GLG News by US GAAP Healthcare Specialists

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Accounting Errors Drive Support for SOX Section 404

May 3, 2006

Analysis of:Restatements Deliver Fuel for Reform | www.cfo.com

The key implication of the article is that Section 404 of the Sarbanes-Oxley Act appears to be strongly supported by the SEC chairman and other former regulators which means that Section 404 appears to be here to stay even though smaller companies oppose the law in its current form for them.  The reason against regulatory breaks for smaller cap companies is the recent announcement that two smaller companies had accounting errors that led to restatements.

The key implication for investment analysts is that the question of whether smaller cap companies will need to fully comply with Section 404 will be unclear in the foreseeable future.  And furthermore, the lack of direction in the resolution of the regulatory burden for smaller cap companies will likely continue up to the deadline for full compliance, which is 31 December 2007.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

SOX before the Supreme Court?

May 3, 2006

Analysis of:U.S. Supreme Court may consider Sarbanes-Oxley anti-fraud law | www.chron.com

The key implication of this article is that the Sarbanes-Oxley law is under growing pressure for some type of revision.  Aside from the effort to deem the law unconstitutional by Kenneth Starr and the Free Enterprise Fund, there is also the effort for small companies to have regulatory exemptions and for lawmakers to legislate changes to SOX.   

The implication to investment analysts is that small companies are increasingly pressured to deal with the mounting regulatory burdens as SOX impacts them at an increasing level of cost.  So, smaller companies are struggling with the SOX cost burden, which impacts earnings.  And, other companies are not going public which means that capital formation in the US is not as favorable as it was because of the additional burden that SOX is creating.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Smaller-cap biotech companies increasingly in demand

May 2, 2006

Analysis of:Emerging Biopharmaceutical Companies | www.genengnews.com

The key implication of the article is that investment analysts can follow the smaller-cap companies in the biotech space to determine if large-cap biotechs and big pharma will be attracted to any of these companies. Smaller-cap companies attract the attention of large-cap biotechs and big pharma if the smaller companies can demonstrate positive clinical results, which the article implies is happening.

In particular, the article implies that an investment analyst will be able to profile companies that have various combinations of strengths to determine which ones will be able to continue to grow and attract market interest. These strengths include positive clinical developments in particular, followed by being well funded and having strong pipelines.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Small Companies target of Big Pharma to fill pipelines

April 26, 2006

Analysis of:Big Pharma thinks small | money.cnn.com

The key implication in the article is that investment analysts can focus on the licensing activity that is expected to increase for Big Pharma Companies such as Pfizer and Merck. These large Companies need to fill their pipelines of new drugs since the industry as a whole is losing $100 billion worth of its branded drugs as they come off patent.

Investments analysts can also expect that licensing deals will become more common than acquisitions since licensing is less costly for Big Pharma, at least initially, and it is simpler and less risky since an entire target Company is not being acquired. Since the pipeline that Big Pharma needs to fill in the next five years is so large, the implication is that this will be a very active area for investment analysts to cover.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

FAS 123R surprise: a new look at getting the most from equity incentives

April 21, 2006

Analysis of:FAS 123R's Golden Opportunity: Performance-based equity compensation comes into its own | www.deloitte.com

The key implication of the article is that the Financial Accounting Standards Board (FASB) Statement No. 123R, Share-Based Payment (FAS 123R) is allowing Companies the potential opportunity, intended or not, to now go back and reconsider the performance-based equity incentive designs for equity compensation rather than the fixed option awards that were in vogue before FAS 123R became a reality.

Investment analysts can now use the advent of FAS 123R to see which Companies understand how to motivate their employees and how they are using equity compensation to do so.  Furthermore, investment analysts can see how top executives are responding to any changes in their equity compensation.  And, it will become apparent if a Company's critical employees will be given equity compensation under FAS 123R.  The implication is that the Companies that do well will reward their critical employees with performance-based equity incentives.  Investment analysts will be able to see how high performance Companies get high performance output from their employees by focusing on performance-based equity incentives. 

This new potential opportunity created by FAS 123R is a reality now because all Companies need to recognize all stock option expense on their income statements, whereas previously under Accounting Principles Board Opinion 25 (APB 25), Companies were penalized for performance-based equity incentives versus fixed option award designs. Now, the implication is that it's all about performance.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Will large-cap biotechs continue to grow?

