
applicable manufacturing process for the product, and determines
that the facility is in compliance with cGMP requirements.
At December 31, 2007, we employed 547 people in our
manufacturing and supply activities, over half of these in
Athlone, Ireland. This facility is our primary location for the
manufacture of oral solid dosage products, including instant,
controlled-release and oral nano particulate products.
Additional dosage capabilities may be added as required to
support future product introductions. Our facility in
Gainesville, Georgia, United States, provides additional oral
controlled-release dosage product manufacturing capability and
is registered with the U.S. Drug Enforcement Administration
for the manufacture, packaging and distribution of
Schedule II controlled drugs.
We may invest a significant amount into building a biologics
manufacturing facility in Ireland.
All facilities and manufacturing techniques used for the
manufacture of products and devices for clinical use or for sale
in the United States must be operated in conformity with cGMP
regulations. There are FDA regulations
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governing the production of pharmaceutical products. Our
facilities are also subject to periodic regulatory inspections
to ensure ongoing compliance with cGMP regulations.
Our competitive position depends on our ability to obtain
patents on our technologies and products, to defend our patents,
to protect our trade secrets and to operate without infringing
the valid patents or trade secrets of others. We own or license
a number of patents in the United States and other countries.
These patents cover, for example:
Tysabri is covered by a number of issued patents and
pending patent applications in the United States and many other
countries. We have a basic U.S. patent, which expires in
2017, for Tysabri covering the humanized antibody and its
use to treat MS. Additional U.S. patents and patent
applications of Elan
and/or our
collaborator, Biogen Idec, which cover: (i) the use of
Tysabri to treat irritable bowel disease and a variety of
other indications and (ii) methods of manufacturing
Tysabri, generally expire between 2012 and 2020. Outside
the United States, patents and patent applications on the
product and methods of manufacturing the product generally
expire between 2014 and 2020, and may be subject to additional
patent protection until 2020 in the nature of Supplementary
Protection Certificates. International patents and patent
applications covering methods of treatment using Tysabri
would generally expire between 2012 to 2020.
In addition to our Tysabri collaboration with Biogen
Idec, we have entered into licenses covering intellectual
property related to Tysabri. We will pay royalties under
these licenses based upon the level of Tysabri sales. We
may be required to enter into additional licenses related to
Tysabri intellectual property. If these licenses are not
available, or are not available on reasonable terms, we may be
materially and adversely affected.
The fundamental U.S. patent covering the use of Prialt
to produce analgesia expires in 2016. A further
U.S. patent covering the stabilized formulation of
Prialt expires in 2015.
The basic U.S. patent for Maxipime expired in March
2007. An ANDA for a generic version of cefepime hydrochloride
was approved by the FDA on June 18, 2007 and marketing of
the generic product began immediately thereafter. Following this
introduction of generic cefepime to the market, our revenues
from, and gross margin for, Maxipime were materially and
adversely affected.
The basic U.S. patent for Azactam expired in October
2005. Azactam is expected to face generic competition,
which is expected to have a substantial adverse effect on our
revenues from, and gross margin for, this product.
The primary patents covering Elan’s NanoCrystal
technology expire in the United States in 2011 and in some
countries outside the United States in 2012. We also have
numerous U.S. and international patents and patent
applications that relate to our NanoCrystal drug
optimization technology applicable to poorly water-soluble
compounds.
In addition, we have a robust patent estate resulting from our
Alzheimer’s disease research.
The pharmaceutical industry is highly competitive. Our principal
pharmaceutical competitors consist of major international
companies, many of which are larger and have greater financial
resources, technical staff, manufacturing, R&D and
marketing capabilities than we have. We also compete with
smaller research companies and generic drug manufacturers.
Tysabri, a treatment for relapsing forms of MS, competes
primarily with
Avonex®
marketed by our collaborator Biogen Idec,
Betaseron®
marketed by Berlex (an affiliate of Bayer Schering Pharma AG) in
the United States and sold under the name
Betaferon®
by Bayer Schering Pharma in Europe,
Rebif®
marketed by Merck Serono and
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Pfizer Inc. (Pfizer) in the United States and by Merck Serono in
Europe, and
Copaxone®
marketed by Teva Neurosciences, Inc. (Teva) in the United States
and co-promoted by Teva and Sanofi-Aventis in Europe. Many
companies are working to develop new therapies or alternative
formulations of products for MS, which if successfully developed
would compete with Tysabri.
A drug may be subject to competition from alternative therapies
during the period of patent protection or regulatory exclusivity
and, thereafter, it may be subject to further competition from
generic products. Our product Azactam lost its basic
U.S. patent protection in October 2005, and the basic
U.S. patent for Maxipime expired in March 2007.
Generic competitors have challenged existing patent protection
for some of the products from which we earn manufacturing or
royalty revenue. If these challenges are successful, our
manufacturing and royalty revenue will be materially and
adversely affected.
Governmental and other pressures toward the dispensing of
generic products may rapidly and significantly reduce, slow or
reverse the growth in, sales and profitability of any of our
products not protected by patents or regulatory exclusivity, and
may adversely affect our future results and financial condition.
The launch of competitive products, including generic versions
of our products, has had and may have a material adverse effect
on our revenues and results of operations.
Our competitive position depends, in part, upon our continuing
ability to discover, acquire and develop innovative,
cost-effective new products, as well as new indications and
product improvements protected by patents and other intellectual
property rights. We also compete on the basis of price and
product differentiation and through our sales and marketing
organization that provides information to medical professionals
and launches new products. If we fail to maintain our
competitive position, our business, financial condition and
results of operations may be materially adversely affected.
We sell our pharmaceutical products primarily to drug
wholesalers. Our revenue reflects the demand from these
wholesalers to meet the in-market consumption of our products
and to reflect the level of inventory that wholesalers of our
products carry. Changes in the level of inventory can directly
impact our revenue and could result in our revenue not
reflecting in-market consumption of our products.
We often manufacture our drug delivery products for licensees
and distributors but do not usually engage in any direct sales
of drug delivery products.
Raw materials and supplies are generally available in quantities
adequate to meet the needs of our business. We are dependent on
third-party manufacturers for the pharmaceutical products that
we market. An inability to obtain raw materials or product
supply could have a material adverse impact on our business,
financial condition and results of operations.
On December 31, 2007, we had 1,610 employees
worldwide, of whom 553 were engaged in R&D activities, 547
were engaged in manufacturing and supply activities, 211 were
engaged in sales and marketing activities and the remainder
worked in general and administrative areas.
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At December 31, 2007, we had the following principal
subsidiary undertakings:
We consider that our properties are in good operating condition
and that our machinery and equipment has been well maintained.
Facilities for the manufacture of products are suitable for
their intended purposes and have capacities adequate for current
and projected needs.
For additional information, refer to Note 14 to the
Consolidated Financial Statements, which discloses amounts
invested in land and buildings and plant and equipment;
Note 22 to the Consolidated Financial Statements, which
discloses future minimum rental commitments; Note 26 to the
Consolidated Financial Statements, which discloses capital
commitments for the purchase of property, plant and equipment;
and Item 5.B. “Liquidity and Capital Resources,”
which discloses our capital expenditures.
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The following table lists the location, ownership interest, use
and approximate size of our principal properties:
Not applicable.
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements, the
accompanying notes thereto and other financial information,
appearing in Item 18. “Consolidated Financial
Statements.”
Our Consolidated Financial Statements contained in this
Form 20-F
have been prepared on the basis of U.S. GAAP. In addition
to the Consolidated Financial Statements contained in this
Form 20-F,
we also prepare separate Consolidated Financial Statements,
included in our Annual Report, in accordance with IFRS, which
differ in certain significant respects from U.S. GAAP. The
Annual Report under IFRS is a separate document from this
Form 20-F.
This financial review primarily discusses:
Our operating results may be affected by a number of factors,
including those described under Item 3.D. “Risk
Factors.”
Our business is organized into two business units:
Biopharmaceuticals and EDT. Biopharmaceuticals engages in
research, development and commercial activities primarily in
Alzheimer’s disease, Parkinson’s disease, multiple
sclerosis, Crohn’s disease, severe chronic pain and
infectious diseases. EDT is an established, profitable and
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growing specialty pharmaceutical business unit of Elan. For
nearly 40 years, EDT has been applying its skills and
knowledge to enhance the performance of dozens of drugs that
have been marketed worldwide. For additional information on our
current operations, please refer to Item 4.B.
“Business Overview.”
The Consolidated Financial Statements include certain estimates
based on management’s best judgments. Estimates are used in
determining items such as the carrying values of intangible
assets and tangible fixed assets, the fair value of share-based
compensation, revenue recognition, the accounting for
contingencies and estimating sales rebates and discounts, among
other items. Because of the uncertainties inherent in such
estimates, actual results may differ materially from these
estimates.
Total goodwill and other intangible assets amounted to
$457.6 million at December 31, 2007 (2006:
$582.2 million). We account for goodwill and identifiable
intangible assets in accordance with the Financial Accounting
Standards Board’s (FASB) Statement No. 142,
“Goodwill and Other Intangible Assets,”
(SFAS 142). Pursuant to SFAS 142, goodwill and
identifiable intangible assets with indefinite useful lives are
no longer amortized, but instead are tested for impairment at
least annually. At December 31, 2007, we had no other
intangible assets with indefinite lives.
Intangible assets with estimable useful lives are amortized on a
straight-line basis over their respective estimated useful lives
to their estimated residual values and, as with other long-lived
assets such as tangible fixed assets, are reviewed for
impairment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. If circumstances require a long-lived asset be
tested for possible impairment, we first compare undiscounted
cash flows expected to be generated by an asset to the carrying
value of the asset. If the carrying value of the long-lived
asset is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value
exceeds its fair value. We determine fair value using the income
approach based on estimated discounted cash flows. Our cash flow
assumptions consider historical and forecasted revenue and
operating costs and other relevant factors. If we were to use
different estimates, particularly with respect to the likelihood
of R&D success, the likelihood and date of commencement of
generic competition or the impact of any reorganization or
change of business focus, then a material impairment charge
could arise. We believe that we have used reasonable estimates
in assessing the carrying values of our intangible assets. The
results of certain impairment tests on intangible assets with
estimable useful lives are discussed below.
We review our goodwill for impairment at least annually or
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. The
goodwill impairment test is a two-step test and is performed at
the reporting unit level. A reporting unit is the same as, or
one level below, an operating segment as defined by
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information.” We have two reporting
units: Biopharmaceuticals and EDT. Under the first step, we
compare the fair value of each reporting unit with its carrying
value, including goodwill. If the fair value of the reporting
unit exceeds its carrying amount, goodwill of the reporting unit
is not considered impaired and step two does not need to be
performed. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test
would be performed to measure the amount of impairment charge,
if any. The second step compares the implied fair value of the
reporting unit goodwill with the carrying amount of that
goodwill, and any excess of the carrying amount over the implied
fair value is recognized as an impairment charge. The implied
fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination is
determined, by allocating the fair value of a reporting unit to
individual assets and liabilities. The excess of the fair value
of a reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. In evaluating
goodwill for impairment, we determine the fair values of the
reporting units using the income approach, based on estimated
discounted future cash flows. The results of our goodwill
impairment tests did not indicate any impairment in 2007, 2006
or 2005.
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In June 2007, we recorded an impairment charge of
$52.2 million, within other net charges in the Consolidated
Income Statement, relating to the Maxipime and Azactam
intangible assets. As a direct result of the approval of a
first generic formulation of cefepime hydrochloride in June 2007
and the anticipated approval for a generic form of
Azactam, we revised the projected future cumulative
undiscounted cash flows. The revised projected cumulative
undiscounted cash flows were lower than the intangible
assets’ carrying value, thus indicating the intangible
assets were not recoverable. Consequently, the impairment charge
was calculated as the excess of the carrying value over the
discounted net present value. In conjunction with the impairment
charge, we revised the estimated useful lives of the intangibles
by nine months from September 2008 to December 2007.
Accordingly, the remaining net intangible assets’ carrying
value was amortized, on a straight-line basis, through
December 31, 2007. There were no material impairment
charges relating to intangible assets in either 2006 or 2005.
