Elan Corporation, plc
Treausry Building, Lower Grand Canal Street
Dublin 2, Ireland
T + 353 1 709-4000 F +353 1 709-4700
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
US Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 USA
August 10, 2005
Re: Elan Corporation, plc
Annual Report on Form 20-F for Fiscal Year ended December 31, 2004
Filed April 11, 2005
File No. 1-13896
Dear Mr. Rosenberg:
We set forth below our responses to the Staff's comment letter, dated July
22, 2005, containing comments with respect to our Annual Report on Form 20-F for
the fiscal year ended December 31, 2004 (the "2004 Annual Report on Form 20-F").
The numbered paragraphs below correspond to the numbered comments set forth in
the Staff's letter. For your convenience, we have reproduced each comment from
the Staff's letter (in italics) immediately before our response.
As requested, we have provided our response to the Staff's comment No. 1 in
disclosure-type format rather than keying our response to each of the Staff's
comments 1(a) through 1(f) individually. However, our response does address each
of the subcomponents of the Staff's comment No. 1. In addition, we plan to file
an amendment to our 2004 Annual Report on Form 20-F to include the revised
disclosure below.
1. Critical Accounting Policies, page 31 - Revenue - Discounts, Sales Returns,
Rebates and Chargebacks
We believe that your disclosure related to estimates of items that reduce gross
revenue such as product returns, chargebacks, customer rebates and other
discounts and allowances could be
1
improved. Please provide us the following information, in disclosure-type
format, to help us evaluate the adequacy of your disclosure:
a) The nature and amount of each accrual at the balance sheet date and the
effect that could result from using other reasonably likely assumptions
than what you used to arrive at each accrual such as a range of reasonably
likely amounts or other type of sensitivity analysis.
b) The factors that you consider in estimating each accrual such as historical
return of products, levels of inventory in the distribution channel,
estimated remaining shelf life, price changes from competitors and
introductions of generics and/or new products.
c) To the extent that information you consider in b) is quantifiable, disclose
both quantitative and qualitative information and discuss to what extent
information is from external sources (e.g., end-customer prescription
demand, third-party market research data comparing wholesaler inventory
levels to end-customer demand). For example, in discussing your estimate of
product that may be returned, consider disclosing and discussing,
preferably by product and in tabular format, the total amount of product
(in sales dollars) that could potentially be returned as of the balance
sheet date and disaggregated by expiration period.
d) If applicable, discuss any shipments made as a result of incentives and/or
in excess of your customer's ordinary course of business inventory level.
Discuss your revenue recognition policy for such shipments.
e) A roll forward of the accrual for each estimate for each period presented
showing the following:
* Beginning balance,
* Current provision related to sales made in current period,
* Current provision related to sales made in prior periods,
* Actual returns or credits in current period related to sales made
in current period,
* Actual returns or credits in current period related to sales made in
prior periods, and
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* Ending balance.
f) Regarding your discussion of results of operations for the period to period
revenue comparisons, discuss the amount of and reason for fluctuations for
each type of reduction of gross revenue (i.e. product returns, chargebacks,
customer rebates and other discounts and allowances) including the effect
that changes in your estimates of these items had on your revenues and
operations.
Elan's Response:
Revenue Recognition-Sales Discounts and Allowances
As described further below and in our significant accounting policies in Note 2
to the Consolidated Financial Statements, we recognize revenue on a gross
revenue basis and make various deductions to arrive at net revenue as reported
in the Consolidated Statement of Operations. These adjustments are referred to
as sales discounts and allowances and are described in detail below. Sales
discounts and allowances include charge-backs, managed health care and Medicaid
rebates, cash discounts, sales returns and other adjustments. Estimating these
sales discounts and allowances is complex and involves significant estimates and
judgments, and we use information from both internal and external sources to
generate reasonable and reliable estimates. We believe that we have used
reasonable judgments in assessing our estimates, and this is borne out by our
historical experience. At December 31, 2004, we had total reserves of $22.1
million for sales discounts and allowances, of which approximately 57% and 13%
related to Maxipime and Azactam, respectively. We have over six years'
experience in relation to these two products.
We do not conduct our sales using the consignment model. All of our product
sales transactions are based on normal and customary terms whereby title to the
product and substantially all of the risks and rewards transfer to the customer
upon either shipment or delivery. Furthermore, we do not have an incentive
program which would compensate a wholesaler for the costs of holding inventory
above normal inventory levels thereby encouraging wholesalers to hold excess
inventory.
