Pharmas, biotechs and others may want to take notice—if they haven’t already—of a series of SEC comment letters to global biopharmaceutical company, Biogen, about one of the company’s non-GAAP financial measures. More specifically, in 2021, the SEC staff objected to the company’s exclusion from non-GAAP R&D and non-GAAP net income of material upfront and premium payments made in connection with collaboration agreements. In the end, Biogen agreed to discontinue these adjustments going forward and to recast prior period information. As reported in this article in MarketWatch, this year a number of biopharmas have taken a lesson from the exchange between Biogen and the SEC staff and have included language in their earnings releases explaining similar changes in practice, following guidance from the SEC staff, regarding exclusion of upfront payments from non-GAAP R&D. Moreover, the article indicated, the impact of the changes was “not insignificant,” leading, in one example, to a change of $0.15 in EPS for a single quarter.

In a March 25, 2021 letter to the Biogen regarding the company’s 8-K filed February 3, 2021, the staff issued a comment pointing out that the company had “excluded upfront payments and premiums paid for the acquisition of related common stock to arrive at non-GAAP R&D expense and non-GAAP net income.” How, the staff asked, had the company considered Question 100.01 of the Non-GAAP CDIs in connection with these adjustments? In particular, the comment noted the company’s statement that it entered into these collaboration agreements as part of its business strategy.

SideBar

CDI 100.01, you may recall, states as follows:

“Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]”

In its response, the company explained that it excluded from non-GAAP R&D expense material upfront payments associated with significant collaboration and licensing arrangements and premiums paid for the acquisition of related common stock “to better reflect our core operating performance.” But these payments and premiums, the company asserted, were not “normal, recurring, cash expenses necessary to operate our business.” Rather, they differed “in their timing, nature and how they are viewed by our management and treated for incentive compensation purposes”: they were unpredictable, infrequent, distorting in their impact, separately negotiated and diverged in a number of other ways from normal, recurring R&D, the company argued. As a result, the company did “not believe that our policy causes the presentation of our Non-GAAP Financial Measures to be misleading.”

But the staff was not persuaded, insisting that it believed that these adjustments were “inconsistent with the guidance in Question 100.01.” The company continued to press its case by letter and over the phone, ultimately requesting—without success—that, “[i]n the event that we are no longer able to include these adjustments in any Non-GAAP financial measures,…that we apply this treatment prospectively with no recasting of prior periods.” But the staff did not relent. In the end, the staff asked the company to confirm that it would “no longer include these adjustments in any non-GAAP financial measure presented in accordance with Item 10(e) of Regulation S-K or Regulation G for all periods presented in future filings.” The company also agreed to “recast prior period information to conform to current year presentation.”