M&As in biotech, pharma may surge ahead of proposed new accounting rule, Bear Stearns says

By Ronda Fears

Nashville, July 15 - Merger and acquisition activity in the biotechnology and pharmaceutical sectors may surge in advance of new accounting rules proposed for M&A transactions, said Bear Stearns & Co. analyst Pat McConnell in a report. The possible new rules, however, would not go into effect until Jan. 1, 2007.

The Financial Accounting Standards Board has proposed changes to the accounting methods for acquisitions that include accounting for transaction fees, earn-outs, target restructuring costs, purchased in-process research and development, as well as the balance sheet and income display of minority interest.

"In our view, the proposed changes should not affect valuations, but may alter some M&A transaction structures," McConnell said in the report.

Research and development matters addressed in the proposed changes would particularly impact biotech and pharma mergers, the analyst said, as well as technology transactions.

"In-process research and development (IPR&D) acquired in a business combination will be capitalized, then either amortized to earnings upon product launch or written off as impaired. Amounts allocated to IPR&D are currently expensed at the date of acquisition. This would primarily impact acquisitions involving biotechnology, pharmaceutical, and technology companies," McConnell said.

"We expect increased M&A activity prior to the effective date. To avoid years of IPR&D amortization and/or impairment charges to earnings, we expect to see increased acquisitions between companies in the pharmaceutical, biotechnology, and technology sectors prior to the effective date of the changes."

The proposed effective date is Jan. 1, 2007, for calendar-year companies, the analyst said, so transactions closing in fiscal annual periods beginning after Dec. 15, 2006, will need to conform to the new rules. The analyst noted, too, that under the proposal, announced but uncompleted transactions will not be grandfathered.

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