For additional information on goodwill and other intangible
assets, refer to Note 15 to the Consolidated Financial
Statements.
In January 2005, we launched Prialt in the United States.
Revenues from sales of Prialt totaled $12.3 million,
$12.1 million and $6.3 million in 2007, 2006 and 2005,
respectively. These revenues were lower than our initial
forecast. Our estimates of the recoverable amount of this
product, based on future net cash flows, are in excess of the
asset’s carrying value of $58.1 million at
December 31, 2007. We believe that we have used reasonable
estimates in assessing the carrying value of this intangible.
Nevertheless, should our future revenues from this product fail
to meet our expectations, the carrying value of this asset may
become impaired.
We have invested significant resources in our manufacturing
facilities in Ireland to provide us with the capability to
manufacture products from our product development pipeline. To
the extent that we are not successful in developing these
pipeline products or do not acquire products to be manufactured
at our facilities, the carrying value of these facilities may
become impaired. At December 31, 2007, our best estimates
of the likely success of development and commercialization of
our pipeline products support the carrying value of our
manufacturing facilities.
We recognize revenue from the sale of our products, royalties
earned and contract arrangements in accordance with the
SEC’s Staff Accounting Bulletin No. 104,
“Revenue Recognition,” (SAB 104), which requires
the deferral and amortization of up-front fees when there is a
significant continuing involvement (such as an ongoing product
manufacturing contract) by the seller after an asset disposal.
We defer and amortize up-front license fees to the income
statement over the “performance period.” The
performance period is the period over which we expect to provide
services to the licensee as determined by the contract
provisions. Generally, milestone payments are recognized when
earned and non-refundable, and when we have no future legal
obligation pursuant to the payment. However, the actual
accounting for milestones depends on the facts and circumstances
of each contract. We apply the substantive milestone method in
accounting for milestone payments. This method requires that
substantive effort must have been applied to achieve the
milestone prior to revenue recognition. If substantive effort
has been applied, the milestone is recognized as revenue,
subject to it being earned, non-refundable and not subject to
future legal obligation. This requires an examination of the
facts and circumstances of each contract. Substantive effort may
be demonstrated by various factors, including the risks
associated with achieving the milestone, the period of time over
which effort was expended to achieve the milestone, the economic
basis for the milestone payment and licensing arrangement and
the costs and staffing to achieve the milestone. It is expected
that the substantive milestone method will be appropriate for
most contracts. If we determine the substantive milestone method
is not appropriate, we apply the proportional performance method
to the relevant contract. This method recognizes as revenue the
percentage of cumulative non-refundable cash payments earned
under the contract, based on the percentage of costs incurred to
date compared to the total costs expected under the contract.
Beginning January 1, 2006, we account for share-based
compensation in accordance with SFAS No. 123 (revised
2004), “Share-Based Payment,” (SFAS 123R), which
requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors based
on estimated grant date fair values. These awards include
employee stock options, RSUs and stock purchases related to our
employee equity purchase plans. We elected to apply the modified
prospective transition method, under which periods prior to 2006
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have not been restated to reflect, and do not include, the
impact of SFAS 123R. The adoption of SFAS 123R has had
a material effect on our reported financial results. Share-based
compensation expense recognized under SFAS 123R for the
years ended December 31, 2007 and 2006 was
$45.1 million and $47.1 million, respectively. For
additional information, refer to Note 25 to the
Consolidated Financial Statements.
SFAS 123R requires companies to estimate the fair values of
share-based awards on the date of grant using an option-pricing
model. The value of awards expected to vest is recognized as an
expense over the requisite service periods. Prior to the
adoption of SFAS 123R, we had accounted for share-based
awards to employees and directors using the intrinsic value
method in accordance with the Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees,” (APB 25) as allowed under SFAS 123.
Under the intrinsic value method, no share-based compensation
expense had been recognized in our Consolidated Statement of
Operations, other than as related to modifications and
compensatory employee equity purchase plans, because the
exercise price of the stock options granted to employees and
directors equaled the fair market value of the underlying stock
at the date of grant.
Estimating the fair value of share-based awards as of the date
of grant using an option-pricing model, such as the binomial
model, is affected by our stock price as well as assumptions
regarding a number of complex variables. These variables
include, but are not limited to, the expected stock price
volatility over the term of the awards, risk-free interest
rates, and actual and projected employee exercise behaviors. If
factors change
and/or we
employ different assumptions in the application of
SFAS 123R in future periods, the compensation expense that
we record under SFAS 123R for future grants may differ
significantly from what we have recorded in the Consolidated
Financial Statements. However, we believe we have used
reasonable assumptions to estimate the fair value of our
share-based awards.
In April 2007, we modified outstanding stock option grants and
outstanding 2007 RSUs held by members of the Operating Committee
of Elan (15 members at the modification date) to provide for the
accelerated vesting of the awards upon involuntary termination,
for any reason other than cause, together with the extension of
the period to exercise outstanding stock options for a two-year
period (previously 90 days) from the termination date. This
resulted in the fair value of the outstanding options being
remeasured at the modification date. The impact of the
modification for all applicable outstanding awards amounted to
additional share-based compensation expense of
$0.8 million, which has been and will be taken into account
over the remaining vesting terms of the awards from the
modification date.
We are currently involved in legal and administrative
proceedings, relating to securities matters, patent matters,
antitrust matters and other matters, some of which are described
in Note 27 to the Consolidated Financial Statements. In
accordance with SFAS No. 5, “Accounting for
Contingencies,” we assess the likelihood of any adverse
outcomes to contingencies, including legal matters, as well as
potential ranges of probable losses. We record accruals for such
contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
If an unfavorable outcome is probable, but the amount of the
loss cannot be reasonably estimated, we estimate the range of
probable loss and accrue the most probable loss within the
range. If no amount within the range is deemed more probable, we
accrue the minimum amount within the range. If neither a range
of loss nor a minimum amount of loss is estimable, then
appropriate disclosure is provided, but no amounts are accrued.
As of December 31, 2007, we had accrued $1.7 million,
representing our estimates of liability and costs for the
resolution of these matters. We developed estimates in
consultation with outside counsel handling our defense in these
matters using the facts and circumstances known to us. The
factors that we consider in developing our legal contingency
accrual include the merits and jurisdiction of the litigation,
the nature and number of other similar current and past
litigation cases, the nature of the product and assessment of
the science subject to the litigation, and the likelihood of
settlement and state of settlement discussions, if any. We
believe that the legal contingency accrual that we have
established is appropriate based on current factors and
circumstances. However, it is possible that other people
applying reasonable judgment to the same facts and circumstances
could develop a different liability amount. The nature of these
matters is highly uncertain and subject to change. As a result,
the amount of our liability for certain of these matters could
exceed or be less than the amount of our estimates, depending on
the outcome of these matters.
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We recognize revenue on a gross revenue basis and make various
deductions to arrive at net revenue as reported in the
Consolidated Statements of Operations. These adjustments are
referred to as sales discounts and allowances and are described
in detail below. Sales discounts and allowances include
charge-backs, managed health care and Medicaid rebates, cash
discounts, sales returns and other adjustments. Estimating these
sales discounts and allowances is complex and involves
significant estimates and judgments, and we use information from
both internal and external sources to generate reasonable and
reliable estimates. We believe that we have used reasonable
judgments in assessing our estimates, and this is borne out by
our historical experience. At December 31, 2007, we had
total provisions of $18.9 million for sales discounts and
allowances, of which approximately 39.9%, 37.2% and 20.5%
related to Azactam, Maxipime and Tysabri,
respectively. We have more than nine years of experience in
relation to Maxipime and Azactam and almost two
years of experience for Tysabri. The sales discounts and
allowances related to Tysabri are estimated based on
historical data of a similar product and our experience to date
with this product. We do not expect Tysabri sales returns
to be material given the manner in which this product is
prescribed and used.
We do not conduct our sales using the consignment model. All of
our product sales transactions are based on normal and customary
terms whereby title to the product and substantially all of the
risks and rewards transfer to the customer upon either shipment
or delivery. Furthermore, we do not have an incentive program
that would compensate a wholesaler for the costs of holding
inventory above normal inventory levels, thereby encouraging
wholesalers to hold excess inventory.
We account for sales discounts, allowances and returns in
accordance with the FASB’s Emerging Issues Task Force
(EITF) Issue
No. 01-9,
“Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s
Products),” and SFAS No. 48, “Revenue
Recognition When Right of Return Exists,”
(SFAS 48) as applicable.
The table below summarizes our sales discounts and allowances to
adjust gross revenue to net revenue for each significant
category. An analysis of the separate components of our revenue
is set out in Item 5.A. “Operating Results,” and
in Note 3 to the Consolidated Financial Statements.
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Total sales discounts and allowances were 13.4% of gross revenue
subject to discounts and allowances in 2007, 14.1% in 2006 and
20.6% in 2005, as detailed in the rollforward below and as
further explained in the following paragraphs.
Charge-backs as a percentage of gross revenue subject to
discounts and allowances were 8.0% in 2007, 9.2% in 2006 and
8.3% in 2005. The managed health care rebates and Medicaid
rebates as a percentage of gross revenue subject to discounts
and allowances were 0.6% and 0.7%, respectively, in 2007; 1.2%
and 0.4%, respectively, in 2006; and 1.1% and 0.6%,
respectively, in 2005. These changes are due primarily to
changes in the product mix.
Cash discounts as a percentage of gross revenue subject to
discounts and allowances remained fairly consistent at 2.2% in
2007, compared to 2.1% in 2006 and 2.0% in 2005. In the United
States, we offer cash discounts, generally at 2% of the sales
price, as an incentive for prompt payment by our customers.
Sales returns as a percentage of gross revenue subject to
discounts and allowances were 0.8% in 2007, 0.2% in 2006 and
7.7% in 2005. The decrease in 2006 as compared to 2005 was
principally due to the voluntary suspension of Tysabri in
February 2005, which increased the provision for returns in
2005, and changes in the product mix.
The following table sets forth the activities and ending
balances of each significant category of adjustments for the
sales discounts and allowances (in millions):
In the United States, we participate in charge-back programs
with a number of entities, principally the U.S. Department
of Defense, the U.S. Department of Veterans Affairs, Group
Purchasing Organizations and other parties whereby pricing on
products is extended below wholesalers’ list prices to
participating entities. These entities purchase products through
wholesalers at the lower negotiated price, and the wholesalers
charge the difference between these entities’ acquisition
cost and the lower negotiated price back to us. We account for
charge-backs by reducing accounts receivable in an amount equal
to our estimate of charge-back claims attributable to a sale. We
determine our estimate of the charge-backs primarily based on
historical experience on a
product-by-product
and program basis, and current contract prices under the
charge-back programs. We consider vendor payments, estimated
levels of inventory in the wholesale distribution channel, and
our claim processing time lag and adjust accounts receivable and
revenue periodically throughout each year to reflect actual and
future estimated experience.
As described above, there are a number of factors involved in
estimating the accrual for charge-backs, but the principal
factor relates to our estimate of the levels of inventory in the
wholesale distribution channel. At December 31, 2007,
Maxipime, Azactam and Tysabri represented
approximately 73.6%, 15.6% and 10.3%, respectively, of the total
charge-backs accrual balance of $5.4 million. If we were to
increase/(decrease) our
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estimated level of inventory in the wholesale distribution
channel by one month’s worth of demand for Maxipime,
Azactam and Tysabri, the accrual for charge-backs
would increase/(decrease) by approximately $0.8 million. We
believe that our estimate of the levels of inventory for
Maxipime, Azactam and Tysabri in the wholesale
distribution channel is reasonable because it is based upon
multiple sources of information, including data received from
all of the major wholesalers with respect to their inventory
levels and sell-through to customers, third-party market
research data, and our internal information.
We offer rebates and discounts to managed healthcare
organizations in the United States. We account for managed
healthcare rebates and other contract discounts by establishing
an accrual equal to our estimate of the amount attributable to a
sale. We determine our estimate of this accrual primarily based
on historical experience on a
product-by-product
and program basis and current contract prices. We consider the
sales performance of products subject to managed healthcare
rebates and other contract discounts, processing claim lag time
and estimated levels of inventory in the distribution channel
and adjust the accrual and revenue periodically throughout each
year to reflect actual and future estimated experience.
