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.
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 make it 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.
“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.”
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