By Mark Maurer
Drugmakers developing Covid-19 vaccines can add one more
challenge to their list: how to account for the sales.
The companies will face challenges recognizing revenue due to a
lack of specific guidance from U.S. regulators and standard-setters
on Covid-19 vaccines and the sheer scale of the production
effort.
Vaccine manufacturers, among them Moderna Inc., Johnson &
Johnson, Pfizer Inc., Merck & Co., and AstraZeneca PLC, not
only could have trouble determining when to book this revenue, but
how much to book also could be in question, accounting experts say.
Stockpiling, complex federal contracts and uncertainty around
future demand for the vaccine add to the accounting
complication.
About 170 different Covid-19 vaccines are being developed
world-wide, according to the World Health Organization. In the
U.S., several companies working on vaccines are in the middle of
late-stage trials, though Johnson & Johnson and AstraZeneca
have paused trials due to potential safety issues. Some drugmakers
have said their vaccines could be greenlighted for use as soon as
this year, while others plan for next year.
Estimates for production capacity vary among companies.
AstraZeneca, for example, wants to provide two billion doses
globally, significantly more than what the company has produced for
other vaccines. It said one billion Covid-19 vaccines could be
ready later this year.
U.S. regulators in recent years have provided general guidance
on accounting for revenue from vaccines, but none specific to the
Covid-19 immunization.
There are different rules for recognizing revenue from vaccines.
For those that go into the U.S. government's Strategic National
Stockpile, special guidance from the Securities and Exchange
Commission applies. All other vaccines sold in the U.S. are covered
by the Financial Accounting Standards Board's revenue recognition
rules.
The SEC last released guidance on accounting for vaccines going
into national stockpiles in 2017. It said manufacturers should
recognize revenue when dosages are received by the U.S. government,
meaning they don't have to wait for the vaccines to be taken out of
the stockpiles and used.
The U.S. stockpiles vaccines for childhood diseases and
influenza as well as bioterror countermeasures. The SEC declined to
comment on whether Covid-19 vaccines would qualify for the same
accounting treatment.
There are no plans to store any potential Covid-19 vaccines in
the Strategic National Stockpile, according to a spokeswoman for
the U.S. Department of Health and Human Services. Various companies
have agreed to supply at least 100 million doses of Covid-19
vaccines to the U.S. government.
HHS, in partnership with the Department of Defense, has put
agreements in place for manufacturing of vaccine doses as part of
development for six vaccines, an HHS spokeswoman said. Those doses,
which are being manufactured with federal funding, won't be
stockpiled and the companies will distribute them to locations
designated by the federal government, the spokeswoman said.
The SEC in March sought to ease audit requirements for certain
vaccine makers, including those making the Covid-19 vaccine. It
ruled that small public companies no longer need to have an auditor
examine their accounting systems and safeguards known as internal
controls. That should allow vaccine makers to devote more resources
to research and development, Hester Peirce, an SEC commissioner,
said at the time.
For immunizations that don't fall under the SEC's stockpiling
guidance, companies have to wait to book revenue until control of
the product is transferred, a technical term that means the
customer is in charge of its use and can reap all available
benefits from it, said Shripad Joshi, an accounting specialist at
S&P Global Ratings, a ratings company.
For example, companies can't recognize revenue from a foreign
government until the government has passed the vaccines on to
doctors or hospitals for use. If that revenue is deferred to later,
potentially next year, there will be a mismatch between costs and
revenue, Mr. Joshi said. "It's all very unclear right now, with so
many vaccine manufacturers and the timing to market," he said.
Revenue from one contract can be booked in various amounts over
multiple accounting periods, which needs to be done carefully. If a
company recognizes revenue outside of the correct accounting
period, it could force a company to restate its earnings.
The uncertainty about vaccines in development and the size of
contracts, with some potentially covering billions of doses, make
the risk of deviation from sales estimates especially high. This
likely will cause complications in recognizing revenue, said Tom
Selling, a retired accounting professor at Southern Methodist
University.
Deciding how much revenue to book for vaccine supplies in a
particular period can be a tricky judgment call, accountants
say.
Some drugmakers, such as Moderna and AstraZeneca, have begun
alerting investors and analysts about the accounting challenges
surrounding the vaccine. "There is heightened interest in several
areas of accounting that will increasingly impact our reported
results as we move forward," David Meline, Moderna's chief
financial officer, said on an Aug. 5 earnings call. The company
declined to comment further.
AstraZeneca said its accounting would vary from deal to deal,
depending on when it receives invoices and reimbursement from
expenses. The Cambridge, U.K.-based company has agreed to produce
vaccines for several customers, including the U.S. and China.
"We'll have different types of accounting for some of those deals,"
Chief Executive Pascal Soriot said on a July 30 earnings call.
AstraZeneca, among others, has vowed not to earn a profit from
making the vaccine.
FASB hasn't yet received any questions or concerns related to
accounting for vaccines, a spokeswoman said. The standard-setter
hasn't issued guidance on revenue from Covid-19 vaccines.
Regulators or investors could challenge companies' estimates,
Mr. Johanns said. "If I was a pharma CFO, it would scare me,
because I know I'm not going to be exactly right and I'm going to
have to adjust the numbers later on," Mr. Johanns said.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
October 22, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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