SEC comment letter trends for health industries

The SEC Division of Corporation Finance's filing review process is a key function utilized by the SEC staff to monitor the critical accounting and disclosure decisions applied by registrants. Our analysis of SEC comment letters identifies the frequency of topical areas addressed by the SEC staff and how their focus areas changed over time. In addition to providing our insights on the nature of the SEC staff comments, we provide sample text from the SEC staff’s comments and links to where you can learn more about the accounting and disclosure requirements addressed in each topical area.

Revenue recognition

ASC 606, Revenue from contracts with customers, requires more quantitative and qualitative disclosure than prior guidance. The following areas have been addressed in the SEC staff's comments:

  • Performance obligations – the nature of performance obligations, why goods or services are distinct, and disclosure of remaining performance obligations. Also, comments related to information provided in other parts of the filing that appear inconsistent with the number of performance obligations in a contract. 

  • Variable consideration – the determination of the transaction price and how a company estimates variable consideration.

  • Recognizing revenue – the timing of when control transfers, the method of recognizing revenue over time, and accounting for licensing arrangements.

  • Gross versus net presentation – judgments related to gross versus net presentation of revenue, including an assessment of whether the company controls the good or service being provided to the end customer.

  • Disaggregated revenue – disaggregation disclosures that appear inconsistent with information provided in other parts of the filing or in other forums, such as investor presentations.


  • Your disclosure indicates that license revenue is recorded at a point-in-time given your determination that delivery of the intellectual property to the licensee is a distinct performance obligation. You also disclose that you record the associated milestone payment portions of transaction prices as revenue at a point-in-time. Please address the following as it specifically relates to your License and Development Agreement: 

    • Identify for us the promised goods and/or services under the agreement; 

    • Explain to us how you considered the development services you are required to perform in determining that the license was a distinct performance obligation; 

    • Quantify for us the total transaction price, how you determined it, and the amounts allocated to the various performance obligations;  

    • Tell us the method (ASC 606-10-32-8) you use to estimate variable consideration for reaching development and regulatory milestone events and the nature, amount and trigger for each constrained milestone; and  

    • Provide us your accounting analysis supporting your accounting policy of recognizing milestones at a point-in-time.

  • For each type of variable consideration, please provide us an analysis supporting why the most-likely amount method is appropriate versus the expected value method. Refer to ASC 606-10-32-8.

  • Regarding your product sale revenue, please tell us the amount of each adjustment recorded during the current year to your gross-to-net variable consideration estimates made upon adoption of ASC 606 and your consideration for disclosing this information under ASC 606-10-50-10b and 50-12A. In your response, tell us the amount, if any, you reflected for any price concessions for inventory in the distribution channel and recorded as revenue upon adoption of ASC 606 given the increased competition for these products.

  • With respect to the agreement's and clinical, regulatory and commercial milestones for each product, we believe additional disclosure would improve information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from your contracts. Refer to ASC 606-10-50-1. Provide us proposed disclosure to be included in future filings that further disaggregates these aggregate amounts. Given the differences in the nature, timing, and uncertainty between clinical, regulatory and commercial milestones, we believe that separate amounts should be provided for those categories for each aggregate amount.

Non-GAAP measurements

Non-GAAP financial measures result in frequent comments regarding compliance with Item 10(e) of Regulation S-K and the related compliance and disclosure interpretations, sometimes resulting in requests to remove or substantially modify non-GAAP metrics. Focus areas have included:

  • Presentation with equal or greater prominence of the most directly comparable GAAP financial measure; 

  • Reconciliation to the most comparable GAAP financial measure;

  • Appropriateness of adjustments to eliminate or smooth items identified as non-recurring, infrequent or unusual; 

  • Use of individually tailored accounting principles; and 

  • Disclosure of why management believes the non-GAAP presentation provides useful information to investors regarding the financial condition or results of operations of the registrant.


  • You disclose non-GAAP measures without presenting the comparable GAAP measures with equal or greater prominence. Please ensure any discussion regarding non-GAAP measures is preceded by an equal or more prominent discussion of the comparable GAAP measure.

