Jack Schuler, one of Elan Corp.'s ( ELN) largest shareholders, is going public with his quiet, months-long quest to oust the Irish drug maker's CEO Kelly Martin. Schuler, frustrated by the company's refusal to listen to him and other large investors, reached out to me over the weekend after reading my column last week in which I named Martin the worst biotech CEO of 2008. "There is no evidence that Kelly
Martin has any experience managing a group of people, let alone any understanding of how pharmaceuticals are marketed," Schuler told me a in a lengthy conversation Sunday night, detailing his reasons for why Elan's board of directors should fire Martin and replace him with a drug industry veteran. "Add to that the egregious spending under Kelly's watch, all these corporate jets flying all over the place, and naming his former Merrill Lynch co-workers as executive vice presidents, it's so off the charts. Where is the board? I can only conclude that Kelly has them all mesmerized." Schuler owns about 5.5 million shares of Elan, or about 1% of the company. He's not just a rich investor who's decided to become an activist shareholder, but someone with a ton of executive and management experience in the drug industry. He joined a diagnostic division of Abbott Labs ( ABT - Get Report) in 1972 and left in 1989 as the company's president and chief operating officer. After that he funded the startup of Stericyle ( SRCL - Get Report) and Ventana Medical Systems, taking on the chairmanship of both companies. Ventana was sold to Roche earlier this year for $3.4 billion. Schuler is a former director at Amgen ( AMGN - Get Report) and Chiron (now owned by Novartis ( NVS - Get Report) and currently sits on the board of Medtronics ( MDT - Get Report).
Elan shares were down 3.9% to $6.91 Monday and have lost about 70% of their value this year, leading to my award last week. "You and I performed a different analysis but we definitely reached the same conclusion," said Schuler, who's also making his frustration known to other media outlets. Last week, Schuler sent a letter to Elan chairman Kyran McLaughlin in which he blasted Martin for the "unacceptably low sales performance" of Elan's multiple sclerosis drug Tysabri and "mismanagement" of the partnership with Biogen Idec ( BIIB - Get Report), which co-markets Tysabri. Schuler, in his letter, also took aim at "egregious misuse of company resources" under Martin's leadership. "I was shocked to read recently in a press article that the company provides the CEO access to corporate jets, some of which are the largest and most expensive," Schuler wrote. "For your CEO to fly from his home to the heart of the company in San Francisco would cost between $100,000 and $150,000 depending on the plane he chooses. A commercial ticket could typically be had for less than $1,000. Do you and the other Board members also use these jets? I wonder what would be the results if the money spent on corporate jets were instead spent with the talented Elan scientists to create life savings drugs." In our conversation Sunday, Schuler says he decided to write the letter to Elan Chairman McLaughlin and go public with its contents because Elan's board has refused to meet any of the demands made by him and other large investors.
"Every large Elan shareholder has come to me with concerns about Martin and that includes Fidelity and Wellington," he says referring to the mutual fund giants who are Elan's largest shareholders. Schuler began talking to McLaughlin in August, originally asking that the company install two new directors with deep drug-marketing experience onto the company's board. "These two people are former top executives at major pharmaceutical companies who knew me and were willing to join Elan's board. These are guys that any biotech company would dream to have on their board," says Schuler. But Schuler says that Elan's chairman stonewalled and ultimately denied the request. He believes Martin had a role in scotching any changes to the Elan board because "Kelly
Martin realized that once we had adult supervision on the board, his days would be numbered." Elan announced Friday that it was taking some cost-cutting steps, including the closure of offices in New York and Tokyo. Elan is headquartered in Dublin, Ireland but has the bulk of its employees, including nearly all of its researchers, in San Francisco. Martin maintained his official CEO's office in New York, close to where he lives. Elan spokeswoman Mary Stutts says San Francisco will be Elan's U.S. headquarters and will be where Martin maintains his new office. She did not know whether Martin intended to relocate to San Francisco. Stutts also confirmed the retirement of Karen Kim, an Elan executive vice president in charge of commercial, communications and corporate development. Kim was a former Merrill Lynch executive brought to Elan by Martin. She last appeared publicly alongside Martin at a Thomson Reuters investor conference on Nov. 18.
Kim's commercial responsibilities have been assumed by new Elan President Carlos Paya, according to Stutts. On Friday, Elan Chairman McLaughlin sent a letter to Schuler in response in which he said that Biogen Idec has been a "good partner" for Tysabri and that the "marketing of this drug has been very successful, particularly given the unique challenges faced, including the fact that it is only one of two drugs ever to have been reinstated after an FDA-mandated withdrawal from the market." Tysabri was removed from the market in 2005 after three patients were diagnosed with the serious brain infection progressive multifocal leukoencephalopathy (PML). Elan and Biogen Idec were allowed to return Tysabri to the market in July 2006 with an intensive safety monitoring program to detect further cases of PML. Since then, additional Tysabri patients have reported suffering from PML, including a new case reported by Biogen Idec on Monday. McLaughlin also rejected Schuler's claim that Elan's executives lack pharmaceutical experience and said that Kelly has been "highly effective in streamlining our operations and positioning us to make the most of our pipeline." "Furthermore, I would note that total SG&A expenditures under Kelly have dropped by
approximately 60% since he joined the company and headcount has been reduced by 65%," McClaughlin added in his letter to Schuler, a copy of which I obtained over the weekend. Elan spokeswoman Stutts says Elan's board "is aware of the concerns about the company's stock price and doesn't believe that the stock price reflects the company's products or pipeline."
She adds that the board "solidly supports Martin and his leadership." Schuler says he and other Elan investors will not stop until the company's board reduces headcount by one more body, namely Martin. "We are not going away. The reason I and the other large shareholders have not simply sold our positions in Elan and walked away is because this company has such tremendous potential. We feel like we are doing a service for the rest of the shareholders and trying to fix a problem," Schuler told me. He added, "I don't know when the board will break, but they will, and when they do, Martin will be gone and changes will be made."