Defining An Earnings Metric That Excludes Litigation Costs – GSK Embraces a New “Core Ea
Reuters brings this interesting story of GlaxoSmithKline creating a new metric – core earnings – that excludes various categories of costs, including costs for litigation. According to the article, the metric brings GSK in line with some other large pharma entities. One might think the new metric is at least in part a testament to the fact that the litigation industry does matter as companies face large claims. Here’s a key excerpt from the article:
"GSK, which announced in July it was changing the way it reports results to give shareholders "clearer visibility of our anticipated progress in 2012 and beyond," presented further details on the move in a briefing for analysts on Thursday.
Legal costs have proved a persistent drag on profits across the drugs industry in recent years, following a slew of patient liability claims and an increasingly aggressive stance by U.S. authorities over cases involving mis-selling of medicines.
Four other elements will also be excluded from GSK’s new definition of core EPS — other operating income and profits on disposals; amortisation and write-offs of intangible assets; major restructuring costs; and accounting adjustments related to material acquisitions.
Up until now, GSK has focused on earnings "before major restructuring."
Setting out the impact of the change, which will take effect from the first quarter of 2012, GSK said that core EPS in 2010 would have been 125.5 pence, rather than 53.9p reported under the old before-restructuring system.
The big difference reflects the fact that massive legal costs were taken in 2010 related to the settlement of claims over its Avandia diabetes drug and sales practices for a range of other products."