Sales Discounts and Allowances
We account for sales discounts and allowances in accordance with EITF Issue No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the
3
Vendor's Products)," and SFAS 48, "Revenue Recognition When Right of Return
Exists," as applicable.
The table below summarizes our sales discounts and allowances to adjust gross
revenue to net revenue for each significant category. An analysis of the
separate components of our revenue is set out in Note 3 of the Consolidated
Financial Statements.
-----------------------------------------------
Years ended December 31,
-----------------------------------------------
2004 2003 2002
-----------------------------------------------
(US$ in millions)
Gross revenue subject to
discounts and allowances 291.7 530.1 779.8
Contract manufacturing and
royalties 130.9 120.0 118.5
Contract revenue 77.3 98.9 350.7
Amortized revenue -
Adalat/Avinza 34.0 34.0 7.8
Co-promotion fees - - 62.8
---------- ---------- ----------
Gross revenue 533.9 783.0 1,319.6
---------- ---------- ----------
Sales discounts
and allowances:
Charge-backs (24.6) (27.1) (22.7)
Managed health care
rebates and other
contract discounts (5.1) (11.0) (21.3)
Medicaid rebates (8.2) (25.7) (51.3)
Cash discounts (5.6) (8.9) (38.1)
Sales returns (7.1) (24.6) (92.8)
Other adjustments (1.6) (0.1) (0.3)
---------- ---------- ----------
Total sales discounts
and allowances (52.2) (97.4) (226.5)
---------- ---------- ----------
Net revenue subject to
discounts and allowances 239.5 432.7 553.3
Contract manufacturing
and royalties 130.9 120.0 118.5
Contract revenue 77.3 98.9 350.7
Amortized revenue
- - Adalat/Avinza 34.0 34.0 7.8
Co-promotion fees - - 62.8
---------- ---------- ----------
Net revenue 481.7 685.6 1,093.1
---------- ---------- ----------
---------- ---------- ----------
Total sales discounts and allowances have decreased from 29.0% of gross revenue
subject to discounts and allowances in 2002 to 18.4% in 2003, and to 17.9% in
2004, as detailed in the rollforward below and as further explained in the
following paragraphs.
4
Charge-backs increased as a percentage of gross revenue subject to discounts and
allowances from 2.9% in 2002 to 5.1% in 2003, and to 8.4% in 2004. The increase
is due primarily to changes in the product mix. Several of our divested products
were sold through retail pharmacies (principally Skelaxin, Zonegran and Sonata)
and therefore had lower levels of charge-backs in comparison to our retained
products.
The reductions in managed health care and Medicaid rebates as a percentage of
gross revenue subject to discounts and allowances from year to year are due
principally to changes in the product mix. Several of our divested products
(principally Skelaxin, Zonegran and Zanaflex) were sold through retail
pharmacies and therefore had larger components subject to managed health care
and Medicaid rebates. Consequently, due primarily to the divestment of these
products, the managed health care and Medicaid rebates as a percentage of gross
revenue subject to discounts and allowances have declined from 2.7% and 6.6%,
respectively, in 2002, to 2.1% and 4.8% in 2003, and to 1.7% and 2.8% in 2004.
Cash discounts as a percentage of gross revenue subject to discounts and
allowances decreased from 4.9% in 2002 to 1.7% in 2003, and to 1.9% in 2004. The
decrease is due principally to a change in our discounting strategy during 2002
as we concentrated on improving margins at the expense of volumes for certain of
our key product lines.
Sales returns as a percentage of gross revenue subject to discounts and
allowances decreased from 11.9% in 2002 to 4.6% in 2003, and to 2.4% in 2004 due
to a number of factors, primarily the genericization of a number of our products
in 2002 (principally Zanaflex), which increased the provision for returns in
that year, and changes in the product mix as a result of product divestments.
