SEC Flash Report: Non-GAAP Financial Measures applicable to the Pharmaceutical Industry

SEC Flash Report: Non-GAAP Financial Measures applicable to the Pharmaceutical Industry


Many registrants in the pharmaceutical industry present non-GAAP financial measures. Certain non-GAAP adjustments are common across registrants in the industry and include:

  • Acquired in-process research and development (IPR&D) costs in an asset acquisition, and

  • Upfront and contingent milestone payments in connection with collaborative and licensing arrangements (or, research and development (R&D) arrangements).

We understand that the SEC staff has recently provided its views on these non-GAAP adjustments to certain large pharmaceutical registrants, the views of which apply holistically to all registrants in the pharmaceutical industry. The staff communicated that it is not appropriate to present a non-GAAP financial measure that excludes expenses related to acquired IPR&D in an asset acquisition or upfront and contingent milestone payments in connection with R&D arrangements. The staff’s objections are premised on the notion that such expenses are normal, recurring operating expenses for pharmaceutical companies. We do not encourage companies outside of the pharmaceutical industry to apply this guidance by analogy.
The staff recognizes that these expenses are often material and important to communicate to investors. Registrants are welcome to supplementally disclose the expenses incurred in a particular reporting period in a footnote below their non-GAAP reconciliations. Moreover, in addition to disclosure of such amounts in the financial statement footnotes or elsewhere in a filing (e.g., management’s discussion and analysis), registrants may choose to separately classify these costs on the face of the income statement.
In most circumstances, if the staff objects to a registrant’s particular non-GAAP adjustment or performance measure, the registrant is permitted to amend its presentation in future filings. However, we understand that the staff may take a different approach for registrants in the pharmaceutical industry that continue to make non-GAAP adjustments for these items. If registrants are made aware of the staff’s views about these adjustments and continue to make them in their filings, the staff may require companies to amend and restate their filings to correct the non-GAAP presentation (we do not believe the requirement to restate will extend to filings made prior to the staff’s communication in April 2022).
Registrants in the pharmaceutical industry are advised to heed the staff’s guidance and make the appropriate changes to their non-GAAP financial measures in their upcoming filings.

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