  • Please include a reconciliation of core earnings that begins with the most directly comparable GAAP measure. Your revised reconciliation should provide disaggregated disclosure of all the adjustments necessary to arrive at core earnings from the most directly comparable GAAP measure.

  • Your current disclosure discusses management’s use, but not how the presentation of the measure is useful to investors. Please revise your disclosure to include a discussion of investor’s use of these measures. Excluding amortization of acquired intangible assets may result in non-GAAP measures that are based on individually tailored accounting principles. Please tell us how you considered Question 100.04 of the Non-GAAP C&DIs and why you believe these measures are useful to investors.

Segment reporting

SEC staff frequently question how registrants have identified operating segments and aggregated them into reportable segments, often due to events reported by companies in press releases or Form 8-K disclosures. SEC staff may expect to see changes in segments when the company has disclosed significant acquisitions or dispositions, changes in organizational structure, or changes in key personnel. To resolve segment questions, the SEC staff may request a copy of the reporting package utilized by the chief operating decision maker, or other documents, to evaluate its consistency with management’s reporting conclusions.

The lack of entity-wide information required to be disclosed under ASC 280 has also been highlighted by the SEC staff, Specifically, the SEC staff has focused on the required disclosures of:

  • Revenues from external customers for each group of similar products and services; and

  • Geographic disclosures of revenues from external customers and long-lived assets attributable to the public entity’s country of domicile and individual foreign countries that are material.


  • Given the disclosures about your core products as well as the impact on your gross margin driven by shifts in product mix, please expand your disclosure to include revenue for each group of similar products to comply with FASB ASC 280-10-50-40.

  • Please tell us in detail how you determined all of your operating segments or brands are properly aggregated into one reportable segment. Please be sure to address each of the aggregation criteria in ASC 280-10-50-11.

  • Please revise future filings to present separately revenues from external customers attributed to your country of domicile. Also, when material, separately disclose the revenues from external customers attributed to an individual foreign country. Refer to ASC 280-10-50-41(a).

Management's discussion and analysis

The SEC staff’s comments on management’s discussion and analysis have emphasized the requirements in Item 303 of Regulation S-K and the related disclosure objectives, including a focus on:

  • The discussion and analysis of results of operations, including the description and quantification of unusual or infrequent events or any significant economic changes;

  • Metrics used by management in assessing performance, including how they are calculated and period over period comparisons;

  • Critical accounting estimates, including the judgments made in the application of significant accounting policies, and the likelihood of materially different reported results if different assumptions or conditions were to prevail; and

  • Liquidity and capital resources, including clear discussion of drivers of cash flows and the trends and uncertainties related to meeting known or reasonably likely future cash requirements.


  • If two or more factors contribute to material changes in revenue, please provide disclosure demonstrating the relative magnitude of each factor, such as the percentage or dollar increase in revenue due to onboarding of new customers versus usage from existing customers. In this regard, it appears from your most recent earnings releases that such information is readily available. Refer to Item 303(a)(3)(iii) 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

  • Where a material change in a line item is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms, if reasonably practicable. Please revise your disclosures in future filings accordingly. Similar revisions should be considered throughout your results of operations disclosures, such as in your discussion of the change in research and development and selling, general and administrative expenses. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

  • We note your disclosure and quantification of capacity utilization. Please revise to describe how this measure is calculated and expand the discussion to include the underlying reasons for any significant fluctuations in the measure from period-to-period. Refer to Item 303(a)(3) of Regulation S-K.

  • Please provide information for investors to assess the probability of future goodwill impairment charges. For example, please disclose whether your reporting unit is at risk of failing step one of the quantitative impairment test or that the fair value of this reporting unit is substantially in excess of carrying value and is not at risk of failing step one. If the reporting unit is at risk of failing step one, you should disclose:  

    • the percentage by which fair value exceeded carrying value at the date of the most recent step one test;

    • the amount of goodwill allocated to the reporting unit;  

    • a detailed description of the methods and key assumptions used and how the key assumptions were determined; 

    • a discussion of the degree of uncertainty associated with the assumptions; and  

    • a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions. 

  • Please describe for us the actuarial methods you utilize to estimate your reserve, including significant assumptions and changes therein and why you believe the methods and assumptions provide a reasonable estimate.

