Drug companies make balance sheet change after SEC crackdown on Biogen

Reporters and analysts covering pharmaceutical companies’ first quarter earnings may have noticed a change in the accounting for prepayments made to fund research and development at companies in which they have acquired interests.

Pfizer Inc. PFE,
Merck & Co. MRK,
Bristol-Myers Squibb Co. BMY,
and Eli Lilly & Co. LLY,
have included all boilerplate text in their press releases to explain the change, which includes adjustments they made for certain non-GAAP measures or those that do not conform to generally accepted accounting principles, the US Standard.

The change comes after the Securities and Exchange Commission sent a series of comment letters to Biogen Inc. BIIB.
in 2021, that are available on the SEC website. The news seems to have reached other pharmaceutical companies.

See also: Plagued by challenges with his Alzheimer’s drug, Biogen turns around

“The pharmaceutical industry is quite club-heavy and has a heavy focus on regulatory issues in its trade associations and industry forums,” said Francine McKenna, accounting expert and incoming faculty member at the University of Pennsylvania’s Wharton School. (McKenna is a former MarketWatch reporter.)

“If you got a letter from the SEC, it wouldn’t be long before everyone knew about it and acted without being told directly,” McKenna said.

In a letter from March 25, 2021, the SEC questioned Biogen’s exclusion of upfront and premium payments made to acquire common stock from some of its collaboration partners in order to generate non-GAAP R&D expenses and non-GAAP net income.

in one Response of April 7, 2021, Biogen said it excluded those costs “to better reflect our core operating performance,” arguing that those payments are distinct from regular recurring costs that are borne over the course of the business.

Also read: Cigna’s use of adjusted sales in quarterly earnings doesn’t comply with SEC rules, experts say

The SEC disagreed in a letter the following month, citing Biogen’s guidance on using non-GAAP measures issued in May 2016, saying that preparing performance measures that exclude ordinary expenses is misleading.

The SEC issued new corporate reporting guidelines in 2016 to slow the spread of non-GAAP numbers and curb the worst offenders. The SEC allows companies to use non-GAAP numbers to supplement their reporting, but they must give equal or greater importance to GAAP numbers and explain how the two are reconciled.

The change is not insignificant.

In the case of Eli Lilly, for example, a regulatory filing dated April 14 of this year said the company expects to record approximately $165 million in expenses for the quarter ended March 31, which translates to earnings per share of 15 cents.

“The Company is making these changes to its presentation of non-GAAP financial measures in accordance with guidance from the US Securities and Exchange Commission (the “SEC”),” said the file.

Merck said the accounting will change resulted in additional R&D spending of US$1.7 billion for 2021, Full year EPS down 65 cents to $5.37.

Bristol Myers said the accounting change shaved 10 cents away from first quarter EPS. Pfizer got off lighter, saying Tuesday the accounting change cost it just 5 cents of EPS in the first quarter.

https://www.marketwatch.com/story/drug-companies-are-making-an-accounting-change-after-the-sec-cracked-down-on-biogen-11651604670?rss=1&siteid=rss Drug companies make balance sheet change after SEC crackdown on Biogen

Brian Lowry

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