BIO tells SEC: do away with quar­ter­ly re­ports for small biotechs

Pres­i­dent Don­ald Trump last Au­gust asked the SEC to look in­to the fea­si­bil­i­ty of abol­ish­ing the quar­ter­ly re­port­ing re­quire­ment in fa­vor of a six-month sys­tem. The reg­u­la­tor re­cent­ly posed this ques­tion to BIO — the largest trade or­ga­ni­za­tion rep­re­sent­ing bio­phar­ma — whether a less fre­quent re­port­ing regime would work for its mem­bers, some of whom spend a for­tune over a decade be­fore their prod­ucts hit the mar­ket… if they ever do.

BIO re­spond­ed with a re­sound­ing yes. “(T)he cur­rent quar­ter­ly re­port­ing frame­work places an un­healthy em­pha­sis on meet­ing or ex­ceed­ing short-term fore­casts, which en­gen­ders an in­ef­fi­cient out­look on short-term re­sults. Due to the lengthy time­line for po­ten­tial­ly life-sav­ing drug dis­cov­ery, which av­er­ages 10-15 years, biotech com­pa­nies and their in­vestors would be bet­ter served by a less fre­quent (e.g. semi­an­nu­al) re­port­ing regime that pri­or­i­tizes long-term val­ue cre­ation,” the or­ga­ni­za­tion said in ear­li­er this month.

Bri­an Sko­r­ney

Baird’s Bri­an Sko­r­ney took is­sue with BIO’s claim that quar­ter­ly re­ports fo­cus on the short-term over the long term. “A myr­i­ad of com­pa­nies in the in­dus­try have shown time and again that they need to held to short term oblig­a­tions and mile­stones or will oth­er­wise sac­ri­fice share­hold­er cap­i­tal on garbage un­der the guise of long-term strat­e­gy. In many ways I think biotech com­pa­nies are not held to a high enough stan­dard of dis­clo­sure and at least, in some re­spect, manda­to­ry quar­ter­ly fil­ings re­quire com­pa­nies to go through the ex­er­cise of rig­or­ous­ly do­ing some in­ter­nal checks and re­port­ing those to the pub­lic. I wor­ry that re­lax­ing SEC dis­clo­sure stan­dards could lead to more shenani­gans as com­pa­nies feel less over­sight.”

Small­er re­port­ing com­pa­nies and emerg­ing growth com­pa­nies, BIO sug­gest­ed, should re­port on a “less fre­quent (e.g. semi­an­nu­al) ba­sis while pre­serv­ing the flex­i­bil­i­ty to adopt more fre­quent (e.g. quar­ter­ly) re­port­ing as they ad­vance to­ward com­mer­cial stage.”

In­stead, Sko­r­ney ar­gued in fa­vor of elim­i­nat­ing quar­ter­ly fi­nan­cial fil­ings:

In ex­change, they should be re­quired to dis­close full clin­i­cal da­ta sets with­in 45 days of re­ceipt and com­plete reg­u­la­to­ry com­mu­ni­ca­tions with­in 45 days of re­ceipt. This is what we re­al­ly want in­fo-wise any­way, and frankly, com­pa­nies are held to a very min­i­mal stan­dard in terms of rig­or of these dis­clo­sures.

Since 2013, the Eu­ro­pean Com­mis­sion has erad­i­cat­ed the re­quire­ment of quar­ter­ly re­ports, say­ing it posed an un­jus­ti­fied bur­den on small and medi­um-sized com­pa­nies. In the Unit­ed States, it has re­mained in­tact since its in­tro­duc­tion in 1970.

The re­sis­tance to quar­ter­ly re­port­ing in the US is hard­ly new.

Crit­ics have long ar­gued that the process is ar­du­ous, cost­ly and de­tracts com­pa­nies from fo­cus­ing on the long term, and dis­in­cen­tivize firms from go­ing pub­lic. In 2016, a coali­tion of in­flu­en­tial busi­ness lead­ers in­clud­ing JP Mor­gan’s Jamie Di­mon and Black­rock’s Lar­ry Fink, as­sert­ed that a “com­pa­ny should not feel ob­lig­at­ed to pro­vide quar­ter­ly earn­ings guid­ance – and should de­ter­mine whether pro­vid­ing quar­ter­ly earn­ings guid­ance for the com­pa­ny’s share­hold­ers does more harm than good.”

Mean­while, sup­port­ers of quar­ter­ly re­ports ar­gue that they en­hance trans­paren­cy, and that longer du­ra­tions be­tween re­ports in­crease the like­li­hood of in­sid­er trad­ing.

BIO’s strat­e­gy won the en­dorse­ment of Jon­ah Meer, chief and CFO of Qrons — a small biotech de­vel­op­ing a ther­a­py for trau­mat­ic brain in­jury.

Jon­ah Meer

“While I am a be­liev­er in trans­paren­cy…there is no need to have a quar­ter­ly re­port, which is very repet­i­tive to pri­or re­ports and does not add much — to those who in fact read the re­port — a mi­nus­cule num­ber of in­vestors. Bear in mind there is of­ten no an­a­lyst cov­er­age for our type of stock — so it’s not even be­ing pro­duced to be an­a­lyzed by the street. A com­pa­ny will know if in­vestors are look­ing for more in­fo and quar­ter­lies and would adapt on their own vo­li­tion.”

For John Maxwell, CFO of drug de­liv­ery com­pa­ny Aque­s­tive Ther­a­peu­tics, quar­ter­ly re­ports set up un­re­al­is­tic ex­pec­ta­tions. “What we’ve ob­served is that quar­ter­ly re­port­ing can some­times cre­ate the ex­pec­ta­tion that ma­jor com­pa­ny de­vel­op­ments should hap­pen quar­ter by quar­ter…doing se­mi-an­nu­al re­port­ing would re­duce the fo­cus on quar­ter­ly num­bers and put more fo­cus on pipeline de­vel­op­ments. That could make sense for both us and our in­vestors.”

Im­age: Kristi Blokhin Shut­ter­stock

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