  • As it relates to your analysis of cash provided by operating activities, please quantify all variance factors cited pursuant to section 501.04 of staff's Codification of Financial Reporting so that investors may readily understand the magnitude of each. Also, please note citing factors such as operating results and changes in balance sheet items may not provide a sufficient basis to understand how operating cash between comparative periods was affected and varied. In this regard, supplement your analysis with the material drivers underlying the factors cited, as appropriate. Refer to section IV.B.1 of Release No. 33-8350 for guidance.

Research and development

Companies incur significant research and development (R&D) expenses in order to remain competitive through innovation. The SEC staff has focused on the quality of disclosures related to R&D costs charged to expense in each reporting period, commenting frequently on the disaggregation of R&D costs by each major product/project category.


  • Please provide us a breakdown of your R&D expenses incurred for each year presented by product candidate or project. To the extent that you do not track costs by project, please explain how your R&D costs are managed and how they are reported within the organization. To the extent that you can distinguish your R&D costs by discovery, preclinical and clinical development categories and/or therapeutic class or by the type of cost, please provide us with this information. 

  • You state that you do not allocate R&D costs by product candidate. However, it appears that you do track such costs by other classifications, such as payroll and other personnel expenses, laboratory supplies, and fees paid to third parties to conduct R&D activities on your behalf. Please revise to disclose the costs incurred by the types of costs classified as R&D for each period presented.

Inventory and cost of sales

The SEC staff comments for inventory focused on disclosing the basis of accounting for inventory.

For cost of sales, the SEC staff focused on the components of cost of sales, ensuring non-cash items, like depreciation, were allocated to cost of sales, and questioning the calculation of gross margin when it was not.


  • You present cost of goods sold exclusive of depreciation and amortization expense along with the subtotal, gross profit. Please tell us how your presentation complies with the guidance in SAB Topic 11:B, as gross profit appears to represent a figure for income  before depreciation.
  • Please disclose the basis of stating inventories and consider disclosing the major classes of inventories in future filings. Refer to ASC 330-10-50-1 and paragraph 6 of Rule 5-02 of Regulation  S-X .

Fair value measurement

Fair value measurements often require the application of significant judgment. The SEC staff has focused on the quality of disclosure around those significant judgments and estimates, frequently commenting on:

  • The valuation techniques and key inputs used to determine the fair value for each significant class of asset or liability, whether determined by management or a third party (e.g., independent pricing service).

  • The quantitative information provided for significant unobservable inputs used in Level 3 fair value measurements, including the sensitivity of the fair value measurement to changes in those significant unobservable inputs.


  • You indicate the securities included in Level 2 of the fair value hierarchy are valued utilizing inputs obtained from an independent pricing service. Please tell us what consideration was given to disclosing a description of the valuation techniques and inputs used in the fair value measurements. In addition, tell us what consideration you gave to separately disclosing the valuation techniques and inputs for each class of assets. We refer you to ASC 820-10-50-2 and ASC 820-10-50-2(bbb).

  • Please disclose quantitative information about the significant unobservable inputs used in developing the fair value of your Level 3 assets and liabilities. Also, tell us what consideration was given to providing a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs. Please refer to ASC 820-10-50-2(bbb) and (g).

  • Please tell us how you complied with the non-recurring fair value measurement disclosures related to the impairment charge, as required by ASC 820-10-50-2(a). Also refer to the example of these disclosures at ASC 820-10-55-100.

Form compliance and exhibits

Compliance-related comments do not typically require significant effort to address; however, the resolution of such comments may require a registrant to amend previous filings. The SEC staff has focused on:

  • The omission of required disclosures (e.g., management’s report on internal control over financial reporting);

  • The omission of required certifications;

  • Errors in the dates or references included in the certifications; and

  • The submission of agreements.


  • Please amend your Form 10-K to provide management's report on internal control over financial reporting, as required by Item 308(a) of Regulation S-K. 

  • Please amend this filing to include a properly signed certification of the Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a). Additionally, revise the title of this certification as it pertains to section 302 of The Sarbanes-Oxley Act of 2002.

