Some more sleep-inducing stuff, this time of the accounting variety. The issue is SAB 101, the effective date of which has now been postponed until the fourth quarter. This accounting pronouncement appears to force companies to recognize even the up-front partnership money they get over time instead of immediately. This postponement means we will likely see some near-term upward surprises in earnings - see the VRTX announcement below as a striking example.
Personally I think it would have been better for the biotechs to report these payments gradually - makes them seem more "real" to the street. Of course which way they are reported is pure accounting gimmickry, and has no effect on economic reality. (Bottom line is they get the cash up-front, no strings attached).
Headline: Vertex Pharmaceuticals Reports Preliminary Results for the Second Quarter of 2000
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CAMBRIDGE, Mass., July 6 /PRNewswire/ -- Vertex Pharmaceuticals
Incorporated (NASDAQ:VRTX) announced today that it expects results for the
second quarter ending June 30, 2000 to be significantly higher than previously
anticipated. In particular, Vertex expects to report a profitable second
quarter with diluted earnings per share between $0.40 and $0.50. The Company
expects to report actual second-quarter financial results on July 25, 2000.
( Photo: newscom.com )
Vertex's financial results fluctuate from quarter to quarter based on the
timing of product revenues, partnership payments, and drug development
expenses. In the second quarter, Vertex received $22.5 million from Novartis
Pharma AG as part of the alliance Vertex and Novartis signed in May 2000.
Vertex will recognize approximately $18.5 million of this amount, including a
$15 million initial payment, as second quarter revenue, in accordance with its
current revenue recognition practices. Vertex will also recognize product
revenues and other partnership payments for the quarter, including a
previously announced $10 million license payment from Aventis S.A.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, which addresses accounting policies to be applied in the recognition,
presentation and disclosure of revenues from contract partnerships, like that
between Vertex and Novartis, in financial statements filed with the SEC. The
net effect of SAB 101, if applicable to payments such as those Vertex has
received from Novartis, would be to defer revenue recognition for some portion
of the amounts received into future accounting periods. On June 26, 2000, the
SEC deferred the implementation of SAB 101 from the second quarter of 2000
until no later than the fourth quarter of 2000, in order to provide companies
with additional time to determine the effect that a change in accounting
policy under SAB 101 will have on their revenue recognition practices. Vertex
and its independent accountants are continuing to review the potential effect
that implementation of SAB 101 would have on the Company's net financial
results. The implementation of SAB 101 could have a material effect on the
reported financial results for the year ending December 31, 2000.
The Company's agreement with Novartis, announced on May 9, 2000, focuses
on the discovery, development and commercialization of small molecule drugs
directed at targets in the kinase protein family. Over the course of the
collaboration, Novartis could, subject to milestones and other conditions,
make pre-commercial payments to Vertex of up to $800 million, based on the
successful discovery and full development of eight compounds.
Peter |
