EX-99.1 2 d410561dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

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2012 Annual Report


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About Us Elan Corporation, plc is a biotechnology company, headquartered in Ireland, committed to making a difference in the lives of patients and their families by dedicating itself to bringing innovations in science to fill significant unmet medical needs that continue to exist around the world. Elan’s shares trade on the New York and Irish Stock Exchanges. For additional information about Elan, please visit www.elan.com.


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Contents

Tysabri Patients: Worldwide 02

Products and Pipeline 03

Letter from the Chairman 06

CEO Review 08

Operating Review 12

Corporate Responsibility 20

Financial Review 26

Board of Directors and Senior Management 47

Directors’ Report 52

Statement of Directors’ Responsibility 78

Independent Auditor’s Report 79

Financial Statements 81

Notes to the Consolidated Financial Statements 90

U.S. GAAP Information 170

Shareholders’ Information 181

Risk Factors 185

Glossary and Acronyms 196

Elan Corporation, plc 2012 Annual Report 01


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Tysabri Patients: Worldwide Q1 Q2 Q3 2008 Q4 37,600 Q1 Q2 Q3 2009 Q4 48,400 29% increase Q1 Q2 Q3 2010 Q4 57,300 18% increase Q1 Q2 Q3 2011 Q4 64,700 13% increase Q1 Q2 2012 Q3 Q4 72,700 12% increase 02 Elan Corporation, plc 2012 Annual Report


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Products and Pipeline 123 APPROVED DISCOVERY PRECLINICAL PHASE PHASE PHASE FILED MARKETED ALZHEIMER’S DISEASE ELND005 ALZHEIMER’S DISEASE—AGITATION / AGGRESSION ELND005 BIPOLAR DISORDER ELND005 MULTIPLE SCLEROSIS1 (WITH BIOGEN IDEC) Tysabri® (natalizumab) Relapsing Forms of Multiple Sclerosis Tysabri® (natalizumab) Secondary Progressive Multiple Sclerosis Tysabri® Subcutaneous CROHN’S DISEASE1 (WITH BIOGEN IDEC) Tysabri® (natalizumab) (U.S.) ALZHEIMER’S IMMUNOTHERAPHY PROGRAM2 (JOHNSON & JOHNSON AND PFIZER) Bapineuzumab (AAB-001) Monoclonal Antibody Subcutaneous AAB-003 Monoclonal Antibody ACC-001 Immunoconjugate 1 As announced on 6 February 2013, we have entered into an asset purchase agreement with Biogen Idec to dispose of our Tysabri Intellectual Property (IP) and other assets to Biogen Idec. The transaction is expected to close in the second quarter of 2013 subject to the satisfaction of certain conditions. See page 12 for further details. 2 As part of the Johnson & Johnson Transaction in September 2009, Janssen AI acquired substantially all of our assets and rights related to AIP. See page 16 for further details. Elan Corporation, plc 2012 Annual Report 03


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volving business Elan Corporation, plc 2012 Annual Report 05


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Letter from the Chairman Dear Shareholders, We have continued to make substantive progress towards achieving our goal of creating a profitable and sustainable business, taking decisive strategic decisions that will help to transform Elan and its prospects over the coming years. 06 Elan Corporation, plc 2012 Annual Report


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At the end of 2012, we achieved our ambition to closely align the interests of investors with the differing capital requirements and operating characteristics of the business by spinning off our discovery research activities into Prothena Corporation plc, which was successfully listed on the NASDAQ Global Exchange in December. Prothena will focus on the discovery and development of novel therapeutic antibodies for a broad range of diseases under the first class leadership of Dr. Dale Schenk and Dr. Lars Ekman, and we wish them and all our former colleagues at Prothena every success.

The new structure was designed to enable Elan to become a profitable, high growth company by focusing on the continued progress of the current business and late stage development programs while allowing for business diversification across new opportunities and products that are on, or close to, market. The decision to restructure the Tysabri relationship with Biogen Idec announced in February 2013, bringing us $3.25 billion in cash on completion and royalties of up to 25% on future sales of Tysabri, was the logical next step of this strategy.

As a result of the Tysabri Transaction, we have a unique opportunity to reward shareholders. The Board has approved a $1 billion Share Repurchase program which will enable a significant portion of the unlocked value of Tysabri to be returned to shareholders directly. In addition, the Board has approved a cash dividend enabling shareholders to benefit directly from the long term cash flow generated by Tysabri.

This reshaping of the company, combined with a radical turnaround in our balance sheet, puts us in excellent shape to make the most of the many opportunities that lie ahead.

Tysabri continued to underpin our confidence in its future, with a 12% rise in patients on therapy during 2012, helped by the increasing ability to stratify risk around the treatment. With good progress on research into new therapeutic possibilities for Tysabri within and beyond multiple sclerosis, we believe the new relationship with Biogen Idec provides us with maximum strategic flexibility while retaining a significant stake in the future success of the product.

The disappointment for all of us at Elan in 2012, and for so many clinicians, patients and their families around the world, was the failure of the Phase 3 intravenous clinical studies of bapineuzumab in Alzheimer’s disease to meet its co-primary endpoints and the decision by Johnson & Johnson and Pfizer to discontinue the studies. Work on a subcutaneous version of bapineuzumab continues and we can be proud of the significant contribution we have made to the understanding of this challenging and complex disease.

Tysabri continued to underpin our confidence in its future, with a 12% rise in patients on therapy, helped by the increasing ability to stratify risk around the treatment. With good progress on research into new therapeutic possibilities for Tysabri within and beyond multiple sclerosis, we believe the new relationship with Biogen Idec provides us with maximum strategic flexibility while retaining a significant stake in the future success of the product.

The spin-off of Prothena has led to significant restructuring within the company, resulting in the closure of our South San Francisco facility, a reduction in our overall staffing levels and changes to our management and structure. We had two changes in membership of the Board during the year with Hans Peter Hasler stepping down to become our Chief Operating Officer in October and Lars Ekman moving over to Prothena to become its first Chairman in December.

2012 and the early months of 2013 have again been a time of significant change at Elan, demonstrating our constant drive to maximize the assets within the business and to create a strong platform for sustainable and profitable growth. I would like to thank the Board of Directors for their ongoing advice and counsel to me and to management in the past year. I would also like to thank all our employees and you, our shareholders, for your contribution to Elan and for your continuing support as we meet the new challenges ahead.

Robert A. Ingram Chairman

Elan Corporation, plc 2012 Annual Report 07


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CEO Review Dear Shareholders, We have continued to take decisive action that we believe will help us to build on our many strengths, reposition the company and fundamentally change the outlook for Elan in the coming years. 08 Elan Corporation, plc 2012 Annual Report


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A number of key events characterised 2012 and directly and We are now in a position where we indirectly impacted the course of the business – the failure of the Phase 3 intravenous clinical studies of bapineuzumab in have the ability and the resources Alzheimer’s disease to meet their co-primary endpoints and to diversify our business across all the decision by Johnson & Johnson and Pfizer to discontinue the studies; the spin-off of our early drug discovery platform; areas of the industry value chain the advancement of ELND005 into two Phase 2 programs for neuro psychiatry; and the strengthening of our balance with tax efficient capital and cash sheet through refinancing of our debt and the sale of our Alkermes plc shares. flow and to acquire a balanced mix The momentum continued into 2013 as we announced a of revenue-producing, late clinical-transformative change to Elan with the decision to restructure stage and lower risk, scientifically the Tysabri collaboration with Biogen Idec for an upfront cash payment of $3.25 billion plus double digit tiered royalties. promising assets. Taken together, We believe this key strategic initiative will benefit the many we believe these steps will allow patients and clinicians using Tysabri by simplifying the business structure around the therapy; and it enables us to us to build a business which is unlock value to the direct benefit of our shareholders. The unlocking of a portion of the Tysabri asset value provides Elan self-funding and self-sustaining with significant strategic flexibility and a unique opportunity to reset the company along a number of dimensions. and sufficiently diversified to We are now in a position where we have the ability and the deliver long-term growth. resources to diversify our business across all areas of the industry value chain with tax efficient capital and cash flow and to acquire a balanced mix of revenue-producing, late clinical-stage and lower risk, scientifically promising assets. to Alzheimer’s disease during the year. These steps, along Taken together, we believe these steps will allow us to build with the Share Repurchase program and the Tysabri-linked a business which is self-funding and self-sustaining and cash dividend policy, will allow us to add to the shareholder sufficiently diversified to deliver long-term growth. value proposition and investment thesis. Much of what we achieved during 2012 was designed to put A key part of creating the new Elan in the coming years us on this path. In December, we completed the spin-off of will be to remain flexible, creative and to be guided by our our early drug discovery platform into a new listed company, consistent and multi-year approach of dynamic risk/reward Prothena Corporation plc, enabling shareholders to have assessment of business opportunities. investment choice. This, together with the resources from the Tysabri transaction, provides us with the opportunity to create 2012 was a year in which we fundamentally de-risked and an enterprise that will diversify its assets, generate future repositioned the company, completed the spin-off of early income, maintain specific science and clinical translational stage research activities to give them the best opportunity capabilities and leverage the financial and business structure to succeed and move forward, advanced ELND005 into from being an Irish plc. Phase 2 programs, added talent to our management team and significantly strengthened our balance sheet. The Tysabri We further strengthened our management team with the Transaction provides us with capital and long term cash appointment of Hans Peter Hasler as Chief Operating flow for investment, growth and business diversification. Officer. Hans Peter previously served with Biogen Idec in a We can now look forward to building a new Elan on these number of key executive leadership roles from 2001 to 2009, strong foundations which will deliver long-term value for most recently as its Chief Operating Officer responsible for our shareholders. I look forward to updating you on our all commercial operations, business development, medical continued progress. affairs and Biogen International. Looking ahead, we will seek to use our expanded resources to selectively add business assets which will allow for diversification across molecules, therapeutic areas and geographies. We will continue to invest prudently in ELND005, a small molecule that targets both amyloid and Kelly Martin non-amyloid pathologies and which we advanced into Phase Chief Executive Officer 2 studies in bipolar disorder and agitation/aggression linked Elan Corporation, plc 2012 Annual Report 09


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merging opportunities Elan Corporation, plc 2012 Annual Report 11


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Operating Review History & Development of the Company As of 31 December 2012, there Elan Corporation, plc is an Irish public limited company listed on the New York and Irish Stock Exchanges, and were approximately 72,700 headquartered in Dublin, Ireland. Elan was incorporated as a private limited company in Ireland in December 1969 patients on Tysabri therapy and became a public limited company in January 1984. Our worldwide, compared to 64,700 registered office and principal executive offices are located at Treasury Building, Lower Grand Canal Street, Dublin 2, patients as of 31 December 2011, Ireland (Telephone: 353-1-709-4000). which represents an increase of Business Overview We made significant changes to our business during 12%. In 2012, global in-market 2012, including the separation of a substantial portion of net sales of Tysabri exceeded our drug discovery business platform into a new publicly traded company incorporated in Ireland, named Prothena $1.6 billion and constituted Corporation plc (Prothena), and the discontinuation of our remaining early stage research activities. On 6 February approximately 12% of the global 2013, we announced that we had entered into an asset purchase agreement with Biogen Idec Inc. (Biogen Idec) MS market by value. to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri (the Tysabri Transaction). In accordance with the terms of the transaction, upon close, the existing collaboration arrangements with Biogen Idec will be trial, which was published in the New England Journal of terminated and Biogen Idec will pay to us an upfront payment Medicine, showed that after two years, Tysabri treatment of $3.25 billion and continuing royalties on Tysabri in-market led to a 68% relative reduction (p<0.001) in the annualised sales. We will earn a royalty of 12% of global net sales of relapse rate when compared with placebo and reduced Tysabri during the first 12 months following the closing of the relative risk of disability progression by 42% to 54% the transaction. Thereafter, we will earn a royalty of 18% (p<0.001). of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. The Until the Tysabri Transaction closes, we will continue to transaction is expected to close in the second quarter of work with Biogen Idec on Tysabri, as well as the clinical and 2013, subject to the satisfaction of certain conditions. scientific communities, to generate incremental efficacy and Refer to the ‘Financial Review’ section and Note 12 to the safety understanding of Tysabri for the treatment of relapsing Consolidated Financial Statements for a detailed description forms of MS as well as for new potential indications so it may of the Tysabri Transaction. be positioned for the clinical benefit of patients. Tysabri As of 31 December 2012, there were approximately 72,700 Tysabri an alpha-4 integrin inhibitor invented by our scientists patients on Tysabri therapy worldwide, compared to 64,700 and commercially available since 2006, continues to be a patients as of 31 December 2011, which represents an successful therapy for Multiple Sclerosis (MS), a neurological increase of 12%. In 2012, global in-market net sales of disorder involving central nervous system dysfunction among Tysabri exceeded $1.6 billion and constituted approximately adults. 12% of the global MS market by value. Tysabri is approved in more than 65 countries. Tysabri Tysabri increases the risk of progressive multifocal is approved in the United States as a monotherapy for leukoencephalopathy (PML), an opportunistic viral infection relapsing forms of MS, generally for patients who have had of the brain which usually leads to death or severe an inadequate response to, or are unable to tolerate, an disability. Infection by the JC Virus (JCV) is required for alternative MS therapy. In Europe, it is approved for highly the development of PML and patients who are anti-JCV active relapsing-remitting MS (RRMS) in adult patients who antibody positive have a higher risk of developing PML. have failed to respond to beta interferon or have rapidly Recent studies suggest that irrespective of MS treatment, evolving, severe RRMS. In the United States, Tysabri is also approximately 55% of MS patients are anti-JCV antibody indicated for inducing and maintaining clinical response positive. Factors that increase the risk of PML are presence and remission in adult patients with moderately to severely of anti-JCV antibodies, prior immunosuppressant (IS) use, active Crohn’s disease (CD) with evidence of inflammation and longer Tysabri treatment duration. Patients who have who have had an inadequate response to, or are unable to, all three risk factors have the highest risk of developing tolerate conventional CD therapies and inhibitors of TNF- . PML. Other serious adverse events that have occurred in Tysabri has advanced the treatment of MS patients with Tysabri-treated patients include hypersensitivity reactions (for its established efficacy. Data from the Phase 3 AFFIRM 12 Elan Corporation, plc 2012 Annual Report


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Elan Corporation, plc 2012 Annual Report 13


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Operating Review (continued) example, anaphylaxis) and infections, including opportunistic In January 2013, Elan and Biogen and other atypical infections. Clinically significant liver injury has also been reported in the post-marketing setting. Idec announced the submission of In the United States, Europe and in other countries, applications to the FDA and EMA programmes are in place to inform patients of the risks requesting updates to the Tysabri associated with Tysabri therapy, including PML, and to enhance collection of post-marketing data on the safety and labels. The applications request utilisation of Tysabri for MS. an expanded indication that would Tysabri – Secondary Progressive Multiple Sclerosis In January 2012, Elan and Biogen Idec announced a global include first-line use for people Phase 3b study, ASCEND, that is being conducted to living with certain relapsing forms evaluate the effectiveness of Tysabri as a treatment for secondary progressive MS (SPMS). According to the of MS who have tested negative National Multiple Sclerosis Society, approximately half of all people initially diagnosed with RRMS — the most common for antibodies to the JCV. A formal form of MS — will transition to SPMS within 19 years. The trial is currently ongoing and data is expected to be assessment of both applications is available in 2015. ongoing. Tysabri – Label Updates Provide for More Informed “Benefit/Risk” Analysis The submissions of a supplemental Biologic License In January 2012, the U.S. Food and Drug Administration Application (sBLA) to the FDA and a Type II labelling (FDA) approved an update to the Prescribing Information variation application to the EMA are supported by risk for Tysabri to include anti-JCV antibody status as a factor stratification data and a risk algorithm designed by Elan and to help stratify the risk of PML in the Tysabri-treated Biogen Idec that enables physicians and individuals living population. The United States label update followed the with MS to make informed decisions when considering European Commission’s approval of anti-JCV antibody treatment with Tysabri. If approved, a first-line label will status as an additional factor to aid in stratifying patients allow all appropriate anti-JCV antibody negative patients to at risk for developing PML in the Summary of Product consider Tysabri early in the course of treatment, regardless Characteristics for Tysabri in Europe in the second quarter of the level of disease activity or prior treatment history. 2011. The inclusion of anti-JCV antibody status as a risk factor along with prior IS use and treatment duration enables Tysabri – Data Published and Presentations at Medical the identification of differing levels of risk and provides the Meetings information patients and physicians need to make a more Elan and Biogen Idec announced and presented findings at the informed treatment decision. 64th Annual Meeting of the American Academy of Neurology (AAN) from several studies of Tysabri in April 2012. The studies Anti-JCV antibody status is measured using a two-step evaluated the long-term safety and efficacy of Tysabri in the enzyme-linked immunosorbent assay (ELISA) called treatment of MS across the course of disease and impact on STRATIFY JCV developed by Elan and Biogen Idec. The MS-related symptoms such as fatigue. assay detects anti-JCV antibodies in the blood of patients, and is widely commercially available in both the United In May 2012 the New England Journal of Medicine published States and Europe. research from our global risk management programme that updates the risk of Tysabri-associated PML. Together with Tysabri – Regulatory Applications for Approval as First-our collaborator Biogen Idec, we developed the quantitative Line Use in Anti-JCV Antibody Negative Patients with MS risk stratification algorithm to help physicians and people with In January 2013, Elan and Biogen Idec announced the MS have more confidence in their treatment decisions when submission of applications to the FDA and European considering Tysabri. Medicines Agency (EMA) requesting updates to the Tysabri labels. The applications request an expanded indication The analysis looked at three risk factors associated with that would include first-line use for people living with a patient’s PML risk: anti-JCV antibody status; use of IS certain relapsing forms of MS who have tested negative therapy prior to Tysabri initiation; and longer duration of for antibodies to the JCV. A formal assessment of both treatment with Tysabri (especially longer than two years). By applications is ongoing. identifying these risk factors and incorporating them into our risk stratification algorithm, we help physicians and patients to make more informed treatment decisions. 14 Elan Corporation, plc 2012 Annual Report


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At the annual European Committee for Treatment and person’s mood and energy affecting their ability to function. Research in Multiple Sclerosis conference (ECTRIMS) in BPD is a lifetime recurrent disorder with cycles of dramatic October 2012, there were eleven Elan and Biogen Idec mood swings of highs and lows, often with periods of normal sponsored Tysabri presentations. Key data presented moods in between. The periods of highs and lows are called indicated patients on Tysabri experienced reduced episodes of mania and depression. BPD is also associated annualised relapse rates, particularly in those treated with with increased cardiovascular morbidity and suicide risk. The Tysabri early in the course of their disease. Data from a United States and European population of BPD patients is separate study showed improvement of MS-related fatigue estimated at approximately 3.5 million. also significantly improves quality of life in patients treated with Tysabri. Additional data presented supported the utility As a result of the commencement of this Phase 2 trial, we of JCV antibody testing in clinical practice. made an $11.0 million milestone payment to Transition Therapeutics, Inc (Transition) during 2012 in accordance with Until the Tysabri Transaction closes Tysabri will continue the terms of the modification to the Collaboration Agreement to be marketed and distributed by Elan and Biogen Idec. agreed with Transition in December 2010. If the Tysabri Transaction closes, Biogen Idec will have sole authority over and exclusive worldwide rights to the ELND005 – Agitation/Aggression in Alzheimer’s Disease development, manufacturing and commercialisation of In November 2012, we announced that we had enrolled the Tysabri. For full prescribing information and more information first patient in a Phase 2 clinical trial of ELND005 (Study about Tysabri, please visit www.elan.com or www.biogenidec. AG201) for the treatment of agitation/aggression in patients com. Information about Tysabri treatment for MS, including with moderate to severe AD. important safety information, is available at www.Tysabri.com. ELND005 may have symptomatic benefit in neuropsychiatric ELND005 indications based on its potential beneficial effects ELND005 is an orally bioavailable small molecule that on exploratory end-points in AD, coupled with a good is being investigated by us for multiple neuropsychiatric indications on the basis of its proposed dual mechanism of action, which includes ?-amyloid anti-aggregation and In November 2012, we announced regulation of brain myo-inositol levels. An extensive clinical programme of Phase 1 and Phase 2 Alzheimer’s disease that we had enrolled the ?rst (AD) studies has been completed with ELND005 to support clinical development, including the published Phase 2 study patient in a Phase 2 clinical trial of ELND005-AD201 in AD. Study AD201 was a Phase 2 placebo controlled study ELND005 (Study AG201) for the in 351 patients with mild to moderate AD who received treatment of agitation/aggression study drug (250mg twice daily; 1,000mg twice daily; in patients with moderate to severe 2,000mg twice daily; or placebo) for up to 18 months. The two higher dose groups were discontinued in December Alzheimer’s Disease. Approximately 2009. The study did not achieve significance on co-primary outcome measures (neuropsychological test battery (NTB) 90% of Alzheimer’s Disease and Alzheimer’s disease Cooperative Study — Activities of Daily Living (ADCS-ADL)). The 250mg twice daily dose patients develop Neuropsychiatric demonstrated a biological effect on amyloid-beta protein in Symptoms and up to 60% develop the cerebrospinal fluid (CSF) in a subgroup of patients who provided CSF samples. This dose achieved targeted drug agitation/aggression over the levels in the CSF previously associated with therapeutic effects in animal models, and showed some effects on course of their disease. With no clinical endpoints in an exploratory analysis. ELND005 – Bipolar Disorder approved therapies for agitation/ In August 2012, we commenced a Phase 2, placebo-controlled, aggression in most countries, safety and efficacy study of oral ELND005 as an adjunctive including the United States, it is maintenance treatment in patients with Bipolar I Disorder (BPD 1) to delay the time to occurrence of mood episodes. a major treatment challenge in BPD 1 is a severe form of Bipolar Disorder (BPD), also patients with Alzheimer’s Disease. commonly known as manic depressive illness. It is a psychiatric disorder characterised by excessive swings in a Elan Corporation, plc 2012 Annual Report 15


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Operating Review (continued)

understanding of its safety profile from earlier clinical trials in AD. In the Phase 2 AD Study (AD201), ELND005 appeared to decrease the emergence and severity of specific Neuropsychiatric Symptoms (NPS), an effect which seemed to correlate with drug exposure for some symptoms. ELND005 also led to a sustained reduction of brain myo-inositol levels that are thought to play a role in phospho-inositol signaling pathways and synaptic activity.

