On Feb. 2 of this year, Pfizer ($PFE) filed an 8-K earnings release. Tucked away on Page 28 of the filing, the pharmaceutical giant had this to say:
“Adjusted income and its components and Adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by GAAP and, therefore, are limited in their usefulness to investors. Because of their non-standardized definitions, they may not be comparable to the calculation of similar measures of other companies” (emphasis added).
While that statement might seem startling at first glance, it is indeed true — and not as startling as one might think. By definition, non-GAAP measures (frequently referred to as “adjusted”) are not standardized. When companies report, say, adjusted net income, the adjustments each company makes can be quite different from the adjustments that other companies make. Calcbench recently examined the types and magnitude of adjustments companies make in a special report you can find on our Research page.
What might be less known is that there are subtleties to these adjustments. For example, as the Calcbench report mentioned, the most common adjustment to net income is excluding the amortization of intangible assets. For pharma companies in particular, excluding the amortization of intangible assets can significantly increase adjusted net income.
Indeed, most pharma companies exclude the amortization of acquired intangible assets in their non-GAAP calculations of Net Income. This list includes such heavyweights as Biogen ($BIIB) and Bristol Myers Squibb ($BMY). It also includes Pfizer, which excluded the amortization of intangible assets as part of purchase accounting (M&A activity) from adjusted net income.
On Page 3 of its subsequent earnings press release later this spring, for Q1 of 2022, Pfizer wrote:
“Also in the first quarter of 2022, Pfizer implemented a change in policy to exclude all amortization of intangibles from Adjusted income, which favorably impacted Adjusted diluted EPS by $0.01 in first-quarter 2022 and by $0.02 in first-quarter 2021. Prior period amounts have been revised to conform to the current period presentation” (emphasis added).
Pfizer announced this accounting policy change in Q4 2021. At the time, the company mentioned that the guidance for full-year 2022 —
“Includes an estimated benefit of approximately $0.06 on Adjusted diluted EPS resulting from a change in policy for intangible amortization expense to begin excluding all amortization of intangibles from Adjusted income) compared to excluding only amortization of intangibles related to large mergers or acquisitions under the prior methodology. This change was effective beginning in the first quarter of 2022 and will require recasting prior period amounts to conform to the new policy” (emphasis added).
As a result, when using adjusted or non-GAAP measures, investors not only need to examine the adjustments made to GAAP net income and study the reconciliation of the two. They also need to examine the details of what is included in those adjustments!
For example, when a company excludes amortization of intangible assets, you need to pay attention to exactly which intangible assets are included in that calculation. Failing to do so might leave you comparing apples to oranges both across companies and over time. That makes for an unappetizing meal.
For the record, we examined both Biogen and Bristol Myers Squibb for similar language and found nothing to indicate that they were following Pfizer’s new adopted policy.
(’Thank you to Olga Usvyatsky, accounting PhD student at Boston College and friend of Calcbench, for giving us the idea to examine Pfizer’s disclosures. Usvyatsky herself will have a guest post taking a deeper dive into this issue next week.)
Or log in with:
No Account? JOIN FOR FREE