AGN "Accounting Acrobatics"
forbes.com
Allergan. The Irvine, Calif. pharmaceuticals maker is ramping up an ad campaign as it awaits government approval of its Botox product for wrinkle-fighting. All this has The Street cheering Allergan's stock to $58, 34 times earnings.
But behind the glowing numbers are some curious off-balance-sheet research entities that Allergan (nyse: AGN - news - people ) has used to protect its bottom line. Allergan joins PeopleSoft (FORBES, Jan. 21) and Elan (Sept. 17, 2001) in this cost-shifting masquerade.
In Allergan's deals, it joins another company in a joint venture, makes a cash investment, then gets some or all of the cash back in the form of a fee for doing R&D. Chief Financial Officer Eric Brandt argues that Allergan uses the move to compete with the pharmaceutical big boys and that its accounting is legitimate.
Flash back to 1997, when Allergan launched a subsidiary, Allergan Specialty, and funded it with $200 million. The unit was going to develop drugs for eye diseases like glaucoma. In March 1998 Allergan spun off the unit, distributing its Class A common stock to Allergan shareholders. Allergan recorded most of the $200 million as a nonrecurring charge (the sort Wall Street tends to ignore) and kept an option to buy the unit. Was the unit now dealing with its former parent at arm's length? Not exactly. Three Allergan officials, including its chief executive, sat on Allergan Specialty's board.
Next, the unit recycled the $200 million back to Allergan to cover Allergan's own R&D expenses. For every buck Allergan spent on research, it billed Allergan Specialty $1.10. Besides covering costs, Allergan got a fee for licensing certain technology to the unit. If Allergan had incurred the R&D costs directly, the costs would have cut deeply into its earnings. Without Specialty, we estimate Allergan's 2000 earnings per share would have been $1.15, instead of the reported $1.61. |