Symptomatic treatments are important in AD patient care, especially at the advanced stages of disease. As patients advance in their AD, there is an increase in both the prevalence and severity of agitation/aggression. Approximately 90% of AD patients develop NPS and up to 60% develop agitation/aggression over the course of their disease. With no approved therapies for agitation/aggression in most countries, including the United States, it is a major treatment challenge in patients with AD.

Further information about ELND005 clinical trials can be found at www.clinicaltrials.gov.

In October 2012, ELND005 was featured during an oral presentation and on two posters at the Clinical Trials in Alzheimer’s Disease Conference, where new analyses were presented from the Phase 2 AD study which focused on the effects of ELND005 on NPS and agitation/aggression in Alzheimer’s Disease dementia. We believe that the data presented at the CTAD supports the evaluation of ELND005 as a potential treatment of clinically significant agitation/aggression at the more advanced stages of Alzheimer’s Disease.

ELND005 – Data Published/Presented at Medical Meetings

In April 2012, at the AAN, data from the ELND005 Phase 2 trials in mild/moderate AD describing responder analyses and characteristics, along with findings on the effect of ELND005 on the emergence of NPS was presented. At the Alzheimer’s Association International Conference (AAIC) in Vancouver, Canada in July 2012, data from the ELND005 Phase 2 trials in mild/moderate AD describing its effect on both brain scyllo-inositol and myo-inositol levels was presented. In addition, data was also presented on the effects of oral ELND005 on NPS in the Phase 2 trial and the potential role of myo-inositol reduction.

In October 2012, ELND005 was featured during an oral presentation and on two posters at the Clinical Trials in Alzheimer’s Disease Conference (CTAD), where new analyses were presented from the Phase 2 AD study which focused on the effects of ELND005 on NPS and agitation/ aggression in AD dementia. We believe that the data presented at the CTAD supports the evaluation of ELND005 as a potential treatment of clinically significant agitation/ aggression at the more advanced stages of AD.

Alzheimer’s Disease Programmes

Beta Amyloid Immunotherapies (AIP)

Beta amyloid immunotherapy pioneered by our scientists involves the potential treatment of AD by inducing or enhancing the body’s immune response in order to clear toxic species of beta amyloid from the brain. In almost a decade of collaboration with Wyeth (which has been acquired by Pfizer plc (Pfizer)), our scientists developed a series of therapeutic monoclonal antibodies and active vaccination approaches that may have the ability to reduce or clear beta amyloid from the brain. The AIP includes bapineuzumab and ACC-001, as well as other compounds.

As part of the Johnson & Johnson Transaction in 2009, Janssen Alzheimer Immunotherapy (Janssen AI), a subsidiary of Johnson & Johnson, acquired substantially all of our assets and rights related to the AIP collaboration. Under the terms of this transaction, Johnson & Johnson provided an initial $500.0 million funding commitment to Janssen AI and we have a 49.9% shareholding in Janssen AI. Any additional funding in excess of the initial $500.0 million funding commitment is required to be funded equally by Elan and Johnson & Johnson up to a maximum additional commitment of $400.0 million in total.

During 2012, the remaining $57.6 million of the initial $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was fully utilised. We provided funding of $76.9 million to Janssen AI during 2012. In addition, we provided funding of $29.9 million to Janssen AI in January 2013. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. We recorded a net loss of $114.6 million on the Janssen AI investment in associate during 2012, relating

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relating to our share of the losses of Janssen AI. we continued to own 7.75 million ordinary shares of Alkermes On 6 August 2012, Johnson & Johnson and Pfizer plc, representing an approximate 6% equity interest in announced the discontinuation of the Phase 3 development Alkermes plc. of bapineuzumab IV in mild to moderate AD based on the co-primary clinical endpoints not being met in the Janssen On 31 January 2013, we announced that we had agreed AI-led Studies 301 and 302. Studies with other compounds to sell all of our remaining 7.75 million ordinary shares of in earlier stages of development in the AIP portfolio are Alkermes plc. The sale closed on 6 February 2013 and we continuing. A subcutaneous formulation of bapineuzumab is received proceeds of $169.7 million. in Phase 2 testing and a vaccine for AD (ACC-001) is also in Phase 2 testing. Scientific Collaborations and Relationships Trinity College Dublin As a result of the discontinuation of the four Phase In October 2012, we committed to sponsoring a five year 3 bapineuzumab IV studies, we recorded a non-cash clinician scientist post-doctoral research fellowship in impairment charge of $117.3 million on our investment in neuroimaging of neurodegenerative diseases. This fellowship associate in Janssen AI in 2012. was awarded to a specialist in Neurology with a focus on Motor Neuron Disease (MND) and advanced Magnetic Prothena Corporation plc Resonance Imaging (MRI) techniques. The fellowship is On 20 December 2012, we completed the separation of based in Neurology in Trinity College Dublin’s School of the Prothena Business into a new, publicly traded company Medicine, the Trinity College Institute of Neuroscience and incorporated in Ireland. The issued share capital of Prothena the Neurology Department at Beaumont Hospital, Dublin. was admitted to trading on the NASDAQ Global Market on 21 December 2012. The separation of the Prothena Dublin Neurological Institute Business from Elan was completed through a demerger We continue to support the Dublin Neurological Institute under Irish law. The demerger was effected by Elan (DNI) by providing financial support for an initiative which transferring its wholly-owned subsidiaries comprising the supports improved access and quality of neurological patient Prothena Business to Prothena, in exchange for Prothena care in Ireland. The total financial support amount pledged issuing its ordinary shares directly to Elan shareholders, by us to the DNI is €1.5 million. Our commitment to the DNI on a pro rata basis. Each Elan shareholder received one began in November 2011 and is for a five year term. Prothena ordinary share for every 41 Elan ordinary shares or Elan American Depository Shares held. In connection University College Dublin with the separation of the Prothena Business, we made In December 2011, we announced an initiative with a cash contribution to Prothena, which together with the University College Dublin (UCD) to support leadership in the consideration for 18% of Prothena’s outstanding ordinary global biotechnology industry, including the establishment shares, totalled $125.0 million. of Europe’s first interdisciplinary Chair in the “Business of Biotechnology”. The initiative is expected to run for at least Prothena focuses on the discovery and development of seven years and will include a contribution in excess of novel antibodies for the potential treatment of a broad range €3 million from us. of diseases that involve protein misfolding or cell adhesion. Prothena also focuses on the discovery and development BT Young Scientist & Technology Exhibition of potential therapeutic monoclonal antibodies directed In October 2012, we made a two year commitment to the BT specifically to disease-causing proteins. These potential Young Scientist & Technology Exhibition. It is now one of the therapies have a broad range of indications, including AL and largest and longest running science exhibitions of the work of AA forms of amyloidosis, Parkinson’s disease and related school students in Europe. As a public company whose roots synucleinopathies, and novel cell adhesion targets involved in are in science, we recognise the importance of encouraging autoimmune disease and metastatic cancers. students to take science and technology subjects at second and third level education. Alkermes plc In September 2011, Alkermes plc and Elan completed the merger between Alkermes, Inc. and Elan Drug Technologies (EDT). Alkermes, Inc. and EDT were combined under a new holding company incorporated in Ireland named Alkermes plc. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc common stock. In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc and received net proceeds of $380.9 million, after deduction of underwriter and other fees. Following this sale Elan Corporation, plc 2012 Annual Report 17


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nhancing lives Elan Corporation, plc 2012 Annual Report 19


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Corporate Responsibility At Elan we acknowledge the importance and responsibilities In relation to the environment, associated with our activities and we see corporate responsibility as distinct yet interconnected with our we aim to implement, develop commitments to our shareholders, our employees, the environment and to the wider community. and uphold sound and relevant For our patients and shareholders, we are committed to environmental practices; and for advancing therapies that will improve lives, change the the wider community, we make course of disease and provide return on investment. For our employees, we aim to attract, develop and retain the best concerted efforts to engage with and brightest people. In relation to the environment, we aim to implement, develop and uphold sound and relevant and support the local communities. environmental practices; and for the wider community, we make concerted efforts to engage with and support the local communities. Our Commitments & Aims The Wider Community Our Patients & Shareholders • Engage • Improve Lives • Support • Change the Course of Disease • Contribute • Provide Return on Investment The Environment Our Employees • Implement • Attract • Develop • Develop • Uphold Sound • Retain the Best and Brightest Environmental Practices 20 Elan Corporation, plc 2012 Annual Report


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Our Patients & Shareholders

Since our last Corporate Responsibility report we have made significant changes to our business; including the separation of a substantial portion of our drug discovery business into a new publicly traded company; the discontinuation of our remaining early stage research activities; and the recent announcement, on 6 February 2013, that we have agreed to restructure our Tysabri collaboration with Biogen Idec.

Further information on our Tysabri collaboration with Biogen Idec; our lead development programme, ELND005, and its role in the potential treatment of BPD and Agitation/ Aggression in AD; and on the Prothena demerger can be found in the Operating Review on pages 12 to 17 of this annual report.

Our Employees

Similar to other knowledge driven businesses, our achievements are dependent on our people. Our aim in this regard is to attract, develop and retain the brightest and best people in all areas of our business.

The changes in our employee base reflect the substantial changes to our organisation in recent years. At the end of 2012, we had 245 employees worldwide (2011: 412 employees), of whom 86 (2011: 226 employees) were engaged in research and development activities and the remainder were involved in other corporate functions.

No. of Employees 2012 and 2011

R&D

General Commercial

YE 2011 YE 2010

86

159

226

186

Employee Engagement

We recognise the importance of good communication and transparency and the vital role this has to play in times of change. We aim to keep our employees informed and updated on the events affecting them, the company and the wider community. To do this we utilise multiple channels of communication, including Global Employee Communication emails, conference calls and face-to-face meetings.

We are committed to communication as a two way process and we offer multiple formal and informal communication channels where employees can report issues affecting them, the company or the wider society to management and these reports can be made anonymously. These channels include our toll-free Compliance Line and Anonymous Web Form. All Compliance Line reports are sent directly to the Office of Compliance, which reports directly to the CEO and has an ancillary reporting relationship to the Audit Committee and the Board of Directors.

Further information on our code of conduct as it applies to employees, directors and contractors is set out in our Directors’ report on page 52 .

We recognise the importance of good communication and greater transparency and the vital role this has to play in times of change. We aim to keep our employees informed and updated on the events affecting them, the company and the wider community. To do this we utilise multiple channels of communication, including Global Employee Communication emails, conference calls and face-to-face meetings.

Elan Corporation, plc 2012 Annual Report 21


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Corporate Responsibility (continued)

Our employee compensation policy is based on a philosophy that emphasises pay-for-performance. Elan’s performance management process feeds into the compensation process and ensures that meritocracy is practised throughout the organisation.

Employee Compensation and Welfare

Our employee compensation policy is based on a philosophy that emphasises pay-for-performance. Elan’s performance management process feeds into the compensation process and ensures that meritocracy is practised throughout the organisation. Alongside basic remuneration packages and cash incentive bonuses, we also offer employees the opportunity to participate in the ownership of Elan through equity-based incentive plans. At a fundamental level, we believe that equity awards encourage alignment between those charged with managing the company, from board level to employees, and the long term interests of our shareholders.

Through our health insurance and retirement benefits, we encourage our employees to safeguard their own health and future and those of their families. Taken together and alongside the more traditional health and safety practices operated throughout the organisation, we are fully committed to ensuring our employees have well-rounded protection for their health and well-being.

As stated above, during 2012 we realigned and restructured our entire enterprise which resulted in a reduction in our overall staffing levels. Being aware of how this impacts our employees, we strive to make this transition as smooth as possible to by providing career transition services and appropriate compensation to those affected.

Employee Health & Safety

We are conscious of our responsibilities and at all times promote a safe and healthy working environment. We are fully committed to the management of all aspects of our business to the highest health and safety standards. In order to achieve this we are committed to continuous improvement of safety management systems and performance.

The Environment

We are committed to responsible environmental practices, to operating in full compliance with all relevant regulatory requirements, and to establishing specific objectives and targets, where appropriate.

In previous years our principal resource consumption was directly related to our Research and Development (R&D) activity levels. However, following the completion of the Prothena demerger and the closure of our South San Francisco site, our carbon footprint has significantly been reduced.

Moving forward into 2013 and recognising our continuing responsibility to operate our business efficiently, we plan to consume energy, recycle and dispose of waste in a relevant and responsible manner. To this end, we keep our waste production and environmental impact under continuous review.

The Wider Community

We strive to make a tangible contribution to the communities in which we operate and to the wider society which supports us. We also recognise the importance of fulfilling our ethical, social and governance responsibilities.

We recognise our responsibility as a public company and are committed to the maintenance of the highest standards of corporate governance. More information on our governance activities can be found in the Directors’ report on pages 52 to 57.

We recognise our responsibility as a public company and are committed to the maintenance of the highest standards of corporate governance. More information on our governance activities can be found in the Directors’ report on pages 52 to 57.

22 Elan Corporation, plc 2012 Annual Report


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Our Commitment to Charitable Organizations

During 2012 and moving forward into 2013, we have provided, through corporate sponsorship and the actions of our employees, support for the following charitable events and organisations:

The ‘MS Walk’ which took place in Golden Gate Park,

San Francisco;

The MS cycling event ‘Waves to Wine’ from San

Francisco to Sonoma;

The ‘Walk to End Alzheimer’s’ along the San Francisco waterfront;

Hurricane Sandy relief efforts supporting the Red Cross in the U.S.;

Barnardos Spirit of Christmas, and The Jack & Jill

Children’s Foundation in Ireland.

As part of our commitment to innovation and scientific education, which we believe will benefit all members of the community; we also supported the Dublin BT Young Scientist & Technology Exhibition in late 2012, through our sponsorship of, and a special award for excellence in, the “Biological and Ecological Sciences” category. The winning project, which featured the use of beetles as an indicator to test the biodiversity of hedgerows, will participate in the 2013 energy, engineering and environmental science fair, I-SWEEEP, which takes place in Houston, Texas in May.

We have made a two year commitment to the BT Young Scientist & Technology Exhibition, which is now one of the largest and longest running science exhibitions of the work of school students in Europe. As a public company whose roots are in science, we recognise the importance of encouraging students to take science and technology subjects at second and third level education.

We also support a culture that encourages employees to give time and effort to their communities. At the corporate level we place a focus on causes that are aligned with our goals and support employees who contribute at a personal and/or local level.

For us, promoting innovation is central to our activities and this extends to our community where we support initiatives in education, science and business.

Conclusion

We hold the fundamental belief that our science has the potential to improve the lives of people living in the community. As in previous years, we continue to see the advocacy and advancement of this science as our ultimate corporate responsibility.

Elan Corporation, plc 2012 Annual Report 23


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24 Elan Corporation, plc 2012 Annual Report


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nd of year financial statements Elan Corporation, plc 2012 Annual Report 25


Financial Review

Introduction

This Annual Report for the year ended 31 December 2012 meets the reporting requirements pursuant to Irish Company law and the listing rules of the Irish Stock Exchange (Listing Rules).

This financial review primarily discusses:

 

 

Current operations;

 

 

The results of the continuing operations of Elan for the year ended 31 December 2012, compared to the year ended 31 December 2011, and the reconciliation of net loss from continuing operations to Adjusted EBITDA loss from continuing operations—non-GAAP measure;

 

 

The results of the discontinued operations of Elan for the year ended 31 December 2012, compared to the year ended 31 December 2011, including the results of operations for the Tysabri, Prothena and EDT businesses, and the reconciliation of net income from discontinued operations to Adjusted EBITDA—non-GAAP measure;

 

 

Liquidity and capital resources;

 

 

Financial risk management; and

 

 

Events after the balance sheet date.

Terms

As used herein, “we”, “our”, “us”, “Elan” and the “Company” refer to Elan Corporation, plc (public limited company) (the Parent Company) and its consolidated subsidiaries (collectively “the Group”), unless the context requires otherwise.

Financial Statements

We prepare our Consolidated Financial Statements contained in this Annual Report in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), and those parts of the Companies Acts, 1963 to 2012 applicable to companies reporting under IFRS. In addition to the Consolidated Financial Statements contained in this Annual Report, we also prepare separate Consolidated Financial Statements on Form 20-F pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The Form 20-F under U.S. GAAP is a separate document from this Annual Report. IFRS differs in certain significant respects from U.S. GAAP. For a discussion of the significant differences between IFRS and U.S. GAAP, please refer to “U.S. GAAP Information”, beginning on page 170 of this Annual Report.

Trademarks

All product names appearing in italics are trademarks of Elan. Non-italicised products are trademarks of other companies.

Current Operations

Elan is an Irish public limited company listed on the Irish and New York Stock Exchanges and headquartered in Dublin, Ireland. We made significant changes to our business during 2012, including the separation of a substantial portion of our drug discovery business platform into a new publicly traded company incorporated in Ireland named Prothena Corporation plc, and the discontinuation of our remaining early stage research activities.

On 6 February 2013, we announced that we entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialisation of Tysabri. In accordance with the terms of the Tysabri Transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first

 

26   Elan Corporation, plc 2012 Annual Report


Financial Review

 

12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. We will recognise a gain on the disposal of the Tysabri business of approximately $3 billion in the 2013 Consolidated Financial Statements.

On 8 March 2013, we provided an update on the Tysabri Transaction. Two material closing conditions in connection with the Tysabri Transaction were the review process under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) in the United States and the review by the Spanish Competition Authority in Europe. The waiting period for the U.S. antitrust review under HSR expired on 8 March 2013. This followed the clearance on 6 March 2013, of the Tysabri Transaction by the Spanish Competition Authority. Consequently, in accordance with the terms of the Asset Purchase Agreement, and assuming satisfaction of the other closing conditions, closing is expected to occur during the second quarter of 2013.

For additional information on our current operations, please refer to the “Operating Review” on pages 12 to17.

Results of Operations for the Years Ended 31 December 2012 and 2011

The selected financial data set forth below is derived from our Consolidated Financial Statements. As a result of the decision to dispose of the Tysabri IP and other assets related to Tysabri, and the separation of the Prothena business into a new, publicly traded company, the results of the Tysabri and Prothena businesses are presented as discontinued operations in the Consolidated Income Statement for the year ended 31 December 2012 and the comparative amounts have been restated to reflect this classification. Following the divestment of the EDT business to Alkermes plc in September 2011, the results of the EDT business were presented as a discontinued operation in the Consolidated Income Statement.

2012 Compared to 2011 (in millions)

 

      2012
$m
    2011
$m
    % increase/
(decrease)
 

Product revenue

     0.2       4.0       (95 )% 

Cost of sales

     0.2       0.6       (67 )% 

Gross profit

           3.4       (100 )% 

Selling, general and administrative expenses

     171.6       114.9       49

Research and development expenses

     195.3       123.5       58

Operating loss

     (366.9     (235.0     56

Interest expense

     55.9       108.5       (48 )% 

Interest income

     (0.6     (0.9     (33 )% 

Investment losses/(gains)

     1.2       (2.6     (146 )% 

Net loss on investments in associates

     235.2       67.7       247

Net charge on debt retirement

     76.1       47.0       62

Distribution in specie—fair value loss

     0.7             100

Net interest and investment gains and losses

     368.5       219.7       68

Loss before tax

     (735.4     (454.7     62

Income tax (benefit)/expense

     (371.5     13.2       (2914 )% 

Net loss from continuing operations

     (363.9     (467.9     (22 )% 

Discontinued operations

      

Net income from discontinued operations (net of tax)

     248.6       997.7       (75 )% 

Net (loss)/income

     (115.3     529.8       (122 )% 

 

Elan Corporation, plc 2012 Annual Report     27   


Continuing Operations

Total Revenue

Revenue can be analysed as follows:

 

      2012
$m
    2011
$m
     % increase/
(decrease)
 

Product revenue:

       

Royalties

     0.7       2.7        (74 )% 

Azactam

     (0.5     0.9        (156 )% 

Maxipime

           0.4        (100 )% 

Total revenue

     0.2       4.0        (95 )% 

Royalties of $0.7 million (2011: $2.7 million) relate to legacy products previously owned by us.

We ceased distributing Azactam and Maxipime in 2010. The revenue and adjustments for Azactam and Maxipime in 2012 and 2011 relates to adjustments to discounts and allowances associated with sales prior to the cessation of distribution.

Selling, General and Administrative Expenses

Total selling, general and administrative (SG&A) expenses increased 49% to $171.6 million in 2012 from $114.9 million in 2011. Included within SG&A expenses were other charges of $57.6 million (2011: $7.8 million), as described below.

Excluding other charges, SG&A expenses increased 6% to $114.0 million in 2012 from $107.1 million in 2011. The increase is primarily as a result of higher share-based compensation expense in 2012.

Research and Development Expenses

Total R&D expenses increased 58% to $195.3 million in 2012 from $123.5 million in 2011. Included within R&D expenses were other charges of $100.3 million (2011: $16.7 million), as described below.

Excluding other charges, R&D expenses decreased 11% to $95.0 million in 2012, compared to $106.8 million in 2011. The decrease is primarily as a result of the cessation of our early stage research activities during the fourth quarter of 2012.

