Bye Bye Pfi

In my book, published about 2 years ago, I outlined why generally accepted accounting practices (GAAP), at least as commonly implemented,  often don’t capture the reality of pharma company profits and losses in a common sense way.  For example, if a company lays off its entire drug development team, it is counted as a cost savings (net of severance payments of course) since expenses are cut.  However, an efficient and effective development team is often one of the most valuable company assets, and its dispersal, could reasonably be considered a large loss of future revenues and profits.  To my knowledge, this kind of loss is never recognized in GAAP financial statements until revenues actually start to fall which may take significant time.  Similarly, an NDA approval converts a potential product into a real one and often represents a significant increase in enterprise value.  This may be recognized by the stock market through an increase of share price.  But, again, to my knowledge, it is not recognized in GAAP accounting unless the rights to the product are sold and the value received as cash or other payment.

Naturally, mergers and acquisitions provide ample opportunities for distortions due to these quirks in GAAP accounting especially since they often involve massive R&D layoffs.

It has been my feeling that for at least the last 10 or 15 years, these distortions have been at the heart of accounting at many pharmaceutical companies and for this reason, these companies would ultimately disappear as ongoing businesses because GAAP accounting didn’t accurately reflect business realities.  Indeed many pharma companies, e.g. Schering Plough, Rorer, Squibb, Warner Lambert, etc., have disappeared.  Just as I had expected.

Now there is speculation that it may happen to the biggest of them all.  Pfizer has  has engaged in extensive merger activity, associated with massive layoffs for many years now.  And, according to a recent article on Bloomberg, it looks like this strategy may be reaching the end of the GAAP accounting road.  The unthinkable may happen.  Pfizer may split up and the giant may be no more.

I have no way of knowing if the speculation in the Bloomberg article will prove to be accurate.  However, the fact that such speculation exists at all, suggests that the concerns summarized in my book are well founded.