WASHINGTON, June 29 (UPI) -- Drug companies that have participated for decades in a federal program to stockpile children's vaccines are considering withdrawing because new accounting guidelines require them to delay booking production payments as revenue until the drugs are removed from the stockpiles for use, United Press International has learned.
The shift could mean a delay of up to a year in recognizing revenue from the contracts, potentially hurting officially reported profits and earnings per share and, by extension, stock prices.
All four major vaccine manufacturers -- Aventis of Strasbourg, France; GlaxoSmithKline of London; Merck & Co. Inc. of Whitehouse Station, N.J., and Wyeth of Madison, N.J. -- are publicly traded.
The problem is serious enough that Aventis, one of the world's largest vaccine manufacturers, already has told the Centers for Disease Control and Prevention in Atlanta it will not extend a stockpile contract.
"We are unable, because of the financial issues ... to proceed until this is resolved," Christine Grant, Aventis vice president for public policy and government relations, told UPI.
CDC officials are worried other firms might back out as well.
"It is definitely a concern," said Dr. Stephen Cochi, acting director of the CDC's National Immunization Program.
The agency has maintained stockpiles of selected childhood vaccines since the 1980s. These caches enable public health officials to respond to sudden outbreaks of illness, bridge disruptions in supplies and reduce the cost of vaccinations through negotiated purchases. The CDC recently tapped into the reserves to help the Marshall Islands deal with an outbreak of measles.
Not all vaccines are stockpiled, however, and over the past four years the United States has suffered chronic shortages of vaccines needed to prevent diphtheria, tetanus, measles, mumps and meningitis. Some children went without.
After an investigation, Congress ordered the CDC to expand the existing program to include all routinely recommended pediatric vaccines. The original program was aimed mainly at disadvantaged children, but the new stockpiles would be large enough to fulfill the entire county's needs for six months. The agency spent some $168 million on the effort in fiscal year 2003 and will spend approximately $680 million more by the end of FY 2006.
The accounting issue, however, threatens the expansion effort.
"This problem needs to be solved," Cochi said. "It's the main obstacle to our proceeding successfully, to have a six-month stockpile of all the pediatric vaccines by 2006/2007. It's the only major obstacle to that."
The controversy centers on how the stockpiles are managed. To reduce chances of spoilage during shipment, the CDC established arrangements years ago to pay manufacturers to store the vaccines near where they are made. The stockpiles are maintained and constantly replenished by the companies.
Replenishment takes place gradually as the vaccines are sold and/or distributed. Manufacturers are allowed to remove and sell older doses of vaccine well before their expiration dates, putting one new dose in for every older dose taken out. Some vaccines are supplied free of charge under the Vaccines for Children program.
The stockpile is continually refreshed as doctors and public health programs are supplied, explained Kimberly Lane, associate director of management and operations for the CDC's National Immunization Program. Few if any doses are thrown away.
The approach has been regarded as routine and beneficial by both the manufacturers and the CDC. There also has been no dispute over when the firms are paid.
"We pay them upon on delivery into the stockpile. We pay them for everything in full, up front," Lane said. "We (also) pay them a separate fee just to rotate that product and keep it fresh."
In December, however, the Securities and Exchange Commission, which has the last word on accounting questions, codified official guidance on how to handle such "bill and hold arrangements," as the transactions are called. The update affected SEC Staff Accounting Bulletin 101, which officially was issued in 1999.
Auditors now are telling drug companies they cannot count payments for the vaccines as revenue until the vaccines actually are taken out of the stockpile for use -- a delay that could be as long as a year. Though they still have the cash in hand, delays in counting the cash as revenue can put firms in a bind.
"If you store a product for the U.S. government, and for whatever reason the U.S. government does not take title to that, under the accounting rules you can't recognize the revenue for that," Kim Bush, president of the Vaccines Business Unit of Baxter Healthcare Corp., in Deerfield, Ill., told experts on vaccine finance at a meeting in Washington this week.
"Whether a company gets to recognize revenue immediately or not ... is going to have a direct impact on the bottom line profits," said Dan Noll, director of accounting standards for the American Institute of Certified Public Accountants. "That means, for example, that a very common measure that investors look at, earnings per share, will be directly impacted as a result of whether the company can record the revenue up front or not."
"Our concern now," Grant said, "is (that), after several decades, this new SEC guidance document says that when you enter into a contract for a new stockpile, or get an amendment for or renew an old stockpile you, our auditors say, can no longer report what the government actually pays you."
The reason for the shift is unclear, but it might be rooted in increased scrutiny of revenue transactions after recent corporate scandals.
"In general, a large number of restatements that were forced by the SEC were because of revenue matters," said Noll.
An SEC spokesman declined to comment on the matter and said opinions are expressed solely through the precisely worded materials issued officially by the SEC.
"We don't speak beyond the document," he told UPI.
The firms have met with SEC officials to express their concern and Congress is now getting involved.
"Senator Harkin is looking at (the issue) and seeing if there is any way to resolve this, said Maureen Knightly, communications director for Iowa Democrat Tom Harkin.
None of the government or company officials who spoke to UPI, however, were clear on how the problem could be solved. The SEC rules are not aimed specifically at vaccine manufacturers, but are general guidance for all companies. Any changes could have far wider impact than intended.
One suggestion is to have the CDC take possession of pediatric stockpiles. The agency plans to take possession of smallpox and anthrax vaccine stocks being created to deal with potential bioterrorism attacks, said Bush, of Baxter Healthcare, which will prevent firms working on those stockpiles from having to deal with the delayed revenue issue.
Should the CDC take possession, however, the agency could end up facing commerce-like problems of inventory control, sales and shipping -- matters now handled by the manufacturers.
"This is something that is actively being worked on and needs to be fixed," said Lance Rodewald, director of CDC's Immunization Services Division. "(It) has to be fixed because right now it really does get in the way of our being able to build up the stockpile. I am confident it is going to be resolved but it has not been resolved yet."
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Dee Ann Divis is UPI's Senior Science & Technology Editor. E-mail ddivis@upi.com