Other Charges

The principal items classified as other charges include severance, restructuring and other costs, facilities and other asset impairment charges and the Cambridge collaboration termination charge. We believe that disclosure of significant other charges is meaningful because it provides additional information in relation to analysing certain items.

Included within cost of sales, SG&A expenses and R&D expenses from continuing operations were total other charges of $157.9 million for 2012 and $24.3 million for 2011 consisting of the following:

2012

 

      Cost of Sales
$m
     SG&A
$m
     R&D
$m
     Total
$m
 

(a) Facilities and other asset impairment charges

            39.6        67.9        107.5  

(b) Severance, restructuring and other costs

            18.0        24.4        42.4  

(c) Cambridge collaboration termination charge

                   8.0        8.0  

Total other net charges

            57.6        100.3        157.9  

 

28   Elan Corporation, plc 2012 Annual Report


Financial Review

 

2011

 

      Cost of Sales
$m
    SG&A
$m
     R&D
$m
     Total
$m
 

(a) Facilities and other asset impairment charges

           2.6        12.9        15.5  

(b) Severance, restructuring and other costs

     (0.2     5.2        3.8        8.8  

Total other net charges

           7.8        16.7        24.3  

 

(a) Facilities and other asset impairment charges

During 2012, we incurred facilities and other asset impairment charges of $107.5 million, which is primarily comprised of asset impairment charges of $66.1 million and lease termination charges of $34.6 million relating to the planned closure of the South San Francisco facility following the separation of the Prothena Business and cessation of our remaining early stage research activities. We also incurred an additional onerous lease charge of $6.4 million relating to EDT’s King of Prussia, Pennsylvania site which closed in 2011, due to a reassessment of the probable sub-lease income to be achieved over the remaining term of the lease.

During 2011, we incurred facilities and other asset impairment charges of $15.5 million, which included asset impairment charges of $3.6 million and lease charges of $11.9 million relating to the consolidation of our facilities in South San Francisco and the closure of EDT’s King of Prussia, Pennsylvania site.

 

(b) Severance, restructuring and other costs

During 2012, we incurred severance and restructuring charges of $42.4 million, principally relating to the planned closure of the South San Francisco facility and associated reduction in headcount following the separation of the Prothena Business and cessation of our remaining early stage research activities.

During 2011, we incurred severance, restructuring and other costs of $8.8 million, principally relating to a realignment and restructuring of our R&D organisation and reduction of related support activities as well as the reduction in our general and administrative (G&A) activities following the divestment of the EDT business.

 

(c) Cambridge collaboration termination charge

Following the cessation of our early stage research activities, we terminated our Collaboration Agreement with the University of Cambridge and incurred a charge of $8.0 million. We entered into the collaboration with the University of Cambridge in November 2011 to establish a centre of research innovation.

Interest Expense

Total interest expense was $55.9 million in 2012 and $108.5 million in 2011.

The decrease of 48% in the interest expense in 2012 compared to 2011 is primarily due to debt refinancing transactions in 2012 and 2011. During 2012 and 2011, we repaid or refinanced $1.3 billion in debt as follows:

 

      2012
$m
    2011
$m
    Total
$m
 

2013 Floating Rate Notes

           (10.5     (10.5

2013 Fixed Rate Notes

           (449.5     (449.5

2016 Notes issued October 2009

     (472.1     (152.9     (625.0

2016 Notes issued August 2010

     (152.4     (47.6     (200.0

Total aggregate principal amount of debt redeemed

     (624.5     (660.5     (1,285.0

6.25% Notes

     600.0             600.0  

Total aggregate principal amount of debt issued

     600.0             600.0  

Net reduction in total aggregate principal amount of debt

     (24.5     (660.5     (685.0

 

Elan Corporation, plc 2012 Annual Report     29   


Investment Gains and Losses

Net investment losses were $1.2 million in 2012, compared to a $2.6 million gain in 2011. The net investment losses in 2012 relate to an impairment of our quoted equity securities. The net investment gains in 2011 are primarily related to the disposal of investment securities.

Net Loss on Investments in Associates

The net loss on investments in associates for the years ended 31 December consisted of the following:

 

      2012
$m
     2011
$m
 

Share of net loss on Janssen AI investment in associate

     114.6        65.0  

Impairment of Janssen AI investment in associate

     117.3         

Share of net loss on Proteostasis investment in associate

     3.3        2.7  

Total

     235.2        67.7  

Janssen AI

In September 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, acquired substantially all of the assets and rights related to our AIP collaboration with Wyeth (which has been acquired by Pfizer). In consideration for the transfer of these assets and rights, we received a 49.9% equity interest in Janssen AI. In general, Elan is entitled to a 49.9% share of all net profits generated by Janssen AI beginning from the date Janssen AI becomes net profitable and certain royalty payments upon the commercialisation of products under the AIP collaboration. Johnson & Johnson also committed to fund up to $500.0 million towards the further development and commercialisation of the AIP to the extent the funding is required by the collaboration. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. If we fail to provide our share of the $400.0 million commitment or any additional funding that is required for the development of the AIP, and if Johnson & Johnson or a third party elects to fund such an amount, our interest in Janssen AI could, at the option of Johnson & Johnson, be commensurately reduced. We recorded our investment in Janssen AI as an investment in associate and this investment was initially recognised based on the estimated fair value of the investment acquired, representing the fair value of our proportionate 49.9% share of Janssen AI’s AIP assets and our proportionate 49.9% interest in the Johnson & Johnson contingent funding commitment.

During 2012, the remaining balance of the initial $500.0 million funding commitment, which amounted to $57.6 million at 31 December 2011, was spent. Subsequent to the full utilisation of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012.

On 6 August 2012, Johnson & Johnson issued a press release announcing the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease based on the co-primary clinical endpoints not being met in the Janssen AI-led Phase 3 clinical studies. As a result of the discontinuation, we recorded a non-cash impairment charge of $117.3 million on our investment in associate in Janssen AI, representing the full initial estimated value of Elan’s 49.9% share of the Janssen AI AIP assets.

The net loss recorded on the Janssen AI investment in 2012, excluding the non-cash impairment charge of $117.3 million, was $114.6 million (2011: $65.0 million) including a loss of $87.9 million (2011: $Nil) related to our share of the losses of Janssen AI in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment, as Elan

 

30   Elan Corporation, plc 2012 Annual Report


Financial Review

 

is required to share up to an additional $400.0 million of losses equally with Johnson & Johnson. The following table sets forth the computation of the net loss on investment in Janssen AI for the years ended 31 December:

 

      2012
$m
    2011
$m
 

Net loss reported by Janssen AI

     913.7       216.3  

Impairment loss reported by Janssen AI

     (678.9      

Net loss reported by Janssen AI excluding impairment loss

     234.8       216.3  

Elan’s 49.9% proportionate interest of Janssen AI’s reported net loss

     117.2       107.9  

Remeasurement of Elan’s 49.9% proportionate interest in Johnson & Johnson funding commitment

     (2.6     (42.9

Net loss on investment in Janssen AI reported in the Consolidated Income Statement

     114.6       65.0  

As a result of the losses on the investment in associate incurred to date, relating to our share of the losses in excess of the losses funded solely by Johnson & Johnson’s initial $500.0 million funding commitment, and the impairment charge of $117.3 million recognised during 2012, there is an excess of losses over the investment made in Janssen AI at 31 December 2012 of $11.0 million (2011: $Nil). This amount has been recorded as a current liability at 31 December 2012. We provided further funding to Janssen AI of $29.9 million during January 2013, which will be recorded in the 2013 financial statements.

Proteostasis

In May 2011, we invested $20.0 million into equity capital of Proteostasis and became a 24% shareholder. Our $20.0 million equity interest in Proteostasis has been recorded as an investment in associate on the Consolidated Balance Sheet. The net loss recorded on the investment in associate in 2012 was $3.3 million (2011: $2.7 million), representing our share of the net losses of Proteostasis.

Net Charge on Debt Retirement

 

2012

In 2012, we redeemed the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued October 2009 (the 2016 Notes issued October 2009) of $472.1 million and the outstanding aggregate principal amount of the 8.75% Senior Notes due 2016 issued August 2010 (the 2016 Notes issued August 2010) of $152.4 million. We recorded a net charge on debt retirement of $76.1 million in 2012 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $58.0 million and the write-off of unamortised deferred financing costs and original issue discounts of $18.1 million.

 

2011

In 2011, following the divestment of EDT, we redeemed the outstanding aggregate principal amount of the 8.875% Senior Fixed Rate Notes due 2013 (the 2013 Fixed Rate Notes) of $449.5 million and the outstanding aggregate principal amount of the Senior Floating Rate Notes Due 2013 (the 2013 Floating Rate Notes) of $10.5 million. We also redeemed $152.9 million of the outstanding aggregate principal amount of the 2016 Notes issued October 2009 and $47.6 million of the outstanding aggregate principal amount of the 2016 Notes issued August 2010. We recorded a net charge on debt retirement of $47.0 million in 2011 in connection with the redemption of these notes, which was comprised of total early redemption premiums of $33.4 million, the write-off of unamortised deferred financing costs and original issue discounts of $10.2 million and transaction costs of $3.4 million.

For additional information regarding indebtedness, please refer to Note 24 to the Consolidated Financial Statements and to “Debt Facilities” in the Liquidity and Capital Resources section of this Financial Review.

Distribution in specie—fair value loss

The carrying amount of the assets distributed in relation to the Prothena distribution in specie amounted to $105.1 million. The non-cash distribution to shareholders is recognised at the fair value of the assets to be distributed. The fair value of the

 

Elan Corporation, plc 2012 Annual Report     31   


non-cash distribution based on the closing share price of the Prothena shares on 21 December 2012, the date that the issued share capital of Prothena was admitted to trading on the NASDAQ Global Market, was $104.4 million. The difference of $0.7 million between the carrying amount and the fair value of the assets distributed has been recognised as a fair value loss in the Consolidated Income Statement. For further information on the separation of the Prothena business, and the resultant distribution in specie, refer to page 37.

Income Tax Expense/(Benefit)

For a discussion of the benefit/expense from income taxes and adjustments for continuing operations for each of the years ended 31 December 2012 and 2011, refer to page 33.

Adjusted EBITDA from Continuing Operations—Non-GAAP Financial Information

A reconciliation of net loss from continuing operations to Adjusted EBITDA loss from continuing operations is set out in the table below.

 

      2012
$m
    2011
$m
 

Net loss from continuing operations

     (363.9     (467.9

Adjustments:

    

Interest expense

     55.9       108.5  

Interest income

     (0.6     (0.9

Distribution in specie—fair value loss

     0.7        

Income tax (benefit)/expense

     (371.5     13.2  

Depreciation and amortisation

     11.5       14.8  

Amortised fees, net

     0.1        (0.6

EBITDA

     (667.8     (332.9

Share-based compensation expense

     29.3       21.6  

Other charges

     157.9       24.3  

Net loss on investments in associates

     235.2       67.7  

Net charge on debt retirement

     76.1       47.0  

Net investment losses/(gains)

     1.2       (2.6

Adjusted EBITDA from continuing operations

     (168.1     (174.9

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) is a non-GAAP measure of operating results. Elan’s management uses this measure to evaluate our operating performance and it is among the factors considered as a basis for our planning and forecasting for future periods. We believe that Adjusted EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions.

Adjusted EBITDA from continuing operations is defined as net income or loss from continuing operations, net interest expense, fair value loss on distribution in specie, income tax (benefit)/expense, depreciation and amortisation of costs and revenue, share-based compensation, other net charges, net loss on investments in associates, net charge on debt retirement and net investment losses and gains. Adjusted EBITDA from continuing operations is not presented as, and should not be considered an alternative measure of, operating results or cash flows from operations, as determined in accordance with IFRS.

In 2012, we reported Adjusted EBITDA losses from continuing operations of $168.1 million, compared to Adjusted EBITDA losses of $174.9 million in 2011. The improvement reflects lower operating expenses, following the cessation of early stage research activities that were not part of the Prothena separation.

 

32   Elan Corporation, plc 2012 Annual Report


Financial Review

 

Taxation

 

      2012
$m
    2011
$m
    % increase/
(decrease)
 

Continuing Operations

      

Provision for income taxes—continuing operations

     (371.5     13.2       (2914 )% 

Discontinued operations:

      

Tysabri

     65.7       56.4       16

Prothena

     (5.0     (2.5     100

EDT

           4.0       (100 )% 

Provision for income taxes—discontinued operations

     60.7       57.9       5

(Benefit from)/provision for income taxes—total operations

     (310.8     71.1       (537 )% 

The overall tax benefit for 2012 for continuing and discontinued operations was $310.8 million (2011: $71.1 million expense). The tax benefit of $310.8 million for continuing and discontinued operations for 2012 reflects income taxes at standard rates in the jurisdictions in which we operate and includes a deferred tax benefit of $310.9 million. The deferred tax benefit of $310.9 million for continuing and discontinued operations includes an Irish deferred tax benefit of $335.0 million and a U.S. deferred tax expense of $24.1 million. The Irish deferred tax benefit of $335.0 million relates primarily to the recognition of deferred tax assets (DTAs), the benefits of which are expected to be utilised in 2013 in offsetting Irish taxable income arising from the Tysabri divestment. The U.S. deferred tax expense of $24.1 million relates primarily to a reduction in our U.S. DTAs from which we are now unlikely to benefit given the reduced recurring U.S. income in future years, as a result of the Tysabri divestment in 2013.

The 2011 income tax expense for continuing and discontinued operations of $71.1 million reflects federal and state taxes at standard rates in jurisdictions in which we operate, foreign withholding tax and a deferred tax expense of $78.3 million. The 2011 deferred tax expense of $78.3 million includes one-time non cash charges of $60.8 million. Of the $60.8 million one-time charges, $17.9 million is due to changes in the expected recoverability of our federal tax credits following the sale of EDT and $42.9 million arises due to the application of new state tax income attribution rules. Following the introduction of these state tax income attribution rules, we no longer expected to benefit from certain state income tax loss and credit carryforwards prior to their expiry and therefore, reduced our state DTA by this amount.

 

Elan Corporation, plc 2012 Annual Report     33   


Discontinued Operations

Net income from discontinued operations for each of years ended 31 December 2012 and 2011, include the results of operations for the Tysabri, Prothena and EDT businesses, as set out below.

 

      Tysabri      Prothena     EDT     Total  
      2012
$m
     2012
$m
    2012
$m
    2012
$m
 

Revenue

     715.9                    715.9  

Cost of sales

     272.9                    272.9  

Gross profit

     443.0                    443.0  

Selling, general and administrative expenses

     14.4        2.0             16.4  

Research and development expenses

     62.7        31.3             94.0  

Operating profit

     365.9        (33.3           332.6  

Net interest and investment gains and losses:

         

Net gain on disposal of investment in associate

                  (10.1     (10.1

Net loss on investments in associates

                  15.5       15.5  

Net interest and investment gains and losses

                  5.4       5.4  

Net income/(loss) before tax from discontinued operations

     365.9        (33.3     (5.4     327.2  

Income tax expense/(benefit)

     65.7        (5.0           60.7  

Net income/(loss) before net gain on divestment from discontinued operations

     300.2        (28.3     (5.4     266.5  

Net loss on divestment of business

            (17.9           (17.9

Net income/(loss) from discontinued operations (net of tax)

     300.2        (46.2     (5.4     248.6  

 

      Tysabri      Prothena     EDT     Total  
      2011
$m
     2011
$m
    2011
$m
    2011
$m
 

Revenue

     656.7              177.9       834.6  

Cost of sales

     245.4              67.2       312.6  

Gross profit

     411.3              110.7       522.0  

Selling, general and administrative expenses

     17.7        1.6       26.1       45.4  

Research and development expenses

     68.6        23.7       48.9       141.2  

Legal settlement gains

                  (84.5     (84.5

Operating profit

     325.0        (25.3     120.2       419.9  

Net interest and investment gains and losses:

         

Net interest expense

                  0.1       0.1  

Net loss on investment in associate

                  8.2       8.2  

Net interest expense

                  8.3       8.3  

Net income/(loss) before tax from discontinued operations

     325.0        (25.3     111.9       411.6  

Income tax expense/(benefit)

     56.4        (2.5     4.0       57.9  

Net income/(loss) before net gain on divestment from discontinued operations

     268.6        (22.8     107.9       353.7  

Net gain on divestment of EDT business

                  644.0       644.0  

Net income from discontinued operations (net of tax)

     268.6        (22.8     751.9       997.7  

Separate analyses of the results from the Tysabri, Prothena and EDT businesses are presented below.

 

34   Elan Corporation, plc 2012 Annual Report


Financial Review

 

Tysabri

On 6 February 2013, we announced that we had entered into an agreement to dispose of our Tysabri IP and other assets related to Tysabri to Biogen Idec. In accordance with the terms of the transaction, upon consummation of the transaction we will terminate our existing collaboration arrangements with Biogen Idec and will receive an upfront payment of $3.25 billion. In addition, we will receive continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year and a 25% royalty on annual global net sales above $2.0 billion each year. We will recognise a gain on the disposal of the Tysabri business of approximately $3 billion in the 2013 Consolidated Financial Statements. On 8 March 2013, we provided an update on the Tysabri Transaction. Two material closing conditions in connection with the Tysabri Transaction were the review process under the Hart-Scott-Rodino Antitrust Improvements Act in the United States and the review by the Spanish Competition Authority in Europe. The waiting period for the U.S. antitrust review under HSR expired on 8 March 2013. This followed the clearance on 6 March 2013, of the Tysabri Transaction by the Spanish Competition Authority. Consequently, in accordance with the terms of the Asset Purchase Agreement, and assuming satisfaction of the other closing conditions, closing is expected to occur during the second quarter of 2013.

As a result of the decision to dispose of the Tysabri IP and other assets related to Tysabri, the results of Tysabri that are included in the Consolidated Income Statement for the year ended 31 December 2012, are presented as a discontinued operation and the comparative amounts have been restated to reflect this classification.

Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri will continue to be marketed in collaboration with Biogen Idec, and in general, subject to certain limitations, we will continue to share with Biogen Idec most of the development and commercialisation costs for Tysabri. Biogen Idec is responsible for manufacturing the product. In the United States, until the Tysabri Transaction closes, we will continue to 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 manufacturing, plus Biogen Idec’s gross margin on Tysabri, and this cost, together with royalties payable by us to other third parties, is included in cost of sales. Upon consummation of the Tysabri Transaction, Biogen Idec will be responsible for all of the development and commercialisation (including distribution) costs for Tysabri. Outside of the United States, Biogen Idec is responsible for distribution.

Tysabri Revenue

Revenue from the Tysabri business for the years ended 31 December 2012 and 2011 consisted of the following:

 

     

2012

$m

    

2011

$m

     % increase/
(decrease)
 

Tysabri—U.S.

     399.3        339.1        18

Tysabri—ROW

     316.6        317.6        (0 )% 

Total Tysabri

     715.9        656.7        9

Global in-market net sales of Tysabri for the years ended 31 December were as follows:

 

     

2012

$m

    

2011

$m

     % increase  

United States

     886.0        746.5        19

ROW

     745.1        764.1        (2 )% 

Total Tysabri in-market net sales

     1,631.1        1,510.6        8

Tysabri in-market net sales were $1,631.1 million in 2012 and $1,510.6 million in 2011. The increase in 2012 reflects the 13% increase in units sold and higher pricing in the U.S., which were negatively impacted by the $64.0 million revenue reserve in Italy, and unfavourable foreign currency movements, including the 8% decrease in the average dollar-euro exchange rate from 2011 to 2012.

 

Elan Corporation, plc 2012 Annual Report     35   


The revenue reserve for Italy relates to a notification received by Biogen Idec from the Italian National Medicines Agency in 2011, stating that sales of Tysabri had exceeded a limit established by the agency in 2007. Biogen Idec filed an appeal in December 2011 seeking a ruling that Biogen Idec’s interpretation is valid and that the position of the agency is unenforceable. As a result of this dispute, Biogen Idec deferred $64.0 million of revenue recognised on in-market net sales of Tysabri in Italy during 2012, having previously deferred $13.8 million of revenue in Italy during 2011. We expect that Biogen Idec will continue to defer a portion of in-market revenues on future sales of Tysabri for Italy until the matter is resolved. As a consequence of this deferral of in-market net sales by Biogen Idec, we have deferred $30.6 million of revenue in 2012 and $37.5 million to date, reflecting the operating and accounting arrangements between the companies.

As of the end of December 2012, approximately 72,700 patients were on therapy worldwide, including approximately 33,400 commercial patients in the United States and approximately 38,400 commercial patients in the ROW, representing an increase of 12% over the approximately 64,700 (revised) patients who were on therapy at the end of December 2011.

Tysabri was developed in collaboration with Biogen Idec. Until the Tysabri Transaction closes, Tysabri will continue to be marketed in collaboration with Biogen Idec, and in general, subject to certain limitations, we will continue to share with Biogen Idec most of the development and commercialisation costs for Tysabri. Biogen Idec is responsible for manufacturing the product. In the United States, until the Tysabri Transaction closes, we will continue to 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 manufacturing, plus Biogen Idec’s gross margin on Tysabri, and this cost, together with royalties payable by us to other third parties, is included in cost of sales. Upon consummation of the Tysabri Transaction, Biogen Idec will be responsible for all of the development and commercialisation (including distribution) costs for Tysabri. Outside of the United States, Biogen Idec is responsible for distribution.

The Tysabri collaboration is a jointly controlled operation in accordance with International Accounting Standards (IAS) 31, “Interests in Joint Ventures” (IAS 31). A jointly controlled operation is an operation of a joint venture (as defined in IAS 31) that involves the use of the assets and other resources of the venturers rather than establishing a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finances, which represent its own obligations.

