Drugmaker Perrigo will restate financial results as far back as the quarter ended Dec. 28, 2013 after determining it had incorrectly accounted for royalties from the best-selling multiple sclerosis drug Tysabri.
The company had recognized the royalty stream as revenue since acquiring the rights as part of its purchase of Elan Pharmaceuticals in 2013. The rights allowed it to receive quarterly royalty payments from Biogen.
But as Perrigo was preparing to sell the royalty stream to Royalty Pharma, its auditors at Ernst & Young notified it that they were reevaluating the historical revenue recognition practices associated with the stream.
“After an extensive evaluation of the facts and circumstances and the judgments required to determine the appropriate classification, it was determined that under U.S. GAAP the Tysabri royalty stream should be recorded as a financial asset, rather than an intangible asset, on the date of acquisition, and the company adopted this change,” Perrigo said Tuesday in a regulatory filing.
As a result, Perrigo will restate its financials for the quarter ended Dec. 28, 2013 to the quarter ended Oct. 1, 2016.
The resolution of the accounting issue “paves the way for the drugmaker to file its delayed 10-K annual report,” The Wall Street Journal said.
Perrigo announced Feb. 27 that it would sell the Tysabri royalty rights to Royalty Pharma in a deal that could be worth as much as $2.85 billion. The transaction closed last month.
The company said it would account for the Tysabri financial asset using the fair value option model, which would require it to remove the royalty stream from net sales in its income statement; remove the amortization expense associated with recording the stream as an intangible asset; and include the quarterly changes in fair value of the stream as a component of other income/expense.
Perrigo’s specialty sciences division, consisting primarily of Tysabri royalties, accounted for 7%, or $322.27 million, of its consolidated net sales in 2015. The company had been under pressure from activist investor Starboard Value to divest its generic and specialty pharma products as well as the Tysabri royalty interest.