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Elan's disjointed ventures

Its fall frees some to succeed, leaves others anxious

http://www.boston.com/dailyglobe2/282/business/Elan_s_disjointed_ventures+.shtml

10/9/2002
By Jeffrey Krasner, Globe Staff

It was, by all accounts, an amicable divorce.

Elan Corp. PLC needed to end the joint venture it launched in June 2000 with Acusphere Inc., a private company in Watertown developing new ways to administer drugs using porous microparticles. The solution: Acusphere regained the rights to the inhalable drug candidates the companies developed together, and gets to keep Elan's $7.5 million equity investment in the business.

A separate $8 million loan from Elan was forgiven. In exchange, Elan takes away rights to royalties if the drugs ever reach the market. No cash changed hands, and both sides walked away friends.

For Acusphere, it may even turn out to be a windfall. The private firm, based in Watertown, can now seek a new partner. After two years of additional development, the drug candidates might be worth even more than when the deal was struck with Elan.

''What's nice about getting the product right back is it's an opportunity to remonetize the product,'' said Sherri L. Oberg, Acusphere's president and chief executive. ''We're in the process of identifying a new partner for this product.''

Elan Corp., Ireland's largest drug company and once the world's 20th-largest pharmaceutical firm, used to be a relentless dealmaker. In just a few years, the company completed 55 joint ventures, many of them with small US biotech start-ups like Acusphere. But investor concerns and an ongoing investigation by the Securities and Exchange Commission destroyed confidence in Elan's shares, which sank from more than $60 in late 2000to less than $2. Yesterday, they closed at $1.28, down 2 cents.

To survive, Elan is shrinking and selling off assets to repay big debts coming due next year. That means terminating many of the joint ventures, an effort that has created opportunity for some of the partners and anxiety for others.

Under interim management, Elan has said it will focus exclusively on neurology, pain management and autoimmune diseases. Drug development programs outside those areas need to be jettisoned quickly, enabling firms like Acusphere to negotiate favorable terms with a company many times its size. But while Elan remains committed to other joint ventures, some of its partners worry whether the crippled company will be able to keep its funding commitments and development drugs as quickly as possible.

One of the firms facing uncertainty is GlycoGenesys Inc., the Boston company formerly known as SafeScience, which is developing drug candidates for treating cancer and agricultural chemicals. The joint venture with Elan announced in July 2001 gave GlycoGenesys $5 million in direct funding when the company was in danger of running out of money and suspending operations. With the investment, GlycoGenesys's shares rebounded and it was able to report continued progress in the development of a drug candidate called GCS-100.

But Elan's new plans don't include oncology. In its most recent quarterly report to investors, GlycoGenesys warned that Elan was likely to provide ''a portion, but not all'' of a promised $7.1 million in additional funding for the joint venture. In August, Elan reimbursed GlycoGenesys for $1.3 million of research expenses.

In an interview, chief financial officer John Burns said further discussions haven't clarified Elan's intentions. ''It's like Yogi Berra said, `It isn't over 'til it's over,' and until we learn otherwise, we proceed with it,'' he said.

Burns said if the joint venture is terminated, GlycoGenesys would be prepared to continue the research by raising additional equity funding or finding a new partner.

For Curis Inc., a Cambridge company seeking to develop treatments based on signaling pathways that control cells, Elan's troubles could mean slower than optimal progress. The company is identifying small molecules which work on the so-called hedgehog pathway, which controls the growth of neurons and other brain cells. The molecules under development show promise for helping patients with Parkinson's disease, a degenerative neurological disorder.

Daniel R. Passeri, Curis's chief executive, said his firm is close to demonstrating proof-of-concept, a step that could lead to human clinical trials. At that point, Elan's expertise in clinical research would presumably play a big part in development of a drug candidate. If anything, he said, he would like to accelerate the development program with Elan.

''Elan has given us positive overtures,'' said Passeri. ''Our objective is an acceleration and an expansion of the program. Every discussion we've had suggests true enthusiasm on their part.''

Elan's joint venture with Curis runs through next July, with Elan footing 20 percent of the research bill and providing financing for Curis to borrow the rest.

The way Elan organized its numerous joint ventures drew unwelcome attention from investors and regulators this year. The company typically created separate firms, headquartered in Bermuda, funded jointly with its partners. The mechanism enabled Elan to classify many of its product development expenses as assets on its balance sheet, with no impact on the firm's earnings. Meantime, Elan would immediately book technology licensing fees from its new partners.

Critics charge that the joint ventures enabled Elan to artificially inflate its earnings, which grew at a torrid pace through last year. Concerns about the accounting sparked an SEC investigation, disclosed in February, which is ongoing. The company was also hit with lawsuits from angry shareholders, and credit downgrades that brought the firm's debt to junk-bond status. Elan's chairman and vice chairman resigned in July.

Amid this turmoil, on July 31 Elan unveiled its survival plan. The company began eliminating 1,000 employees and said it would sell off noncore assets with the goal of raising $1.5 billion by the end of next year. Among the units to be spun off: Athena Diagnostics Inc. of Worcester, a provider of diagnostic services.

Some analysts said Elan's financial position is so precarious, there's a buying opportunity for those looking to acquire joint venture assets. ''Fire sale is a way to describe it,'' said Todd Lebor, stock analyst with Morningstar Inc. ''Elan is desperate. It needs cash. It needs to monetize these investments it made.''

Still, some local partners said their individual projects with Elan are proceeding smoothly.

''Elan's most recent changes haven't affected our relationship at all,'' said Dr. Stephen Ober, president of Beyond Genomics Inc. of Waltham, which is working with the pharmaceutical firm to develop treatments for Alzheimer's disease. ''To the best of our knowledge, our funding level will stay the same.'' Alzheimer's a neurological ailment, remains one of Elan's core businesses.

Ober said he expected the joint venture to be extended when it reaches its contractual end next April.

A spokesman for Biogen Inc., the giant Cambridge biotech firm, said work with Elan on Antegren, a drug for multiple sclerosis and Crohn's disease, remains on track. ''Elan has indicated that Antegren remains a top priority for them,'' said Tim Hunt. ''They've been a reliable partner. Both companies are committed to the development of Antegren.''

Indeed, despite its cash crunch this summer, Elan paid $82.5 million to Autoimmune Diseases Research and Development Corp. to regain certain rights to Antegren and eliminate the need to pay royalties to Autoimmune. The move underscores that Antegren is central to Elan's ultimate financial success.

Asked if Biogen has sought to purchase Antegren from Elan, Hunt declined to comment.

Partners in fields slated for divestiture could be in the best position to negotiate with Elan. Jim McNab, chief executive of eNOS Pharmaceuticals Inc. of Cambridge, said he is speaking with Elan officials in the hope of regaining rights to so-called statin combination therapies as a treatment for arterial blockages.

''The idea is to move the technology from the joint venture back to'' eNOS, said McNab, noting that it is unlikely Elan would fund a Phase III trial, which could cost as much as $60 million. McNab said he is exploring a noncash transaction similar to the one completed last week by Acusphere.

Oberg said Acusphere's successful divorce from Elan gave her an air of celebrity when she spoke at a health care investment conference organized by UBS Warburg in New York on Monday. ''People kept on coming up to me and saying, `We hear you had a joint venture with Elan. We have a joint venture with Elan. How did you get out of it?' Unfortunately, I don't have the magic answer.''
 

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