Our actual operating profit or loss on Tysabri differs from our share of the collaboration operating profit or loss, because certain Tysabri-related expenses are not shared through the collaboration and certain unique risks are retained by each party. The Tysabri collaboration operating profit or loss is calculated excluding R&D expenses (we record our share of the total Tysabri collaboration R&D expenses within our R&D expenses).

The net Tysabri revenue of $715.9 million in 2012 (2011: $656.7 million) was calculated as follows:

 

     

2012

$m

   

2011

$m

    % increase  

Tysabri in-market sales

     1,631.1       1,510.6       8

Operating expenses incurred by Elan and Biogen Idec (excluding R&D expenses)

     (726.3     (685.3     6

Tysabri collaboration operating profit

     904.8       825.3       10

Elan’s 50% share of Tysabri collaboration operating profit

     452.4       412.6       10

Elan’s directly incurred costs

     263.5       244.1       8

Net Tysabri revenue

     715.9       656.7       9

Tysabri Cost of Sales

Cost of sales increased 11% to $272.9 million in 2012 from $245.4 million in 2011. Included within cost of sales were other charges of $0.5 million (2011: $Nil), as described below. Cost of sales includes $261.1 million of directly incurred collaboration expenses, primarily related to royalty payments, related to Tysabri for 2012 (2011: $233.4 million). The Tysabri gross margin is 62% in 2012 (2011: 63%). The Tysabri gross margin is impacted by the collaboration profit-sharing, commercial spend and operational arrangements.

 

36   Elan Corporation, plc 2012 Annual Report


Financial Review

 

Tysabri Selling, General and Administrative Expenses

Total SG&A expenses decreased 19% to $14.4 million in 2012 from $17.7 million in 2011. Included within SG&A expenses were other charges of $3.0 million (2011: $0.7 million), as described below.

Excluding other charges, SG&A expenses decreased 33% to $11.4 million in 2012 from $17.0 million in 2011. This is primarily as a result of a reduction in our directly incurred legal expenses.

Tysabri Research and Development Expenses

Total R&D expenses decreased 9% to $62.7 million in 2012 from $68.6 million in 2011. Included within R&D expenses were other charges of $0.7 million (2011: $0.9 million), as described below.

Excluding other charges, R&D expenses decreased 8% to $62.0 million in 2012, compared to $67.7 million in 2011, reflecting the lower Tysabri R&D expenses incurred by us during 2012.

Tysabri Other Net Charges

Other net charges related to the Tysabri business of $4.2 million in 2012 (2011: $1.6 million) were incurred as a result of the planned closure of the South San Francisco facility and the associated reduction in headcount. These charges included $0.5 million (2011: $Nil) recorded in cost of sales, $3.0 million (2011: $0.7 million) recorded in SG&A expenses and $0.7 million (2011: $0.9 million) recorded in R&D expenses.

Tysabri Provision for Income Taxes

For a discussion of the provision for income taxes for discontinued operations for the years ended 31 December 2012 and 2011, refer to page 33.

Prothena

On 20 December 2012, we completed the separation of the Prothena Business into a new, publicly traded company incorporated in Ireland. The issued share capital of Prothena was admitted to trading on the NASDAQ Global Market on 21 December 2012. Prothena focuses on the discovery and development of novel antibodies for the potential treatment of a broad range of diseases that involve protein misfolding or cell adhesion. The separation of the Prothena Business from Elan was completed through a demerger under Irish law. The demerger was effected by Elan transferring our wholly-owned subsidiaries comprising the Prothena Business to Prothena, in exchange for Prothena issuing Prothena ordinary shares directly to Elan shareholders, on a pro rata basis. Prothena’s issuance of its outstanding shares constituted a deemed in specie distribution (a distribution of non-cash assets) by Elan to Elan shareholders. Each Elan shareholder received one Prothena ordinary share for every 41 Elan ordinary shares or Elan American Depositary Shares (ADSs) held.

Immediately following the separation of the Prothena Business, a wholly owned subsidiary of Elan subscribed for 3.2 million newly-issued ordinary shares of Prothena, representing 18% of the outstanding ordinary shares of Prothena. This investment was recorded as an available for sale investment on the Consolidated Balance Sheet at an initial fair value of $22.9 million. In connection with the separation of the Prothena Business, we made a cash distribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totalled $125.0 million.

The financial results of the Prothena Business included in the Consolidated Income Statement for the year ended 31 December 2012 are presented as a discontinued operation and the comparative amounts have been restated to reflect this classification.

Prothena Selling, General and Administrative Expenses

SG&A expenses were $2.0 million for the period to 20 December 2012 and $1.6 million in 2011. The increase in SG&A expenses in 2012, compared to 2011, reflected the higher SG&A support costs resulting from the increase in research activities.

 

Elan Corporation, plc 2012 Annual Report     37   


Prothena Research and Development Expenses

R&D expenses were $31.3 million for the period to 20 December 2012 and $23.7 million in 2011. The increase in R&D expenses in 2012, compared to 2011, primarily reflected the increased spend in the NEOD001 amyloidosis programme, as well as higher spending on Prothena’s portfolio of targets including alpha-synuclein for the potential treatment of synucleinopathies, such as Lewy body dementia and Parkinson’s disease, and tau for Alzheimer’s disease and other tauopathies.

Prothena Provision for Income Taxes

For a discussion of the provision for income taxes for discontinued operations in the period to 20 December 2012, and in the year ended 31 December 2011 refer to page 33.

Net Loss on Divestment of Prothena Business

The net loss recorded on the divestment of the Prothena Business in 2012 was $17.9 million, primarily related to transaction costs.

EDT

On 16 September 2011, we announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on 8 September 2011. Alkermes, Inc. and EDT were combined under a new holding company incorporated in Ireland named Alkermes plc. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc common stock. At the close of the transaction, we held approximately 25% of the equity of Alkermes plc, with the existing shareholders of Alkermes, Inc. holding the remaining 75% of the equity. Alkermes plc shares are registered in the United States and trade on the NASDAQ stock market. Our equity interest in Alkermes plc was recorded as an investment in associate on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.

The results of EDT were presented as a discontinued operation in the 2011 Consolidated Income Statement and the comparative amounts have been restated to reflect this classification.

On 13 March 2012, we announced that we had sold 76% (24.15 million) of the ordinary shares that we held in Alkermes plc for net proceeds of $380.9 million after deduction of underwriter and other fees. Following the sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. As we no longer had the ability to exercise significant influence over Alkermes plc after the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc was recorded as an available-for-sale investment with an initial carrying amount of $134.1 million.

On 31 January 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on 6 February 2013 and we received proceeds of $169.7 million. We will recognise a realised gain on the disposal of the Alkermes plc available-for-sale investment of $35.6 million in the 2013 Consolidated Financial Statements.

 

38   Elan Corporation, plc 2012 Annual Report


Financial Review

 

EDT Revenue

Revenue from the EDT business for the period to 16 September 2011, when the EDT business was divested by Elan, was $177.9 million. The EDT revenue can be analysed as follows:

 

     

2011

$m

 

Product revenue:

  

Manufacturing revenue and royalties:

  

TriCor® 145

     35.5  

Focalin® XR/Ritalin® LA

     25.9  

Ampyra®

     22.6  

Verelan®

     18.1  

Naprelan

     5.9  

Other

     60.0  

Total manufacturing revenue and royalties from the EDT business

     168.0  

Contract revenue:

  

Research revenue

     6.0  

Milestone payments

     3.9  

Total contract revenue from the EDT business

     9.9  

Total revenue from the EDT business

     177.9  

Manufacturing revenue and royalties comprised revenue earned from products EDT manufactured for clients and royalties earned principally on sales by clients of products that incorporate EDT’s technologies.

Except as noted above, no other single product accounted for more than 10% of EDT manufacturing revenue and royalties in 2011. The royalties on products not manufactured by EDT were 34% of total manufacturing revenue and royalties in 2011.

Contract revenue was $9.9 million for the period up to 16 September 2011. Contract revenue consisted of research revenue, license fees and milestones arising from R&D activities performed on behalf of third parties.

EDT Cost of Sales

Cost of sales were $67.2 million for the period up to 16 September 2011. Included within cost of sales were other charges of $0.2 million, as described below. Excluding other charges, the gross margin was 62% in 2011.

EDT Other Charges

During 2011, EDT incurred severance, restructuring and other costs of $10.0 million and asset impairment charges of $6.4 million arising from the closure of the King of Prussia, Pennsylvania site in 2011. The severance and restructuring costs of $10.0 million included $0.2 million recorded in cost of sales, $1.6 million recorded in SG&A expenses and $8.2 million recorded in R&D expenses. The entire asset impairment charge of $6.4 million was recorded in R&D expenses.

EDT Legal Settlement Gains

In June 2008, a jury ruled in the U.S. District Court for the District of Delaware that Abraxis Biosciences, Inc. (Abraxis, since acquired by Celgene Corporation) had infringed a patent owned by us in relation to the application of NanoCrystal® technology to Abraxane®. We were awarded $55 million, applying a royalty rate of 6% to sales of Abraxane from 1 January 2005 through 13 June 2008 (the date of the verdict), though the judge had yet to rule on post-trial motions or enter the final order. This award and damages associated with the continuing sales of the Abraxane product were subject to interest. In February 2011, EDT entered into an agreement with Abraxis to settle this litigation. As part of the settlement agreement with Abraxis, EDT received $78.0 million in full and final settlement in March 2011 and recorded a gain of this amount in the income statement. No continuing royalties will be received in respect of Abraxane.

 

Elan Corporation, plc 2012 Annual Report     39   


During 2011, EDT entered into an agreement with Alcon Laboratories, Inc. (Alcon) to settle litigation in relation to the application of NanoCrystal technology. As part of the settlement agreement with Alcon, EDT received $6.5 million in full and final settlement.

EDT Net Gain on Disposal of Investment in Associate

Following the completion of the merger between Alkermes, Inc. and EDT in September 2011, we held approximately 25% of the equity of Alkermes plc (31.9 million shares) at the close of the transaction. Our equity interest in Alkermes plc was recorded as an investment in associate on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.

In March 2012, we sold 76% (24.15 million ordinary shares) of our shareholding in Alkermes plc and received net proceeds of $380.9 million, after deduction of underwriter and other fees. Following this sale we continued to own 7.75 million ordinary shares of Alkermes plc, representing an approximate 6% equity interest in Alkermes plc. Following the sale of the 24.15 million ordinary shares, our remaining equity interest in Alkermes plc ceased to qualify as an investment in associate and was recorded as an available-for-sale investment with an initial carrying value of $134.1 million. The initial fair value of the available-for-sale investment in Alkermes plc was based on the closing Alkermes plc share price on the date significant influence ended of $17.30 per share. The net gain on disposal of $10.1 million was calculated as follows:

 

     

2012

$m

 

Share proceeds

     398.5  

Fair value of available-for-sale investment retained

     134.1  

Carrying value of investment in associate disposed

     (504.9

Transaction costs

     (17.6

Gain on disposal of investment in associate

     10.1  

On 31 January 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on 6 February 2013 and we received proceeds of $169.7 million. We will recognise a realised gain on the disposal of the Alkermes plc available-for-sale investment of $35.6 million in the 2013 Consolidated Financial Statements.

EDT Net Loss on Investment in Associate

For the year ended 31 December 2012, we recorded a net loss on the investment in associate of $12.5 million related to our share of the losses of Alkermes plc in the period prior to the disposal of the 24.15 million ordinary shares of Alkermes plc. We also recorded an expense of $3.0 million related to the amortisation of a basis difference of approximately $300.0 million between the carrying amount of our investment in the associate and our share of the book value of the assets of Alkermes plc. This basis difference principally related to identifiable intangible assets and goodwill attributable to the Alkermes Inc. business prior to its acquisition of EDT.

EDT Taxation

For a discussion of the provision for income taxes for discontinued operations in the period to 16 September 2011, refer to page 33.

Net Gain on Divestment of EDT Business

On 16 September 2011, we announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on 8 September 2011. In connection with the transaction, we received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc., representing approximately 25% of the equity of Alkermes plc. Our equity interest in Alkermes plc was recorded as an investment in associate on the Consolidated Balance Sheet at an initial carrying amount of $528.6 million, based on the closing share price of $16.57 of Alkermes, Inc. shares on the date of the transaction.

 

40   Elan Corporation, plc 2012 Annual Report


Financial Review

 

The net gain recorded on divestment of the EDT business in the 2011 Consolidated Income Statement amounted to $644.0 million, and was calculated as follows:

 

      $m  

Cash consideration

     500.0  

Investment in Alkermes plc

     528.6  

Total consideration

     1,028.6  

Property, plant and equipment

     (202.0

Goodwill and other intangible assets

     (68.6

Working capital and other net assets

     (73.4

Pension plan curtailment gain

     6.3  

Foreign currency translation reserve

     (11.1

Transaction and other costs

     (35.8

Net gain on divestment of business

     644.0  

Adjusted EBITDA from Discontinued Operations—Non-GAAP Financial Information

A reconciliation of Adjusted EBITDA from discontinued operations to net income from discontinued operations is set out in the table below. Refer to page 32 for information on this non-GAAP measure of operating results and our reasons for presenting it.

 

     

2012

$m

   

2011

$m

 

Net income

     248.6       997.7  

Adjustments:

    

Net interest expense

           0.1  

Income tax expense

     60.7       57.9  

Depreciation and amortisation

     15.1       23.5  

EBITDA

     324.4       1,079.2  

Share-based compensation expense

     9.8       11.0  

Net loss on investments in associates

     15.5       8.2  

Net loss/(gain) on divestment of businesses

     17.9       (644.0

Net gain on disposal of investment in associate

     (10.1      

Other charges

     4.2       18.0  

Legal settlement gains

           (84.5

Adjusted EBITDA from discontinued operations

     361.7       387.9  

Liquidity and Capital Resources

Cash and Cash Equivalents, Liquidity and Capital Resources

Our liquid resources and shareholders’ equity at 31 December were as follows:

 

     

2012

$m

    

2011

$m

     % increase/
(decrease)
 

Cash and cash equivalents

     431.3        271.7        59

Restricted cash and cash equivalents—current

     2.6        2.6        0

Available-for-sale investments—current

     167.9        0.3        55867

Total liquid resources

     601.8        274.6        119

Shareholders’ equity

     568.6        815.2        (30 )% 

 

Elan Corporation, plc 2012 Annual Report     41   


At 31 December 2012, our total cash and cash equivalents, current restricted cash and cash equivalents, and current investment securities of $601.8 million (2011: $274.6 million) included $357.7 million (2011: $235.8 million) that was held by foreign subsidiaries in the following jurisdictions:

 

     

2012

$m

    

2011

$m

     % increase/
(decrease)
 

United States

     292.1        172.8        69

Bermuda

     41.1        38.0        8

Other

     24.5        25.0        (2 )% 

Total

     357.7        235.8        52

There are currently no restrictions that would have a material adverse impact on the parent company or consolidated liquidity of Elan in relation to the intercompany transfer of cash held by our foreign subsidiaries.

For additional information on our liquidity and capital management, refer to Note 31 (f) to the Consolidated Financial Statements.

Cash Flows Summary

Continuing and Discontinued Operations:

 

     

2012

$m

   

2011

$m

 

Net cash provided by/(used in) operating activities

     66.3       (111.2

Net cash flows provided by investing activities

     292.2       651.5  

Net cash flows used in financing activities

     (198.8     (691.0

Effect of foreign exchange rate changes

     (0.1     (0.1

Net increase/(decrease) in cash and cash equivalents

     159.6       (150.8

Cash and cash equivalents at beginning of the year

     271.7       422.5  

Cash and cash equivalents at end of the year

     431.3       271.7  

Operating Activities

The components of net cash used in operating activities at 31 December were as follows:

 

     

2012

$m

   

2011

$m

 

Adjusted EBITDA from continuing operations

     (168.1     (174.9

Adjusted EBITDA from discontinued operations

     361.7       387.9  

Net interest and tax

     (52.6     (95.2

Divestment of business—transaction costs

           (34.1

Other net charges

     (94.8     (153.0

Working capital decrease/(increase)

     20.1       (41.9

Net cash provided by/(used in) operating activities

     66.3       (111.2

Net cash provided by operating activities was $66.3 million in 2012 (2011: $111.2 million used).

The improvement in Adjusted EBITDA from continuing operations net cash outflow from a loss of $174.9 million in 2011 to a loss of $168.1 million in 2012 reflects lower operating expenses, following the cessation of early stage research activities that were not part of the Prothena separation. The decrease in Adjusted EBITDA from discontinued operations net cash inflow from $387.9 million in 2011 to $361.7 million in 2012 was primarily due to lower revenues as a result of the EDT divestment in 2011, offset by the continued growth of Tysabri.

 

 

42   Elan Corporation, plc 2012 Annual Report


Financial Review

 

Net interest and tax are discussed further on page 29 for net interest expense and on page 33 for income taxes. The interest and tax expenses within net cash used in operating activities exclude net non-cash credits of $307.8 million in 2012 (2011: $83.6 million of non-cash charges), comprised of net non-cash interest expenses of $3.1 million in 2012 (2011: $5.3 million) and a net non-cash tax credit of $310.9 million (2011: $78.3 million expense).

The divestment of business charge of $34.1 million in 2011 includes the transaction costs and other cash charges related to the divestment of EDT.

The other net charges of $94.8 million in 2012 (2011: $153.0 million) were principally related to the other net charges described on pages 28, 37 and 39; adjusted to exclude non-cash other charges of $72.5 million in 2012 (2011: $11.1 million); and Prothena spin-off transaction costs of $5.2 million. The net cash outflow in 2011 is primarily attributable to the settlement reserve charge outflow of $206.3 million related to the Zonegran settlement that was recognised in 2010 and paid in March 2011, and was partially offset by the receipt of legal settlement gains of $84.5 million during 2011.

The working capital decrease in 2012 of $20.1 million is primarily due to the increase in the restructuring accrual and onerous lease provision related to the planned closure of the South San Francisco facility and reduction in headcount following the separation of the Prothena Business and cessation of the remaining early stage research activities, and the Cambridge Collaboration termination fee of $8.0 million.

The working capital increase in 2011 of $41.9 million is primarily due to expansion of the Tysabri business, an increase in EDT working capital prior to the divestment and a lower debt interest accrual related to the debt retirement transactions during 2011.

Investing Activities

Net cash provided by investing activities was $292.2 million in 2012. The primary component of cash provided by investing activities was the net proceeds of $380.9 million from the sale of our 24.15 million shares held in Alkermes plc. This is offset by funding of $76.9 million provided to Janssen AI during 2012.

Net cash provided by investing activities was $651.5 million in 2011. The primary component of cash provided by investing activities was the cash consideration received from the disposal of the EDT business of $500.0 million, in addition to the decrease in restricted cash balances due to payment of the amount held in escrow in respect of the Zonegran settlement of $203.7 million in March 2011, partially offset by capital expenditures of $38.8 million.

Financing Activities

Net cash used in financing activities of $198.8 million in 2012 was primarily comprised of outflows of $682.5 million related to the debt redemption of the 2016 Notes issued October 2009 and the 2016 Notes issued August 2010 offset by proceeds from the issuance of $600.0 million (net of transaction costs of $12.1 million) of the 6.25% Senior Fixed Rate Notes due 2019 (the 6.25% Notes). The principal amount of debt repaid was $624.5 million and cash debt retirement costs of $58.0 million were incurred upon early redemption of the Notes. In addition, in connection with the separation of the Prothena Business, we made a cash distribution to Prothena, which together with the consideration for 18% of Prothena’s outstanding ordinary shares, totalled $125.0 million.

Net cash used by financing activities of $691.0 million in 2011 was primarily comprised of outflows of $697.3 million related to the debt redemption of the 2013 Fixed Rate Notes and the 2013 Floating Rate Notes and partial redemption of the 2016 Notes issued October 2009 and 2016 Notes issued August 2010. The principal amount of debt repaid was $660.5 million and cash debt retirement costs of $36.8 million were incurred upon early redemption of these notes.

Debt Facilities

At 31 December 2012, we had outstanding debt of $600.0 million in aggregate principal amount, which consisted of the following:

 

      $m  

6.25% Notes

     600.0  

Total

     600.0  

 

Elan Corporation, plc 2012 Annual Report     43   


Our indebtedness could have important consequences to us. For example, it does or could:

 

 

Increase our vulnerability to general adverse economic and industry conditions;

 

 

Require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of our cash flow to fund R&D (including our funding commitments to Janssen AI (for AIP)), working capital, capital expenditures, acquisitions, investments and other general corporate purposes;

 

 

Cause us to elect to redeem our indebtedness at a premium in order to avoid potential debt covenant breaches;

 

 

Limit our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate;

 

 

Place us at a competitive disadvantage compared to our competitors that have less debt; and

 

 

Limit our ability to borrow additional funds.

During 2012, as at 31 December 2012, and, as of the date of filing of this Annual Report, we were not in violation of any of our debt covenants. For additional information regarding our outstanding debt, refer to Note 24 to the Consolidated Financial Statements.

On 22 February 2013, we announced that, upon the closing of the Tysabri Transaction, we would institute a share repurchase programme by utilising $1 billion of the upfront proceeds from the Tysabri Transaction. As stated above, the indenture governing the 6.25% Notes contains certain covenants that restrict or prohibit our ability to engage in or enter into a variety of transactions, including the consummation of the Share Repurchase. Prior to the consummation of the Share Repurchase, we intend to redeem the $600.0 million of outstanding principal amount of our 6.25% Notes. We expect to incur a net charge on debt retirement in the 2013 Consolidated Financial Statements of approximately $120 million in connection with the redemption of these notes, including an early redemption premium and the write-off of unamortised deferred financing costs.

Commitments and Contingencies

For information regarding commitments and contingencies, refer to Note 33 to the Consolidated Financial Statements.