In the United States, we are required by law to participate in
state government-managed Medicaid programs, as well as certain
other qualifying federal and state government programs whereby
discounts and rebates are provided to participating state and
local government entities. Discounts and rebates provided
through these other qualifying federal and state government
programs are included in our Medicaid rebate accrual and are
considered Medicaid rebates for the purposes of this discussion.
We account for Medicaid rebates by establishing an accrual in an
amount equal to our estimate of Medicaid rebate claims
attributable to a sale. We determine our estimate of the
Medicaid rebates accrual primarily based on historical
experience regarding Medicaid rebates, legal interpretations of
the applicable laws related to the Medicaid and qualifying
federal and state government programs, and any new information
regarding changes in the Medicaid programs’ regulations and
guidelines that would impact the amount of the rebates on a
product-by-product
basis. We consider outstanding Medicaid claims, Medicaid
payments, claims processing lag time and estimated levels of
inventory in the distribution channel and adjust the accrual and
revenue periodically throughout each year to reflect actual and
future estimated experience.
In the United States, we offer cash discounts, generally at 2%
of the sales price, as an incentive for prompt payment. We
account for cash discounts by reducing accounts receivable by
the full amount of the discounts. We consider payment
performance of each customer and adjust the accrual and revenue
periodically throughout each year to reflect actual experience
and future estimates.
We account for sales returns in accordance with SFAS 48 by
establishing an accrual in an amount equal to our estimate of
revenue recorded for which the related products are expected to
be returned.
For returns of established products, our sales return accrual is
estimated principally based on historical experience, the
estimated shelf life of inventory in the distribution channel,
price increases and our return goods policy (goods may only be
returned six months prior to expiration date and for up to
12 months after expiration date). We also take into account
product recalls and introductions of generic products. All of
these factors are used to adjust the accrual and revenue
periodically throughout each year to reflect actual and future
estimated experience.
In the event of a product recall, product discontinuance or
introduction of a generic product, we consider a number of
factors, including the estimated level of inventory in the
distribution channel that could potentially be returned,
historical experience, estimates of the severity of generic
product impact, estimates of continuing demand and our return
goods policy. We consider the reasons for, and impact of, such
actions and adjust the sales returns accrual and revenue as
appropriate.
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Returns from newly introduced products are significantly more
difficult for us to assess. We determine our estimate of the
sales return accrual primarily based on the historical sales
returns experience of similar products, such as those within the
same or similar therapeutic category. We also consider the shelf
life of new products and determine whether we believe an
adjustment to the sales return accrual is appropriate. The shelf
life in connection with new products tends to be shorter than
the shelf life for more established products because we may
still be developing the optimal stability duration for the new
product that would lengthen its shelf life, or an amount of
launch quantities may have been manufactured in advance of the
launch date to ensure sufficient supply exists to satisfy market
demand. In those cases, we assess the reduced shelf life,
together with estimated levels of inventory in the distribution
channel and projected demand, and determine whether we believe
an adjustment to the sales return accrual is appropriate. While
it is inherently more difficult to assess returns from newly
introduced products than from established products, nevertheless
in all instances we believe we have been able to gather
sufficient information in order to establish reasonable
estimates.
As described above, there are a number of factors involved in
estimating this accrual, but the principal factor relates to our
estimate of the shelf life of inventory in the distribution
channel. At December 31, 2007, Maxipime, Azactam and
Tysabri represented approximately 21.1%, 69.4% and 7.4%,
respectively, of the total sales returns accrual balance of
$7.6 million. We believe, based upon both the estimated
shelf life and also our historical sales returns experience,
that the vast majority of this inventory will be sold prior to
the expiration dates, and accordingly believe that our sales
returns accrual is appropriate.
In addition to the sales discounts and allowances described
above, we make other sales adjustments primarily related to
estimated obligations for credits to be granted to wholesalers
under wholesaler service agreements we have entered into with
many of our pharmaceutical wholesale distributors in the United
States. Under these agreements, the wholesale distributors have
agreed, in return for certain fees, to comply with various
contractually defined inventory management practices and to
perform certain activities such as providing weekly information
with respect to inventory levels of product on hand and the
amount of out-movement of product. As a result, we, along with
our wholesale distributors, are able to manage product flow and
inventory levels in a way that more closely follows trends in
prescriptions. We generally account for these other sales
discounts and allowances by establishing an accrual in an amount
equal to our estimate of the adjustments attributable to the
sale. We generally determine our estimates of the accruals for
these other adjustments primarily based on historical experience
and other relevant factors, including estimated levels of
inventory in the distribution channel in some cases, and adjust
the accruals and revenue periodically throughout each year to
reflect actual experience.
During 2007, we recorded $0.4 million of adjustments to
increase the discounts and allowances related to sales made in
prior periods, primarily due to the availability of additional
information relating to our actual returns experience for
Tysabri, Maxipime and Azactam.
We use information from external sources to estimate our
significant sales discounts and allowances. Our estimates of
inventory at the wholesalers are based on:
We also use information from external sources to identify
prescription trends and patient demand. Since 2004, we have been
receiving inventory pipeline data from the three major
wholesalers (McKesson Corp., Cardinal
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Health, Inc. and AmerisourceBergen Corp.). The inventory
information received from these wholesalers is a product of
their record-keeping process and excludes inventory held by
intermediaries to whom they sell, such as retailers and
hospitals. We receive information from IMS Health, a supplier of
market research to the pharmaceutical industry, which we use to
project the prescription demand-based sales for our
pharmaceutical products. Our estimates are subject to inherent
limitations of estimates that rely on third-party information,
as certain third-party information is itself in the form of
estimates, and reflect other limitations, including lags between
the date as of which third-party information is generated and
the date on which we receive such information.
In September 2006, the FASB issued Statement No. 157,
“Fair Value Measurements,” (SFAS 157), which is
effective for financial statements issued for fiscal years
beginning after November 15, 2007. SFAS 157 defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. On December 14, 2007, the
FASB issued FASB Staff Position (FSP)
FAS 157-b,
which will delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. This proposed FSP partially
defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008. We do not expect that
the adoption of SFAS 157 will have a material impact on our
financial position or results from operations.
In February 2007, the FASB issued Statement No. 159,
“The Fair Value Option for Financial Assets and Financial
and Financial Liabilities,” (SFAS 159), which is
effective for fiscal years beginning after November 15,
2007. SFAS 159 provides companies with the option to
measure specified financial instruments and warranty and
insurance contracts at fair value on a
contract-by-contract
basis, with changes in fair value recognized in earnings each
reporting period. We are currently evaluating the provisions of
SFAS 159; however we do not expect that its adoption will
have a material impact on our financial position or results of
operations.
In June 2007, the FASB ratified EITF Issue
No. 07-03,
“Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,”
(EITF 07-03).
EITF 07-03
is effective prospectively for fiscal years beginning after
December 15, 2007.
EITF 07-03
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed. We do not expect that the
adoption of
EITF 07-03
will have a material impact on our financial position or results
from operations.
In November 2007, the FASB’s EITF reached consensus on
Issue 07-01,
“Accounting for Collaborative Arrangements,”
(EITF 07-01),
which is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim periods
within those fiscal years.
EITF 07-01
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. We do not expect that the
adoption of
EITF 07-01
will have a material impact on our financial position or results
from operations.
In December 2007, the FASB issued Statement No. 141
(revised 2007), “Business Combinations,”
(SFAS 141R), which is effective for financial statements
issued for fiscal years beginning after December 15, 2008,
with early adoption not permitted. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements at full fair value the
identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. We are currently
evaluating the potential impact, if any, of the adoption of
SFAS 141R on our consolidated results of operations and
financial position.
In December 2007, the FASB issued Statement No. 160
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of Accounting Research
Bulletin No. 51,” (SFAS 160), which is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, with early adoption not
permitted. SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes
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to a parent’s ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. We are currently evaluating the potential impact, if
any, of the adoption of SFAS 160 on our consolidated
results of operations and financial position.
On January 14, 2008, the FDA approved Elan and Biogen
Idec’s supplemental Biologics License Application for
Tysabri for Crohn’s disease. Tysabri is now
approved for inducing and maintaining clinical response and
remission in adult patients with moderately to severely active
CD with evidence of inflammation who have had an inadequate
response to, or are unable to tolerate, conventional CD
therapies and inhibitors of TNF-alpha.
2007
Compared to 2006 and 2005 (in millions, except share and per
share amounts)
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Total revenue was $759.4 million in 2007,
$560.4 million in 2006 and $490.3 million in 2005 as
detailed in the schedule above and as further explained in the
following paragraphs.
Total product revenue was $728.6 million in 2007,
$532.9 million in 2006 and $458.1 million in 2005. The
increases in 2007 of 37%, compared to 2006, and in 2006 of 16%,
compared to 2005, were primarily due to the continued strong
growth of Tysabri within our Biopharmaceuticals business
and continued growth across a number of products in our EDT
portfolio, partially offset by decreases in amortized revenue
and reduced revenue from Maxipime in 2007 compared to
2006 following the introduction of generic competition. The
components of product revenue are set out below (in millions):
Total product revenue from our Biopharmaceuticals business
increased 68% to $454.6 million in 2007 from
$269.8 million in 2006. The increase primarily reflects
higher sales of Tysabri and Azactam, partially
offset by the decline in sales of Maxipime due to generic
competition. In 2006, total Biopharmaceuticals product revenue
increased 23% to $269.8 million from $219.6 million in
2005. The increase reflects higher sales of Tysabri,
Maxipime, Azactam and Prialt as a result of
strong demand.
The FDA initially granted approval of Tysabri in November
2004 for the treatment of relapsing forms of MS and our
commercial distribution began shortly thereafter. The revenue
from sales of Tysabri amounted to $11.0 million in
2005 prior to the voluntary suspension of the commercialization
and clinical dosing of the product in February 2005 due to
safety concerns. In June 2006, the FDA approved the
reintroduction of Tysabri for the treatment of relapsing
forms of MS. Approval for the marketing of Tysabri in the
European Union was also received in June 2006 and has
subsequently been received in a number of other countries. The
distribution of Tysabri in both the United States and the
ROW recommenced in July 2006.
Tysabri was developed and is now being marketed in
collaboration with Biogen Idec. In general, subject to certain
limitations imposed by the parties, we share with Biogen Idec
most of the development and commercialization costs for
Tysabri. Biogen Idec is responsible for manufacturing the
product. In the United States, we purchase Tysabri from
Biogen Idec and are responsible for distribution. Consequently,
we record as revenue the net sales of Tysabri in the
U.S. market. We purchase product from Biogen Idec at a
price that includes the cost of
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manufacturing, plus Biogen Idec’s gross profit on
Tysabri, and this cost, together with royalties payable
to other third parties, is included in cost of sales.
Outside of the United States, Biogen Idec is responsible for
distribution and we record as revenue our share of the profit or
loss on these sales of Tysabri, plus our
directly-incurred expenses on these sales.
Global in-market net sales of Tysabri can be analyzed as
follows (in millions):
At the end of December 2007, approximately 21,100 patients
were on therapy worldwide, comprising approximately 20,400 on
commercial therapy and approximately 700 in MS clinical trials.
In the U.S. market, we recorded net sales of
$217.4 million (2006: $28.2 million; 2005:
$11.0 million). As of the end of December 2007, more than
2,500 doctors have enrolled patients and approximately
12,900 patients were on commercial Tysabri therapy.
As previously mentioned, in the ROW market, Biogen Idec is
responsible for distribution and we record as revenue our share
of the profit or loss on ROW sales of Tysabri, plus our
directly-incurred expenses on these sales. In 2007, Elan
recorded ROW revenue of $14.3 million (2006: negative
revenue of $10.7 million), which was calculated as follows
(in millions):
As of the end of December 2007, approximately
7,500 patients, principally in the European Union, were on
commercial Tysabri therapy.
