By Randall Osborne

West Coast Editor

SAN FRANCISCO - The first round of public hearings finished Friday on a proposal by the Financial Accounting Standards Board (FASB) to eliminate the rule that allows pooling of interests as a bookkeeping option in mergers and acquisitions.

Among analysts and company officials, one school of thought claims the move would hamstring biotech deals, while another insists the change would only put the focus in such transactions back where it belongs: on cash earnings.

"They're both right," said Richard Pops, CEO of Alkermes Inc., of Cambridge, Mass. "But when you run a company, you have to be wary. Let's say it will all be fine in two years. Well, that's eight quarters of jeopardy for your shareholders that you have to worry about."

Pops, a board member of the Biotechnology Industry Organization (BIO), will testify Friday, during the second round of hearings in New York.

Phil Ufholz, tax counsel and director of government relations for BIO, said most of those slated to speak in front of FASB represent digital firms and financial institutions, but the pooling rule also is critically important to biotech - especially small firms.

If the rollback goes through, Ufholz said, "companies will have to rethink their plans."

Last April, the FASB voted unanimously to do away at the end of this year with pooling, which lets two merging companies simply add the book value of their net assets. Pooling can lead to overpayment of an acquisition, and to profile such a deal afterward is impossible by inspecting the paperwork, according to the FASB.

Purchase accounting, the alternate method, calls for recording assets and liabilities at fair market value, with the amount above that written off as "goodwill" from the buyer's earnings over time - thus giving a more accurate picture of the company's growth, says the FASB.

The private, seven-member FASB is recognized by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants as the setter of standards for financial reporting.

Doug Braunstein, head of global healthcare for Chase H&Q in New York, said eliminating pooling "is more likely over time to cause people to focus on the funds of cash earnings [rather than charges against them], which is a better valuation tool. Some very large players are going to take the step, and force the research-analyst community to focus on cash earnings."

The recent merger between AOL and Time-Warner, he noted, was done through purchase accounting rather than pooling. But the trend has yet to inspire many in biotech.

"It's like crossing the street," he said. "You don't necessarily want to be the first guy."

Ufholz said most prefer to stay curbside. A company's critical march toward profitability can be slowed by the "goodwill" charges, and investors might not understand enough to hang on, he said.

"It can take 14 and a half years to develop a product, and for startup companies, they're not profitable for all that time," he said. Many aim for buyouts, but their prospects will shrink severely if the potential buyers can't use pooling and must, as part of the deal, take "goodwill" charges against their bottom lines, Ufholz added.

"The little guy's finished," he said.

Pops said he will urge the FASB to keep the pooling rule, and find another way to ensure accuracy in reporting. Determining the value of "goodwill" intangibles such as brand name, processes, and intellectual property is tricky, he said.

"Most of the valuation [of biotech firms] is not in the form of hard assets," Pops said. "By definition, combinations of two biotech companies are going to result in large goodwill amortization charges. The market doesn't understand that. It's more than two big industrial companies coming together and taking a charge. In our case, it could actually delay profitability for a number of quarters or years."