Contractual Obligations

The following table sets out at 31 December 2012, our main contractual obligations due by period for debt principal and interest repayments 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 or future investments in financial assets. As at 31 December 2012, the directors had authorised capital expenditures, which had been contracted for, of $0.1 million (2011: $3.0 million). As at 31 December 2012, the directors had authorised capital expenditures, which had not been contracted for, of $1.7 million (2011: $6.4 million).

 

      Total
$m
     Less than
1 Year
$m
     1-3 Years
$m
     3-5 Years
$m
     More than
5 Years
$m
 

2019 Notes issued October 2012

     600.0                             600.0  

Total debt principal obligations

     600.0                             600.0  

Debt interest payments

     254.9        37.5        75.0        75.0        67.4  

Operating lease obligations

     109.2        21.3        34.5        29.0        24.4  

Total contractual obligations

     964.1        58.8        109.5        104.0        691.8  

On 17 September 2009, Janssen AI, a newly formed subsidiary of Johnson & Johnson, completed the acquisition of substantially all of our assets and rights related to the AIP. In addition, Johnson & Johnson, through its affiliate Janssen Pharmaceutical, invested $885.0 million in exchange for newly issued American Depositary Receipts (ADRs) of Elan, representing 18.4% of our outstanding Ordinary Shares at the time. Johnson & Johnson also committed to fund up to $500.0 million towards the further development and commercialisation of the AIP. Any required additional expenditures in respect of Janssen AI’s obligations under the AIP collaboration in excess of the initial $500.0 million funding commitment is required to be funded by Elan and Johnson & Johnson in proportion to their respective shareholdings up to a maximum

 

44   Elan Corporation, plc 2012 Annual Report


Financial Review

 

additional commitment of $400.0 million in total. In the event that further funding is required beyond the $400.0 million, such funding will be on terms determined by the board of Janssen AI, with Johnson & Johnson and Elan having a right of first offer to provide additional funding. During 2012, the remaining balance of the initial $500.0 million funding commitment, which amounted to $57.6 million at 31 December 2011, was spent. Subsequent to the full utilisation of the initial $500.0 million funding commitment, we provided funding of $76.9 million to Janssen AI during 2012. In addition, we provided funding to Janssen AI of $29.9 million in January 2013, which will be recorded in the 2013 financial statements. Following the provision of this funding in January 2013, our remaining funding commitment to Janssen AI is $93.2 million. The table above does not reflect this funding commitment, which is contingent on the future operations and expenditure of Janssen AI.

In December 2010, we modified our Collaboration Agreement with Transition and, in connection with this modification, Transition elected to exercise its opt-out right under the original agreement and we agreed to pay Transition $9.0 million, which we paid to them in January 2011. Under the modified Collaboration Agreement, Transition was eligible to receive a further $11.0 million payment from us upon the commencement of the next ELND005 clinical trial. This was paid to Transition during 2012 when we commenced a Phase 2 study of oral ELND005 as an adjunctive maintenance treatment of patients with BPD 1. We also commenced a Phase 2 clinical trial of ELND005 during 2012 for the treatment of agitation/aggression in patients with moderate to severe Alzheimer’s disease.

As a consequence of Transition’s decision to exercise its opt-out right, it will no longer fund the development or commercialisation of ELND005 and has relinquished its 30% ownership of ELND005 to us. Consistent with the terms of the original agreement, following its opt-out decision, Transition will be entitled to receive milestone payments of up to $93.0 million, along with tiered royalty payments on net sales of ELND005 ranging in percentage from a high single digit to the mid teens, depending on the level of future sales.

At 31 December 2012, we had commitments to invest $2.0 million (2011: $2.6 million) in healthcare managed funds.

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 our debt as sub-investment grade. None of our debt has a rating trigger that would accelerate the repayment date upon a change in rating.

For information regarding the fair value of our debt, refer to Note 31 to the Consolidated Financial Statements.

Our debt ratings as at 31 December 2012 were as follows:

 

      Standard & Poor’s      Moody’s Investors
Service
 

6.25% Notes

     BB-         Ba3   

Capital Expenditures

We believe that our current and planned research, product development and corporate facilities will adequately meet our current and projected needs. 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.

Financial Risk Management

Our financial risk management objectives and policies and exposure to market risk are outlined in Note 31 to the Consolidated Financial Statements.

Events After the Balance Sheet Date

On 31 January 2013, we announced that we had agreed to sell all of our remaining 7.75 million ordinary shares of Alkermes plc. The sale closed on 6 February 2013 and we received proceeds of $169.7 million. We will recognise a realised gain on the disposal of the Alkermes plc available-for-sale investment of $35.6 million in the 2013 Consolidated Financial Statements.

 

Elan Corporation, plc 2012 Annual Report     45   


On 6 February 2013, we announced that we entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. As a result of this transaction, Biogen Idec will have sole authority over and exclusive worldwide rights to the development, manufacturing and commercialisation of Tysabri. In accordance with the terms of the Tysabri Transaction, upon consummation of the transaction, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. We will recognise a gain on the disposal of the Tysabri business of approximately $3 billion in the 2013 Consolidated Financial Statements.

On 8 March 2013, we provided an update on the Tysabri Transaction. Two material closing conditions in connection with the Tysabri Transaction were the review process under the Hart-Scott-Rodino Antitrust Improvements Act in the United States and the review by the Spanish Competition Authority in Europe. The waiting period for the U.S. antitrust review under HSR expired on 8 March 2013. This followed the clearance on 6 March 2013, of the Tysabri Transaction by the Spanish Competition Authority. Consequently, in accordance with the terms of the Asset Purchase Agreement, and assuming satisfaction of the other closing conditions, closing is expected to occur during the second quarter of 2013.

On 22 February 2013, we announced that, upon the closing of the Tysabri Transaction, we would institute a share repurchase programme by utilising $1 billion of the upfront proceeds from the Tysabri Transaction (the “Share Repurchase”). As announced on 8 March 2013, the Share Repurchase will be effected through a tender offer, which commenced on 11 March 2013, by way of a Dutch Auction. The price range is $11.25 to $13.00. Pursuant to the tender offer, J&E Davy will purchase tendered shares at the lowest price possible that will enable them to purchase up to the aggregate repurchase amount of $1.0 billion. All shares purchased in the tender offer will be purchased at the same price, even if the shareholder tendered at a lower price. In the event that the Share Repurchase is over-subscribed, J&E Davy will purchase less than all of the shares that are tendered at or below the purchase price on a pro rata basis. We will subsequently purchase from J&E Davy all of the shares purchased by them pursuant to the tender offer.

Pursuant to the indenture governing the 6.25% Notes, we are subject to certain covenants that restrict or prohibit our ability to engage in or enter into a variety of transactions, including the consummation of the Share Repurchase. Prior to the consummation of the Share Repurchase, we intend to redeem the $600.0 million of outstanding principal amount of our 6.25% Notes. We expect to incur a net charge on debt retirement in the 2013 Consolidated Financial Statements of approximately $120 million in connection with the redemption of these notes, including an early redemption premium and the write-off of unamortised deferred financing costs.

On 25 February 2013, Royalty Management, LLC (Royalty Pharma) announced that they had made a proposal, on an indicative basis, to make an offer for the entire share capital of the Company of $11 per share. The Elan Board of Directors acknowledged this announcement and noted that the proposal remains an indication of interest, is highly conditional and may or may not lead to an offer being made for the entire issued share capital of the Company. The Board of Directors also noted that any credible proposal which may be made by Royalty Pharma or any other party would be considered by the Company.

On 4 March 2013, we announced the approval by the Board of Directors of a cash dividend programme, whereby a percentage of the Tysabri royalty to be paid to Elan by Biogen Idec in conjunction with the Tysabri Transaction terms set out above, will be paid to shareholders as a dividend. The initial percentage of the Tysabri royalty to be paid out to shareholders as a dividend is 20% of these royalties. We expect to pay these cash dividends to our shareholders in twice-yearly instalments. The first dividend is expected to be paid in the fourth quarter of 2013, subject to the closing of the Tysabri Transaction. Payment of the dividends will be made in accordance with applicable law, including, where applicable, shareholder approval.

 

46   Elan Corporation, plc 2012 Annual Report


Board of Directors and Senior Management

 

Board of Directors and Senior Management

Directors

Robert A. Ingram (70)

 

Position    Date of Appointment     

Tenure as of

31 December 2012

 

Non-Executive Director

     3 December 2010         2 years   

Chairman of the Board

     26 January 2011         1 year 11 months   

Member of the Nominating & Governance Committee (NGC)

     26 January 2011         1 year 11 months   

Mr. Ingram was appointed a director of Elan in December 2010, and assumed the role of chairman effective 26 January 2011. He is currently a general partner of Hatteras Venture Partners, LLC and has served as an advisor to the CEO of GlaxoSmithKline plc since January 2010. Mr. Ingram served as vice chairman pharmaceuticals of GlaxoSmithKline, acting as a special advisor to the corporate executive team from January 2003 until December 2009. He was chief operating officer and president, pharmaceutical operations of GlaxoSmithKline from January 2001 to January 2003. Mr. Ingram was CEO of Glaxo Wellcome plc from 1997 to 2000, and chairman of Glaxo Wellcome Inc. from 1999 to 2000. He is lead director of CREE Inc. and Valeant Pharmaceuticals Inc. and a director of HBM BioVentures AG and Edwards Lifesciences Corporation.

Gary Kennedy (55)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     26 May 2005         7 years 7 months   

Member of the Audit Committee

     9 September 2005         7 years 3 months   

Chairman of the Audit Committee

     24 May 2007         5 years 7 months   

Member of the Leadership, Development & Compensation Committee (LDCC)

     26 August 2009         3 years 4 months   

Mr. Kennedy was appointed a director of Elan in May 2005, and is currently Chairman of Greencore Group plc. Mr. Kennedy is also a director of Friends First Assurance Company, serves as a board member to a number of private companies and was a director of IBRC Limited until February 2013. From May 1997 to December 2005, he was group director, finance and enterprise technology, at Allied Irish Banks, plc (AIB), 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 and is a Fellow of Chartered Accountants Ireland.

Patrick Kennedy (43)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     22 May 2008         4 years 7 months   

Member of the LDCC

     10 September 2008         4 years 3 months   

Chairman of the LDCC

     29 January 2009         3 years 11 months   

Mr. Kennedy was appointed a director of Elan in May 2008. He is currently CEO of Paddy Power plc, an international betting and gaming group, listed on both the London and Irish Stock Exchanges; and is also a director of Bank of Ireland. Mr. Kennedy was previously Chief Financial Officer (CFO) of Greencore Group plc and prior to that worked with McKinsey & Company in both their London and Dublin offices. Mr. Kennedy also previously worked with KPMG’s corporate finance arm, splitting his time between Dublin and the Netherlands. Mr. Kennedy is a graduate of University College Dublin, Trinity College Dublin and a Fellow of Chartered Accountants Ireland.

 

Elan Corporation, plc 2012 Annual Report     47   


Giles Kerr (53)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     13 September 2007         5 years 3 months   

Member of the Audit Committee

     31 January 2008         4 years 11 months   

Member of the NGC

     27 January 2010         2 years 11 months   

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. At present, Mr. Kerr is a member of the board and the chairman of the audit committee of Victrex plc and BTG plc. He is also a director of Isis Innovation Ltd. and a number of other private companies. Previously, Mr. Kerr was the group finance director and CFO of Amersham plc, and prior to that he was a partner with Arthur Andersen in the United Kingdom. Mr. Kerr is a Fellow of the Institute of Chartered Accountants in England and Wales.

G. Kelly Martin (54)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Executive Director & CEO

     4 February 2003         9 years 10 months   

Mr. Martin was appointed a director of Elan in February 2003 following his appointment as president and CEO. Before joining Elan, Mr. Martin spent more than 20 years at Merrill Lynch & Co., Inc., where he held a broad array of operating responsibilities.

Kieran McGowan (69)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     1 December 1998         14 years 1 month   

Lead Independent Director

     1 February 2006         6 years 11 months   

Member of the NGC

     31 May 2002         10 years 7 months   

Chairman of the NGC

     9 September 2005         7 years 3 months   

Mr. McGowan was appointed a director of Elan in December 1998. He is a director Charles Schwab Worldwide Funds plc and was, until May 2012, chairman of CRH plc, as well as sitting on the board of a number of private companies. From 1990 until his retirement in December 1998, Mr. McGowan was chief executive of the Industrial Development Authority of Ireland. He has served as president of the Irish Management Institute and has chaired the Governing Authority at University College Dublin.

Kyran McLaughlin (68)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     30 January 1998         14 years 11 months   

Member of the NGC

     31 May 2002         10 years 7 months   

Mr. McLaughlin was appointed a director of Elan in January 1998 and served as chairman from January 2005 to January 2011. He is deputy chairman at Davy, Ireland’s largest stockbroker firm. He is also a director of Ryanair Holdings plc and is a director of a number of private companies.

 

48   Elan Corporation, plc 2012 Annual Report


Board of Directors and Senior Management

 

Donal O’Connor (62)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     22 May 2008         4 years 7 months   

Member of the Audit Committee

     10 September 2008         4 years 3 months   

Member of the LDCC

     26 May 2010         2 years 7 months   

Mr. O’Connor was appointed a director of Elan in May 2008. He holds directorships in a number of private companies. Prior to joining the Elan Board, Mr. O’Connor was the senior partner of PricewaterhouseCoopers in Ireland from 1995 until 2007. He was also a member of the PricewaterhouseCoopers Global Board and was a former chairman of the Eurofirms Board. Mr. O’Connor is a graduate of University College Dublin and a Fellow of Chartered Accountants Ireland.

Richard Pilnik (56)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     16 July 2009         3 years 5 months   

Mr. Pilnik was elected a director of Elan in July 2009. Mr. Pilnik served in several leadership positions during his 25-year career at Eli Lilly & Company, most recently as group vice president and chief marketing officer, where he was responsible for commercial strategy, market research and medical marketing. Currently, Mr. Pilnik serves as executive vice president and president of Quintiles Commercial Solutions, which is a global pioneer in pharmaceutical services. Mr. Pilnik holds a B.A. from Duke University and an M.B.A. from the Kellogg School of Management at Northwestern University.

Dennis J. Selkoe MD (69)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director(1)

     1 July 1996         16 years 4 months   

Member of the Science and Technology Committee (S&TC)

     26 August 2009         3 years 4 months   

Member of the NGC

     27 January 2010         2 years 11 months   

 

(1) Retired as a director 16 July 2009 and subsequently reappointed on 26 August 2009.

Dr. Selkoe was appointed a director of Elan in July 1996, following the acquisition of Athena Neurosciences, where he served as a director since July 1995. Dr. Selkoe was a scientific founder of Athena Neurosciences. Dr. Selkoe, as a neurologist, is the Vincent and Stella Coates Professor of Neurologic Diseases at Harvard Medical School and co-director of the Centre for Neurologic Diseases at The Brigham and Women’s Hospital.

Andrew von Eschenbach, MD (71)

 

Position    Date of Appointment      Tenure as of
31 December 2012
 

Non-Executive Director

     15 September 2011         1 year 3 months   

Member of the S&TC

     15 September 2011         1 year 3 months   

Dr. von Eschenbach, MD, was appointed a director of Elan in September 2011. He is currently the President of Samaritan Health Initiatives Inc. and a health care policy consultancy. Previously he served as Commissioner of the FDA from 2005 to 2009 and prior to that was Director of the National Cancer Institute and held a number of leadership roles at the University of Texas M.D. Anderson Cancer Centre. He was educated at St. Joseph’s University, Philadelphia and received his M.D. from Georgetown University. His current responsibilities include serving on the boards of Histosonics Inc., the Focused Ultrasound Surgery Foundation, Viamet Pharmaceuticals, the National Comprehensive Cancer Centres Network Foundation, BioTime Inc. and Banyan Biomarkers, Inc. He also serves on the advisory boards of Chugai Pharmaceutical

 

Elan Corporation, plc 2012 Annual Report     49   


International Advisory Council, GE Healthymagination, the Prostate Cancer Foundation and the Scientific Advisory Board of Arrowhead Research Corporation. Dr. von Eschenbach is also a Senior Fellow at the Milken Institute and director of the FDA Project at the Manhattan Institute.

Senior Management

Nigel Clerkin (39)

Executive Vice President & Chief Financial Officer

Mr. Clerkin was named chief financial officer in May 2011. Prior to that, he had served as senior vice president, finance and group controller since January 2004. He previously held a number of financial and strategic planning positions since joining Elan in January 1998. Mr. Clerkin is a Fellow of Chartered Accountants Ireland and a graduate of Queen’s University Belfast.

Guriq Basi, Dr. (56)

Chief Science & Technology Officer

Dr. Basi was appointed chief science and technology officer in October 2012. Before this, Dr. Basi was head of pre-clinical development at Neotope Biosciences, an Elan business unit which specialised in the discovery and development of biologics for the treatment of diseases associated with protein misfolding. Between June 2008 and May 2010, Dr. Basi was vice-president of extramural research at Elan and prior to that was senior director of discovery research and head of molecular biology. Between 1988 and joining Elan in 1992, Dr. Basi was a staff scientist at Protein Design Labs/PDL Biopharma. Dr. Basi undertook postdoctoral research in neurobiology at Stanford University, received his PhD in Biological Chemistry from the University of Illinois at Chicago, and his BA in Biochemistry from The Ohio State University.

Menghis Bairu, Dr. (52)

Chief Medical Officer & Head of Development

Dr. Bairu was appointed executive vice president, chief medical officer and head of global development in 2008. Dr. Bairu served as chief medical officer until September 2010 and then in October 2012 was reappointed to this position. During his time at Elan, Dr. Bairu also served as head of Onclave Therapeutics, an Elan business unit which specialised in developing oncology related assets, and was senior vice president and head of international covering all of Elan’s biopharmaceutical activities outside the United States. Prior to joining Elan, Dr. Bairu worked at Genentech in a number of medical and commercial roles, served on the board of One World Health, a nonprofit drug development company funded by the Bill & Melinda Gates Foundation, and was a director of A-Cube, a privately held pharma start-up. Dr. Bairu also lectures at the University of California San Francisco School of Medicine on global clinical trials’ design, development and conduct.

William F. Daniel (61)

Executive Vice President & 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. From 1990 to 1992, Mr. Daniel was financial director of Xtravision plc. Mr. Daniel is a Fellow of Chartered Accountants Ireland and a graduate of University College Dublin. He is a member of the Council of the Institute of Directors in Ireland.

Fabiana Lacerca-Allen (45)

Chief Compliance Officer

Ms. Lacerca-Allen joined Elan as senior vice president, chief compliance officer in June 2010. Ms. Lacerca-Allen has more than 18 years of compliance and legal experience at Fortune 500 companies and law firms in the United States and in Argentina. She joined Elan from Mylan Laboratories, where she was senior vice president and chief compliance officer and led Mylan’s compliance programmes, including the establishment of policies and compliance processes. Prior to her role

 

50   Elan Corporation, plc 2012 Annual Report


Board of Directors and Senior Management

 

with Mylan, Ms. Lacerca-Allen served as legal compliance director for Bristol-Myers Squibb where she was a member of the executive team for Latin America, Canada and Puerto Rico and led all compliance initiatives in those regions. She has also held significant positions with Microsoft, Merck, Sharpe & Dohme and AT&T Capital.

Hans Peter Hasler (57)

Chief Operating Officer (COO)

Mr. Hasler was appointed a non-executive director of Elan in September 2011 and retired in October 2012 to take up the role of COO. He is the Chairman of HBM Healthcare Investments AG and Director of the Board of Acino, Switzerland. Mr. Hasler was principal of HPH Management GmbH. Previously, Mr. Hasler served with Biogen Idec in a number of key executive leadership roles from 2001 to 2009. Prior to his departure from Biogen Idec, Mr. Hasler served as its chief operating officer responsible for all commercial operations, business development, medical affairs and Biogen International. During his tenure, he served as head of global neurology/cardiovascular business and head of International business overseeing the launch of Tysabri in Europe and the management of Avonex. In addition, Mr. Hasler served as chief marketing officer / head of global strategic marketing with Wyeth Pharmaceuticals.

Grainne McAleese (33)

Group Controller & Principal Accounting Officer

Ms. McAleese was appointed group controller and principal accounting officer of Elan in 2011. Since joining Elan in 2004, Ms. McAleese has worked in a number of roles in the group finance area. Prior to joining Elan, she worked with PricewaterhouseCoopers in New York and KPMG in Dublin. Ms. McAleese is a Certified Public Accountant in the United States, a Fellow of Chartered Accountants Ireland and a graduate of Dublin City University.

Mary Sheahan (40)

Head of Human Resources, IT, Facilities and Portfolio Assessment Management

During 2012, Ms. Sheahan was appointed head of human resources, information technology, facilities and portfolio assessment management. As part of this role Ms. Sheahan also serves as a director on the board of Janssen Alzheimer Immunotherapy. Since joining Elan in 1997, Ms. Sheahan has held a number of commercial, R&D and corporate finance roles in Ireland and the United States. Most recently she was vice president—finance, tax and treasury from 2007 to 2011. Prior to joining Elan, Ms. Sheahan worked in KPMG in Dublin. Ms. Sheahan holds a Commerce degree and a Masters in Accounting from University College Dublin and is a Fellow of Chartered Accountants Ireland.

John Given (43)

General Counsel

Mr. Given was appointed General Counsel of Elan on 1 March 2013. Mr. Given was a senior corporate partner at leading Irish law firm A&L Goodbody. With more than twenty years of private practice experience, including nine as head of M&A with A&L Goodbody, Mr. Given has advised many leading Irish and international companies, including many in the life sciences and healthcare sectors. As Elan’s lead external counsel for over a decade, Mr. Given has advised the Company on all of our corporate activity for many years and has an in-depth understanding of the Company. Mr. Given is a graduate of University College Cork, a solicitor and a member of the Law Society of Ireland.

