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Actionable news in VRX: VALEANT PHARMACEUTICALS INTERNATIONAL,

Valeant is providing the media with an earnings metric that the SEC told it to stop using

The Securities and Exchange Commission told Valeant Pharmaceuticals International Inc. to clean up its use of nonstandard earnings numbers, but the company is now sending reporters the number the regulator told it to stop putting in its filings.

The move comes following the Quebec-based Valeant’s VRX, +3.75% accounting and drug-pricing scandal, during which time the company’s share price fell to just above $14 from an all-time high of $257.53 in July 2015. In addition to legal and regulatory issues, executive turnover, activist meddling and accusations of accounting fraud from short sellers, Valeant has tangled with the SEC on a number of issues including its use of nonstandard metrics to explain its unique business model.

The SEC ended a probe of Valeant’s accounting in October of 2016 after a series of back-and-forth communications, in which it criticized the company for using numbers that did not comply with Generally Accepted Accounting Principles, or GAAP. The regulator has been cracking down on the use of non-GAAP metrics, which usually make results look better, but can be misleading for investors.

See: SEC wants earnings to comply with its rules and it won’t take no for an answer

In an October 28 letter, which can be read here, the SEC told Valeant to stop using one specific metric, non-GAAP adjusted net income, because it was too similar to cash flow and was, therefore, not supposed to be used to calculate per-share earnings.

“Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, not on how management chooses to characterize it,” the SEC wrote. “Your non-GAAP measure bears a striking resemblance to your cash flows and differs drastically, including directionally, from your GAAP net income.”

Valeant had even referred to the adjusted net income non-GAAP measure as “cash earnings,” until the SEC told it to stop, the letter shows. “We believe that your per share presentation is inconsistent with both Commission and staff guidance and should be discontinued,” the SEC wrote.

Valeant responded that it would stop providing the per-share non-GAAP number “as it is currently calculated.”

The company said it would also, “revise the presentation to disclose a modified non-GAAP adjusted net income measure, which we intend to present on a per share basis.”

Since then, Valeant has continued to present the adjusted-net-income metric in its earnings release—but has stopped presenting an adjusted EPS number. But since investors need an EPS number to compare to the consensus, which is based on non-GAAP guidance, that presents a problem.

While the company can no longer provide the non-GAAP EPS number, its statements to the media appear to attempt to communicate it to investors anyway.

Lainie Keller, Valeant’s vice president of corporate communications, called and emailed reporters in anticipation of the company’s third-quarter earnings report.

“We don’t report on adjusted EPS,” she wrote. “However, it can be calculated with the understanding that we have ~350 million shares outstanding at this time. That calculation comes to $1.04, which is also above analyst estimates.”

MarketWatch declined to report the $1.04 number as it is not included in any of the company’s earnings presentations or disclosures. Instead, MarketWatch wrote: “A Valeant spokesperson said in an email that the company doesn’t report adjusted EPS but instructed MarketWatch to calculate one based on shares outstanding.”

Keller then requested that MarketWatch remove that from its story, while also writing: “it is clear that I never instructed nor requested anyone to calculate it.”

“Valeant has and will continue to adhere to the commitments our company made to the SEC, as well as the laws, rules and regulations that govern financial reporting,” Valeant General Counsel Christina Ackerman told MarketWatch in emailed comments.

John Jenkins, an attorney who specializes in securities law and is an editor at TheCorporateCounsel.net, disagreed.

“I think an email from a company representative that communicates impermissible non-GAAP data to a journalist with the expectation that it will be made public could raise issues under Reg G,” Jenkins told MarketWatch, referring to a 2003 rule that covers how public companies disclose or release non-GAAP financial measures.

Valeant General Counsel Ackerman said the information was included in, or derivable from, the company’s public earnings materials.

“We strive to be transparent in our communication to the public that allows analysts and investors to fully understand and measure our performance; and, we believe this is in line with the SEC’s position as reflected in comments they made to us and our peers within the industry,” she wrote to MarketWatch.

Other media outlets, including CNBC, Yahoo Finance and Reuters, included the $1.04 number in their earnings reports.

This is not the first time a company has provided comments to MarketWatch reporters containing numbers that appear to be prohibited by the SEC. In August, Activision Blizzard’s PR team ATVI, -2.22% also emailed reporters to suggest they subtract GAAP revenue deferrals from the non-GAAP number to produce another number that it said was more comparable with the analyst consensus. MarketWatch received several such emails, and a follow-up email after reporting second-quarter earnings that excluded the additional calculation.

Activision told MarketWatch this at the time: “We report our results on a GAAP basis as well as a non-GAAP (redefined) basis, both of which include deferrals. As we’ve done in the past, we provide supplemental information to facilitate comparison to analyst consensus figures.”

Some media outlets included numbers based on that calculation, as reflected in stories from Bloomberg and Benzinga.

“Companies are trying to lead the horses—journalists—to water, but you’re not drinking, so they beat the horses,” said Jack Ciesielski, a frequent adviser to the SEC and accounting standards bodies who publishes “The Analyst’s Accounting Observer,” an accounting research service for security analysts.

The SEC, for its part, has been touting its success in taming the abuse of non-GAAP metrics, which kicked off in May 2016, when it issued a set of guidelines, reminding companies that they must put all GAAP numbers first and give them equal prominence with non-GAAP numbers.

The SEC then began a crackdown on the use of non-GAAP earnings numbers that continues to this day and has led it to send comment letters to dozens of companies, many of which have had to change their reporting practices.

Ciesielski said the SEC may have to wait a bit longer to claim victory.

“Some of this is a bridge between old and new standards. But these tactics are not an attempt to relive old GAAP [metrics that they preferred] after a big change happens,” Ciesielski told MarketWatch in an interview. “It sure looks like it’s an attempt to hit performance targets instead.”

Valeant shares have fallen 4% in the last 12 months, while the S&P 500 SPX, -0.61% has risen 19% and the Dow Jones Industrial Average DJIA, -0.62% has gained about 26%.


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