VRX Bausch Health Cos

By Michael Rapoport 

The Securities and Exchange Commission reviewed Valeant Pharmaceuticals International Inc.'s use of adjusted "non-GAAP" financial measures and criticized Valeant's disclosures at one point as "potentially misleading, " according to newly public correspondence between the SEC and the company.

The SEC took issue with Valeant's practice of stripping out acquisition-related costs from its customized non-GAAP measures given that the Canadian drug company's business strategy was heavily dependent on acquisitions, according to comment letters the SEC sent to the company starting in December. The commission also questioned Valeant's disclosure of the tax effects of the costs it stripped out of its non-GAAP measures.

SEC staff members are "concerned with your overall format and presentation of the non-GAAP measures and believe revisions to your future earnings releases and investor materials are appropriate," the SEC's corporation-finance division wrote to Valeant in a Dec. 4 letter.

In responses to the SEC letters, Valeant defended its use of non-GAAP measures but said it would make changes in its disclosures. A Valeant spokeswoman said in a statement Tuesday that the company "believes that its disclosures were in accordance with applicable SEC rules."

The SEC has recently stepped up criticism of non-GAAP metrics -- unofficial measures of corporate earnings that don't follow generally accepted accounting principles, or GAAP. These measures strip out non-cash and one-time items to present what companies say is a clearer picture of their true performance, but critics contend the companies are taking out expenses they shouldn't and making themselves appear stronger than they really are.

Valeant had a GAAP loss of $291.7 million in 2015 versus an adjusted profit of $2.84 billion, after stripping out items like restructuring and acquisition costs, impairment charges and amortization of intangible assets.

The comments came as part of a regular SEC review of Valeant's filings, which the commission said in an April 26 letter it had completed. They don't result in any penalty for the company.

The correspondence shows the SEC's "lack of comfort" with Valeant's reporting, said Wells Fargo & Co. analyst David Maris, who has often been critical of Valeant. It "could add gravity" to the various regulatory investigations of the company, he said, including the SEC's own probe into Valeant's ties to a mail-order pharmacy which helped the company get insurance reimbursements for its often high-priced drugs. Valeant earlier this year restated earnings with regard to $58 million of revenue in connection with the pharmacy.

Valeant is trying to move forward after months of questions about its accounting and business practices. The company has replaced its chief executive and much of its board, filed its belated annual report and vowed to curb the dramatic drug-price increases that drew political backlash.

Valeant's stock slipped 0.4% Tuesday to close at $26.11. The company's shares have lost about 90% of their value since hitting their high last August.

In the comment letters, the SEC asked Valeant to justify "why you remove the impact of acquisition-related expenses" and questioned the company's reference to its "core" operating results, since its operations were so reliant on large, frequent acquisitions. Valeant stripped out $400 million in "restructuring, integration, acquisition-related and other costs" from its non-GAAP earnings in 2015, and nearly $1.3 billion in the last three years.

Valeant replied that acquisition expenses were "not related to the company's core operating performance," and said that the volume and size of its acquisitions had varied over time. But the company agreed to stop referring to "core" results.

In addition, the non-GAAP numbers seem to assume a low tax rate, the SEC said in a March 18 comment letter, giving the impression Valeant could generate big pre-tax profits without paying any significant amount of taxes. "We find this presentation to be potentially misleading," the SEC said.

Valeant responded that it believed its approach had been "reasonable" but said it would address the SEC's concerns. In March, the company said it would change the tax reporting it uses when calculating its non-GAAP metrics.

Among other issues, the SEC questioned whether Valeant was giving "equal prominence" to its GAAP results when it reported non-GAAP metrics, and criticized Valeant's name of "cash earnings per share" for its adjusted metric, arguing that the name could be confusing since it doesn't measure cash flows. Valeant agreed to give equal prominence to GAAP and to retitle cash EPS as "adjusted earnings per share," a change the company told investors about in December.

The SEC has become more critical of non-GAAP measures as evidence has mounted that they portray companies' performance in a much more favorable light than standard GAAP measures. Earnings of S&P 500 companies fell 0.5% on a non-GAAP basis in 2015 compared with the previous year, but GAAP earnings fell 15.4%, according to data from Thomson Reuters and S&P Dow Jones Indices.

Commission staff members have said recently that more comment letters would soon be released questioning companies' use of the customized metrics, and SEC Chair Mary Jo White has suggested new regulations may be needed if companies abuse the current rules. The rules allow companies to report non-GAAP metrics as long as they also disclose the comparable GAAP numbers and detail the differences between the two.

Justin Lahart contributed to this article.

Write to Michael Rapoport at Michael.Rapoport@wsj.com

(END) Dow Jones Newswires

May 24, 2016 18:13 ET (22:13 GMT)

Valeant Pharma (NYSE:VRX)
Historical Stock Chart
From Mar 2024 to Apr 2024

Valeant Pharma (NYSE:VRX)
Historical Stock Chart
From Apr 2023 to Apr 2024