 

Elan Corporation, plc 2012 Annual Report     51   


Directors’ Report

Introduction

The directors submit their Annual Report, together with the audited financial statements of Elan Corporation, plc, for the year ended 31 December 2012. The Corporate Governance Statement and the reports of the respective committee chairmen, which are set out on pages 58 to 77, form part of this Directors’ Report.

Review of the Business, Key Performance Indicators and Future Developments

Elan Corporation, plc is an Irish public limited company listed on the New York and Irish Stock Exchanges, and headquartered in Dublin, Ireland. Our shares trade on the New York and Irish Stock Exchanges.

We made significant changes to our business during 2012, including the separation of a substantial portion of our drug discovery business platform into a new publicly traded company incorporated in Ireland and the discontinuation of our remaining early stage research activities. On 6 February 2013, we announced that we have entered into an asset purchase agreement with Biogen Idec to transfer to Biogen Idec all Tysabri IP and other assets related to Tysabri. In accordance with the terms of the transaction, upon close, the existing collaboration arrangements with Biogen Idec will be terminated and Biogen Idec will pay to us an upfront payment of $3.25 billion and continuing royalties on Tysabri in-market sales. We will earn a royalty of 12% of global net sales of Tysabri during the first 12 months following the closing of the transaction. Thereafter, we will earn a royalty of 18% of global net sales up to $2.0 billion each year, and a 25% royalty on annual global net sales above $2.0 billion. We will recognise a gain on the disposal of the Tysabri business of approximately $3 billion in the 2013 Consolidated Financial Statements. On 8 March 2013, we provided an update on the Tysabri Transaction. Two material closing conditions in connection with the Tysabri Transaction were the review process under the Hart-Scott-Rodino Antitrust Improvements Act in the United States and the review by the Spanish Competition Authority in Europe. The waiting period for the U.S. antitrust review under HSR expired on 8 March 2013. This followed the clearance on 6 March 2013, of the Tysabri Transaction by the Spanish Competition Authority. Consequently, in accordance with the terms of the Asset Purchase Agreement, and assuming satisfaction of the other closing conditions, closing is expected to occur during the second quarter of 2013.

The Letter from the Chairman and the CEO Review on pages 6 to 9, the Operating Review on pages 12 to 17 and the Financial Review on pages 26 to 46 contain a review of the business and anticipated future developments.

Principal Risks and Uncertainties

Our future operating performance is subject to certain risks and uncertainties. These include, but are not limited to, the following principal items:

 

 

On 25 February 2013, Royalty Pharma announced that they had made a proposal, on an indicative basis, to make an offer for the entire share capital of the Company at $11 per share. The Elan Board of Directors acknowledged this announcement and noted that the proposal remains an indication of interest, is highly conditional and may or may not lead to an offer being made for the entire issued share capital of the Company. The Board of Directors also noted that any credible proposal which may be made by Royalty Pharma or any other party would be considered by the Company. As a result of the proposed offer, we are deemed to be in an “offer period” for the purposes of the Irish Takeover Rules which may restrict our ability to execute our strategy on a timely basis;

 

 

our agreement to dispose of all of the IP and other assets related to Tysabri may not be consummated;

 

 

any negative developments relating to Tysabri, such as safety or efficacy issues (including increased incidence of deaths and cases of PML) would adversely affect us;

 

 

the introduction or greater acceptance of competing products, including biosimilars, or adverse regulatory or legislative developments may reduce our revenues and adversely affect our results of operations;

 

 

if the Tysabri Transaction with Biogen Idec is consummated, we will no longer have any commercialised products and our revenue will continue to be dependent on Tysabri, the development, manufacturing and commercialisation of which will be controlled exclusively by Biogen Idec with no participation by us;

 

52   Elan Corporation, plc 2012 Annual Report


Directors’ Report

 

 

whether we are deemed to be an Investment Company for the purposes of the U.S. Investment Company Act of 1940 or a Passive Foreign Investment Company (PFIC) in accordance with U.S. PFIC Legislation for federal income tax purposes;

 

 

the potential for the successful development and commercialisation or acquisition of additional products as we have no material research or pre-clinical programmes or capabilities;

 

 

whether restrictive covenants in our debt obligations will adversely affect us;

 

 

our dependence on Johnson & Johnson and Pfizer for the development and potential commercialisation of bapineuzumab and any other potential products in the AIP in particular given the announced discontinuation of development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease and the possibility that we will never realise any return upon our economic interest in the AIP collaboration (including on our remaining commitment to fund up to an additional $93.2 million to Janssen AI);

 

 

the expense and success of development activities for ELND0005, including, in particular, whether the Phase 2 clinical trials for ELND005 are successful, whether ELND005 is successfully developed in any indication, and, if so, the speed with which regulatory authorisations and product launch may be achieved;

For further discussion of these items and other risks that may impact our business, please refer to the “Risk Factors” section of this Annual Report. Information on legal proceedings involving Elan is provided in Note 35 to the Consolidated Financial Statements.

Events After the Balance Sheet Date

For information on events after the balance sheet date, please refer to Note 38 to the Consolidated Financial Statements.

Research and Development

During the year ended 31 December 2012, our total expenditures on R&D amounted to $289.3 million, compared to $264.7 million for the year ended 31 December 2011.

Financial Results and Dividends

The results for the year are set out beginning on page 81 of this Annual Report. The directors do not propose the payment of a dividend for the year ended 31 December 2012.

On 4 March 2013, we announced the approval by the Board of Directors of a cash dividend programme, whereby a percentage of the Tysabri royalty to be paid to Elan by Biogen Idec in conjunction with the Tysabri Transaction terms set out above, will be paid to shareholders as a dividend. The initial percentage of the Tysabri royalty to be paid out to shareholders as a dividend is 20% of these royalties. We expect to pay these cash dividends to our shareholders in twice-yearly instalments. The first dividend is expected to be paid in the fourth quarter of 2013, subject to the closing of the Tysabri Transaction. Payment of the dividends will be made in accordance with applicable law, including, where applicable, shareholder approval.

Financial Risk Management

Our financial risk management objectives and policies and exposure to market risk are outlined in Note 31 to the Consolidated Financial Statements.

International Financial Reporting Standards

This Annual Report for the year ended 31 December 2012 is prepared in accordance with IFRS as adopted by the European Union and meets the reporting requirements pursuant to Irish company law and the Irish Stock Exchange Listing Rules. Separately, we also prepare an Annual Report on Form 20-F pursuant to the rules and regulations of the SEC and in accordance with U.S. GAAP, which differ in certain significant respects from IFRS. The Annual Report on Form 20-F under U.S. GAAP is a separate document from this Annual Report. Refer to the “U.S. GAAP Information”, beginning on page 170 for a discussion of the significant differences between IFRS and U.S. GAAP.

 

Elan Corporation, plc 2012 Annual Report     53   


Directors

The names of the directors are shown on pages 47 to 50. Mr. Hasler and Dr. Ekman retired from the board on 1 October 2012 and 7 December 2012, respectively.

Directors’ and Secretary’s Interests

The beneficial interests of those persons who were directors and the secretary of Elan Corporation, plc at 31 December 2012, including their spouses and children under 18 years of age, are shown in the Report of the LDCC on page 66.

Transactions with Directors

There were no transactions with directors during the year ended 31 December 2012 other than as outlined in Note 36 to the Consolidated Financial Statements.

Significant Shareholdings

The following table sets forth disclosure of major shareholdings (in excess of 3%) that have been notified (and not amended or withdrawn) to us as at 14 March 2013, at 31 December 2012 and at 31 December 2011:

As at 14 March 2013:

 

Name of Owner or Identity of Group    No. of
Shares
    Date of
Disclosure(1)
    Percent  of
Issued
Share
Capital(2)
 

Janssen Pharmaceuticals

     107,396,285 (3)      September 2009        18.0

Fidelity Management and Research Company

     58,668,894       March 2013        9.8

Invesco Limited

     53,068,490       November 2012        8.9

Wellington Management

     37,333,409       December 2012 (4)      6.2

Blackrock Inc.

     23,735,433       September 2011        4.0

T. Rowe Price Associates, Inc.

     18,493,407       December 2012 (4)      3.1

Templeton Global Advisors Limited

     18,811,720       February 2013        3.1

All directors and officers as a group (16 persons)

     6,725,174 (5)(6)      March 2013        1.1

As at 31 December 2012:

 

Name of Owner or Identity of Group    No. of
Shares
    Date of
Disclosure(1)
    Percent  of
Issued
Share
Capital(2)
 

Janssen Pharmaceuticals

     107,396,285 (3)      September 2009        18.0

Fidelity Management and Research Company

     77,695,797       November 2012        13.1

Invesco Limited

     53,068,490       November 2012        8.9

Wellington Management

     37,333,409       December 2012 (4)      6.3

Blackrock Inc.

     23,735,433       September 2011        4.0

T. Rowe Price Associates, Inc.

     18,493,407       December 2012 (4)      3.1

All directors and officers as a group (17 persons)

     5,845,383 (5)(6)      December 2012        1.0

 

54   Elan Corporation, plc 2012 Annual Report


Directors’ Report

 

As at 31 December 2011:

 

Name of Owner or Identity of Group    No. of
Shares
    Date of
Disclosure(1)
    Percent  of
Issued
Share
Capital(2)
 

Janssen Pharmaceuticals

     107,396,285 (3)      September 2009        18.2

Fidelity Management and Research Company

     70,728,655       August 2011        12.0

Invesco Limited

     24,110,217       August 2011        4.1

Wellington Management

     37,305,855       December 2011 (4)      6.3

Blackrock Inc.

     23,735,433       September 2011        4.0

All directors and officers as a group (17 persons)

     6,347,415 (5)      December 2011        1.1

 

(1) Since the date of disclosure, the interest of any person listed above in our Ordinary Shares may have increased or decreased. No requirement to notify us of any change would have arisen unless the holding moved up or down through a whole number percentage level.

 

(2) Based on 597.8 million, 594.9 million and 589.3 million Ordinary Shares outstanding on 14 March 2013, 31 December 2012 and 31 December 2011, respectively.

 

(3) These shares were issued as part of the Johnson & Johnson Transaction. Refer to page 30 for additional information.

 

(4) Sourced from SEC filings.

 

(5) Includes 5.9 million, 5.0 million and 5.6 million Ordinary Shares issuable upon exercise of currently exercisable options held by directors and officers as a group as of 14 March 2013, 31 December 2012 and 31 December 2011, respectively.

 

(6) Elan stock options outstanding amounts at close of business on 20 December 2012 were subject to an adjustment in connection with the separation and distribution of the Prothena Business. In line with the terms of our employee equity plans (2006 LTIP, 1996 LTIP and 1999 Stock Option Plan) the number of options outstanding was increased and the corresponding exercise prices decreased to reflect the changes in the Company’s share price across the transaction date. Refer to Note 28 for additional information on the adjustments made in connection with the demerger of the Prothena Business.

Except for these interests, we have not been notified at 14 March 2013, at 31 December 2012 or at 31 December 2011 of any interest of 3% or more of our issued share capital. None of Janssen Pharmaceuticals, Fidelity Management and Research Company LLC, Invesco Limited, Wellington Management Company LLC, Blackrock, Inc., T. Rowe Price Associates, Inc. nor Templeton Global Advisors Limited have voting rights different from other shareholders.

We, to our knowledge, are not directly or indirectly owned or controlled by another entity or by any government. We do not know of any arrangements, the operation of which might result in a change of control of the Company.

Share Capital

A total of 597,822,228 Ordinary Shares of Elan were issued and outstanding at 14 March 2013, of which 3,788 Ordinary Shares were held by holders of record in the United States, excluding shares held in the form of ADRs. 488,973,789 Ordinary Shares were represented by our ADSs, evidenced by ADRs, issued by Citibank, N.A., as depositary, pursuant to a deposit agreement. At 14 March 2013, the number of holders of record of Ordinary Shares was 7,008, which includes 11 holders of record in the United States, and the number of registered holders of ADRs was 2,793. Because certain of these Ordinary Shares and ADRs were held by brokers or other nominees, the number of holders of record or registered holders in the United States is not representative of the number of beneficial holders or of the residence of beneficial holders.

In September 2012, the 1,000 outstanding Executive Shares of 1.25 each and the 21,375 ‘B’ Executive Shares of 0.05 each were fully redeemed at par and cancelled.

For additional information regarding our share capital, refer to Note 27 to the Consolidated Financial Statements.

Accounting Records

The directors believe that they have complied with Section 202 of the Companies Act, 1990 with regard to books of account by employing financial personnel with appropriate expertise and by providing adequate resources to the financial function. The books of account of Elan Corporation, plc are maintained at our office in Treasury Building, Lower Grand Canal Street, Dublin 2, Ireland.

 

 

Elan Corporation, plc 2012 Annual Report     55   


Political Donations

During 2012, there were no political contributions that require disclosure under the Electoral Act, 1997 (2011: $Nil).

Subsidiary Companies

For additional information regarding significant subsidiary undertakings, please refer to Note 40 to the Consolidated Financial Statements.

Corporate Governance

The Corporate Governance Statement on pages 58 to 63 forms part of this Directors’ Report.

We have a secondary listing on the Irish Stock Exchange. For this reason, we are not subject to the same ongoing listing requirements as those which would apply to any Irish company with a primary listing on the Irish Stock Exchange, including the requirement that certain transactions require the approval of shareholders. For further information, shareholders should consult their own financial adviser.

Authority to Purchase Own Shares

At our 2012 AGM, shareholders passed special resolutions which authorise the Company to purchase and sell its own shares. The Company may purchase up to 15% of its own shares at a price in line with the formula approved by shareholders at the AGM. The authority is valid until the earlier of the date of the next AGM or 23 November 2013.

On 22 February 2013, we announced that, upon the closing of the Tysabri Transaction, we would institute a share repurchase programme by utilising $1 billion of the upfront proceeds from the Tysabri Transaction. As announced on 8 March 2013, the Share Repurchase will be effected through a tender offer, which commenced on 11 March 2013, by way of a Dutch Auction. The price range is $11.25 to $13.00. Pursuant to the tender offer, J&E Davy will purchase tendered shares at the lowest price possible that will enable them to purchase up to the aggregate repurchase amount of $1.0 billion. All shares purchased in the tender offer will be purchased at the same price, even if the shareholder tendered at a lower price. In the event that the Share Repurchase is over-subscribed, J&E Davy will purchase less than all of the shares that are tendered at or below the purchase price on a pro rata basis. We will subsequently purchase from J&E Davy all of the shares purchased by them pursuant to the tender offer.

Change of Control Provisions

For information regarding certain change of control provisions of agreements to which we are a party, please refer to page 195 in the “Risk Factors” section of this Annual Report. Details of the change in control provisions included in the employment agreement with our CEO are set forth in the Directors’ Remuneration section of this Directors’ Report. In addition, our equity plans contain change of control provisions which can allow for accelerated vesting of equity awards in the event of a change of control of the Company. Details of the rules concerning the appointment and removal of the directors are set out in the Articles of Association.

There are no provisions in our Memorandum and Articles of Association:

 

 

Delaying or prohibiting a change in control of Elan that operate only with respect to a merger, acquisition or corporate restructuring;

 

 

Discriminating against any existing or prospective holder of shares as a result of such shareholder owning a substantial number of shares; or

 

 

Governing changes in capital, where such provisions are more stringent than those required by law.

We have not received any notifications from shareholders (as shareholders are obliged to do) regarding any agreements between shareholders which might result in restrictions on the transfer of shares.

Information regarding the structure of our share capital is set forth in Note 27 to the Consolidated Financial Statements. Information regarding the provisions contained in our Memorandum and Articles of Association are set forth below.

 

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Directors’ Report

 

Memorandum and Articles of Association

Our Memorandum of Association sets out the objects and powers of the Company. Our Articles of Association detail the rules regarding the internal operation of the Company, including:

 

 

The rights, preferences and dividends attaching to our shares;

 

 

The operation of general meetings, including notice, proxies and voting;

 

 

The rules relating to directors, such as their appointment, retirement, re-election, powers, responsibilities and indemnification; and

 

 

Liquidation rights.

Our Memorandum and Articles of Association may only be amended by special resolution of the shareholders. The rights attaching to the different classes of shares may be varied by special resolution passed at a class meeting of that class of shareholders. The additional issuance of further shares ranking pari passu with, or subordinate to, an existing class shall not, unless specified by the Articles of Association or the conditions of issue of that class of shares, be deemed to be a variation of the special rights attaching to that class of shares.

Auditors

In accordance with Section 160(2) of the Companies Act, 1963, the auditors, KPMG, Chartered Accountants, will continue in office.

On behalf of the board,

 

Robert A. Ingram,

  G. Kelly Martin,

Chairman

  Chief Executive Officer

21 March 2013

 

 

Elan Corporation, plc 2012 Annual Report     57   


Corporate Governance Statement

Policies

In October 2011, we applied to the Irish Stock Exchange (ISE) for the re-classification of the listing of our Ordinary Shares on the Official List of the ISE from a primary listing to a secondary listing and this became effective on 3 November 2011. There was no change to our listing on the New York Stock Exchange (NYSE). Our Ordinary Shares continue to be traded on the main market for listed securities of the ISE but we are not subject to the same ongoing listing requirements as those which would apply to an Irish company with a primary listing on the ISE, including the requirement that certain transactions require the approval of shareholders. In addition, the provisions of the Irish Corporate Governance Annex (the “Irish Annex”) ceased to apply to the Company following the re-classification, however we have voluntarily incorporated the recommendations of the Irish Annex.

We are committed to the adoption and maintenance of the highest standards of corporate governance and compliance and have applied the provisions and principles of the U.K. Corporate Governance Code (the Code) as issued by the Financial Reporting Council (FRC) in June 2010 and adopted by the ISE.

Our corporate governance guidelines (the Guidelines), which have been adopted by the board of directors cover the mission of the board, director responsibilities, board structure (including the roles of the chairman, CEO and the lead independent director, board composition, independent directors, definition of independence, board membership criteria, selection of new directors, time limits and mandatory retirement, board composition and evaluation), leadership development (including formal evaluation of the chairman and CEO, succession planning and director development), board committees, board meeting proceedings, board and independent director access to top management, independent advice and board interaction with institutional investors, research analysts and media.

Our policy is to conduct our business in compliance with all applicable laws, rules and regulations and therefore our employees are expected to perform to the highest standards of ethical conduct, consistent with legal and regulatory requirements. Our Code of Conduct applies to directors, officers and employees and provides guidance on how to fulfil these requirements, how to seek advice and resolve questions about the appropriateness of conduct, and how to report possible violations of our legal obligations or ethical principles. All employees have a mandatory compliance objective, which accounts for 10% of their performance goals and objectives. This is designed to ensure that employees comply with our Code of Conduct and all policies and procedures that govern our daily business activities. Our Corporate Compliance Office manages our corporate compliance programme, which establishes a framework for adherence to applicable laws, rules and regulations and ethical standards, as well as a mechanism for preventing and reporting breaches. An executive-level Corporate Compliance Steering Committee also provides oversight of our compliance activities.

In addition to the general provisions contained in the code of conduct concerning conflicts of interest, the board adopted, in January 2011, a comprehensive Conflicts of Interests Policy for directors, which sets out wide-ranging procedures covering the identification and management of such conflicts.

The Guidelines, the Committee Charters and Code of Conduct are available on our website, www.elan.com. Any amendments to, or waivers from the Code of Conduct, will also be posted to our website. There have been no such waivers.

Board Role and Responsibilities

The board is responsible to the shareholders for ensuring that the Company is appropriately managed and that it achieves its objectives.

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. At board and committee meetings, directors receive regular reports on the Company’s financial position, risk management, key business issues and other material issues. The board held eight scheduled meetings in 2012. In addition, five meetings were held to deal with specific matters as they arose.

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

 

58   Elan Corporation, plc 2012 Annual Report


Corporate Governance Statement

 

shareholders. Procedures are in place whereby directors and committees, in furtherance of their duties, may take independent professional advice, if necessary, at our expense.

Subject to certain limited exceptions, directors may not vote on matters in which they have a material interest. In the absence of an independent quorum, the directors may not vote compensation to themselves or any member of the board of directors. Directors are entitled to remuneration as shall, from time to time, be voted to them by ordinary resolution of the shareholders and to be paid such expenses as may be incurred by them in the course of the performance of their duties as directors. Directors who take on additional committee assignments or otherwise perform additional services for the Company, outside the scope of their ordinary duties as directors, shall be entitled to receive such additional remuneration as the board may determine. The directors may exercise all of the powers of the Company to borrow money. These powers may be amended by special resolution of the shareholders. There is no requirement for a director to hold shares.

The board has delegated authority over certain areas of our activities to a number of standing committees; further information on these committees is described below.

Board Composition

The Company’s Memorandum and Articles of Association provide that the number of directors will be no less than three and no more than fifteen. Currently the board comprises the non-executive chairman, nine other non-executive directors and one executive director. The board considers that the current board size is appropriate and facilitates the work of the board and its committees whilst being small enough to maintain flexibility and to carry out its duties in a timely fashion.

The NGC keep the composition and skills profile of the board and its committees under review and recommends changes where appropriate. The board seeks to ensure that it has an appropriate mix of skills and experience in areas such as science, pharmaceuticals, finance, governance, management and general business amongst others. The board is satisfied that it has an appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their duties and responsibilities effectively. Further information on the work of the NGC is set out in its report on page 77.

Chairman

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.

Lead Independent Director

The chair of the NGC serves as the lead independent director. The lead independent director coordinates, in a lead capacity, the other independent directors and provides ongoing and direct feedback from the directors to the chairman and the CEO. The specific responsibilities of the lead independent director are set out in our Guidelines. Mr. McGowan has served as the lead independent director since 1 February 2006.