Maxipime revenue decreased 23% to $122.5 million in
2007 from our 2006 sales level and increased 14% to
$159.9 million in 2006 from our 2005 sales level. The
decrease in 2007 was principally due to the introduction of
generic competition. In June 2007, the first generic formulation
of cefepime hydrochloride was approved by the FDA. Generic
cefepime hydrochloride was launched shortly thereafter, and we
expect it will continue to materially and adversely affect our
revenues from, and gross margin for, Maxipime. The
increase in Maxipime revenue in 2006 from our 2005 sales
level reflected growth in the demand for the product and was
partially offset by supply shortages in 2006.
Azactam revenue increased 11% to $86.3 million in
2007 from our 2006 sales level and increased 35% to
$77.9 million in 2006 from our 2005 sales level. The
increases in 2007 and 2006 were primarily due to increased
demand. Azactam lost its patent exclusivity in October
2005, and its future sales are expected to be negatively
impacted by generic competition, although to date no generic
form of Azactam has been approved.
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Prialt revenue increased 2% to $12.3 million in 2007
from our 2006 sales level and increased 92% to
$12.1 million in 2006 from our 2005 sales level. The
increases in both 2007 and 2006 were primarily due to increased
demand. Prialt was launched in the U.S. market in
the first quarter of 2005. In March 2006, we completed
the sale of the European rights to Prialt to Eisai, while
retaining the product rights in the United States. We had not
made any commercial sales of Prialt in Europe prior to
this divestment.
(B) Product
revenue from our EDT business
Manufacturing revenue and royalties from our EDT business
comprise revenue earned from products we manufacture for third
parties and royalties we earn principally on sales by third
parties of products that incorporate our technologies.
Manufacturing revenue and royalties increased 16% to
$269.5 million in 2007 from our 2006 sales level and
increased 14% to $232.4 million in 2006 from
$204.5 million in 2005. The increase in 2007 primarily
reflects continued growth across a number of products in our EDT
portfolio and increased manufacturing activity. The increase in
2006 from our 2005 sales level was principally due to increased
royalties on sales by third parties, primarily TriCor and
Skelaxin. In January 2006, our royalty on Skelaxin changed from
5% on all net sales of the product by King Pharmaceuticals, Inc.
(King) in 2005, to 10% on net sales in excess of
$50.0 million in each calendar year going forward.
Except as noted above, no other single product accounted for
more than 10% of our manufacturing revenue and royalties in
2007, 2006 or 2005. In 2007, 47% of these revenues consisted of
royalties received on products that we do not manufacture,
compared to 44% in 2006 and 34% in 2005.
Potential generic competitors have challenged the existing
patent protection for several of the products from which we earn
manufacturing revenue and royalties. We and our clients defend
our intellectual property rights vigorously. However, if these
challenges are successful, our manufacturing revenue and
royalties will be materially and adversely affected.
Amortized revenue was $4.5 million in 2007, compared to
$30.7 million in 2006 and $34.0 million in 2005. The
amortized revenue recorded in 2007 was related to the licensing
to Watson Pharmaceuticals, Inc. (Watson) in 2002 of rights to
our generic form of Adalat CC (2006: $9.0 million; 2005:
$9.0 million). The deferred revenue relating to Adalat CC
was fully amortized by June 30, 2007. In 2006, we also
recorded $21.7 million (2005: $25.0 million) of
amortized revenue relating to the restructuring of our Avinza
license agreement with Ligand Pharmaceuticals, Inc (Ligand) in
2002. The deferred revenue relating to Avinza was fully
amortized by December 2006.
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Contract revenue consists of research revenue and milestones
arising from R&D activities we perform on behalf of third
parties or technology licensing. The fluctuations between years
in contract revenue within both of our Biopharmaceuticals and
EDT businesses were primarily due to the timing of milestone
receipts.
Cost of sales was $337.9 million in 2007 (including
share-based compensation of $4.0 million), compared to
$210.3 million in 2006 (including share-based compensation
of $4.2 million) and $196.1 million in 2005 (including
share-based compensation of $Nil). The cost of sales as a
percentage of total revenue was 44% for 2007, 38% for 2006 and
40% for 2005, resulting in a gross profit margin of 56% in 2007,
62% in 2006 and 60% in 2005. The decrease in the gross profit
margin in 2007 compared to 2006 was principally due to the
change in the mix of product sales, including reduced amortized
revenues, the impact of Tysabri and the reduced price of
Maxipime as a result of the entry of a generic
competitor. The Tysabri gross profit margin of 32% in
2007 (2006: 19%) is impacted by the profit sharing and
operational arrangements in place with Biogen Idec and reflects
Elan’s gross margin on sales of the product in the United
States of 36% in 2007 (2006: 34%), offset by the inclusion in
cost of sales of royalties payable by Elan on sales of
Tysabri outside of the United States. These royalties are
payable by Elan but reimbursed by the collaboration. The
improvement in gross profit margin in 2006 compared to 2005 was
primarily due to the change in the mix of product sales and the
inclusion in 2005 of costs related to the voluntary suspension
of Tysabri in the United States.
SG&A expense was $341.8 million in 2007,
$362.4 million in 2006 and $359.4 million in 2005.
Total SG&A expense for 2007 included $78.4 million
(2006: $75.0 million; 2005: $84.7 million) in relation
to Tysabri. The decrease of 6% in total SG&A expense
in 2007 compared to 2006 primarily reflects the restructuring of
our commercial infrastructure related to the approval of a
generic form of Maxipime in June 2007 and the anticipated
approval of a generic form of Azactam, along with reduced
amortization expense following the impairment of our Maxipime
and Azactam intangible asset, which resulted in the
reduction of related selling and administrative costs. In
addition, share-based compensation expense related to SG&A
decreased to $23.9 million in 2007, compared to
$28.8 million in 2006. The increase in SG&A expense
related to Tysabri reflects the relaunch of Tysabri
in the United States in 2006. The SG&A expense related
to the Tysabri ROW sales are reflected in the Tysabri
ROW revenue as previously described.
The increase of 1% in total SG&A expense in 2006 compared
to 2005 reflected the expensing of share-based compensation of
$28.8 million in 2006 (2005: $Nil), offset by decreased
expenses in relation to Tysabri and also due to ongoing
financial discipline. The decrease in SG&A expense related
to Tysabri in 2006 compared to 2005 reflected the impact
of the temporary suspension of Tysabri in 2005 and the
relaunch of Tysabri in the United States in 2006,
partially offset by the expensing of share-based compensation of
$2.5 million (2005: $Nil).
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R&D expenses were $260.4 million in 2007,
$217.5 million in 2006 and $232.3 million in 2005. The
increase of 20% in 2007 compared to 2006 was primarily due to
increased expenses associated with the progression of our
Alzheimer’s disease programs, particularly the move of
AAB-001 into Phase 3 clinical trials and the move of ELND005
into Phase 2 clinical trials during 2007. R&D expenses for
2007 included $39.3 million (2006: $31.5 million;
2005: $66.9 million) in relation to Tysabri.
The reduction in total R&D expense of 6% in 2006 compared
to 2005 reflected the completion of the safety evaluation
related to Tysabri in 2005, partially offset by increased
spending relating to the progression of key Alzheimer’s
disease programs, particularly AAB-001, the initiation of new
collaborations in the areas of autoimmune diseases and
neurodegeneration with Archemix and Transition, respectively,
and by the cost of expensing share-based compensation of
$14.1 million in 2006 (2005: $Nil).
There were no product or business divestments in 2007.
In March 2006, we sold the Prialt European rights to
Eisai and received $50.0 million at closing and are
entitled to receive an additional $10.0 million on the
earlier of two years from closing or launches of Prialt
in key European markets. We recorded a gain of
$43.3 million on this sale. We may also receive an
additional $40.0 million contingent on Prialt
achieving revenue-related milestones in Europe. As of
December 31, 2007, we had received $8.0 million of the
$10.0 million related to the launches of Prialt in
key European markets.
In April 2004, we sold our interests in Zonegran in North
America and Europe to Eisai for initial net consideration of
$113.5 million at closing. We were also entitled to receive
additional consideration of up to $110.0 million from Eisai
if no generic form of Zonegran was approved by certain dates up
through January 1, 2006. We received $85.0 million of
this contingent consideration prior to the approval of a generic
form of Zonegran in December 2005. Consequently, the total net
proceeds received from the sale of Zonegran amounted to
$198.5 million and resulted in a cumulative net gain of
$128.5 million, of which $85.6 million was recognized
in 2005 and $42.9 million in 2004.
In February 2004, we sold our European sales and marketing
business to Zeneus Pharma Ltd. for initial net cash proceeds of
$93.2 million, resulting in a loss of $2.9 million in
2004. We received an additional $6.0 million in February
2005, which was accrued at December 31, 2004, and
$15.0 million of contingent consideration in December 2005,
which resulted in a net gain of $17.1 million in 2005 after
the release of contingent liabilities of $2.1 million,
which were not ultimately required. We will not receive any
further consideration in respect of this disposal.
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The principal items classified as other charges/(gains) include
the impairment of our Maxipime and Azactam assets,
severance, restructuring and other costs, legal settlements and
awards, and acquired in-process research and development costs.
These items have been treated consistently from period to
period. We believe that disclosure of significant other
(gains)/charges is meaningful because it provides additional
information in relation to analyzing certain items.
The Maxipime and Azactam asset impairment charge
of $52.2 million is related to the launch of a generic
formulation of Maxipime (cefepime hydrochloride) in June
2007 and the anticipated approval of a generic form of
Azactam. As a direct result of the approval of a first
generic formulation of cefepime hydrochloride in June 2007 and
the anticipated approval for a generic form of Azactam,
we revised the projected future cumulative undiscounted cash
flows. The revised projected cumulative undiscounted cash flows
were lower than the intangible assets’ carrying value thus
indicating the intangible assets were not recoverable.
Consequently, the impairment charge was calculated as the excess
of the carrying value over the discounted net present value. The
remaining net intangible assets’ carrying value was
amortized, on a straight-line basis, through December 31,
2007.
During 2007, we incurred severance, restructuring and other
costs of $32.4 million arising principally from the
restructuring of our commercial infrastructure and consolidation
of our U.S. West Coast locations, which resulted in the
closure of the San Diego facility and the expansion of our
operations in South San Francisco. The restructuring of our
commercial infrastructure was primarily a result of the approval
of a generic form of Maxipime and the anticipated
approval of a generic form of Azactam.
During 2006, the net severance, restructuring and other costs of
$7.5 million (2005: $11.8 million) were related to the
realignment of our resources to meet our current business
structure. The restructuring and severance charges in 2006 were
primarily related to the consolidation of our Biopharmaceuticals
R&D activities into our South San Francisco facility.
These charges arose from termination of certain operating
leases, reduction of headcount and relocation of employees, and
they included the reversal of a $9.4 million charge for
future lease payments on an unutilized facility in South
San Francisco. As a part of the restructuring of our
Biopharmaceutical R&D activities, this facility was brought
back into use.
In December 2006, we were awarded $49.8 million following
the conclusion of binding arbitration proceedings that were
initiated against King with respect to an agreement to
reformulate
Sonata®.
This award was recognized as a gain in 2006 and was received in
January 2007.
During 2005, we recorded a net gain of $7.4 million related
primarily to the Pfizer litigation settlement in which we
received a payment of $7.0 million. The settlement arose
from a claim concerning intellectual property rights and the
development of target compounds arising from a collaboration
with Pfizer.
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In July 2006, Elan and Archemix entered into a multi-year,
multi-product alliance focused on the discovery, development and
commercialization of aptamer therapeutics to treat autoimmune
diseases. As a result of the alliance, Elan paid Archemix an
upfront payment of $7.0 million. In addition, in September
2006, Elan and Transition announced an exclusive, worldwide
collaboration agreement for the joint development and
commercialization of ELND005, for the treatment of
Alzheimer’s disease. Elan incurred a charge related to the
license fee of $15.0 million, of which $7.5 million
was paid to Transition in 2006 and the rest in 2007. For
additional information, please refer to Item 4.B.
“Business Overview,” which describes our R&D
programs in detail.