5
The following table sets forth the activities and ending balances of each
significant category of adjustments for the sales discounts and allowances (US$
in millions):
Managed
Health Care
Rebates and
Other
Charge- Contract Medicaid Cash Sales Other
back Discounts Rebates Discounts Returns Adjustments Total
------- ----------- -------- --------- ------- ----------- ---------
Balance at
December 31, 2002 $ 7.2 $ 11.2 $ 8.0 $ 1.9 $ 72.9 $ 0.5 $ 121.7
Provision related to
sales made in
current period 27.3 11.0 25.7 8.9 17.6 0.1 90.6
Provision related to
sales made in
prior periods (0.2) -- -- -- 7.0 -- 6.8
Returns and payments (25.7) (20.4) (34.4) (9.5) (68.0) (0.6) (158.6)
Divestments 0.1 3.1 2.5 -- (1.0) -- 4.7
------------------------------------------------------------------------------------------------
Balance at
December 31, 2003 8.7 4.9 21.8 1.3 28.5 -- 65.2
Provision related to sales
made in current period 24.4 5.1 8.6 5.6 6.8 1.6 52.1
Provision related to sales
made in prior periods 0.2 -- (0.4) -- 0.3 -- 0.1
Returns and payments (24.2) (6.8) (23.9) (6.5) (19.8) (0.7) (81.9)
Divestments (0.2) (1.1) (4.4) -- (7.2) (0.5) (13.4)
------------------------------------------------------------------------------------------------
Balance at
December 31, 2004 $ 8.9 $ 2.1 $ 1.7 $ 0.4 $ 8.6 $ 0.4 $ 22.1
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Charge-backs
In the U.S., we participate in charge-back programs with a number of entities,
principally the U.S. Department of Defense, the U.S. Department of Veterans
Affairs, Group Purchasing Organizations and other parties whereby pricing on
products is extended below wholesaler's list price to participating entities.
These entities purchase products through wholesalers at the lower negotiated
price, and the wholesalers charge the difference between their acquisition cost
and the lower negotiated price back to us. We account for charge-backs by
reducing accounts receivable in an amount equal to our estimate of charge-back
claims attributable to a sale. We determine our estimate of the charge-backs
primarily based on historical experience on a product-by-product and program
basis, and current contract prices under the charge-back programs. We consider
vendor payments, estimated levels of inventory in the distribution channel, and
our claim processing time lag and adjust accounts receivable and revenue
periodically throughout each year to reflect actual and future estimated
experience.
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As described above, there are a number of factors involved in estimating the
accrual for charge-backs, but the principal factor relates to our estimate of
the levels of inventory in the distribution channel. At December 31, 2004,
Maxipime and Azactam represented approximately 90% and 8%, respectively, of the
total charge-backs accrual balance of $8.9 million. If we were to
increase/(decrease) our estimated level of inventory in the distribution channel
by one month's worth of demand for these products, the accrual for charge-backs
would increase/(decrease) by approximately $2.2 million. We believe that our
estimate of the levels of inventory for Maxipime and Azactam in the distribution
channel is reasonable because it is based upon multiple sources of information,
including data received from all of the major wholesalers with respect to their
inventory levels and sell-through to customers, third-party market research
data, and our internal information.
Managed health care rebates and other contract discounts
We offer rebates and discounts to managed health care organizations in the U.S.
We account for managed health care rebates and other contract discounts by
establishing an accrual equal to our estimate of the amount attributable to a
sale. We determine our estimate of this accrual primarily based on historical
experience on a product-by-product and program basis and current contract
prices. We consider the sales performance of products subject to managed health
care rebates and other contract discounts, processing claim lag time and
estimated levels of inventory in the distribution channel, and adjust the
accrual and revenue periodically throughout each year to reflect actual and
future estimated experience.
As described above, there are a number of factors involved in estimating this
accrual, but the principal factor relates to our estimate of the levels of
inventory in the distribution channel. At December 31, 2004, Maxipime and
Azactam represented approximately 58% and 24%, respectively, of the total
managed health care rebates and other contract discounts accrual balance of $2.1
million. If we were to increase/(decrease) our estimated level of inventory in
the distribution channel by one month's worth of demand for these products, the
accrual would increase/(decrease) by approximately $0.3 million. We believe that
our estimate of the levels of inventory for Maxipime and Azactam in the
distribution channel is reasonable because it is based upon multiple sources of
information, including data received from all of the major wholesalers with
respect to their inventory levels and sell-through to customers, third-party
market research data, and our internal information.