 

Board Tenure

 

Under the terms of our Articles of Association, directors serve for a term of three years expiring at the Annual General Meeting (AGM) in the third year following their election at an AGM or as the case may be, their re-election at the AGM. Directors are not required to retire at any set age. Following our adoption of the requirements of the Code, all directors now stand for annual re-election at the AGM each year.

  LOGO

The directors may from time to time appoint any person to be a director either to fill a casual vacancy or as an additional director. A director so appointed shall hold office until the conclusion of the AGM immediately following their appointment, where they shall retire and may offer themselves for election.

 

Elan Corporation, plc 2012 Annual Report     59   


A director retiring at an AGM shall retain office until the close or adjournment of the meeting. No person shall be eligible for election or re-election to the office of director at any General Meeting unless recommended by the directors or proposed by a duly qualified and authorised member within the prescribed time period.

Induction and Development

Directors are provided with appropriate 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 the Company 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.

Independence of Directors

 

Under our Guidelines, at minimum, two-thirds of the board are required to be independent. In addition to the provisions of the Code, we adopted a definition of independence based on the rules of the 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 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.   LOGO

In December 2012, the board considered the independence of each non-executive director, and determined Mr. Ingram, Mr. Gary Kennedy, Mr. Patrick Kennedy, Mr. Kerr, Mr. McGowan, Mr. McLaughlin, Mr. O’Connor, Mr. Pilnik, Dr. Selkoe and Dr. von Eschenbach, who represent in excess of two-thirds of the board, to be independent in character and judgment and that 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, Mr. McGowan and Dr. Selkoe who have served as non-executive directors for in excess of nine years. Additionally, Mr. McLaughlin is deputy chairman of Davy, the Company’s broker and sponsor on the ISE and Dr. Selkoe has an ongoing consultancy agreement with the Company and particulars of both arrangements are set out in Note 36 to the Consolidated Financial Statements. It is the board’s view that each of these non-executive directors discharges their duties in a thoroughly independent manner and constructively and appropriately challenges the executive director and the board. For these reasons, the board considers that they are independent.

Conflicts of Interest

In addition to the general provisions contained in the code of conduct concerning conflicts of interest which apply to all directors, executives and employees of the Company, the board, in January 2011, adopted a comprehensive Conflicts of Interests Policy for directors. This specific policy sets out comprehensive procedures covering the identification and management of such conflicts. The policy covers directors’ personal interests which may conflict with the interests of the Company, interfere with the director’s ability to perform his or her duties and responsibilities to the Company or give rise to a situation where a director may receive an improper personal benefit because of his position. The policy also extends to director’s immediate family.

Where a director considers that they may have a conflict of interest with respect to any matter they must immediately notify this to the chairman of the Audit Committee or, if the chairman of the Audit Committee is the interested director, to the lead independent director. The Audit Committee (excluding, if applicable, the interested director) considers each notification to determine whether a conflict of interest exists. Until the Audit Committee has completed its determination the director will not

 

60   Elan Corporation, plc 2012 Annual Report


Corporate Governance Statement

 

participate in any vote, deliberation or discussion on the potential conflict with any other director or employee of the Company and the director will not be furnished with any board materials relating, directly or indirectly, to the potential conflict.

Board Effectiveness

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 and board committees was conducted during the year by the lead independent director through meetings with each member of the board. The results were presented to the NGC and to the board. The board concluded that it and its committees had operated satisfactorily during the year. Under the Code, the board is required to have an externally facilitated evaluation at least every three years and it is planned to do so during 2013.

Board Committees

During the majority of 2012, the board had four standing committees to assist it in exercising its authority. In December 2012, the board approved the establishment of a new committee, the Transaction Committee (TC). The TC’s role is to assist the board with oversight of future transactions proposed by management, including both acquisitions and disposals. The TC held no formal meetings in 2012. In addition to the TC, the other committees of the board are the Audit Committee, the Leadership, Development & Compensation Committee (LDCC), the Nominating & Governance Committee (NGC) and the Science and Technology Committee (S&TC).

Each of the committees has a charter under which its authority is delegated to it by the board. The charter for each committee is available in the Corporate Governance section of our website, www.elan.com, or from the company secretary on request.

The reports of the Audit Committee, the Leadership, Development & Compensation Committee and the Nominating & Governance Committee are set out on pages 64 to 77.

Board and Board Committee Meetings

The following table shows the number of scheduled board and board committee meetings held and attended by each director and secretary during the year. In addition to regular scheduled board and board committee meetings, a number of other meetings were held to deal with specific matters. If directors are unable to attend a board or board committee meeting they are provided with all the documentation and information relevant to that meeting and are encouraged to discuss the issues arising in that meeting with the chairman, CEO or company secretary.

 

      Board      Audit
Committee
     LDCC      NGC      S&TC  

Directors

              

Robert A. Ingram

     8/8                         3/3           

Lars Ekman(1)

     7/8                                 2/2   

Hans Peter Hasler(2)

     7/7                         3/3           

Gary Kennedy

     7/8         8/8         4/4                   

Patrick Kennedy

     8/8                 4/4                   

Giles Kerr

     8/8         8/8                 3/3           

G. Kelly Martin

     8/8                                   

Kieran McGowan

     8/8                         3/3           

Kyran McLaughlin

     8/8                         3/3           

Donal O’Connor

     8/8         8/8         4/4                   

Richard Pilnik

     7/8                                   

Dennis J. Selkoe

     8/8                         3/3         2/2   

Andrew von Eschenbach

     8/8                                 2/2   

Secretary

              

William F. Daniel

     8/8         8/8         4/4         3/3         2/2   

 

(1) Retired as a director on 7 December 2012

 

(2) Retired as a director on 1 October 2012

 

Elan Corporation, plc 2012 Annual Report     61   


Company Secretary

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 fulfils its role. He is also secretary to the Audit Committee, the LDCC, the NGC, the S&TC and the TC. The company secretary ensures compliance with applicable rules and regulations. The appointment and removal of the company secretary is a matter for the board.

Relations with Shareholders

We communicate regularly with our shareholders throughout the year, specifically following the release of quarterly and annual results, and at the time of major developments. Our website, www.elan.com, is the primary method of communication for the majority of our shareholders. We publish our annual report and accounts, quarterly results, Form 20-F, notice of general meetings and other public announcements on our website. In addition, our AGMs, quarterly conference calls and presentations at healthcare investor conferences are webcast and are available on our website.

The directors consider it important to understand the views of shareholders and, in particular, any issues which concern them. The board periodically receives presentations on investor perceptions.

Our investor relations department, with offices in Ireland and the United States, provides a point of contact for shareholders and full contact details are set out on the investor relations section of our website. Shareholders can also submit an information request through the shareholder services section of our website.

Annual General Meeting

The principal forum for discussion with shareholders is our AGM 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 AGM. 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 AGM 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 Code and applicable regulations, 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. This information is made available on our website following the AGM.

Going Concern

The directors, having made inquiries, including consideration of the factors discussed in the Liquidity and Capital Resources section on page 41 of this Annual Report, believe that the Company has adequate resources to continue in operational existence for the foreseeable future and that it is appropriate to continue to adopt the going concern basis in preparing our Consolidated Financial Statements.

Internal Control

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:

 

 

A clear focus on business objectives is set by the board having considered the risk profile of the Company;

 

 

A formalised risk reporting system, with significant business risks addressed at each board meeting;

 

 

A clearly defined organisational structure under the day-to-day direction of our CEO. Defined lines of responsibility and delegation of authority have been established within which our activities can be planned, executed, controlled and monitored to achieve the strategic objectives that the board has adopted for the Company;

 

 

A comprehensive system for reporting financial results to the board, including a budgeting system with an annual budget approved by the board;

 

 

A system of management and financial reporting, treasury management and project appraisal—the system of reporting covers trading activities, operational issues, financial performance, working capital, cash flow and asset management;

 

62   Elan Corporation, plc 2012 Annual Report


Corporate Governance Statement

 

 

Preparation and issue of financial reports to shareholders and the markets, including the Consolidated Financial Statements, is overseen by the Audit Committee. The Group’s financial reporting process is controlled using documented accounting policies and reporting formats, supplemented by detailed instructions and guidance on reporting requirements. Our processes support the integrity and quality of data by arrangements for segregation of duties. Each reporting entity’s financial information is subject to scrutiny at reporting entity and Group level by senior management. The Group’s financial reports and financial guidance are also reviewed by the Audit Committee of the board in advance of being presented to the full board for their review and approval; and

 

 

To support our system of internal control, we have separate Corporate Compliance and Internal Audit departments. Each of these departments reports periodically to the Audit Committee. The Internal Audit function includes responsibility for the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

In accordance with the revised FRC (Turnbull) guidance for directors on internal control published in October 2005, “Internal Control: Revised Guidance for Directors on the Combined Code”, the board confirms that there is an ongoing process for identifying, evaluating and managing any significant risks faced by the group, that it has been in place for the year under review and up to the date of approval of the financial statements and this process is regularly reviewed. 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 the Consolidated 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.

Compliance Statement

The directors confirm that the Company has complied throughout the year ended 31 December 2012 with the provisions of the Code. We follow a U.S. style compensation system for our senior management and our non-executive directors. As a result, we include the non-executive directors in our equity compensation plans. In accordance with the Code, we sought and received shareholder approval to make certain equity grants to our non-executive directors at our 2004 AGM.

This Corporate Governance Statement forms part of the Directors’ Report.

 

Robert A. Ingram,

  G. Kelly Martin

Chairman

  Chief Executive Officer

21 March 2013

 

 

Elan Corporation, plc 2012 Annual Report     63   


Report of the Audit Committee

The Audit Committee held eight scheduled meetings in 2012. Details of meeting attendance by Audit Committee members are included in the table on page 61. In addition three further meetings were held to deal with specific matters.

Committee Membership

 

Name    Status During 2012  

Gary Kennedy (Chairman)

     Member for the whole period   

Giles Kerr

     Member for the whole period   

Donal O’Connor

     Member for the whole period   

The current members of the Audit Committee are all independent non-executive directors of the Company. The board considers each member to be independent under the Guidelines, the Code and the criteria of the NYSE corporate governance listing standards concerning the composition of Audit Committee.

The board is satisfied that at least one member of the Audit Committee has recent and relevant financial experience. The board has determined that Mr. Kennedy, Mr. Kerr and Mr. O’Connor are Audit Committee financial experts for the purposes of the Sarbanes-Oxley Act of 2002.

Role and Focus

The Audit Committee 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 core responsibilities of the Audit Committee include reviewing and reporting to the board on:

 

 

Matters relating to the periodic financial reporting prepared by the Company;

 

 

The independent auditors’ qualifications and independence;

 

 

The performance of the internal auditor and the corporate compliance functions;

 

 

Compliance with legal and regulatory requirements including the operation of the Company’s Securities Trading Policy and Code of Conduct;

 

 

The Company’s overall framework for internal control over financial reporting and other internal controls and processes; and

 

 

The Company’s overall framework for risk management.

The Audit Committee oversees the maintenance and review of the Company’s Code of Conduct. It has established procedures for the receipt and handling of complaints concerning accounting or audit matters.

The Audit Committee appoints and agrees on the compensation for the independent external auditors subject, in each case, to the approval of the Company’s shareholders at general meeting. It maintains policies and procedures for the pre-approval of all audit services and permitted non-audit services undertaken by the independent external auditor. The principal purpose of these policies and procedures is to ensure that the independence of the independent external auditor is not impaired. The policies and procedures cover three categories of work: audit services, audit-related services and non-audit services. The pre-approval procedures permit certain audit, audit-related and non-audit services to be performed by the independent external auditor during the year subject to fee limits agreed with the Audit Committee in advance. Authority to approve, between Audit Committee meetings, work in excess of the pre-agreed fee limits is delegated to members of the Audit Committee if required. Regular reports to the full Audit Committee are also provided for and, in practice, are a standing agenda item at Audit Committee meetings.

Following the entering into of a Corporate Integrity Agreement between the Company and the Office of Inspector General of the U.S. Department of Health and Human Services, the Audit Committee, on behalf of the board of directors, is responsible for the review and oversight of matters related to compliance with federal healthcare programme requirements, FDA requirements and the obligations of the Corporate Integrity Agreement.

 

64   Elan Corporation, plc 2012 Annual Report


Report of the Audit Committee

 

Activities Undertaken During the Year

The Audit Committee held a number of private meetings without management present with the Company’s general counsel, chief compliance officer and head of internal audit and with the engagement partner from the Company’s independent external auditors. The purpose of these meetings was to facilitate free and open discussions between the Audit Committee members and those individuals separate from the main sessions of the Audit Committee, which were attended by the CFO, the group controller and the Company’s general counsel.

At each regularly scheduled board meeting, the chairman of the Audit Committee reported to the board on the principal matters covered at the preceding Audit Committee meetings. The minutes of all Audit Committee meetings were also circulated to all board members. During 2012, the Audit Committee considered and reviewed various aspects of the Company and its business including, but not limited to the matters referred to below.

 

 

The Company’s financial reports and financial guidance were reviewed and various accounting matters and policies were considered.

 

 

Reports were received from the independent external auditors concerning their audit strategy, the planning and the results of their audit of the financial statements of the Company and from management, the internal audit function and chief compliance office on the effectiveness of the Company’s system of internal controls and, in particular, its internal control over financial reporting.

 

 

The Audit Committee reviewed the operations of the Company’s Code of Conduct, the employee helpline and email system. No material issues were reported through this route during the year. No waivers to the Code of Conduct were made in 2012.

 

 

The implementation of the measures required under the terms of the Corporate Integrity Agreement between the Company and the Inspector General of the U.S. Department of Health and Human Services.

 

 

Reviewed and approved, or recommended for approval to the board of directors, various aspects of the Prothena Demerger completed in December 2012.

 

 

Reviewed proposals for the restructuring of the Company’s debts.

 

 

Reviewed correspondences between the Company and the SEC and the Irish Auditing and Accounting Supervisory Authority (IAASA).

 

 

The Audit Committee reviewed the further implementation of the comprehensive enterprise-wide risk management process in the Company, including the role of the Turnbull Guidance for Directors, other corporate governance measures and the utilisation of the insurance function in the control and management of Company wide risk.

 

 

Matters concerning the internal audit function, corporate compliance function and financial functions were reviewed. The Company’s continuing work to comply with the applicable provisions of the Sarbanes-Oxley Act of 2002 was monitored by the Audit Committee.

 

 

The Audit Committee charter, the Company’s Security Trading policy and the operation of the Audit Committee were reviewed during 2012.

 

 

The amount of audit and non-audit fees of the independent auditor was monitored throughout 2012. The Audit Committee was satisfied throughout the year that the objectivity and independence of the independent external auditor were not in any way impaired by either the nature of the non-audit work undertaken, the level of non-audit fees charged for such work or any other facts or circumstances.

On behalf of the Audit Committee,

Gary Kennedy

Chairman of the Audit Committee and Non-Executive Director

21 March 2013

 

Elan Corporation, plc 2012 Annual Report     65   


Report of the Leadership Development and Compensation Committee

Introduction

I am pleased to present the Report of the Leadership Development and Compensation Committee (the Committee) for the year ended 31 December 2012. In the following pages you will find disclosures on the role and focus of the Committee, the Committee’s remuneration policy, a review of the remuneration paid to company directors and senior management during 2012 and a discussion of the Committee’s activities during the year. As the Company has changed significantly in recent years, so too has the evolution of our remuneration practices and the activities of the Committee. However, one unchanging aspect of this work is our commitment to the philosophy that underpins these measures, that is, to set remuneration levels that are appropriate for our directors and senior management, having regard to their substantial responsibilities, their individual performance and the Company’s performance as a whole. Below is an outline of the report we trust that you find this both informative and useful.

1 Meetings & Committee Membership

The Committee held four scheduled meetings in 2012. Details of meeting attendance by Committee members are included in the table on page 61. In addition, one meeting was held to deal with specific matters.

 

Name    Status During 2012  

Patrick Kennedy (Chairman)

     Member for the whole period   

Hans Peter Hasler

     Retired 1 October 2012   

Gary Kennedy

     Member for the whole period   

Donal O’Connor

     Member for the whole period   

The Committee is composed entirely of independent non-executive directors. Each member of the committee is nominated to serve for a three-year term subject to a maximum of two terms of continuous service.

2 Remuneration Policy

The Committee is responsible for the Company’s compensation philosophy and policies. The Committee determines, amongst other things, the compensation, terms and conditions of the CEO, the board and our senior management. The Committee exercises all the powers of the board of directors to grant options and restricted stock units (RSUs) and to generally administer our equity award plans.

The Committee’s policy is to set remuneration levels that are appropriate for our directors and senior management having regard to their substantial responsibilities, their individual performance and the Company’s performance as a whole. Our aim is to attract, retain and motivate directors and senior management of the quality required to run the Company successfully, to align directors and senior management with the long-term interests of our shareholders, and to foster the sustainable success of the Company. In this regard the Committee gives full consideration to the legal and regulatory requirements of the Company and to the principles and provisions of the UK Corporate Governance Code (the Code) and related guidance.

The role and responsibilities of the Committee are set out in writing in its charter, under which authority is delegated to it by the board. The charter is available on the Corporate Governance section of our website, www.elan.com, or from the company secretary on request. While the Committee’s specific oversight is limited to the CEO, the board and a number of senior executives, the Committee has among its aims the goal of informing the broad policy framework that is applied by management in relation to employee remuneration at all levels. Through this the Committee plays the vital role of ensuring that the remuneration policies of the group are fit for purpose and enhance long-term shareholder value.

2(a) Independent Compensation Consultants & Comparator Groups

The Committee retains compensation consultants to assist in evaluating director and executive compensation, and has the sole authority to retain and terminate such consultants and to review and approve their fees and other retention terms. To this end the Committee engages Semler Brossy Consulting Group, LLC (SBCG) as independent compensation consultants. SGCG’s role is to ensure that the Committee receives objective advice in making recommendations to the

 

66   Elan Corporation, plc 2012 Annual Report


Report of the Leadership Development and Compensation Committee

 

board on compensation matters and to assist the Committee in fulfilling its role of overseeing the design and operation of our compensation programme on behalf of the board. The services provided by SBCG include, regular attendance at Committee meetings; review of the Committee’s charter; updates on trends in compensation, corporate governance, and regulatory developments; review and update of peer groups; evaluation of the market competitiveness; updates on evolving practice in the area of severance; and input to discussions on CEO pay and the CEO recommendations for senior executives. SBCG do not provide any other services to Elan and are not engaged to carry out any work for, nor receive any payments from, the Company, or the wider Elan group, other than that done or received on behalf of the Committee.

The Committee seeks to benchmark remuneration against companies of a similar size, sector, and performance; however, the Committee is aware that if too much emphasis is placed on comparators this can lead to disproportionate and unintended consequences, therefore, comparator groups are used by the Committee as a guide only and are one of a number of factors taken into account by the Committee when determining the level and elements of the Company’s compensation policy.

During 2012, the Committee reviewed its comparator company group, amending the groupings used in 2011 reflecting the changes in size and direction of the Company in 2012. Secondary comparator groups were also consulted in relation to specific factors and other unique events that occurred during the year. The Committee keeps the composition of its comparators groups under review to ensure that they remain relevant to the Company and its changing needs.

2(b) Committee supports

In addition to the power to engage, review and terminate compensation consultants, the Committee also has the authority to retain legal counsel or other consultants to advise it. Generally, such independent advice is sought with the knowledge of the CEO but the Committee retains discretion in this regard. The Committee may request staff support from the CEO as it deems appropriate or request any officer or employee of the Company or the Company’s outside counsel to attend any of its meetings or to meet with any of its members or consultants.

2(c) External Appointments and Retention of Fees

The Committee recognizes that executive directors, and senior management, may be invited to take up non-executive directorships, public sector and/or not-for-profit appointments, and that these can broaden the experience and knowledge of the individual concerned, from which the Company can benefit. Executive directors and senior management may, subject to approval, accept external appointments as non-executives of other companies and retain any related fees paid to them.

2(d) Prohibition on Loans

Directors and officers of the Company may not receive, either directly or indirectly, a loan from the Company or any of its subsidiaries.

2(e) Directors’ Shareholdings

Directors are encouraged to acquire and maintain an equity stake in the Company to strengthen the alignment of interests between the directors and the shareholders; however there is no formal requirement for directors or senior management to hold Company shares.

2(f) Shareholder Vote “Say on Pay”

At the 2013 Annual General Meeting, to be held on 30 May 2013, this Report will be put to a shareholder ‘advisory’ vote. While there is no legal obligation to put such a resolution to shareholders, we believe that it is an appropriate acknowledgement of shareholders’ right to have a ‘say on pay’.

3 Remuneration Review

3(a) Non-Executive Director Remuneration

Non-executive directors are compensated with fee payments and equity awards with additional payments where directors are members of board committees.

 

Elan Corporation, plc 2012 Annual Report     67   


In 2012, Dr. Ekman (retired 7 December 2012), Mr. McGowan, Mr. McLaughlin and Dr. von Eschenbach received fee payments in the form of RSUs. Non-executive directors are also reimbursed for reasonable travel expenses to and from board and committee meetings.

3(a)(i) Non-Executive Directors’ Terms of Appointment

 

Period

   Three-year term which can be extended by mutual consent, contingent on satisfactory performance and re-election at the Annual General Meeting (AGM).     

Termination

   By the director or the Company at each party’s discretion without compensation.    