Net interest expense was $113.1 million in 2007,
$111.5 million in 2006 and $125.7 million in 2005. The
increase of 1% in 2007 as compared to 2006 primarily reflects
less interest income earned as a result of lower cash balances.
At December 31, 2007, all of Elan’s liquid investments
were invested in bank deposits and funds. In December 2007, due
to the dislocations in the capital markets, one of these funds
was closed. As a result, at December 31, 2007, the amount
invested in this fund of $274.8 million was no longer
included in cash and cash equivalents and was presented as an
investment. Since December 31, 2007, Elan has reduced the
amount invested in this fund to approximately $100 million
and has moved approximately $175 million into bank deposits
and United States treasury funds. Included within net interest
expense for 2007 is net interest income of $42.3 million,
which includes a charge of $3.8 million incurred in
relation to this fund. There were no equivalent charges in 2006
or 2005.
The decrease in net interest expense of 11% in 2006 as compared
to 2005 primarily reflected the decrease in interest expense
associated with the early retirement of $36.8 million of
the 7.25% senior notes (Athena Notes) due in 2008, the early
conversion of $206.0 million in aggregate principal amount
of 6.5% Convertible Notes in the second quarter of 2005,
and increased interest income associated with higher cash
balances and interest rates, partially offset by interest
expense related to the 8.875% senior notes due in 2013
(8.875% Notes) and senior floating rate notes due in 2013
(Floating Rate Notes due 2013), both of which were issued in
November 2006.
Net investment losses were $0.9 million in 2007, compared
to a gain of $1.6 million in 2006 and a loss of
$7.2 million in 2005. The net investment losses in 2007
were primarily comprised of $6.6 million gains on the sale
of investment securities (2006: $8.3 million; 2005:
$17.5 million) and an impairment charge of
$6.1 million (2006: $7.3 million; 2005:
$24.0 million).
In 2007, we raised $31.3 million in net cash proceeds from
the disposal of investment securities. The $6.6 million in
gains on the sale of investment securities in 2007 includes
gains on sale of securities of Adnexus Therapeutics, Inc. of
$3.0 million and Women’s First Healthcare, Inc. of
$1.3 million.
In 2006, we raised $14.1 million in net cash proceeds from
the disposal of investment securities. The $8.3 million in
gains on the sale of investment securities in 2006 includes
gains on sale of securities of Salu, Inc. of $3.0 million,
Nobex Corporation of $2.5 million and Women’s First
Healthcare, Inc. of $1.0 million.
In 2005, we raised $62.7 million in net cash proceeds from
the disposal of investment securities. The $17.5 million in
gains on the sale of investment securities in 2005 includes
gains on sale of securities of Allergy Therapeutics plc of
$10.0 million, Iomai Corporation of $3.2 million and
Emisphere Technologies, Inc. of $1.8 million.
In 2007, we recorded an impairment of $5.0 million related
to an investment of $11.4 million in auction rate
securities. The remaining impairment charges of
$1.1 million (2006: $7.3 million; 2005:
$24.0 million) related to various investments in emerging
pharmaceutical and biotechnology companies.
We had a net tax provision of $6.9 million for 2007,
compared to a net tax benefit of $9.0 million in 2006 and a
net tax provision of $1.0 million for 2005.
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The overall tax provision for 2007 was $5.1 million. Of
this amount, $1.8 million has been credited to
shareholders’ equity to reflect utilization of stock option
deductions. The remaining $6.9 million provision is
allocated to ordinary activities. The tax provision reflected
the availability of tax losses, tax at standard rates in the
jurisdictions in which we operate, income derived from Irish
patents and foreign withholding tax. Our Irish patent-derived
income was exempt from tax pursuant to Irish legislation, which
exempts from Irish tax income derived from qualifying patents.
From January 1, 2008, the amount of income that can qualify
for the patent exemption will be capped at €5 million
per year. This cap will not have a material effect on
Elan’s tax position. For additional information regarding
tax, refer to Note 21 to the Consolidated Financial
Statements.
The overall tax benefit for 2006 was $11.0 million. Of this
amount, $2.0 million has been credited to
shareholders’ equity to reflect utilization of stock option
deductions. The remaining $9.0 million benefit is allocated
to ordinary activities. The tax benefit reflected the
availability of tax losses, tax at standard rates in the
jurisdictions in which we operate, income derived from Irish
patents and foreign withholding tax. Our Irish patent-derived
income was exempt from tax pursuant to Irish legislation, which
exempts from Irish tax income derived from qualifying patents.
The overall tax provision for 2005 was $0.4 million. Of
this amount, $0.6 million has been credited to
shareholders’ equity to reflect utilization of stock option
deductions. The remaining $1.0 million provision is
allocated to ordinary activities. The tax provision reflected
tax at standard rates in the jurisdictions in which we operate,
income derived from Irish patents, foreign withholding tax and
the availability of tax losses. Our Irish patent-derived income
was exempt from tax pursuant to Irish legislation, which exempts
from Irish tax income derived from qualifying patents.
Our business is organized into two business units:
Biopharmaceuticals and EDT. Biopharmaceuticals engages in
research, development and commercial activities primarily in
Alzheimer’s disease, Parkinson’s disease, multiple
sclerosis, Crohn’s disease, severe chronic pain and
infectious diseases. EDT is an established, profitable and
growing specialty pharmaceutical business unit of Elan. For
nearly 40 years, EDT has been applying its skills and
knowledge to enhance the performance of dozens of drugs that
have been marketed worldwide. For additional information on our
current operations, please refer to Item 4.B.
“Business Overview.”
Biopharmaceuticals
(in millions)
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Total revenue for our Biopharmaceuticals segment was
$463.9 million in 2007, $278.3 million in 2006 and
$231.7 million in 2005, and is analyzed further below
between product revenue and contract revenue.
Biopharmaceuticals product revenue was $454.6 million in
2007, $269.8 million in 2006 and $219.6 million in
2005. Refer to page 40 for additional discussion on product
revenue from our Biopharmaceuticals business.
Contract revenue of $9.3 million in 2007 (2006:
$8.5 million; 2005: $12.1 million) consists of
milestones arising from R&D activities we perform on behalf
of third parties. The fluctuations between years in contract
revenue within our Biopharmaceuticals business were primarily
due to the timing of milestone receipts.
Cost of sales was $224.2 million in 2007, compared to
$87.4 million in 2006 and $84.0 million in 2005. The
cost of sales as a percentage of revenue was 48% for 2007, 31%
for 2006 and 36% for 2005, resulting in a gross profit margin of
52% in 2007, 69% in 2006 and 64% in 2005. The decrease in the
gross profit margin in 2007 as compared to 2006 was principally
due to the change in the mix of product sales, the impact of
Tysabri and the reduced selling price of Maxipime
as a result of the entry of a generic competitor. The
Tysabri gross profit margin of 32% in 2007 (2006: 19%) is
impacted by the profit sharing and operational arrangements in
place with Biogen Idec and reflects Elan’s gross margin on
sales of the product in the United States of 36% in 2007 (2006:
34%), partially offset by the inclusion in cost of sales of
royalties payable by Elan on sales of Tysabri outside of
the United States. These royalties are payable by Elan but
reimbursed by the collaboration. The improvement in gross profit
margin in 2006 as compared to 2005 was primarily due to the
change in the mix of product sales and the inclusion in 2005 of
costs related to the voluntary suspension of Tysabri in
the United States.
SG&A expense was $297.4 million in 2007,
$323.1 million in 2006 and $331.3 million in 2005.
Total SG&A expense for 2007 includes $78.4 million
(2006: $75.0 million; 2005: $84.7 million) in relation
to Tysabri. The decrease of 8% in total SG&A expense
in 2007 compared to 2006 primarily reflects the restructuring of
our commercial infrastructure related to the approval of a
generic form of Maxipime in June 2007 and the anticipated
approval of a generic form of Azactam, along with reduced
amortization expense following the impairment of our Maxipime
and Azactam intangible asset, which resulted in the
reduction of related selling and administrative costs. The
increase in SG&A expenses related to Tysabri
reflects the relaunch of Tysabri in the United States
in 2006. The SG&A expense related to the Tysabri ROW
sales are reflected in the Tysabri ROW revenue as
previously described.
The decrease of 2% in total SG&A expense in 2006 compared
to 2005 reflected decreased expenses in relation to Tysabri
and ongoing financial discipline, offset by the expensing of
share-based compensation of $24.9 million in 2006 (2005:
$Nil). The decrease in SG&A expense related to Tysabri
in 2006 compared to 2005 reflected the impact of the
temporary suspension of Tysabri in 2005 and the relaunch
of Tysabri in the United States in 2006, partially offset
by the expensing of shared-based compensation of
$2.5 million in 2006 (2005: $Nil).
R&D expenses were $212.0 million in 2007,
$170.1 million in 2006 and $192.8 million in 2005. The
increase of 25% in 2007 compared to 2006 was primarily due to
increased expenses associated with the progression of our
Alzheimer’s disease programs and particularly the advance
of AAB-001 into Phase 3 clinical trials and the advance of
ELND005 into Phase 2 clinical trials during 2007. R&D
expenses for 2007 included $39.3 million (2006:
$31.5 million; 2005: $66.9 million) in relation to
Tysabri.
The reduction in total R&D expense of 12% in 2006 compared
to 2005 reflected the completion of the safety evaluation
related to Tysabri in 2005, partially offset by increased
spending relating to the progression of key Alzheimer’s
disease programs, particularly AAB-001, the initiation of new
collaborations in the areas of autoimmune diseases and
neurodegeneration with Archemix and Transition, respectively,
and by the cost of expensing share-based compensation of
$12.6 million in 2006 (2005: $Nil).
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There were no product or business divestments in 2007. Refer to
page 44 for additional discussion on the net gain on
divestment of products and business for 2006 and 2005.
Other
Net Charges
The principal items classified as other charges include the
impairment of our Maxipime and Azactam assets,
severance, restructuring and other costs and acquired in-process
research and development. These items have been treated
consistently from period to period. We believe that disclosure
of other net charges is meaningful because it provides
additional information in relation to these material items.
Refer to page 45 for additional discussion on other net
charges from our Biopharmaceuticals business.
EDT
(in millions)
Total revenue for EDT was $295.5 million in 2007,
$282.1 million in 2006 and $258.6 million in 2005, and
is analyzed below between product revenue and contract revenue.
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EDT product revenue is comprised of manufacturing revenue and
royalties of $269.5 million (2006: $232.4 million;
2005: $204.5 million) and amortized revenue related to
Adalat/Avinza of $4.5 million (2006: $30.7 million;
2005: $34.0 million). Refer to page 42 for additional
discussion on EDT product revenue.
EDT contract revenue, which consists of research revenue and
milestones from R&D activities performed on behalf of third
parties, totaled $21.5 million in 2007, $19.0 million
in 2006 and $20.1 million in 2005. The fluctuations between
years were primarily due to the timing of milestone receipts.
Cost of sales was $113.7 million in 2007, compared to
$122.9 million in 2006 and $112.1 million in 2005. The
cost of sales as a percentage of revenue was 38% for 2007, 44%
for 2006 and 43% for 2005, resulting in a gross profit margin of
62% in 2007, 56% in 2006 and 57% in 2005. The fluctuation in the
gross profit margin in 2007 as compared to 2006 and 2005 was
principally a result of changes in product mix. Royalties
continue to grow as a percentage of total manufacturing revenue
and royalties. In 2007, our royalties were 47% of total
manufacturing revenue and royalties (2006: 44%; 2005: 34%).
SG&A expense was $44.4 million in 2007,
$39.3 million in 2006 and $28.1 million in 2005. The
increase of 13% in 2007 from 2006 primarily reflects higher
legal costs related to the protection of our intellectual
property, which is partially offset by lower amortization
charges as some EDT intangible assets were fully amortized in
2006. The increase of 40% in 2006 from 2005 primarily reflects
the impact of the expensing of share-based compensation of
$3.9 million in 2006 (2005: $Nil), and higher legal costs
related to the protection of our intellectual property and
contractual rights.
R&D expenses were $48.4 million in 2007,
$47.4 million in 2006 and $39.5 million in 2005. The
increase of 2% in 2007 compared to 2006 and of 20% in 2006
compared to 2005 primarily reflects increased spend on
proprietary programs and on identifying suitable collaborative
products for the NanoCrystal technology.
