Thursday, May 26, 2016

Valeant staff comment dialogue spotlights non-GAAP measures

By Mark S. Nelson, J.D.

Valeant Pharmaceuticals International, Inc.’s answers to queries by SEC staff about the company’s financials may offer a glimpse into the SEC’s recent focus on non-GAAP financial measures. As the Valeant dialogue progressed, the staff and Valeant even tussled over whether a non-GAAP presentation that implied the company could produce billions in pre-tax profits while paying only a tiny tax bill could be misleading. The SEC’s latest non-GAAP guidance arrived after the Valeant dialogue ended yet before Valeant’s comment letters appeared publicly on EDGAR. Still, some of the agency’s concerns with Valeant’s presentation are at least broadly suggestive of topics covered in the agency’s revised C&DIs (SEC Staff Letters: December 4, 2015, February 1, 2106, March 18, 2016, April 26, 2016; Valeant’s Replies: December 18, 2015, February 16, 2016, April 1, 2016, April 8, 2016).

In a broadside query to Valeant’s Form 8-K, the SEC staff stated its worries about the “overall format and presentation” of Valeant’s non-GAAP measures. Valeant replied that it includes these items because it considers them to be useful to analysts and other investors who wish to see the company’s operating results through the lens used by its managers. Valeant also said the non-GAAP measures are responsive to frequent questions it gets from the analyst community and investors, and that inclusion of the measures may help the company to avoid troubles that might otherwise arise under Regulation FD.

In a follow-up comment, the staff asked Valeant to remove references to “core operating results,” which the company’s reply indicated it would do. Previously, Valeant had explained to the staff that it had grown via both acquisitions and organic growth.

The SEC staff also peppered Valeant with numerous, more specific questions about various features of the company’s non-GAAP measures. Valeant repeatedly said it would update its future filings. Specifically, the staff asked Valeant to give equal prominence to GAAP financial measures, to avoid the use of confusingly similar titles and descriptions per Item 10(e) of Regulation S-K, and to do more to identify and explain each non-GAAP measure and the most directly comparable GAAP measure.

Moreover, Valeant was asked to revise several tables to better quantify tax matters. A later reply by Valeant indicated the company would do more to explain adjustments in its future earnings releases. The company also clarified that its earlier presentation followed ASC 740-270.

The SEC staff also went beyond the Form 8-K and commented on Valeant’s Q3 2015 financial results presentation based on information gleaned from the company’s investor relations webpage. Here, the staff wanted Valeant to remove certain words related to “cash EPS” and to add cross references to its reconciliation to non-GAAP measures under Item 100 (Note 1) of Regulation G.

Valeant’s drug pricing practices have been separately targeted by a congressional committee that heard testimony from Valeant’s interim CEO. In March, the company announced that it would seek to replace CEO J. Michael Pearson and that the company was adding William Ackman, CEO of Pershing Square Capital Management, L.P., to its board. The company’s press release also offered a further explanation of its accounting and financial reports. The SEC staff indicated that it had completed its review of Valeant’s Form 8-K.

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