As the world battles with COVID-19, the life sciences sector has never been more important. The sector will play a large role in forming and implementing social policy around the world, and as a result will come under increased scrutiny.
The KPMG Investor Insights team recently asked some investors and analysts what they thought about the way listed companies in the sector reported financial performance and KPIs at a recent event. This audience was also asked what they thought auditors need to pay attention to when auditing listed pharma companies.
Below are some of the key highlights from the discussion - you can access the slide deck Pharma and Healthcare.
Investors rely on a number of valuation drivers that feed into the metrics and methods they use to assign value to life sciences companies. Our audience made a few key observations, listed below.
The sector is highly reliant on adjusted (or ‘core’) performance measures, which strip out many items identified by companies as ‘non-cash’ or ‘non-recurring’. Our audience discussed the need for better transparency and granularity on these core measures.
Investors had questions over whether financial reporting on a ‘core’ basis truly reflects the costs of drug development. For example, R&D costs (or acquired R&D assets) are often capitalised at inception but also excluded from ‘core’ performance measures when they are amortised or impaired, which conceals the true total cost.
A key question from investors was whether auditors are ‘holding management’s feet to the fire’ on disclosures. Our investor audience encouraged auditors to keep a watchful eye on how items in the financial statements related to COVID-19 are presented by companies. They highlighted the potential for asymmetric treatment of such items – e.g. companies might identify COVID-19 related costs (e.g. additional implementation costs of remote working and physical distancing, purchase of personal protective equipment) as unusual items to be excluded from core measures, without treating COVID-related financial benefits (e.g. higher sales of pharma products, lower travel expenses) in a similar way.
Members of our audience highlighted that the granularity of disclosure they require to assess companies in sufficient detail is only contained in the annual report, which is often released more than three months after the year end. They find it hard to explain why some large pharma companies publish the full annual report in January, while others in the sector wait until April.
In the same vein, KPMG in the UK continues to encourage listed companies to consider their investors’ needs and speed up the publication of their annual report. (Our policy on preliminary announcements aims to deliver the auditor’s insights on the financial statements to investors earlier when significant challenges to quicker publication of the annual report exist.)
Our investor audience shared their thoughts on financial KPIs that are tied to remuneration. They noted that – although such measures are useful for determining which metrics are on the minds of management – there are some areas which deserve further investigation.
From our discussion, we gathered that investors want:
Our pharma and healthcare roundtable session with investors and analysts was held on 3 June 2020. It is one of a series of investor outreach events we hold to discuss and share perspectives on how corporate reporting, auditing and assurance, and stewardship can evolve to meet investors’ needs today and in the future. Visit our Investor Insights page to find out more.