During 2007 and 2006, we incurred severance, restructuring and
other costs of $3.8 million and $3.2 million,
respectively, arising from the realignment of our resources to
meet our current business structure.
In December 2006, we were awarded $49.8 million following
the conclusion of binding arbitration proceedings that were
initiated against King with respect to an agreement to
reformulate Sonata. This award was recognized as a gain in 2006
and was received in January 2007.
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Our liquid and capital resources at December 31 were as follows
(in millions):
We have historically financed our operating and capital resource
requirements through cash flows from operations, sales of
investment securities and borrowings. We consider all highly
liquid deposits with an original maturity of three months or
less to be cash equivalents. Our primary sources of funds as of
December 31, 2007 consisted of cash and cash equivalents of
$423.5 million, which excludes restricted cash of
$20.1 million, and current investment securities of
$276.9 million.
At December 31, 2007, our shareholders’ deficit was
$234.7 million, compared to shareholders’ equity of
$85.1 million at December 31, 2006. The decrease is
primarily due to the net loss incurred during the year. Our debt
covenants do not require us to maintain or adhere to any
specific financial ratios. Consequently, the shareholders’
deficit has no impact on our ability to comply with our debt
covenants.
The results of our cash flow activities for 2007 and 2006 are
described below.
2007
Net cash used in operating activities was $167.5 million in
2007. The primary components of cash used in operating
activities were the net loss (adjusted to exclude non-cash
charges and benefits) and changes in working capital accounts.
Changes in working capital accounts provided a net cash inflow
of $15.5 million and include the increase in accounts
receivable of $30.1 million, the decrease in prepaid and
other assets of $60.3 million (principally related to the
$49.8 million arbitration award, which was paid by King in
January 2007), the increase in inventory of $7.4 million,
and the net decrease of $7.3 million in accounts payable
and accrued and other liabilities.
Net cash used in investing activities was $318.1 million in
2007. At December 31, 2007, all of Elan’s liquid
investments were invested in bank deposits and funds. In
December 2007, due to dislocations in the capital markets, one
of these funds was closed. As a result, the amount invested in
this fund on the closure date of $305.9 million
(December 31, 2007: $274.8 million) no longer
qualified as cash and cash equivalents and was reclassified as
an investment. Since December 31, 2007, Elan has reduced
the amount invested in this fund to approximately
$100 million and has moved approximately $175 million
into bank deposits and United States treasury funds. Net cash
used in investing activities in 2007 also includes
$12.3 million related to the purchase of investment
securities and $26.1 million related to the purchase of
property, plant and equipment, offset by net proceeds of
$31.3 million
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from the sale of investment securities. As of December 31,
2007, we did not have any significant commitments to purchase
property, plant and equipment, except for committed additional
capital expenditures of $12.7 million.
Net cash used in financing activities totaled
$599.7 million in 2007, primarily reflecting the repayment
of loans and capital lease obligations of $629.6 million
(principally the redemption of the $613.2 million of the
Athena Notes), offset by $28.2 million of net proceeds from
employee stock issuances.
We believe that our current liquid asset position will be
sufficient to meet our needs for at least the next
12 months. For additional information, See Item 11.
“Quantitative and Qualitative Disclosures about Market
Risk.”
2006
Net cash used in operating activities was $241.5 million in
2006. The primary components of cash used in operating
activities were the net loss (adjusted to exclude non-cash
charges and benefits) and changes in working capital accounts.
The changes in working capital accounts include the net increase
in trade receivables and prepaid and other assets of
$82.0 million (principally $49.8 million arbitration
award entered in our favor and against King in December 2006,
which was paid by King in January 2007), the increase in
inventory of $7.1 million, and the net increase of
$15.2 million in accounts payable and accrued and other
liabilities.
Net cash provided by investing activities was $37.5 million
in 2006. The major component of cash generated from investing
activities includes net proceeds of $14.1 million from the
sale of investment securities and $54.2 million from the
sale of the European rights to Prialt (net of transaction
costs), partially offset by $29.9 million for capital
expenditures.
Net cash provided by financing activities totaled
$629.3 million in 2006, primarily reflecting the net
proceeds of $602.8 million from the issuances of
$465.0 million of the 8.875% Notes and
$150.0 million of the Floating Rate Notes due 2013, and
$29.8 million of net proceeds from employee stock
issuances, offset by $5.7 million related to the repayment
of loans and capital lease obligations.
At December 31, 2007, we had outstanding debt of
$1,765.0 million, which consisted of the following
(in millions):
During 2007, as of December 31, 2007, and, as of the date
of filing of this
Form 20-F,
we were not in violation of any of our debt covenants. Our debt
covenants do not require us to maintain or adhere to any
specific financial ratios. Consequently, the shareholders’
deficit of $234.7 million at December 31, 2007 has no
impact on our ability to comply with our debt covenants. For
additional information regarding our outstanding debt, refer to
Note 18 to the Consolidated Financial Statements.
For information regarding commitments and contingencies, please
refer to Notes 26 and 27 to the Consolidated Financial
Statements.
We believe that our current and planned manufacturing, research,
product development and corporate facilities will adequately
meet our current and projected needs. In June and December 2007,
we entered into lease agreements for two additional buildings in
South San Francisco, which are currently under
construction. The lease term for the first building is expected
to commence in the first quarter of 2009 and the second in the
first quarter of 2010. The buildings will be
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utilized for our R&D, sales and administrative functions.
We may invest a significant amount of our cash and resources
into building a biologics manufacturing facility for AAB-001. We
will use our resources to make capital expenditures as necessary
from time to time and also to make investments in the purchase
or licensing of products and technologies and in marketing and
other alliances with third parties to support our long-term
strategic objectives.
See Item 4.B. “Business Overview” for information
on our R&D, patents and licenses, etc.
See Item 4.B. “Business Overview” and
Item 5.A. “Operating Results” for trend
information.
As of December 31, 2007, we have no unconsolidated special
purpose financing or partnership entities or other off-balance
sheet arrangements that have, or are reasonably likely to have,
a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital
resources, that are material to investors.
The following table sets out, at December 31, 2007, our
main contractual obligations due by period for debt principal
and interest repayments and capital and operating leases. These
represent the major contractual, future payments that may be
made by Elan. The table does not include items such as expected
capital expenditures on plant and equipment, future investments
in financial assets or future milestones we may elect to pay
Biogen Idec. As of December 31, 2007, the directors had
authorized capital expenditures, which had been contracted for,
of $12.7 million (2006: $5.6 million). As of
December 31, 2007, the directors had authorized capital
expenditures, which had not been contracted for, of
$1.8 million (2006: $7.3 million).
At December 31, 2007, we had liabilities related to
unrecognized tax benefits of $5.8 million. It is not
possible to accurately assess the timing of or the amount of any
settlement in relation to these liabilities.
At December 31, 2007, we had commitments to invest
$1.8 million (2006: $2.4 million) in healthcare
managed funds.
Under our collaboration agreement with Biogen Idec, if global
in-market net sales of Tysabri are, on average, for four
calendar quarters, in excess of $125 million per calendar
quarter, then we may elect to make a milestone payment to Biogen
Idec of $75 million in order to maintain our percentage
share of Tysabri at approximately 50% for annual global
in-market net sales of Tysabri that are in excess of
$700 million. Additionally, if we have made this
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first milestone payment, then we may elect to pay a further
$50 million milestone to Biogen Idec if global in-market
net sales of Tysabri are, on average, for four calendar
quarters, in excess of $200 million per calendar quarter,
in order to maintain our percentage share of Tysabri at
approximately 50% for annual global in-market net sales of
Tysabri that are in excess of $1.1 billion. Should
we elect not to make the first milestone payment of
$75 million, then our percentage share of Tysabri
will be reduced to approximately 35% for annual global
in-market net sales of Tysabri exceeding
$700 million. If we elect to make the first milestone
payment, but not the second milestone payment, then our
percentage share of Tysabri will be reduced to
approximately 35% for annual global net sales of Tysabri
exceeding $1.1 billion.
In disposing of assets or businesses, we often provide customary
representations, warranties and indemnities (if any) to cover
various risks. We do not have the ability to estimate the
potential liability from such indemnities because they relate to
unknown conditions. However, we have no reason to believe that
these uncertainties would have a material adverse effect on our
financial condition or results of operations.
The two major rating agencies covering our debt rate it as
sub-investment
grade debt. None of our debt has a rating trigger that would
accelerate the repayment date upon a change in rating.
Our debt ratings as of December 31, 2007 were as follows:
We believe that we have sufficient current cash, liquid
resources, realizable assets and investments to meet our
liquidity requirements for at least the next 12 months.
Longer-term liquidity requirements and debt repayments will need
to be met out of available cash resources, future operating cash
flows, financial and other asset realizations and future
financing. However, events, including a material deterioration
in our operating performance as a result of our inability to
sell significant amounts of Tysabri, material adverse
legal judgments, fines, penalties or settlements arising from
litigation or governmental investigations, failure to
successfully develop and receive marketing approval for products
under development (in particular, AAB-001) or the occurrence of
other circumstances or events described under “Risk
Factors,” could materially adversely affect our ability to
meet our longer-term liquidity requirements.
We commit substantial resources to our R&D activities,
including collaborations with third parties such as Biogen Idec
for the development of Tysabri and Wyeth for
Alzheimer’s disease. We expect to commit significant cash
resources to the development and commercialization of products
in our development pipeline.
We continually evaluate our liquidity requirements, capital
needs and availability of resources in view of, among other
things, alternative uses of capital, debt service requirements,
the cost of debt and equity capital and estimated future
operating cash flow. We may raise additional capital,
restructure or refinance outstanding debt, repurchase material
amounts of outstanding debt (including the 7.75% Notes and
the Floating Rate Notes due 2011 and the 8.875% Notes and
the Floating Rate Notes due 2013), consider the sale of
interests in subsidiaries, investment securities or other assets
or the rationalization of products, or take a combination of
such steps or other steps to increase or manage our liquidity
and capital resources. Any such actions or steps, including any
repurchase of outstanding debt, could be material. In the normal
course of business, we may investigate, evaluate, discuss and
engage in future company or product acquisitions, capital
expenditures, investments and other business opportunities. In
the event of any future acquisitions, capital expenditures,
investments or other business opportunities, we may consider
using available cash or raising additional capital, including
the issuance of additional debt.
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Kyran McLaughlin (63)
Non-Executive Chairman, Member of the Nominating Committee
Mr. McLaughlin was appointed a director of Elan in January
1998 and was appointed chairman of Elan in January 2005. He is
deputy chairman at Davy Stockbrokers, Ireland’s largest
stockbroker firm. He is also a director of Ryanair Holdings, plc
and is a director of a number of private companies.
Floyd Bloom, MD (71)
Non-Executive Director, Member of the Science and Technology Committee
Dr. Bloom was appointed a director of Elan in July 2007. He
is the retired chairman of the Scripps Research Department of
Neuropharmacology and was the previous
editor-in-chief
of Science. He also served as president of the American
Association for the Advancement of Science
(2002-2003)
and was chairman of its board of directors
(2003-2004).
A professor at Scripps Research since 1983, Dr. Bloom
serves as chairman of the Department of Neuropharmacology
(1989-2000;
2002 to present). A member of the National Academy of Science
since 1977, Dr. Bloom is the recipient of numerous prizes
for his contributions to science.
Shane Cooke (45)
Executive Director, Chief Financial Officer and Head of Elan Drug Technologies
Mr. Cooke was appointed a director of Elan in May 2005. He
joined the company as executive vice president and chief
financial officer (CFO) in July 2001, and was additionally
appointed head of EDT in May 2007. Prior to joining Elan,
Mr. Cooke was chief executive of Pembroke Capital Limited,
an aviation leasing company, and prior to that held a number of
senior positions in finance in the banking and aviation
industries. Mr. Cooke is a chartered accountant and a
graduate of University College Dublin.
Laurence G. Crowley (70)
Non-Executive Director, Member of the Leadership Development and Compensation Committee, Member of the Audit Committee
Mr. Crowley was appointed a director of Elan in March 1996.
