SEC raises red flags over Valeant's 'non-GAAP' measures

Valeant has been working to improve its financial transparency since an accounting blunder it uncovered last year forced it to restate earnings. And the SEC, which raised concerns about Valeant’s disclosures in newly public correspondence, had some suggestions on how to do that.

The commission reviewed the Canadian drugmaker’s use of “non-GAAP” financial measures and raised some concerns in a letter sent to the company in December, The Wall Street Journal reports. In particular, the body took issue with Valeant’s practice of stripping out acquisition-related expenses from its non-GAAP measures--considering “acquisition” has basically been Valeant’s middle name over its past few years of serial dealmaking.

In comment letters, the SEC asked Valeant to explain why it removed “the impact of acquisition-related expenses” and questioned what it meant by “core” operating results, when operations relied on a series of hefty buys. Valeant stripped out $400 million in “restructuring, integration, acquisition-related and other costs” from its non-GAAP tally in 2015, and nearly $1.3 billion over the last three years, according to the Journal.

SEC staffers 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 the Quebec-based pharma in a Dec. 4 letter, as quoted by the WSJ.

The SEC also took issue with Valeant’s disclosure of the tax effects of the costs it stripped out of its non-GAAP measures, labeling that strategy “potentially misleading.”

As a company spokeswoman told the newspaper, Valeant “believes that its disclosures were in accordance with applicable SEC rules,” but it said in response to the letters that it would tweak its disclosures in the future.

While the SEC’s feedback came as part of a regular review of the company’s filings, it’s also looking into the company’s former relationship with now-dead specialty pharmacy Philidor, the subject of the $58 million in accounting missteps that forced a recent earnings misstatement. And the criticism “could add gravity” to that investigation and other ongoing probes into the company and its business practices, Wells Fargo analyst David Maris wrote in a note seen by the WSJ.

Meanwhile, Valeant is doing its best to get itself back after channel-stuffing allegations, debt-default worries and political pricing pushback decimated its share price. Earlier this year, now-departed CEO J. Michael Pearson promised that improving "Valeant's reporting procedures, internal controls and transparency" were among the company’s top priorities; new skipper Joseph Papa has since taken up the mantle, and he said earlier this week at the UBS Global Healthcare Conference that he plans to give shareholders a deeper look into how individual business units are performing, Bloomberg reports.

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