April 19, 2006

Analysis of:Party May Be Over For Large-Cap Biotechs | www.forbes.com

The business implications from the article appear to suggest that an investment gain in large-cap biotechs is not as good now as one in large-cap pharmaceuticals and cyclical growth stocks.  The implication is that the run-up on large-cap biotechs has topped out, so interest has now shifted to other groups of stocks.

Also, the implication appears that large-cap biotechs would likely increase M&A activity in order to increase their valuations.  Although the article did not specifically address this point, it appears to be a logical deduction that the large-cap biotechs would seek additional means to increase their valuations rather than tread water.

Furthermore, the implication is also that it appears that large-cap pharmaceuticals would likely increase M&A activity in order to take advantage of the tide of investment in their stocks.  It is an opportune time for large-cap pharmaceuticals to maximize their position in the marketplace.

Ronald KiimaPresident Kiima Incorporated

Zales in Crisis: Initial Thoughts From a Former SEC Accounting Official

April 11, 2006

Analysis of:Zale Faces SEC Accounting Probe Over Service Pacts and Payroll | online.wsj.com

Given that the currently available details into Zale’s accounting crisis are limited and vague, stock analysts need to proceed very cautiously here particularly in light of the recent management departures and ongoing SEC investigation. The subject WSJ article cites three primary areas of accounting currently under scrutiny: extended-service agreements (ESAs), leases and payroll accruals. Although I have not reviewed Zale’s financial statements in detail, I have drawn from my twenty plus years as a corporate auditor, former SEC Assistant Chief Accountant and SEC/Sarbanes-Oxley consultant to set forth below my initial observations, thoughts and concerns.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Will/should smaller public companies get SOX 404 relief?

April 11, 2006

Analysis of:Comments requested on Advisory Committee recommendations | www.mcgladrey.com

As is widely known and discussed, Section 404 is putting fear into smaller public companies, let alone larger public ones. But will smaller public companies, which the article states are less than $787 million of market capitalization, have scaled securities regulation? This is the recommendation of the SEC's Advisory Committee on Smaller Public Companies. Further, the primary recommendation is that microcap companies have even less securities regulation than small cap companies which represent the $128.2 million to $787.1 million market cap range.

Furthermore, it is recommended that certain public companies be exempt from all of the SOX 404 internal control reporting requirements. Additional recommendations have been proposed as well.

What are the business implications of these recommendations? It appears that input has been more prevalent from much larger public companies, so the intent has been to hear from smaller public companies. Nevertheless, with the requirement date of full Section 404 implementation looming on the horizon in 2007, it appears that all public companies should seek to prepare instead of waiting to see if the securities regulations are scaled back.

If in fact the securities regulations are scaled back for smaller public companies, it appears that shareholders will likely think twice before investing in them since the perception will be that internal controls are less effective even though the reality may in fact be the opposite. So, whether or not the securities regulations are scaled back, smaller public companies will have the burden of keeping their investors trust by ensuring that they are operating with effective internal controls.

Peter CulpepperChief Financial OfficerProvectus Pharmaceuticals, Inc.

Accounting changes can impact equity compensation

April 10, 2006

Analysis of:Financial Reporting Letter - Share-Based Payment | www.bdo.com

It's not everyday that accounting changes can impact equity compensation, but Statement 123(R) does, and we will see its impact in the financial statements this year.

Statement 123(R) was issued December 2004 but is not effective until fiscal years ending this year.  It was effective in fiscal years beginning after 6/15/2005 for public companies, and six months later for small-business filers.

The effect of the Statement is to require companies to recognize compensation expense based on the fair value of award like stock options.  This was not done previously and will result in additional expense recorded on the financial statements of companies.

The business implications are prompting companies to reconsider how their equity-based employee plans should be structured.  Companies are determining the impact of the new rules on their financial condition, assessing whether to alter their compensation structure, and need to be able to explain the changes to investors.

Ronald KiimaPresident Kiima Incorporated

The SEC's Ongoing Battle Over Cash Flow Manipulations!

April 7, 2006

Analysis of:Closer Look at Blockbuster's Results | online.wsj.com

Given the emphasis placed on cash flow provided by (used in) by operating activities, and certain measures derived there from (e.g., free cash flow, etc.), by the Street, the recent Blockbuster case further evidences the need for stock analysts to truly appreciate the geographical distinctions between operating, investing and financing activities within a statement of cash flows prepared under US GAAP (SFAS No. 95). Appreciating such distinctions is particularly critical when performing comparative analysis among industry peers.

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