He was governor of the Bank of Ireland until his retirement in
July 2005. He is presently chairman of Ecocem Ltd. and Realex
Payments and is a director of a number of private companies and
not-for-profit organizations. Mr. Crowley is a chartered
accountant.
Lars Ekman, MD, PhD (58)
Non-Executive Director, Chairman of the Science and Technology Committee
Dr. Ekman was appointed a director of Elan in May 2005 and
joined Elan as executive vice president and president, global
R&D, in 2001. He retired from his executive position in
Elan on December 31, 2007. Prior to joining Elan, he was
executive vice president, R&D, at Schwarz Pharma AG since
1997. From 1984 to 1997, Dr. Ekman was employed in a
variety of senior scientific and clinical functions at Pharmacia
(now Pfizer). Dr. Ekman is a board certified surgeon with a
PhD in experimental biology and has held several clinical and
academic positions in both the United States and Europe. He
obtained his PhD and MD from the University of Gothenburg,
Sweden.
Jonas Frick (50)
Non-Executive Director, Member of the Science and Technology Committee
Mr. Frick was appointed a director of Elan in September
2007. He is the former chief executive officer (CEO) of
Scandinavian Life Science Ventures (SLS Ventures). He was the
chief executive officer and president of Medivir AB and served
in senior executive positions in Pharmacia’s international
businesses in the central nervous system and autoimmune areas
across Italy, Sweden and Japan. He is a founding member of the
Swedish Biotechnology Industry Organization.
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Ann Maynard Gray (62)
Non-Executive Director, Member of the Nominating Committee
Ms. Gray was appointed a director of Elan in February 2001.
She was formerly president of Diversified Publishing Group of
Capital Cities/ABC, Inc. Ms. Gray is also a director of
Duke Energy Corporation and The Phoenix Companies, Inc.
Gary Kennedy (50)
Non-Executive Director, Chairman of the Audit Committee
Mr. Kennedy was appointed a director of Elan in May 2005.
From May 1997 to December 2005, he was group director,
finance & enterprise technology, at Allied Irish
Banks, plc (AIB) and a member of the main board of AIB and was
also on the board of M&T, AIB’s associate in the
United States. Prior to that, Mr. Kennedy was group vice
president at Nortel Networks Europe after starting his
management career at Deloitte & Touche. He served on
the board of the Industrial Development Authority of Ireland for
10 years until he retired in December 2005. He is a
director of Finance Ireland plc, the NUI Galway Development
Board and a number of private companies. Mr. Kennedy is a
chartered accountant.
Giles Kerr (48)
Non-Executive Director, Member of the Audit Committee
Mr. Kerr was appointed a director of Elan in September
2007. He is currently the director of finance with the
University of Oxford, England, and a fellow of Keble College. He
is also a director and chairman of the audit committee of
Victrex plc and a director of BTG plc, Isis Innovation Ltd and a
number of private companies. Previously, he was the group
finance director and chief financial officer of Amersham plc,
and prior to that, he was a partner with Arthur Andersen in the
United Kingdom.
G. Kelly Martin (49)
Executive Director, President and CEO
Mr. Martin was appointed a director of Elan in February
2003 following his appointment as president and chief executive
officer. He was formerly president of the International Private
Client Group and a member of the executive management and
operating committee of Merrill Lynch & Co., Inc. He
spent over 20 years at Merrill Lynch & Co.,
Inc. in a broad array of operating and executive
responsibilities on a global basis.
Kieran McGowan (64)
Non-Executive Director, Lead Independent Director, Chairman of the Nominating Committee
Mr. McGowan was appointed a director of Elan in December
1998. From 1990 until his retirement in December 1998, he was
chief executive of the Industrial Development Authority of
Ireland. He is chairman of the governing authority of University
College Dublin and CRH, plc, and a director of Irish Life and
Permanent, plc, United Drug, plc, Enterprise Ireland, and a
number of private companies.
William Rohn (64)
Non-Executive Director, Member of the Leadership, Development and Compensation Committee
Mr. Rohn was appointed a director of Elan in May 2006. He
is currently vice chairman of Raven Biotechnologies, Inc., and a
director of Metabasis Therapeutics, Inc., Cerus Corp and
Pharmacyclics, Inc. Previously, he was chief operating officer
of Biogen Idec until January 2005 and prior thereto president
and chief operating officer of Idec Pharmaceutical Corporation
from 1993.
Dennis J. Selkoe, MD (64)
Non-Executive Director, Chairman of the Leadership Development and Compensation Committee, Member of the Science and Technology Committee
Dr. Selkoe was appointed a director of Elan in July 1996,
following our acquisition of Athena Neurosciences, where he
served as a director since July 1995. Dr. Selkoe was a
founder of Athena Neurosciences. Dr. Selkoe, a neurologist,
is a professor of neurology and neuroscience at Harvard Medical
School. He also serves as
co-director
of the Center for Neurologic Diseases at The Brigham and
Women’s Hospital.
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Jeffrey Shames (52)
Non-Executive Director, Member of the Audit Committee
Mr. Shames was appointed a director of Elan in July 2007.
He is the retired chairman and chief executive officer of MFS
Investment Management. Mr. Shames is currently an executive
in residence at the Massachusetts Institute of Technology (MIT)
and has served on both the visiting committee and the
Dean’s Advisory Board of the Sloan School at MIT. He is the
chairman of the Board of Trustees of Berklee College of Music; a
member of the Board of Trustees of City Year (a youth service
organization); co-founder and member of the Board of Hurricane
Voices, a not-for profit breast cancer foundation; and trustee
of the XPrize Foundation.
Menghis Bairu, MD (47)
Senior Vice President, Head of International
Dr. Bairu was appointed senior vice president and head of
international for all of Elan’s biopharmaceutical
activities outside the United States in May 2007. He joined Elan
in 2004 and had served as vice president and head of global
medical affairs and as senior director in charge of the regional
medical scientists. Prior to joining Elan, Dr. Bairu worked
at Genentech, Inc. in various commercial, clinical and managed
care roles. He received his undergraduate degree in business
administration from Instituto VII Tecnico Commerciale in Milan,
Italy, and attended the Universita Statale, Facoltà di
Medicina e Chirurgia (Faculty of Medicine and Surgery) in
Milan, where he received his Medical Degree.
James Callaway, PhD (51)
Senior Vice President, Head of Immunotherapy AD Clinical Programs
Dr. Callaway was appointed senior vice president, head of
immunotherapy Alzheimer’s disease clinical programs, in
March 2004. Since joining Elan in 1995, Dr. Callaway has
held several senior positions, including interim head of global
development and vice president of biopharmaceutical development
services. Prior to joining Elan, he worked at Bayer
Pharmaceuticals. Dr. Callaway received his PhD in
biological chemistry from University of California, Los Angeles,
and a Bachelor of Science in chemistry from California State
University, Chico.
Nigel Clerkin (34)
Senior Vice President, Finance and Group Controller
Mr. Clerkin was appointed senior vice president, finance
and group controller in January 2004, having previously held a
number of financial and strategic planning positions since
joining Elan in January 1998. He is also our principal
accounting officer. Mr. Clerkin is a chartered accountant
and a graduate of Queen’s University Belfast.
Richard Collier (54)
Executive Vice President and General Counsel
Mr. Collier joined Elan as executive vice president and
general counsel in November 2004. Prior to joining Elan,
Mr. Collier was senior counsel at Morgan, Lewis &
Bockius LLP. Prior to joining Morgan Lewis, he was senior vice
president and general counsel at Pharmacia (now Pfizer), after
serving in that position at Pharmacia & Upjohn. Prior
to his experience at Pharmacia, Mr. Collier spent
11 years at Rhone-Poulenc Rorer, Inc. Previously, he was in
private practice after having served with the U.S. Federal
Trade Commission and U.S. Department of Justice.
Mr. Collier is a graduate of Temple University and earned
his Juris Doctor at Temple University.
William F. Daniel (55)
Executive Vice President and Company Secretary
Mr. Daniel was appointed a director of Elan in February
2003 and served until July 2007. He has served as the company
secretary since December 2001, having joined Elan in March 1994
as group financial controller. In July 1996, he was appointed
group vice president, finance, group controller and principal
accounting officer. From 1990 to 1992, Mr. Daniel was
financial director of Xtravision, plc. Mr. Daniel is a
chartered accountant and a graduate of University College Dublin.
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David W. Feigal, Jr, MD (58)
Senior Vice President, Head of Global Regulatory and Global Safety Surveillance
Dr. Feigal joined Elan as senior vice president, head of
global regulatory and global safety surveillance in November
2006. Prior to joining Elan, he served most recently as a
principal with NDA Partners, and prior thereto spent
12 years with the FDA. Before joining the FDA,
Dr. Feigal worked for 10 years within the academic and
hospital settings of the University of California in
San Diego, San Francisco and Davis. Dr. Feigal
holds an BA from University of Minnesota, an MD from Stanford
University and a Master of Public Health from the University of
California, Berkeley.
Allison Hulme, PhD (44)
Executive Vice President, Global Development
Dr. Hulme was appointed executive vice president, head of
global development, in May 2007. From 2005 to 2007,
Dr. Hulme was executive vice president, autoimmune,
Tysabri, global development. Previously, Dr. Hulme
held the positions of executive vice president, Tysabri
business enterprise, and senior vice president, head of
global development. Prior to joining Elan in October 1995,
Dr. Hulme held several positions in clinical research at
Glaxo Wellcome Pharmaceuticals (United Kingdom) and served as a
lecturer at Luton University. She holds a degree in science
from Luton University and earned her PhD from Cranfield
Institute of Technology.
Karen S. Kim (45)
Executive Vice President, Corporate Strategy & Alliances, Communications, Branding and Specialty Business Group
Ms. Kim was appointed executive vice president, corporate
strategy & alliances, communications, branding and
specialty business group, in January 2005. She joined Elan in
September 2003 as senior vice president, head of global
corporate strategy and strategic alliances. Prior to joining
Elan, Ms. Kim held senior management positions at Merrill
Lynch & Co., which she joined in 1998, and where she
was most recently head of client development in the
International Private Client Group. Previously she held senior
management positions at the Cambridge Group and The MAC
Group/Gemini Consulting. She is a graduate of Wellesley College
and earned her MBA from the Harvard Graduate School of Business
Administration.
Ivan Lieberburg, MD, PhD (58)
Executive Vice President and Chief Medical Officer
Dr. Lieberburg is executive vice president and chief
medical officer of Elan, where he has held a number of senior
positions, most recently senior vice president of research.
Prior to joining Athena Neurosciences in 1987,
Dr. Lieberburg held faculty positions at the Albert
Einstein College of Medicine and Mt. Sinai School of Medicine in
New York. He received an AB from Cornell University and earned
his PhD in Neurobiology from The Rockefeller University.
Dr. Lieberburg was a postdoctoral fellow in Neurobiology at
Rockefeller University. He earned his MD from the University of
Miami. Dr. Lieberburg was a research endocrine fellow at
the University of California, San Francisco.
Kathleen Martorano (46)
Executive Vice President, Strategic Human Resources
Ms. Martorano was appointed executive vice president,
strategic human resources, and a member of the office of the
chief executive officer, in January 2005. She joined Elan in May
2003 as senior vice president, corporate marketing and
communications. Prior to joining Elan, Ms. Martorano held
senior management positions at Merrill Lynch &
Co., which she joined in 1996, and where she was most recently
first vice president of marketing and communications for the
International Private Client Group. Previously, she held senior
management positions with Salomon Brothers. Ms. Martorano
holds a Bachelor of Science degree from Villanova University.
Johannes Roebers, PhD (47)
Senior Vice President, Head of Biologic Strategy, Planning and Operations
Dr. Roebers joined Elan as senior vice president, head of
biologic strategy, planning and operations, in July 2007. Prior
to joining Elan, Dr. Roebers worked at Genentech. He joined
Genentech when it acquired the Oceanside manufacturing facility
from Biogen Idec in 2005, as he had been Biogen Idec’s
project leader for design,
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construction and
start-up of
the facility since 2001. Before joining Biogen Idec,
Dr. Roebers spent 11 years with Bayer Corporation. He
received his Diplom-Ingenieur in mechanical engineering from
RWTH Aachen in Aachen, Germany, and his PhD in chemical
engineering from Clemson University.