  • Please amend your filing to provide new certifications filed as Exhibits 31.1 and 31.2 to conform exactly to that provided in Item 601(b)(31) of Regulation S-K as it relates to internal controls over financial reporting (ICFR). In this regard, the introductory sentence in paragraph 4 should refer to ICFR as defined in the Exchange Act and certification 4(b) should discuss your obligations related to ICFR.

Goodwill and other intangibles

The SEC staff has focused on the quality of the disclosure around significant judgments and estimates associated with goodwill and intangible assets, including impairment assessments, frequently commenting on:

  • The identification of reporting units, including factors considered when multiple components have been combined into a single reporting unit due to economic similarities;

  • At risk reporting units, including information about the amount of goodwill and headroom at the reporting unit, discussion of the key assumptions used to determine the reporting unit’s fair value and their associated degrees of uncertainty, and a description of potential events or changes in circumstances that could negatively affect the key assumptions; 

  • Triggering events that may indicate that an interim impairment assessment is necessary; and

  • The timing of goodwill and intangible asset impairment charges.


  • We note your statement that your reporting units with goodwill are equivalent to your operating segments. Please tell us your operating segments and if your operating segments changed during the year. If you have aggregated any of your operating segments when determining your reportable segments, please revise the segment footnote in your financial statements to disclose that operating segments have been aggregated. See ASC 280-10-50-21(a). 

  • Please tell us how you considered the qualitative factors outlined in ASC 350-20-35-3C when performing your goodwill impairment analysis and clarify whether you performed a qualitative or quantitative assessment, or both. Also, tell us whether any of your reporting units are at risk of failing a quantitative analysis and if true, revise your critical accounting policies to disclose:

    • The percentage by which fair value exceeded carrying value as of the date of the most recent test;

    • The amount of goodwill allocated to the reporting unit;

    • A discussion of the degree of uncertainty, which includes specifics to the extent possible, associated with key assumptions used in your analysis; and 

    • A description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.

       

      If you have determined that estimated fair values substantially exceed the carrying values of your reporting units, please disclose such determination. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section V of SEC Release 33-8350.

  • We note your disclosure in your Form 10-K that as of the end of your fiscal year, the fair value of your goodwill exceeded the carrying value by a minimal amount. Your stock price has continued to decline and you recognized operating cash flow losses and operating losses during the first quarter. Additionally, we note significant decreases in total revenues for the first quarter of the current year compared to the prior year. Tell us how you considered whether these trends were considered to be a triggering event for an additional goodwill impairment analysis. Please refer to ASC 350-20-35-30.

Business combinations

The accounting for business combinations and the related disclosures are a consistent area of focus for the SEC staff, with frequent comments related to:

  • Purchase price allocations, including questions about how fair value was determined and the key assumptions used; 

  • Why the registrant omitted the pro forma financial information or other disclosures required by ASC 805; and

  • Compliance with the Regulation S-X Article 11 pro forma financial information requirements for significant business combinations disclosed on Form 8-K and in certain registration statements.


  • Please provide more detail regarding the royalty rate for the subject trade name and respective required rates of return used in the relief from royalty calculation. In addition to quantifying the inputs, please tell us how these inputs were determined, if a range of inputs were considered, and the magnitude of the impact on the trade name value if other inputs within the range, if any, had been used.

  • Please disclose a qualitative description of the factors that make up the goodwill recognized in the transaction in accordance with ASC 805-30-50-1(a).

  • We note your business combinations during the year were material in the aggregate to total assets for the current and prior year. Please disclose the following pursuant to ASC 805-10-50- 3 or tell us why you believe you are not required to disclose this information: 

    • The amount of acquisition-related costs, the amount recognized as an expense, and the line item or items in the income statement in which those expenses are recognized;  

    • The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period; and

    • The revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information).

  • Please tell us how you considered the requirements for pro forma financial information pursuant to Article 11 of Regulation S-X for the sale of your Facilities described in Item 2.01 of Form 8-K.

Contact us

Tim Weld

Tim Weld

US Health Industries Assurance Leader, PwC US

Laura  Robinette

Laura Robinette

US Pharmaceutical & Life Sciences Assurance Leader, PwC US

Jeroen van Paassen

Jeroen van Paassen

Partner, National Professional Services Group, PwC US

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