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Medicaid rebates
In the U.S., we are required by law to participate in state government-managed
Medicaid programs as well as certain other qualifying federal and state
government programs whereby discounts and rebates are provided to participating
state and local government entities. Discounts and rebates provided through
these other qualifying federal and state government programs are included in our
Medicaid rebate accrual and are considered Medicaid rebates for the purposes of
this discussion. We account for Medicaid rebates by establishing an accrual in
an amount equal to our estimate of Medicaid rebate claims attributable to a
sale. We determine our estimate of the Medicaid rebates accrual primarily based
on historical experience regarding Medicaid rebates, legal interpretations of
the applicable laws related to the Medicaid and qualifying federal and state
government programs, and any new information regarding changes in the Medicaid
programs' regulations and guidelines that would impact the amount of the rebates
on a product-by-product basis. We consider outstanding Medicaid claims, Medicaid
payments, claims processing lag time and estimated levels of inventory in the
distribution channel and adjust the accrual and revenue periodically throughout
each year to reflect actual and future estimated experience.
Cash Discounts
In the U.S., we offer cash discounts, generally at 2% of the sales price, as an
incentive for prompt payment. Prior to our change in discounting strategy during
2002, we also offered additional incentive cash discounts to customers who
purchased product between certain time intervals or with certain minimum
volumes. While these discounts were designed to encourage volume, they were not
in the nature of incentives to compensate wholesalers for holding excess
inventory. We discontinued these discounts during the third quarter of 2002 as
we took a commercial decision to improve product margins at the expense of
volumes. We no longer offer such discounts to any of our customers. Principally,
as a consequence of this change in discounting strategy, cash discounts as a
percentage of gross revenue subject to discounts and allowances decreased from
4.9% in 2002 to 1.7% in 2003, and 1.9% in 2004. We account for cash discounts by
reducing accounts receivable by the full amount of the discounts. We consider
payment performance of each customer and adjust the accrual and revenue
periodically throughout each year to reflect actual and future estimated
experience.
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Sales Returns
We account for sales returns in accordance with SFAS 48 by establishing an
accrual in an amount equal to our estimate of revenue recorded for which the
related products are expected to be returned.
For returns of established products, our sales return accrual is estimated
principally based on the historical experience of returns, the estimated shelf
life of inventory in the distribution channel, price increases, and our return
goods policy (goods may only be returned six months prior to expiration date and
for up to twelve months after expiration date). We also take into account
product recalls and introductions of generic products. All of these factors are
used to adjust the accrual and revenue periodically throughout each year to
reflect actual and future estimated experience.
In the event of a product recall, product discontinuance or introduction of a
generic product, we consider a number of factors, including the estimated level
of inventory in the distribution channel that could potentially be returned,
historical experience, estimates of the severity of generic product impact,
estimates of continuing demand and our return goods policy. We consider the
reasons for and impact of such actions and adjust the sales returns accrual and
revenue as appropriate.
Returns from newly introduced products are significantly more difficult for us
to assess. We determine our estimate of the sales return accrual primarily based
on the historical sales returns experience of similar products, such as those
within the same or similar therapeutic category. We also consider the shelf life
of new products and determine whether we believe an adjustment to the sales
return accrual is appropriate. The shelf life in connection with new products
tends to be shorter than the shelf life for more established products because we
may still be developing an optimal manufacturing process for the new product
that would lengthen its shelf life, or an amount of launch quantities may have
been manufactured in advance of the launch date to ensure sufficient supply
exists to satisfy market demand. In those cases, we assess the reduced shelf
life, together with estimated levels of inventory in the distribution channel
and projected demand, and determine whether we believe an adjustment to the
sales return accrual is appropriate. While it is inherently more difficult to
assess returns from newly introduced products than from established products,
nevertheless in all instances we believe we have been able to gather sufficient
information in order to establish reasonable estimates.
9
As described above, there are a number of factors involved in estimating this
accrual, but the principal factor relates to our estimate of the shelf life of
inventory in the distribution channel. At December 31, 2004, Maxipime and
Azactam represented approximately 35% and 34%, respectively, of the total sales
returns accrual balance of $8.6 million. At December 31, 2004, we have estimated
the gross revenue value of Maxipime and Azactam inventory in the distribution
channel to be approximately $40 million and $17 million, respectively. Assuming
inventory leaves the distribution channel on a first-in first-out basis, we have
estimated that this distribution channel inventory has a shelf life running to
various dates during 2006 (gross revenue value approximately $11 million) and
2007 (gross revenue value approximately $46 million). We believe, based upon
both the estimated shelf life and also our historical sales returns experience,
that the vast majority of this inventory will be sold prior to its expiration
date, and accordingly believe that our sales returns accrual is appropriate.