Dale Schenk, PhD (50)
Executive Vice President and Chief Scientific Officer
Dr. Schenk was appointed Elan’s executive vice
president and chief scientific officer in September 2007. From
2003 to 2007, Dr. Schenk was senior vice president and
Elan’s chief scientific officer. From 1999 to 2003,
Dr. Schenk was senior vice president of discovery research
at Elan and, from 1998 to 1999, he was the company’s vice
president of neurobiology. Previously, Dr. Schenk was
director of neurobiology for Athena Neurosciences from 1994 to
1998. Earlier at Athena, from 1987 to 1994, Dr. Schenk
served as the leader of several research programs.
Dr. Schenk earned his bachelor’s degree in biology and
a PhD in physiology and pharmacology from the University of
California, San Diego.
Ted Yednock, PhD (50)
Executive Vice President, Head of Global Research
Dr. Yednock was appointed executive vice president, head of
global research, in September 2007. Dr. Yednock joined
Athena Neurosciences in 1990 to initiate work on MS. He has
contributed to a number of research efforts since that time in
the areas of both autoimmune and neurodegeneration, and has held
a number of scientific and management positions within the
organization, including senior vice president, head of global
research, and vice president, biology. He earned his
bachelor’s degree in biology and chemistry from the
University of Illinois and his PhD in immunology from the
University of California, San Francisco.
For the year ended December 31, 2007, all executive
officers and outside directors as a group (19 persons)
received total compensation of $13.2 million.
We reimburse officers and outside directors for their actual
business-related expenses. For the year ended December 31,
2007, an aggregate of $0.2 million was accrued to provide
pension, retirement and other similar benefits for directors and
officers. We also maintain certain health and medical benefit
plans for our employees in which our officers participate.
Officers serve at the discretion of the board of directors. No
director or officer has a family relationship with any other
director or officer.
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Directors’
Remuneration
On July 1, 2003, we entered into a pension agreement with
Mr. John Groom, a former director of Elan Corporation, plc,
whereby we shall pay him a pension of $200,000 per annum,
monthly in arrears, until May 16, 2008 in respect of his
former senior executive roles.
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The roles of the chairman and CEO are separated. The chairman of
the board is responsible for the leadership and management of
the board. Our CEO is responsible for the operation of the
business of the Company. Other significant commitments of the
chairman are set out in Item 6.A. “Directors and Senior
Management.” These commitments did not change during 2007.
The board regularly reviews its responsibilities and those of
its committees and management. The board meets regularly
throughout the year, and all of the directors have full and
timely access to the information necessary to enable them to
discharge their duties.
Directors are provided with extensive induction materials on
appointment and meet with key executives with a particular focus
on ensuring non-executive directors are fully informed on issues
of relevance to Elan and its operations. All directors are
encouraged to update and refresh their skills and knowledge, for
example, through attending courses on technical areas or
external briefings for non-executive directors.
All directors have access to the advice and services of the
company secretary. The company secretary supports the chairman
in ensuring the board functions effectively and fulfills its
role. He is secretary to the Audit Committee, Leadership
Development and Compensation Committee (LDCC), Nominating and
Governance Committee (NGC) and Science and Technology Committee
and ensures compliance with applicable rules and regulations, as
well as providing advice on a range of issues to commercial
colleagues.
The board has reserved certain matters to its exclusive
jurisdiction, thereby maintaining control of the Company and its
future direction. All directors are appointed by the board, as
nominated by its NGC, and subsequently elected by shareholders.
Procedures are in place whereby directors and committees, in
furtherance of their duties, may take independent professional
advice, if necessary, at our expense. The board held eight
scheduled meetings during 2007.
Our guidelines require that the board will conduct a
self-evaluation at least annually to determine whether it and
its committees are functioning effectively. An evaluation of the
performance of the board, the board committees and individual
directors was conducted during the year by the lead independent
director through meetings with each member of the board. The
results were presented to the nominating and governance
committee and to the board. The board concluded that it and its
committees had operated satisfactorily during the past year.
The board has delegated authority over certain areas of our
activities to four standing committees, as more fully described
below.
For additional information, see Items 7.B. “Related Party
Transactions” and 10.B. “Memorandum and Articles of
Association.”
Under our guidelines, two-thirds of the board are required to be
independent. At the year-end, the board included
11 independent, non-executive directors who constitute in
excess of two-thirds of the board. We adopted a definition of
independence based on the rules of the New York Stock Exchange
(NYSE), the exchange on which the majority of our shares are
traded. For a director to be considered independent, the board
must affirmatively determine that he or she has no material
relationship with the Company. The specific criteria that affect
independence are set out in the Company’s corporate
governance guidelines and include former employment with the
Company, former employment with the Company’s independent
auditors, receipt of compensation other than directors’
fees, material business relationships and interlocking
directorships.
In December 2007, the board considered the independence of each
non-executive director and considers that all the then
non-executive directors were independent in character and
judgment and there are no relationships or circumstances that
are likely to affect their independent judgment.
In reaching this conclusion, the board gave due consideration to
participation by board members in our equity compensation plans.
The board also considered the positions of Mr. McLaughlin,
Chairman, Mr. Crowley and
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Dr. Selkoe, who have served as non-executive directors for
in excess of nine years. Additionally, Dr. Selkoe has an
ongoing consultancy agreement with the company, which is set out
in detail in Item 7.B. “Related Party
Transactions.” It is the board’s view that each of
these non-executive directors discharges his duties in a
thoroughly independent manner and constructively and
appropriately challenges the executive directors and the board.
For this reason, the board considers that they are independent.
The Audit Committee, composed entirely of independent
non-executive directors, helps the board in its general
oversight of the Company’s accounting and financial
reporting practices, internal controls and audit functions, and
is directly responsible for the appointment, compensation and
oversight of the work of our independent auditors. The members
of the committee are Mr. Kennedy, Chairman,
Mr. Crowley, Mr. Kerr (appointed January 31,
2008) and Mr. Shames. Mr. McGowan resigned from
the Audit Committee on January 31, 2008. Mr. Kennedy
qualifies as an audit committee financial expert. The Audit
Committee held nine meetings during 2007. For additional
information on the Audit Committee, please refer to
Item 16.A. “Audit Committee Financial Expert” and
Item 16.C. “Report of the Audit Committee.”
The LDCC, composed entirely of independent non-executive
directors, reviews our compensation philosophy and policies with
respect to executive compensation, fringe benefits and other
compensation matters. The committee determines the compensation
of the chief executive officer and other executive directors and
reviews the compensation of the other members of the executive
management. The members of the committee are Dr. Selkoe,
Chairman, Mr. Crowley and Mr. Rohn. The committee held
four meetings during 2007. Further information about the work of
the LDCC is set out in the Report of the Leadership Development
and Compensation Committee on page 64.
The NGC, composed entirely of independent non-executive
directors, reviews on an ongoing basis the membership of the
board of directors and of the board committees and the
performance of the directors. It recommends new appointments to
fill any vacancy that is anticipated or arises on the board of
directors. The committee reviews and recommends changes in the
functions of the various committees of the board. The guidelines
and the charter of the committee set out the manner in which the
performance evaluation of the board, its committees and the
directors is to be performed and by whom. In December 2007, it
received a report from the lead independent director on his
evaluation of the performance of the board, the board committees
and individual directors, which he conducted through meetings
with each member of the board. The members of the committee are
Mr. McGowan, Chairman, Ms. Gray and
Mr. McLaughlin. The committee held five meetings during
2007.
The Science and Technology Committee advises the board in its
oversight of matters pertaining to our research and technology
strategy and provides a perspective on those activities to the
board. It does so by reviewing the discovery approaches within
our internal research effort and external innovation network and
by reviewing internal and external technology capabilities
against long-term trends and advancements. The members of the
committee are Dr. Ekman, Chairman, Dr. Bloom,
Mr. Frick (appointed January 31, 2008) and
Dr. Selkoe. The committee held two meetings during 2007.
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Board
and Board Committee Meetings
The number of scheduled board and board committee meetings held
and attended by each director during the year was as follows:
We communicate regularly with our shareholders throughout the
year, specifically following the release of quarterly and annual
results, and after major developments. Our Annual General
Meetings, quarterly conference calls and presentations at
healthcare investor conferences are webcast and are available on
our website (www.elan.com). The board periodically receives
presentations on investor perceptions.
The principal forum for discussion with shareholders is the
Annual General Meeting and shareholder participation is
encouraged. Formal notification, together with an explanation of
each proposed resolution, is sent to shareholders at least
21 calendar days in advance of the Annual General Meeting.
At the meeting, the CEO provides a summary of the period’s
events after which the board and senior management are available
to answer questions from shareholders. All directors normally
attend the Annual General Meeting and shareholders are invited
to ask questions during the meeting and to meet with directors
after the formal proceedings have ended.
In accordance with the Combined Code recommendations, the
Company counts all proxy votes. On each resolution that is voted
on with a show of hands, the Company indicates the level of
proxies lodged, the number of votes for and against each
resolution and the number of votes withheld.
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The directors, having made inquiries, believe that we have
adequate resources to continue in operational existence for at
least the next 12 months and that it is appropriate to
continue to adopt the going concern basis in preparing our
Consolidated Financial Statements.
The board of directors has overall responsibility for our system
of internal control and for monitoring its effectiveness. The
system of internal control is designed to provide reasonable,
but not absolute, assurance against material misstatement or
loss. The key procedures that have been established to provide
effective internal control include:
The directors reviewed our system of internal control and also
examined the full range of risks affecting us and the
appropriateness of the internal control structures to manage and
monitor these risks. This process involved a confirmation that
appropriate systems of internal control were in place throughout
the financial year and up to the date of signing of these
financial statements. It also involved an assessment of the
ongoing process for the identification, management and control
of the individual risks and of the role of the various risk
management functions and the extent to which areas of
significant challenges facing us are understood and are being
addressed. No material unaddressed issues emerged from this
assessment.
Please refer to Item 15. “Controls and
Procedures,” for management’s annual report on
internal control over financial reporting.
The terms of reference for the committee are to determine the
compensation, terms and conditions of employment of the chief
executive officer and other executive directors and to review
the recommendations of the chief executive officer with respect
to the remuneration and terms and conditions of employment of
our senior management. The committee also exercises all the
powers of the board of directors to issue Ordinary Shares on the
exercise of share options and vesting of RSUs and to generally
administer our equity award plans.
Each member of the committee is nominated to serve for a
three-year term subject to a maximum of two terms of continuous
service.
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Our policy on executive directors’ remuneration is to set
remuneration levels that are appropriate for our senior
executives having regard to their substantial responsibilities,
their individual performance and our performance as a whole. The
committee sets remuneration levels after reviewing remuneration
packages of executives in the pharmaceutical and biotech
industries. The committee takes external advice from independent
benefit consultants and considers Section B of the Code of
Best Practice of The Combined Code as issued by the London and
Irish Stock Exchanges.
The typical elements of the remuneration package for executive
directors include basic salary and benefits, annual cash
incentive bonus, pensions and participation in equity award
plans. Non-executive directors are compensated with fee payments
and equity awards (with additional payments where directors are
members of board committees) and are reimbursed for travel
expenses to and from board meetings.
The committee grants equity awards to encourage identification
with shareholders’ interests.
The basic salaries of executive directors are reviewed annually
having regard to personal performance, company performance and
market practice.
Annual cash incentive bonuses, which are not pensionable, are
paid to executive directors based on the recommendation of the
committee. Bonus determination is not based on specific
financial or operational targets, but on individual and company
performance.
On May 25, 2006, our shareholders approved the Elan
Corporation, plc 2006 Long Term Incentive Plan (2006 LTIP). It
is the committee’s policy, in common with other companies
operating in the pharmaceutical and biotech industries, to award
share options and RSUs to management and employees, taking into
account the best interests of the Company. The equity awards
generally vest between one and four years and do not contain any
performance conditions other than service.
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