SEC Asked Valeant to Change How It Reported Deal Costs, Tax

  • M&A costs shouldn’t be excluded as one-time items in results
  • Valeant, regulators exchanged letters from December to April

U.S. securities regulators last year told Valeant Pharmaceuticals International Inc. that it needed to clarify how it reported financial results to investors, and that expenses from the drugmaker’s many acquisitions shouldn’t be excluded from adjusted earnings as one-time costs.

In a series of letters between the Securities and Exchange Commission and Valeant from December to April, the drugmaker was told that it could no longer describe in earnings releases a “core” business that excluded the cost of deals, because Valeant made so many acquisitions that such activity was a regular part of its operations.

“Please revise this explanation in future earnings releases to remove any reference to your core operating results, given that your non-GAAP adjustments associated with your acquisitions appear to be directly attributable to your operations which consist of large, frequent acquisitions,” wrote Jim Rosenberg, senior assistant chief accountant in the SEC’s Office of Healthcare and Insurance, in a Feb. 1 letter.

Valeant, through its lawyers at Skadden, Arps, Slate, Meagher & Flom LLP, told the SEC in a Feb. 16 response that it would no longer use the “core” language.

Valeant’s lawyers also said, in an April 8 letter, that the company would change how it presented adjustments to earnings based on tax costs, after the SEC raised concerns that the way it presented its tax rates might mislead investors. The SEC said on April 26 that its review was finished.

Valeant engaged with the SEC as part of a review of its non-GAAP financial measures in certain filings, and the review was completed in April, Laurie Little, a Valeant spokeswoman, said in an e-mailed statement.

“Valeant has revised its methodology for calculating adjusted EPS,” or non-GAAP measures, she said, adding that this was disclosed in a filing on April 29. “The company believes that its disclosures were in accordance with applicable SEC rules.”

‘Lack of Comfort’

David Maris, an analyst with Wells Fargo who has been critical of Valeant’s reporting, called the SEC correspondence “concerning.”

“It shows, in our opinion, the SEC’s lack of comfort with and its criticism of Valeant’s reporting,” he said in a note to clients on Tuesday. Maris lowered his price target on the stock to $25 to $30, from $27 to $31.

Valeant was until recently one of the drug industry’s most acquisitive firms. From 2011 to 2015, the company completed 46 deals worth a total of $32.2 billion, according to data compiled by Bloomberg. The drugmaker has slowed its acquisition activity since late last year, when it faced questions over its accounting, price increases and a now-severed relationship with a controversial mail-order pharmacy. Valeant’s shares are down about 90 percent since their all-time peak in August.

The shares fell less than 1 percent to close at $26.11 in New York.

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