12:00 AM
Apr 16, 2007
 |  BioCentury  |  Finance

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 this expense."

However, some companies have started to tinker with their compensation schemes. Some profitable companies are using restricted stock rather than stock options. Restricted stock allows a company to give the employee stock outright and is therefore measured by current value, rather than an unforeseeable future value, as is the case with an option to purchase stock at a later date.

E&Y's Giovannetti and Tracy Lefteroff of PricewaterhouseCoopers both said they are seeing more restricted stock awards.

"If I'm going to end up taking a P&L charge, by doing restricted stock I'm pretty sure that I can measure the value on the day I grant it. I'm more likely to give employees a real value," Giovannetti noted. "It was fairly rare two or three years ago, but is becoming relatively common now."

Bonuses also are starting to play a bigger role in compensation packages. Still, said Lefteroff, "stock options are the tool of choice."

Some companies also may be minimizing stock option awards among employees who are not executives. Companies "might be a little more judicious going forward as to who gets them," said Donnermeyer.

DNA sales slip

In March, Genentech (DNA) warned investors that its 1Q U.S. product sales would be flat relative to 4Q06. Last week, the actual numbers revealed a slip of less than 1% versus the prior quarter. The softness was spread across most products, with the exception of Avastin (up $43 million), thrombolytics (up $6 million) and Raptiva for psoriasis (unchanged). Total U.S. sales came in at $2.04 billion.

By comparison, U.S. sales in 1Q06 grew by 12% sequentially.

According to Bear Stearns analyst Mark Schoenebaum, "the...

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