Fees

   Board Membership Fees   
   Chairman’s Fee    $ 150,000   
   Director’s Fee    $ 55,000   
   Additional Board/Committee Fees   
   Lead Independent Director’s Fee    $ 20,000   
   Audit Committee Chairman’s Fee    $ 25,000 (1) 
   Audit Committee Member’s Fee    $ 15,000   
   Other Committee Chairman’s Fee    $ 20,000 (1) 
   Other Committee Member’s Fee    $ 12,500   

Equity

   Non-executive directors are entitled to be considered for an annual equity award, based on the recommendation of the Committee and supported by the advice of the Committee’s compensation consultants. Such equity awards are normally granted in February of each year and are currently made in the form of RSUs. The awards to be made in February 2013 will have the following grant date fair values:         
   Chairman    $ 400,000   
   Other non-executive directors    $ 200,000   

Expenses

   Reimbursement of travel and other expenses reasonably incurred in the performance of their duties.    

Time commitment

   Five scheduled in-person board meetings, the AGM and relevant committee meetings depending upon board/committee requirements and general corporate activity.     
   Non-executive board members are also expected to be available for a number of unscheduled board and committee meetings, where applicable, as well as to devote appropriate preparation time ahead of each meeting.      

Confidentiality

   Information acquired by each director in carrying out their duties is deemed confidential and cannot be publicly released without prior clearance from the chairman of the board.     

 

(1) Inclusive of committee membership fee

3(b) Executive Director and Senior Management Remuneration

3(b)(i) Basic Salary

The basic salary of the executive director and senior management is reviewed annually having regard to personal performance, Company performance and market practice.

3(b)(ii) Annual Cash Incentive Bonus

We operate a cash bonus plan in which all employees, including the executive director, are eligible to participate. Bonuses are not pensionable. The cash bonus plan operates on a calendar year basis. We measure our performance against a broad series of financial, operational and scientific objectives and measurements and set annual metrics relating to them. A bonus target, expressed as a percentage of basic salary, is set for all employees. Payment will be made based on a combination of individual, team and company performance.

 

68   Elan Corporation, plc 2012 Annual Report


Report of the Leadership Development and Compensation Committee

 

3(b)(ii) Share-Based Compensation

It is the Committee’s policy, in common with other companies operating in similar industries, to award share options and RSUs to executives, senior management and employees. At the 2012 AGM, shareholders approved the Elan Corporation, plc 2012 Long Term Incentive Plan (the 2012 Plan) which provides equity for the grant of up to 30 million ordinary shares. As with its predecessor plans, the purposes of the 2012 Plan is to further advance the interests of the Company and its shareholders by providing a means to attract, retain, and motivate employees, consultants and directors, to provide for competitive compensation opportunities, to encourage long term service, to recognise individual contributions and reward achievement of performance goals, and to promote the creation of long term value for shareholders by aligning the interests of such persons with those of shareholders. It is anticipated that the 2012 Plan would meet the Company’s equity plan requirement for at least three years. Equity awards are usually made annually. Equity awards may also be granted to some individuals on joining the Company or on the occurrence of other specific events. The equity awards under this plan generally vest between one and four years and do not contain any performance conditions other than service.

Equity awards may also be granted to some individuals on joining the Company or on the occurrence of other specific events in these circumstances such awards are designed to align the interests of the new hire with those of our shareholders. These awards are authorised by the CEO under delegated authority from the Committee; such authority is reviewed by the Committee on an annual basis and includes safeguards and other conditions that the CEO must adhere to.

In addition, we have an Employee Equity Purchase Plan (EEPP) in which our employees, including executive directors, are eligible to participate. This plan allows eligible employees to purchase shares at a discount of up to 15% of the lower of the fair market value at the beginning or last trading day of the offering period. The EEPP was originally approved by the shareholders at the 2004 AGM and allows all employees, who meet the eligibility criteria, the opportunity to purchase shares in the Company at a discount. At the 2012 AGM shareholder approved an increase of 1.5 million shares in the number of shares available to employees to purchase in accordance with the terms of the plan. It is anticipated that there will be sufficient shares in the EEPP to meet the Company’s needs for at least three years. Purchases are limited and subject to certain U.S. Internal Revenue Code (IRC) restrictions.

3(b)(iii) Pension Arrangements

Pensions for executive directors are calculated on basic salary only (no incentive or benefit elements are included). Currently there is only one Executive Director, the CEO, Mr. Martin. Mr. Martin participates in a defined contribution plan (401(k) plan) for U.S. based employees. Non-executive directors do not receive pensions.

For additional information on pension benefits for our employees, refer to Note 15 to the Consolidated Financial Statements.

3(c) Executive Directors’ Service Contracts

On 7 January 2003, we and Elan Pharmaceuticals, Inc. (EPI) entered into an agreement with Mr. Martin such that Mr. Martin was appointed president and CEO effective 3 February 2003.

Effective 7 December 2005, we and EPI entered into a new employment agreement with Mr. Martin, under which Mr. Martin continued to serve as our CEO with an initial base annual salary of $798,000. Under the 2003 agreement, Mr. Martin was eligible to participate in our annual bonus plan, performance-based stock awards and merit award plans. Under the new agreement, Mr. Martin was granted an option to purchase 750,000 Ordinary Shares with an exercise price per share of $12.03, vesting in three equal annual instalments (the 2005 Options). Mr. Martin’s employment agreement was amended on 19 December 2008 to comply with the requirements of Section 409A of the IRC.

On 2 June 2010, Elan and Mr. Martin agreed to amend his 2005 employment contract from an open-ended agreement to a fixed term agreement. Under this 2010 agreement, Mr. Martin committed to remain in his current role as CEO and director of the Company through to 1 May 2012. It was agreed that upon the completion of this fixed term Mr. Martin would then serve the board as executive adviser through to 31 January 2013. Under this amendment, Mr. Martin’s base salary was increased from $800,000 to $1,000,000 per year effective 1 June 2010, and when Mr. Martin moved to the role of executive adviser, his base salary was to be reduced to $750,000 per year, he would not be eligible for a bonus and he would resign from the board. However, as 2012 represented a significant transformational period for the Company, it was decided by the board that the Company and our shareholders would be best served by Mr. Martin continuing his leadership through this critical period and strategic inflection point. To that end, the board requested that Mr. Martin extend his tenure as the Elan

 

Elan Corporation, plc 2012 Annual Report     69   


CEO creating continuity and providing an opportunity to achieve further clarity for Elan’s strategic and financial path forward. Mr. Martin agreed to this request and the extension.

Effective 30 April 2012, we, EPI and Mr. Martin amended and restated Mr. Martin’s employment agreement. Under the amended and restated agreement, Mr. Martin’s term as CEO was extended indefinitely while his base salary remained at $1,000,000 per year, the vesting of his equity awards that were granted in February 2012 was accelerated to October 2012, the vesting of any equity awards granted in 2013 would receive partial acceleration upon termination of Mr. Martin’s employment, and Mr. Martin was awarded an option to purchase 486,000 shares (subsequently adjusted to 501,754 shares on 20 December 2012, in connection with the separation and distribution of the Prothena Business. Refer to Note 28 for additional information on the 20 December 2012, equity adjustments), with an exercise price per share of $13.79 (subsequently adjusted to $13.36 on 20 December 2012), and an RSU grant covering 81,000 shares (subsequently adjusted to 83,626 shares on 20 December 2012). The equity awards granted in April 2012 vest over a two year period.

In general, the amended and restated agreement, continues until Mr. Martin resigns, is involuntarily terminated, is terminated for cause or dies, or is disabled. Subject to certain conditions, if Mr. Martin’s employment is involuntarily terminated (other than for cause, death or disability), Mr. Martin leaves for good reason or Mr. Martin resigns on or after 2 April 2013, we will pay Mr. Martin a lump sum equal to two (three, in the event of a change in control) times his salary and target bonus. Similarly, most options will be exercisable until the earlier of (i) two years from the date of termination or (ii) tenth anniversary of the date of grant, or in the event of a change in control, the earlier of (i) three years from the date of termination or (ii) the tenth anniversary of the date of grant of the stock option.

In the event of such an involuntary termination (other than as the result of a change in control), Mr. Martin will, for a period of two years (three years in the event of a change in control), or, if earlier, the date Mr. Martin obtains other employment, continue to participate in our health and medical plans and we shall pay Mr. Martin a lump sum of $50,000 to cover other costs and expenses. Mr. Martin will also be entitled to career transition assistance and the use of an office and the services of a full-time secretary for a reasonable period of time not to exceed two years (three years in the event of a change in control).

In addition, if it is determined that any payment or distribution to Mr. Martin would be subject to excise tax under Section 4999 of the IRC, or any interest or penalties are incurred by Mr. Martin with respect to such excise tax, then Mr. Martin shall be entitled to an additional payment in an amount such that after payment by Mr. Martin of all taxes on such additional payment, Mr. Martin retains an amount of such additional payment equal to such excise tax amount.

The agreement also obligates us to indemnify Mr. Martin if he is sued or threatened with suit as the result of serving as our officer or director. We will be obligated to pay Mr. Martin’s attorney’s fees if he has to bring an action to enforce any of his rights under the employment agreement.

Mr. Martin is eligible to participate in the retirement, medical, disability and life insurance plans applicable to senior executives in accordance with the terms of those plans. He may also receive financial planning and tax support and advice from the provider of his choice at a reasonable and customary annual cost.

3(d) Adjustment of shares options following the demerger of Prothena Corporation plc

Under the terms of our employee equity plans (2006 LTIP, 1996 LTIP and 1999 Stock Option Plan), Elan stock options and RSUs outstanding at close of business on 20 December 2012 were subject to an adjustment, on the closing of the demerger of Prothena Corporation, plc. The total number of RSUs outstanding on that day was increased by 3.24165%, and the number of options outstanding were also increased and their grant prices were reduced to reflect the change in the Company’s share price arising from the transaction.

4 Compensation of Directors and Officers 2012

For the year ended 31 December 2012, all directors and executive officers as a group that served during the year (17 persons) received total compensation of $6.4 million (2011: $7.8 million). We reimburse directors and officers for their actual business-related expenses. For the year ended 31 December 2012, an aggregate of $0.4 million (2011: $0.5 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 executive director and officers participate.

 

70   Elan Corporation, plc 2012 Annual Report


Report of the Leadership Development and Compensation Committee

 

4(a) Directors and Remuneration

 

      2012
Salary/Fees
$
    

2012
Bonus

$

     2012
Pension
$
     2012
Benefit
in Kind
$
    

2012

Total

$

    

2011

Total

$

 

Executive Directors:

                 

G. Kelly Martin

     1,000,000        1,250,000        7,500        45,289        2,302,789        2,885,110  

Total

     1,000,000        1,250,000        7,500        45,289        2,302,789        2,885,110  

Non-Executive Directors:

                 

Robert A. Ingram

     150,000                                150,000        240,793  

Lars Ekman(1)(4)

     70,109                                70,109        78,503  

Hans Peter Hasler(2)

     50,625                                50,625        19,626  

Gary Kennedy

     92,500                                92,500        92,500  

Patrick Kennedy

     75,000                                75,000        75,000  

Giles Kerr

     82,500                                82,500        82,500  

Kieran McGowan(1)

     95,000                                95,000        95,000  

Kyran McLaughlin(1)

     67,500                                67,500        84,292  

Donal O’Connor

     82,500                                82,500        82,500  

Richard Pilnik

     55,000                                55,000        60,604  

Dennis J. Selkoe(3)

     141,000                                141,000        130,000  

Andrew von Eschenbach(1)

     67,500                                67,500        19,626  

Total

     2,029,234        1,250,000        7,500        45,289        3,332,023        3,946,054  

 

(1) In 2012, all or some portion of director’s fee was received in the form of RSUs which vest on the earlier of 10 years or 90 days after retirement from the board.

 

(2) Retired as director on 1 October 2012.

 

(3) Includes fees of $61,000 in 2012 (2011:$50,000) under a consultancy agreement. See Item 7B. “Related Party Transactions” for additional information.

 

(4) Retired as director on 7 December 2012.

In addition to the above, directors receive share-based awards, which are outlined in detail on pages 73 to 75 of this Annual Report. For the year ended 31 December 2012, we incurred total share-based compensation expense of $8.5 million (2011: $6.2 million) in relation to directors.

4(b) Payments to Former Directors

Dr. Ekman

Effective 31 December 2007, Dr. Lars Ekman resigned from his operational role as president of R&D and continued to serve as a member of the board of directors of Elan in a non-executive capacity. Dr. Ekman retired from the board on 7 December 2012 in contemplation of his appointment as chairman of Prothena Corporation plc.

As part of Dr. Ekman’s retirement from executive duties, we agreed to make payments if we achieve certain milestones in respect of our Alzheimer’s disease programme. To date none of the required milestones have been triggered and no payments have been made.

Dr. Bloom

On 17 July 2009, EPI entered into a consultancy agreement with Dr. Bloom under which Dr. Bloom agreed to provide consultant services to Elan with respect to the treatment and/or prevention of neurodegenerative diseases and to act as an advisor to the science and technology committee (the “2009 Agreement”). Effective 17 July 2011, the 2009 Agreement was extended for a further year (“the Amended Agreement”) and under which we would pay Dr. Bloom a fee of $12,500 per quarter. Effective 17 July 2012, Dr. Bloom’s Amended Agreement was renewed for a further 12 month period. As with its predecessor, this agreement can be terminated by either party upon 30 days written notice. Under the consultancy agreements, Dr. Bloom received $50,000 in 2012 (2011: $44,674).

 

Elan Corporation, plc 2012 Annual Report     71   


Mr. Hasler

Effective 1 October 2012, Elan Pharmaceuticals GmbH entered into an employment agreement with Mr. Hasler under which Mr. Hasler was appointed our chief operating officer with an initial base annual salary of 600,000 CHF. Mr. Hasler is eligible to participate in our annual bonus plan. Mr. Hasler was awarded an option to purchase 375,000 shares vesting in three annual instalments. Mr. Hasler resigned from the board in October 2012 in connection with his appointment as chief operating officer.

4(c) Directors’ and Secretary’s Interests

At 31 December 2012 & 2011, the beneficial interests of those persons who were directors and the secretary of Elan Corporation, plc, including their spouses and children under 18 years of age, were as follows:

 

     

Ordinary Shares;

Par Value 0.05

Cents Each

 
Directors    2012(1)      2011(1)  

Robert A. Ingram

               

Gary Kennedy

     7,650         7,650   

Patrick Kennedy

     10,500         10,500   

Giles Kerr

               

G. Kelly Martin

     338,452         147,476   

Kieran McGowan

     6,200         6,200   

Kyran McLaughlin

     190,000         190,000   

Donal O’Connor

     18,900         18,900   

Richard Pilnik

     3,700           

Dennis J. Selkoe

     180,675         180,675   

Andrew von Eschenbach

     2,000           

Secretary

                 

William F. Daniel

     53,037          46,274    

 

(1)

No director or executive officer beneficially owned 1% or more of our outstanding shares of the Company as of 31 December 2012, or as of 31 December 2011.

 

72   Elan Corporation, plc 2012 Annual Report


Report of the Leadership Development and Compensation Committee

 

The table below details the Options and Restricted Stock Units outstanding at 31 December 2011 and at 31 December 2012

 

     Date of Grant     At
31  December
2011(2)
   

Exercise
Price

$(1)

    Granted
2012 
    Exercised
or  Vested/
Cancelled
2012(1)
    Market
Price at
Exercise/
Vest
Date
    At
31  December
2012(1)(2)
   

Earliest

Vest

Date

   

Option Expiry/
RSU Latest

Vest Date

 

Robert A. Ingram

    9 February 2011        29,412        RSU                             30,365          9 February 2021 (3) 
    9 February 2011        29,412        RSU                             30,365          9 February 2021 (3) 
    9 February 2012               RSU        30,372                      31,357          9 February 2022 (3) 
      20 December 2012               RSU        2,891                                        
              58,824                33,263                       92,087                   

Gary Kennedy

    26 May 2005        15,000      $ 7.80                            15,486        26 May 2007        25 May 2015   
    1 February 2006        10,000      $ 15.40                            10,324        1 February 2008        31 January 2016   
    21 February 2007        10,000      $ 13.51                            10,324        21 February 2009        20 February 2017   
    14 February 2008        10,000        RSU                            10,324          14 February 2018 (3) 
    11 February 2009        7,500        RSU                            7,743          11 February 2019 (3) 
    26 May 2010        23,855        RSU                            24,628          26 May 2020 (3) 
    9 February 2011        18,382        RSU                            18,978          9 February 2021 (3) 
    9 February 2012               RSU        15,186                     15,678          9 February 2022 (3) 
      20 December 2012               Various        3,562                                       
              94,737                18,748                       113,485                   

Patrick Kennedy

    22 May 2008        20,000      $ 24.30                            20,648        22 May 2009        21 May 2018   
    11 February 2009        7,500        RSU                            7,743          11 February 2019 (3) 
    26 May 2010        23,855        RSU                            24,628          26 May 2020 (3) 
    9 February 2011        18,382        RSU                            18,978          9 February 2021 (3) 
    9 February 2012          RSU        15,186                     15,678          9 February 2022 (3) 
      20 December 2012               Various        2,752                                       
              69,737                17,938                       87,675                   

Giles Kerr

    13 September 2007        20,000      $ 18.90                            20,648        13 September 2008        12 September 2017   
    14 February 2008        10,000        RSU                            10,324          14 February 2018 (3) 
    11 February 2009        7,500        RSU                            7,743          11 February 2019 (3) 
    26 May 2010        23,855        RSU                            24,628          26 May 2020 (3) 
    9 February 2011        18,382        RSU                            18,978          9 February 2021 (3) 
    9 February 2012          RSU        15,186                     15,678          9 February 2022 (3) 
      20 December 2012               Various        3,076                                       
              79,737                18,262                       97,999                   

G. Kelly Martin

    6 February 2003        944,000      $ 3.85               100,000        13.45             
                 400,000        11.72             
                 444,000        10.46              31 December 2003        5 February 2013   
    13 November 2003        1,000,000      $ 5.11                             1,032,416        31 December 2003        12 November 2013   
    10 March 2004        60,000      $ 15.76                             61,945        1 January 2005        9 March 2014   
    10 March 2005        280,000      $ 7.24                             289,077        1 January 2006        9 March 2015   
    7 December 2005        750,000      $ 11.65                             774,312        31 December 2006        6 December 2015   
    21 February 2007        494,855      $ 13.51                             510,896        21 February 2008        20 February 2017   
    14 February 2008        329,590      $ 24.22                             340,274        14 February 2009        13 February 2018   
    18 September 2009        150,000      $ 6.95                             154,862        March 18, 2012        17 September 2019   
    11 February 2010        673,797      $ 6.83                             695,639        11 February 2011        10 February 2020   
    11 February 2010        82,742        RSU               41,371        13.26       42,712        11 February 2011        11 February 2013   
    9 February 2011        932,134      $ 6.59                             962,351        9 February 2012        8 February 2021   
    9 February 2011        136,029        RSU               45,343        13.17       93,626        9 February 2012        9 February 2014   
    9 February 2012               RSU        37,500        37,500        10.89              1 October 2012        1 October 2012   
    9 February 2012             $ 12.76        225,000                     232,294        1 October 2012        8 February 2022   
    30 April 2012             $ 13.36        486,000                     501,754        1 February 2013        29 April 2022   
    30 April 2012               RSU        81,000                     83,626        1 February 2013        1 July 2014   
      20 December 2012               Various        181,351                                       
              5,833,147                1,010,851        1,068,214                5,775,784                   
                 

 

Elan Corporation, plc 2012 Annual Report     73   


     Date of Grant     At
31  December
2011(2)
   

Exercise
Price

$(1)

    Granted
2012 
    Exercised
or  Vested/
Cancelled
2012(1)
    Market
Price at
Exercise/
Vest
Date
    At
31 December
2012(1) (2)
   

Earliest

Vest

Date

   

Option Expiry/
RSU Latest

Vest Date

 

Kieran McGowan

    10 March 2004        40,000      $ 15.76                            41,297        10 March 2005        9 March 2014   
    10 March 2005        7,500      $ 7.24                            7,743        1 January 2006        9 March 2015   
    1 February 2006        10,000      $ 15.40                            10,324        1 February 2008        31 January 2016   
    21 February 2007        10,000      $ 13.51                            10,324        21 February 2009        20 February 2017   
    14 February 2008        10,000        RSU                            10,324          14 February 2018 (3) 
    11 February 2009        7,500        RSU                            7,743          11 February 2019 (3) 
    26 May 2010        23,855        RSU                            24,628          26 May 2020 (3) 
    9 February 2011        18,382        RSU                            18,978          9 February 2021 (3) 
    21 April 2011        2,980        RSU                            3,077          21 April 2021 (4) 
    28 July 2011        2,093        RSU                            2,161          28 July 2021 (4) 
    28 October 2011        1,956        RSU                            2,019          28 October 2021 (4) 
    9 February 2012               RSU        15,186                     15,678          9 February 2022 (3) 
    9 February 2012               RSU        1,803                     1,861          9 February 2022 (4) 
    27 April 2012               RSU        1,709                     1,764          27 April 2022 (4) 
    26 July 2012               RSU        1,984                     2,048          26 July 2022 (4) 
    25 October 2012               RSU        2,181                     2,252          25 October 2022 (4) 
      20 December 2012               Various        5,092                                       
              134,266                 27,955                       162,221                   

Kyran McLaughlin

    10 March 2004        40,000      $ 15.76                            41,297        10 March 2005        9 March 2014   
    10 March 2005        7,500      $ 7.24                            7,743        1 January 2006        9 March 2015   
    1 February 2006        10,000      $ 15.40                            10,324        1 February 2008        31 January 2016   
    21 February 2007        10,000      $ 13.51                            10,324        21 February 2009        20 February 2017   
    14 February 2008        10,000        RSU                            10,324          14 February 2018 (3) 
    11 February 2009        11,250        RSU                            11,615          11 February 2019 (3) 
    26 May 2010        28,626        RSU                            29,554          26 May 2020 (3) 
    9 February 2011        18,382        RSU                            18,978          9 February 2021 (3) 
    21 April 2011        4,224        RSU