Other adjustments
In addition to the significant sales discounts and allowances described above,
we make other individually insignificant sales adjustments. We generally account
for these other sales discounts and allowances by establishing an accrual in an
amount equal to our estimate of the adjustments attributable to the sale. We
generally determine our estimates of the accruals for these other adjustments
primarily based on historical experience, performance on commitments to
government entities and other relevant factors, including estimated levels of
inventory in the distribution channel in some cases, and adjust the accruals and
revenue periodically throughout each year to reflect actual experience.
Provisions related to sales made in prior periods
During 2003 we recorded $6.8 million of additional discounts and allowances
related to sales made in prior periods, primarily due to the availability of
additional information relating to the impact of genericization of a number of
our products (principally Zanaflex).
Divestments
Since the beginning of 2003 we have divested a number of businesses, including
principally our primary care franchise, Zonegran and our European sales and
marketing business. The divestment adjustments arise primarily as a result of
the negotiated terms of these divestments. For example, we have entered into
terms that would either extend or limit our liability for
10
discounts and allowances related to the divested businesses. We have accordingly
adjusted our discounts and allowances accruals to reflect the terms of the
agreements. Divestment adjustments also include post-divestment revisions
resulting from the availability of additional information. Divestment
adjustments are recorded as part of the gain/(loss) on sale of businesses, and
not as an increase or decrease from gross revenue.
Use of Information from External Sources
We use information from external sources to estimate our significant sales
discounts and allowances. Our estimates of inventory at the wholesalers are
based on:
* The projected prescription demand-based sales for our products and
historical inventory experience;
* Our analysis of third-party information, including written and oral
information obtained from all of the major wholesalers with respect to
their inventory levels and sell-through to customers, and third-party
market research data; and
* Our internal information.
The inventory information received from wholesalers is a product of their
record-keeping process and excludes inventory held by intermediaries to whom
they sell, such as retailers and hospitals. We receive information from IMS
Health, a supplier of market research to the pharmaceutical industry, which we
use to project the prescription demand-based sales for our pharmaceutical
products. We also use information from external sources to identify prescription
trends and patient demand. Up to 2004, we received inventory pipeline data from
IMS Health. Since 2004, IMS Health no longer provides this service and we have
been receiving such pipeline data directly from the three major wholesalers
(McKesson Corp., Cardinal Health, Inc. and AmerisourceBergen Corp.). Our
estimates are subject to inherent limitations of estimates that rely on
third-party information, as certain third-party information is itself in the
form of estimates, and reflect other limitations including lags between the date
as of which third-party information is generated and the date on which we
receive such information.
2. Note 21. Discontinued Operations, Sale of Businesses, and Held for Sale
Assets and Liabilities, page 105
It appears that individual drugs are included in discontinued operations.
Demonstrate to us how each product, product group or business included in
discontinued operations meets the definition
11
of an asset group in paragraph 4 of FAS 144. Fully explain how cash flows of
each asset group are identifiable and independent of the cash flows of other
groups of assets. Also explain how you were able to determine cost of sales,
selling, general and administrative expenses and research and development
expenses directly attributable to each drug or product group presented as
discontinued operations.
Elan's Response:
Paragraph 41 of FASB Statement 144, "Accounting for the Impairment or Disposal
of Long Lived Assets," states that
"a component of an entity comprises operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes
from the rest of the entity. A component of an entity may be a reportable
segment or an operating segment (as those terms are defined in paragraph 10
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information"), a reporting unit (as the term is defined in SFAS 142,
"Goodwill and Other Intangible Assets"), a subsidiary, or an asset group as
the term is defined in paragraph 4 of SFAS 144."
Paragraph 42 of SFAS 144 requires an entity to report in discontinued operations
the results of operations of the component of an entity that either has been
disposed of or is classified as held for sale if:
a) the operations and cash flows of the component have been (or will be)
eliminated from the ongoing operations of the entity as a result of
the disposal transaction, and
b) the entity will not have any significant continuing involvement in the
operations of the component after the disposal transaction.
