UPDATE: Actelion Dismisses Investor Criticism Ahead Of AGM

Actelion Ltd (ATLN.VX) Monday dismissed criticism from investor Elliott Advisors, who bashed the Swiss firm's management for having lost a legal battle that could cost Europe's largest biotech more than $500 million and renewed its call for a board overhaul, urging investors to back its proposals at this week's annual shareholder meeting.

Investors, meanwhile, voted with their feet in the wake of the costly legal verdict and dumped Actelion's stock, which fell more than 5% in early Monday trade. The fall erased some CHF400 million of Actelion's market capitalization, which currently hovers around CHF6.2 billion. At 0940 GMT, the shares were down 5.4%, or CHF2.75, at CHF48.2.

Actelion said Sunday that a U.S. jury last Friday had awarded Japan-based drug maker Asahi Kasei Pharma Corp. (AHKSY) up to $547 million. It also warned of potential punitive damages stemming from the legal fight with the Japanese firm, which revolves around a drug compound Actelion decided to discontinue when, in 2007, it took over CoTherix, which had a development agreement with Asahi Kasei.

Analysts said the verdict came at a very bad time for Actelion, warning that the punitive damages could be several times higher than the initial award. Brokerage Helvea analyst Olav Zilian, however, said Actelion is likely to appeal the jury's verdict.

The legal battle has already cost Actelion some CHF90 million and may further undermine the credibility of its contested management and board ahead of the crucial investor meeting May 5 in Basel. Elliott Advisors, which is owned by $17 billion U.S. hedge fund Elliott Management, said the court room loss was a reflection of Actelion's "poor management as well poor corporate governance by the Actelion board." It urged shareholders who have planned to back the Swiss firm at the investor meeting to amend already submitted proxies, saying "it's not too late to save Actelion." Actelion dismissed the criticism.

Elliott, which owns more than 6% in the Swiss company, wants to renew Actelion's board and has nominated six new board members, including former Novartis AG (NVS) executive James Shannon, whom it wants to run as chairman, replacing longstanding Rob Cawthorn. Elliott is also backing Actelion board nominees Jean-Pierre Garnier, a former GlaxoSmithKline PLC (GSK) chief executive, and former Schering-Plough chief financial officer Robert Bertolini. The new board should redefine Actelion's strategy, including a potential sale of the company.

Firms such as Amgen Inc (AMGN) and GlaxoSmithKline were believed to have considered a bid for the Swiss firm, but no official offer has been made and the companies have repeatedly declined to comment. Given the added legal trouble and Elliott's renewed pressure, Bank Vontobel analyst Andrew Weiss said "we see a possibility that Elliott may get its way and put Actelion up for sale, or Actelion seeks protection in the form of a strong partner."

Elliott's harsh criticism, which it made public earlier this year, follows a series of drug development setbacks at the biotech firm, which relies heavily on sales of its single blockbuster hypertension drug Tracleer, which generates the bulk of Actelion's roughly CHF2 billion in annual sales. Elliott has argued that once Tracleer loses its patent protection in 2015 and should the Swiss company fail to bring a follow-up drug on the market, the company would massively destroy shareholder value as such an outcome could force Actelion to cut costs and reduce its staff base.

Elliott is claiming that it has the backing of most hedge fund investors and that many institutional shareholders are likely to back it as well after U.S. proxy advisor ISS supported part of Elliott's proposals. According to an analysis by U.S. shareholder service firm Georgeson Inc, which was hired by Elliott, the hedge fund investor may prevail at the upcoming annual shareholder meeting. Analysts say that Actelion's court room loss could also help sway the result in favor of Elliott.

Actelion, meanwhile, is confident it can prevail at this week's meeting, shrugging off Elliott's critique. "Respectfully, the company believes that these criticisms have no factual basis," Actelion said in a statement Monday.

Actelion said that it will wait until the U.S. jury has concluded its deliberations before deciding to appeal the verdict and specifically address Elliott's criticism, which besides being directed against the company's board also centered on CEO Jean-Paul Clozel. Elliott has said it is exploring various legal options, "including whether Actelion has complied with ad-hoc publication requirements, whether the board and management have breached their fiduciary duties [and] whether there is criminal liability of management involved."

Actelion, which recently launched a CHF800 million share buyback and plans to pay out its first ever dividend in an attempt to win over investors, has received official backing for its strategy and board from Swiss investor Rudolf Maag, who owns about 4% in the company's capital, and Swiss investment company BB Biotech AG.

Actelion wants to stay independent as the board and management believe that its drug pipeline carries more shareholder value than investors could receive in a potential sale. Actelion is confident it can bring Tracleer follow-up drug macitentan to market in 2013, helping it shield itself from the expected sales drop after Tracleer loses its patent. Other drugs, such as a multiple-sclerosis compound, should help the concern going forward.

-By Goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; goran.mijuk@dowjones.com

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