FASB Proposal Would Distort Biotech's Financial Statements

WASHINGTON, D.C. (June 30, 2004) — Requiring companies to expense employee stock options as dictated by a recent government proposal would do little to provide investors with a clearer picture of a biotechnology company's financial health, according to the Biotechnology Industry Organization (BIO).

BIO submitted comments to the Financial Accounting Standards Board (FASB) in response to FASB's April proposal to require companies to estimate the value of long-term, nontransferable stock options given to employees and to treat the estimated value as an expense with the intention of providing the information to investors.

"The biotechnology industry, like many other growth sectors of the economy, uses broad-based employee stock option plans as an integral part of our efforts to recruit and retain highly qualified physicians, scientists and other professionals," said BIO President Carl B. Feldbaum.

"BIO opposes the FASB proposal because it would distort the financial statements of small and mid-size biotechnology companies. Unlike other mature industries where stock prices are earnings-driven, the biotech industry includes a large number of small, entrepreneurial companies with extremely volatile stock prices hinging on the regulatory product approval process.

"Based on this volatility and the extensive use of employee stock compensation programs within the biotech industry, mandatory stock option expensing will result in less clarity, consistency and reliability of financial statements," Feldbaum added.

Further, BIO contends that employee stock options do not meet the definition of an "expense" under existing accounting standards and, therefore, should not be treated as such. Also, the proposed FASB requirements would distort earnings per share and create an undue administrative burden on small biotech companies struggling to fund clinical development of new medicines.

Additionally, BIO opposes the FASB proposal on the grounds that it does not provide sufficient guidance on how to value employee stock options and could lead to increased litigation by groups claiming earnings were misrepresented.

BIO's comments are available online at http://www.bio.org/tax/action/20040629.asp.

BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states and 33 other nations. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology products.