Journalists and analysts covering pharmaceutical companies’ first-quarter earnings may have noticed a shift in the way initial payments made to fund research and development are accounted for by companies in which they have acquired stakes.
Pfizer Inc. PFE,
Merck & Co. MRK,
Bristol-Myers Squibb Co. BMY,
and Eli Lilly & Co. LLY,
All have included general language in their versions to explain the change, which involves adjustments that were being made to certain non-GAAP metrics, or those that do not conform to the 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, which are available on the SEC website. The message seems to have reached other pharmaceutical companies.
See also: Approached by the challenges with his drug for Alzheimer’s disease, Biogen pivots
“The pharmaceutical industry is very focused on regulatory issues by its trade associations and industry forums,” said Francine McKenna, an accounting expert and incoming professor at Wharton School at the University of Pennsylvania. (McKenna is a former MarketWatch reporter.)
“If you receive a letter from the SEC, it won’t take long to find out and act without having to say it directly,” McKenna said.
In a letter dated March 25, 2021, the SEC questioned Biogen’s exclusion from the initial payments and premiums paid for the acquisition of common shares in some of its partnership partners to reach Non-GAAP R&D and net non-GAAP revenue.
In a response dated April 7, 2021, Biogen said it excluded these costs “to better reflect our core operating performance,” arguing that these payments differ from the usual recurring costs incurred in the course of business.
Also read: According to experts, Swan’s use of adjusted earnings in quarterly earnings does not conform to SEC rules
The SEC disagreed in a letter the following month, referring to Biogen in the May 2016 guide to using non-GAAP metrics, which said that creating performance measures that exclude normal spending is misleading.
The SEC issued new guidelines for corporate reporting in 2016 in an effort to curb the proliferation of non-GAAP numbers and curb the worst offenders. The SEC allows companies to use non-GAAP numbers to supplement their reports, but they should 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 on April 14 this year said the company expected to have charges for the quarter ended March 31 of about $ 165 million, equivalent to 15 cents earnings per share.
“The company is making these changes to its presentation of non-GAAP financial measures following the guidelines of the U.S. Securities and Exchange Commission (the“ SEC ”),” the presentation said.
Merck said the change in accounting meant an additional $ 1.7 billion in R&D spending for 2021, which reduced the full year’s EPA 65 cents to $ 5.37.
Bristol Myers said the accounting change fell 10 cents from first-quarter EPS. Pfizer came out lighter, saying on Tuesday that the accounting change only cost it 5 cents EPS in the first quarter.