An asset grouping as defined in SFAS 144 is the lowest level at which cash flows
can be identified that are largely independent of the cash flows of other asset
groups. Significant judgment is required to determine the lowest level of
identifiable, largely independent cash flows. In assessing the classification in
our 2004 Annual Report on Form 20-F within discontinued operations of individual
products, product groups or businesses, we considered whether there were
significant revenue or operating activity interdependencies between these
products, product groups or businesses. While all of the products and businesses
shared common group resources such as accounting, finance, group sales and
marketing and general corporate overhead, they all had unique product revenue
streams that were separately managed and measured and which were
12
not dependent on other products or businesses. Each product and business had its
own income statement, which included all directly attributable costs.
In addition, prior to their disposal we identified each of these products,
product groups and businesses as individual assets held for use and measured
each asset for impairment in accordance with the provisions of paragraphs 7-14
of SFAS 144. Each product, product group or business was unique and had its own
discrete revenues and costs that enabled us to measure its fair value and
compare this with its carrying value for impairment assessment purposes. We did
not aggregate products, product groups or businesses to perform this analysis.
We have recorded the results and gains or losses on the divestment of our
discontinued operations including Frova, Myobloc, the Pain Portfolio, Actiq,
Abelcet U.S./Canada, the dermatology portfolio of products, Athena Diagnostics,
Elan Diagnostics, drug delivery businesses, Myambutol and various other smaller
operations within discontinued operations in the consolidated income statements,
because the respective cash flows have been elimated from our ongoing operations
and we do not have a significant continuing involvement in the operations of
these components.
The following table summarizes each of the divestments and the nature of assets,
liabilities and operations that were included in the transaction.
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Asset/Business Name Nature of Transaction Classification
Frova Intellectual property rights, Business/Asset
title and interest, sales and group
distribution rights, inventory,
books and records, equipment,
customer base, and benefits to
contracts related to Frova.
Myobloc Intellectual property rights, Business/Asset
title and interest, inventory, group
books and records, rights to
manufacturing facility,
manufacturing and customer service
employees, and specialized equipment.
Pain Portfolio Intellectual property rights, Business/Asset
title and interest, books and group
records, and inventory.
Actiq Intellectual property rights, Product/Asset
title and interest, books and group
records, and inventory.
Abelcet Intellectual property rights, Business/Asset
title and interest, inventory, group
books and records, and
manufacturing facility and
related employees, including
certain sales force.
Dermatology Intellectual property rights, Business/Asset
title and interest, inventory, group
sales force, and books and records.
Diagnostics Legal entities, collectively all Reporting Unit
of the assets and liabilities,
including intellectual property
rights, title and interest,
facility, books and records, and
employees.
Drug Delivery Legal entities, collectively all Reporting Unit
of the assets and liabilities,
including intellectual property
rights, title and interest,
facility, books and records,
and employees.
Myambutol Intellectual property rights, title Product/Asset
and interest, inventory, books and group
records, and specialized equipment.
Others Intellectual property rights, title Product/Asset
and interest, inventory, and books group
and records.
Each product, product group or business included in discontinued operations
meets the definition of an asset group as set out in paragraph 4 of SFAS 144 as
cash flows can be separately identified for each of these components of the
business (i.e. cash flows which are largely independent from
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other cash flows of the business). The disposal of Frova, Myobloc, the Pain
Portfolio, Dermatology, Abelcet, Diagnostics and drug delivery businesses have
been determined to constitute a sale of a business in accordance with the
criteria outlined in paragraph 6 of EITF 98-3 and SEC Rule SX 210.11.01(d), and
would therefore meet the definition of an asset group as outlined in paragraph 4
of SFAS 144. For a transferred set of assets and activities to be a business, it
must contain all of the inputs and processes necessary for it to continue to
conduct normal operations after the transferred set is separated from the
transferor, which includes the ability to sustain a revenue stream by providing
its outputs to customers. We believe each of the above components is a
self-sustaining integrated set of assets and activities conducted and managed
for the purpose of providing a return to investors and consisted of inputs and
processes that were used to generate revenues. Diagnostics and the drug delivery
businesses were separate subsidiaries of the Company while Dermatology, the Pain
Portfolio, Frova, Mybloc and Abelcet were assets or groups of assets and
activities that had all of the major elements necessary to be a business by
itself.
