Kelly Martin: Mr. Fixit or Mr. Liquidator?

A Wall Streeter takes the helm of ailing Irish drugmaker Elan

Any way you look at it, G. Kelly Martin is an unusual choice to lead embattled drugmaker Elan Corp. (ELN ) First, he has no experience in the pharmaceutical industry; in fact, when first approached about the position, he had only a passing knowledge of the company. And Martin, 44, has never been a chief executive before. He has spent his entire working life at Merrill Lynch & Co., fixing up one troubled unit after another. When he left in December, he was head of its international private-client group. And Martin had been one of the few executives willing, or able, to defend Merrill publicly: It was he who testified for the firm in the Senate hearings on Enron Corp. in the summer of 2002.

Then again, why did Martin select such a doozy of a company for his first try as CEO? Elan was once Ireland's biggest public company. It was home-grown, innovative, and seemed to be making the difficult transition from biotech to full-fledged pharmaceutical. But in early 2002, revelations about its aggressive accounting, which included the much-maligned "special purpose entities," led to an ongoing investigation by the Securities & Exchange Commission. Around the same time, Elan's highly anticipated Alzheimer's drug was found to cause brain inflammation in some trial patients and had to be kicked back to the lab. By July, the drugmaker's stock had collapsed, several shareholder lawsuits had been filed, and the CEO and chief financial officer resigned.

Martin took over as CEO on Feb. 3. Since then, his experience as a trouble-shooter has given rise to the widespread suspicion that his job is to clean up Elan and sell it. "People are skeptical he's in it for the long haul," says Peter Frawley, an analyst for Merrion Stockbrokers Ltd. in Dublin. The fact that Martin's contract includes a promise of $5 million if Elan is sold this year and $3 million if it goes next year only adds to the doubts about the company's survival. While this kind of offer may be standard practice for executives coming to troubled companies, and Elan says it protects Martin in case of a hostile takeover, to some it looks an awful lot like an incentive to sell.

Martin, who is generally known for his calm demeanor and self-deprecating wit, is clearly exasperated by the suggestion. He says he would hardly have left a high-powered career, planned to move from Connecticut to San Diego (where Elan's development operations are located), and gone through a crash course in science just to hand over Elan to a rival. The company has enough cash to survive the year. For now, few other biotechs are strong enough to buy it; and until the SEC probe and shareholder suits are settled, no big pharmaceutical is likely to go near it. Indeed, Elan's credibility is so diminished that one pharmaceutical analyst in London says "most people I know listen to their conference calls for a bit of a laugh." Any revival is likely to be years away, and even then Elan will certainly be smaller, and probably less ambitious, than it was.

In Martin's estimation, Elan "is a great company scientifically that was overengineered financially." That "overengineering" included 55 joint ventures, two off-balance-sheet partnerships, and $1.5 billion in convertible bonds (handled by Merrill) that allowed Elan to shift R&D costs off the balance sheet and acquire new products. When the company's two top executives, both of whom had worked for Elan's auditor, KPMG International, admitted that some of those deals would reduce earnings and result in $4.5 billion in debt coming due in the next five years, investors bailed and the SEC stepped in.

Martin is well-equipped to lead a financial restructuring. In 21 years at Merrill, he was known for his operational skills: One of his toughest jobs was turning around the firm's global debt markets group, which had lost $1.5 billion in 1998. After he tidied up the group, it posted a $1 billion profit in 2001. Martin was not involved in the firm's deals with Enron. "He had a gift for quickly figuring out where the money-making opportunities were and which people were best suited to meet the challenge," says Jerome P. Kenney, Merrill's vice-chairman.

Many on Wall Street believe Martin was passed over for a more senior position at Merrill as new CEO E. Stanley O'Neal consolidated his power. Still, even Daniel P. Tully, the former CEO of Merrill and a member of Elan's board of directors, advised Martin to stay at Merrill. "I thought he had a bright future there," Tully says. Martin says he was bored, though, and wanted to run his own company. When a consultant suggested he apply for the position at Elan, he was intrigued. "Here was this company that was once worth $20 billion. But it has been hit with these major financial issues," he says. "I couldn't pass it up."

Martin has promised to simplify Elan's balance sheet, unravel most of the partnerships, and communicate more openly with analysts. At this point, Merrill is not providing any financial advice to Elan. Since he was appointed in early January, Elan's stock price has increased 22%--which brings it to about $3.50. At its peak in 2001, the stock went for some $60.

As for the company's science, few were calling it great last year. Elan has been reeling from disappointing drug sales and research results. Its revenues fell 21% in 2002, to $1.5 billion, and it reported a $2.4 billion loss. The company, which expects product revenues of about $400 million to $500 million this year, says it likely won't make any money until 2005. Given these dire circumstances, Elan's board could hardly wait for a new CEO to launch a recovery plan. It decided to focus Elan's development efforts in just three areas: neurology, pain, and autoimmune disease. In the past six months, Elan has raised more than $1.5 billion by selling off six lucrative product lines as well as its diagnostics business. It shuttered 12 of its 25 facilities worldwide and cut staff from 4,700 to 2,900.

Martin hasn't deviated from the program. He'll soon be under pressure to capitalize on Elan's most promising drugs: This year, it plans to file for Food & Drug Administration approval of the pain medication Prialt and Antegren, a treatment for Crohn's disease, an intestinal condition. Both would enter competitive U.S. markets. Elan is also testing Antegren for multiple sclerosis, which analysts believe could make it a billion-dollar-a-year drug. "It's critical to Elan's survival," Martin says.

For now, though, Martin's main job is to settle in as CEO. At Merrill, co-workers say Martin had a chameleon-like ability to adapt to new situations. When he, with no IT experience, took over the information technology operation, he spent hours interviewing the techies--a routine he's now employing with Elan's scientists. On a recent plane trip, Martin listened intently as Elan chief scientific and medical officer Ivan Lieberburg described Prialt, a synthetic version of the paralyzing venom of a tropical snail. "I said: `How the heck did anyone think of this?"' Martin recalls with a laugh. "I'm amazed at how innovative scientists can be." Martin needs to foster more of that creative thinking in the lab--and not in the financials--if he has any hope of fixing the company.

By Arlene Weintraub in San Diego and Kerry Capell in London

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