Thursday, July 14, 2022

By Olga Usvyatsky

We recently had a post exploring how SEC comment letters prompted several large pharmaceutical companies to reconsider their non-GAAP reporting. Those comment letters directed pharma heavyweights Pfizer ($PFE), Eli Lilly ($LLY), Bristol Myers Squibb ($BMY), and Biogen ($BIIB) to stop excluding acquired in-process research and development (IPR&D) expenses from the calculation of their adjusted earnings numbers.

That exclusion of acquired R&D expenses could significantly increase non-GAAP EPS compared to GAAP-based metrics. For example, if Bristol Myers Squibb continued to exclude IPR&D, that would have added $0.10 (or 16.9 percent) to the first quarter of 2022 GAAP EPS of $0.59, and 5.1 percent to the non-GAAP EPS of $1.96.

When high-profile players in the pharma industry address SEC concerns by materially altering non-GAAP presentations, other companies in the sector typically should follow suit — or risk getting their own SEC comments. But did all the companies get the memo?

To answer this question, we examined non-GAAP disclosures of about 50 pharma companies with annual revenue above $500 million. We found no companies with material non-GAAP acquired IPR&D expenses in the first quarter of 2022 — but roughly 15 percent of the companies in our population did report non-GAAP IPR&D charges in 2021, and did not update their non-GAAP disclosures even after that warning shot the SEC fired at Pfizer, Biogen, Eil Lilly, and Bristol Myers Squibb.

For example, look at Bausch Health Companies ($BHC) non-GAAP earnings reported on May 10, 2022. The company had $2 million in acquired in-process R&D costs in the first quarter of 2021 and no non-GAAP IPR&D expenses in the first quarter of 2022. See Figure 1, below.

OK, but notice the definition of non-GAAP metrics, including acquired in-process research and development as one of the items used by the company to arrive at Adjusted Net Income. (Emphasis is ours.):

“Adjusted net income (non-GAAP) is net income (loss) attributable to Bausch Health Companies Inc. (its most directly comparable GAAP financial measure) adjusted for restructuring and integration costs, acquired in-process research and development costs, loss on extinguishment of debt, asset impairments (including loss on assets held for sale), acquisition-related adjustments, excluding amortization, separation and IPO costs and separation-related and IPO-related costs and other non-GAAP charges as these adjustments are described above, and amortization of intangible assets…”

Now, it’s quite possible that Bausch Health may have already changed its non-GAAP policy, but didn’t recast previous years and hadn’t yet updated its non-GAAP definition.  As discussed in our earlier posts, there is no requirement to disclose changes in non-GAAP methodologies.

At the same time, about 30 percent of companies in our sample did clearly state that they complied with the new SEC guidance and will no longer exclude acquired IPR&D expenses. The remaining 55 percent of companies had no non-GAAP acquired IPR&D costs in either 2021 or 2022.

Overall, companies took the SEC directive seriously and updated their non-GAAP policies. But disclosure on this issue appears to be still evolving, and we may see more changes in the next several quarters.

Olga Usvyatsky is a PhD student in accounting at Boston College and occasional contributor to the Calcbench Blog. She can be reached at

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