Ebb & Flow

More than a year after the expensing of stock options was officially required by FASB, the impact seems to have been minimal for most biotechnology companies. Although the change has made financial statements more difficult to read, the Street has taken the switch entirely in stride, while companies themselves are looking more closely at the composition of their compensation packages.

Prior to implementation at Dec. 15, 2005, there were concerns that stock option expensing would inaccurately portray the financial health of small and mid-sized biotechs, which are highly dependent on stock options to attract and retain top talent. But since the reporting rules have taken effect, most biotech and technology companies have chosen to simply report on both a GAAP and a non-GAAP or pro forma basis.

Indeed, in an analysis of the BioCentury 100 companies conducted by Ernst & Young, stock options were the item that companies most often adjusted for in presenting non-GAAP results in their FY06 earnings announcements, with almost half doing so.

A total of $2.5 billion in stock option expenses were reported by the BioCentury 100 companies in 2006, excluding four foreign companies (see "Non-GAAP Disclosures").

"It's been a bit of a ho-hum in the marketplace," said Glenn Giovannetti of Ernst & Young. "It hasn't nicked stock prices even for profitable companies. Companies haven't been penalized because of a larger non-cash compensation number."

"A lot of our clients wanted us to get very involved in fighting against stock option expensing," said Keith Donnermeyer of Deloitte & Touche. "But at the end of the day, for the vast majority of the companies, I think it was more of an irritant. People just don't like to record

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