Other individual products we have divested principally include Myambutol, Actiq,
Ultiva, and Ponstan. Individual products are the lowest level at which we can
separately identify cash flows in our business, which are not dependent on the
cash flows of other groups of assets and liabilities. Separate income statements
are maintained for each product and these financial statements are used for
management reporting purposes to review the performance of each product on a
stand-alone basis. The individual product income statements include the product
revenue, related cost of sales and any selling, general and administrative and
research and development expenses that are directly attributable to the product,
but do not include any allocation of general corporate overhead expenses. Within
our management reporting system, a separate cost center is maintained for each
product where direct expenses are charged as incurred, therefore it is possible
to determine cost of sales, selling, general and administrative expenses and
research and development expenses directly attributable for each product. The
individual product income statements form the basis for the results from
discontinued operations included in the consolidated financial statements.
3. Note 31. Segment Information
We noted your disclosure on page 36 with regards to product revenues. Please
tell us why you have not provided the disclosures required by paragraph 37 of
FAS 131 here in the audited financial statements.
15
Elan's Response:
We acknowlege that our disclosure in the audited financial statements regarding
segment information does not meet the requirements of paragraph 37 of FAS 131
and hereby respectfully propose to amend our 2004 Annual Report on Form 20-F
with the following additional disclosure.
Biopharmaceuticals GS&O Total
------------------------- --------------------- -----------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ---- ---- ---- ----
(US$ in millions)
Product revenue:
Retained products
Maxipime 117.5 109.1 79.2 -- -- -- 117.5 109.1 79.2
Azactam 50.6 45.1 33.0 -- -- -- 50.6 45.1 33.0
Tysabri 6.4 -- -- -- -- -- 6.4 -- --
Contract manufacturing
and royalties 15.3 12.4 9.4 115.6 107.6 109.1 130.9 120.0 118.5
------- ------ ----- ------ ------ ------ ------ ------ -------
Total retained
products' revenue 189.8 166.6 121.6 115.6 107.6 109.1 305.4 274.2 230.7
Amortized revenue
- Adalat/Avinza -- -- -- 34.0 34.0 7.8 34.0 34.0 7.8
Divested products
European business 10.5 89.0 81.7 -- -- -- 10.5 89.0 81.7
Zonegran 41.2 80.7 43.1 -- -- -- 41.2 80.7 43.1
Skelaxin -- 60.2 145.4 -- -- -- -- 60.2 145.4
Sonata -- 48.2 92.5 -- -- -- -- 48.2 92.5
Zanaflex 7.7 (5.2) 56.8 -- -- -- 7.7 (5.2) 56.8
Other 5.6 5.6 21.6 -- -- -- 5.6 5.6 21.6
Total divested
products revenue 65.0 278.5 441.1 -- -- -- 65.0 278.5 441.1
Co-promotion fees -- -- 62.8 -- -- -- -- -- 62.8
------- ------ ----- ------ ------ ------ ------ ------ -------
Total product revenue 254.8 445.1 625.5 149.6 141.6 116.9 404.4 586.7 742.4
Contract revenue:
License fees 13.4 27.6 5.0 4.2 22.0 229.7 17.6 49.6 234.7
Risk-sharing arrangements -- -- 37.2 -- -- -- -- -- 37.2
Research revenues
/milestones 6.9 7.0 20.8 52.8 42.3 58.0 59.7 49.3 78.8
------- ------ ----- ------ ------ ------ ------ ------ -------
Total contract revenue 20.3 34.6 63.0 57.0 64.3 287.7 77.3 98.9 350.7
Total revenue $275.1 $479.7 $688.5 $206.6 $205.9 $404.6 $481.7 $685.6 $1,093.1
We acknowledge that: (i) we are responsible for the adequacy and accuracy of the
disclosure in our 2004 Annual Report on Form 20-F; (ii) Staff comments or
changes to disclosure in response to Staff's comments do not foreclose the
Securities and Exchange Commission from taking any action with respect to the
filing; and (iii) we may not assert Staff comments as a defense in any
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proceeding initiated by the Securities and Exchange Commission or any person
under the federal securities laws of the United States.
We believe that we have fully responded to the Staff's comments. However, if you
have any questions about any of our responses or require further information,
please do not hesitate to telephone me at 011-353-1-709-4063 or Elan's group
controller, Nigel Clerkin, at 011-353-1-709-4234.
Yours sincerely,
/s/ Shane Cooke
Shane Cooke
Executive Vice President and
Chief Financial Officer
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