Valeant Pharmaceuticals’ use of non-GAAP financial reporting highlights widespread problems, former Biovail board member says

MONTREAL – Valeant Pharmaceuticals International Inc.’s long fall is warming up the controversy over whether the company is having its own reporting metrics to sugarcoat a bitter financial situation, leading a former board person in the drugmaker’s predecessor Biovail to speak out against a trend that’s been adopted by some of Canada’s largest businesses.

“It may not be illegal, but it is misleading,” said Spencer Lanthier, a chartered accountant who sat on the board of Biovail from 2008 until its September 2010 reverse merger with Valeant. 

Lanthier is referring to using adjusted net earnings, adjusted sales and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) – ways of reporting financial results that deviate from Generally Accepted Accounting Principles (GAAP), a common set of standards and procedures legally required by securities regulators.

The use of such non-GAAP disclosures strips away items for example one-off costs, moving companies say allows investors to higher judge the performance from the underlying business. 

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However, these adjusted numbers require investors and analysts to place their faith within the company managers who result in the reports.

“Since it is become so prevalent, nobody appears to be in a position to stop it at this point over time,” Lanthier said in an interview.

Lanthier said a big problem with Valeant is it considers mergers and acquisitions-related costs to be a part of these one-offs, which like a prolific acquirer can produce a huge difference in the bottom line.

On March 15, Valeant projected adjusted earnings per share to be between US$9.50 and US$10.50 for 2016, down from the previous guidance of US$13.25 to US$13.75.

This new, lower guidance helped send the stock plunging to half its value on one day. Lanthier said even this less optimistic number still doesn’t give a precise measurement.

It may not be illegal, but it is misleading.



By comparison, in exactly the same report Valeant gave its unaudited fourth quarter 2015 financial results with non-GAAP adjusted earnings per share as US$2.50, while listing GAAP earnings as a loss of 98 cents US per share. 

When it comes to guidance, Valeant doesn’t use GAAP measures since it says it would be difficult to quantify certain unknown amounts for example debt repayment, legal settlements or gains and losses from asset sales. 

Valeant officials were unavailable for comment, but, in news reports release on 2015 earnings the company said it believes these non-GAAP measures are useful to investors within their assessment of operating performance and valuation.

“By disclosing non-GAAP financial measures, management promises to provide investors having a meaningful, consistent comparison from the company’s core operating results and trends for that periods presented,” it said in a footnote from the March 15 report. 

Many of Canada’s biggest companies report using adjusted reporting measures, including Alimentation Couche-Tard Inc., Enbridge Inc. and Agnico Eagle Mines Limited. 

“Sometimes you will find really small differences and they might be reasonable, but there are outrageous cases such as (Valeant’s) where the difference is monumental,” Lanthier said. 

“If you are a company in the market where everyone is reporting in adjusted net earnings and also you don’t, then you’re in a disadvantage.”

If you are a company in the market where everyone is reporting in adjusted net earnings and you don’t, then you’re in a disadvantage.

The risks of non-GAAP reporting are on the radar of Canadian securities regulators, who say that by omitting selected items companies can paint a far more positive picture of monetary performance.

“Staff is concerned that investors may be confused or perhaps misled by non-GAAP financial measures,” said a notice from the Canadian Standards Association last revised on Jan. 19.

This isn’t just a recent concern for regulators. In 2013 the Ontario Securities Commission released a study after reviewing 50 companies that used non-GAAP reporting and said in 86 per cent of them staff identified concerns within their disclosures.

“The outcomes of our review were disappointing,” said the report. 

“Staff cautions issuers that regulatory action might be taken if the issuer discloses information inside a manner considered misleading and therefore possibly damaging to the public interest.” 

In February Valeant said hello would delay filing its annual report while a board committee looked into its accounting practices. Additionally, it said it would restate 2014 and 2015 financial statements.

Financial Post

dvanderlinde@nationalpost.com

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