Staff Writer

WASHINGTON - Disclaimer: What you are about to read are the mere opinions of three biotech executives speaking Tuesday on Sarbanes-Oxley legislation at the Biotechnology Industry Organization's annual convention here.

All three executives have every intention of fully complying with the new financial reporting requirements. They see value to the new requirements, and they have no desire to see the inside of a jail cell, so they will spend the extra $1 million a year to make sure their annual and quarterly reports are accurate and that they have effective internal controls for financial information. If you are a member of the SEC, Justice Department or a mistrusting stockholder, please do not hold their comments against them.

"You might be better off following a life of criminal crime than financial crime," said Steve Mayer, chief financial officer of Rockville, Md.-based Human Genome Sciences Inc. "Because the penalties for financial crimes are greater. And that's my personal view. I think that falls under the disclaimer."

A rumble of laughter overcame the audience at a BIO 2003 workshop following Mayer's comment on Tuesday. The session titled "What biotechnology executives need to know in the brave new financial reporting world" focused on Sarbanes-Oxley legislation and Nasdaq requirements that resulted following the Enron, WorldCom and ImClone Systems Inc. scandals.

"You have to be brave to do financial reporting in this environment," Mayer said. Public companies face new disclosure regulations, internal control requirements, new SEC rules about fair disclosure and new accounting rules. "The whole trend toward fair-value accounting is one that troubles me," Mayer said. "We're getting into the realm of making estimates and guesses."

On top of the new requirements, companies have tighter deadlines for filing. A 10-Q, for example, must be filed in 30 days instead of 45 days. In order to certify that all of the information in the reports is accurate and in compliance, executives need to take more notes, hold more meetings and spend more time going over everything. "We ought to actually have more time, not less," Mayer said.

Rene Salas, a Virginia-based partner with Ernst & Young and the moderator of the panel, highlighted some of the biggest changes:

• Section 406 requires a code of ethics for senior financial officers - one that addresses conflicts of interest.

• Section 403 requires disclosures of transactions involving management and principal stockholders. Companies must file the forms within two business days of the transaction and they must begin electronically filing the forms by July 30.

• Section 906 requires certification by company executives that everything in the filing is accurate.

• Section 302 requires certification that there are no untrue statements or omissions in the filing, that there are disclosure control procedures in place, and that fraud is disclosed.

• Section 404 requires a company to show that its internal controls work.

• Sections 202 and 301 deal with the need for an audit committee, and a process by which employees can bring up concerns anonymously.

• Section 407 requires the disclosure of an audit committee financial expert.

Mayer does not agree with all of the details of the changes, but he does understand why they were put in place. "I agree," he said, "with the objective, which is to return confidence in the financial markets, which is important for all of us."

With the first change listed, Section 406, many biotech companies already had a code of ethics in place directed at all employees. Both Mayer and Greg Patrick, the chief financial officer of Gaithersburg, Md.-based MedImmune Inc., said they revised policies that dealt with harassment concerns to include accounting and financial concerns as well. Employees need to know that they can go to their CFO and even higher to the audit committee if they have concerns. "The whole objective is to make sure the books are clean," Mayer said.

In order to address Section 403, biotech executives may need to begin working on the filings before the transactions occur. And as for Sections 906 and 302, executives may have to spend more time and money hiring outside help to make sure all statements are true and that nothing is omitted.

"It's not premised that it's to the best of your knowledge," Patrick said. "It's an absolute certification."

Mayer said a sticky area can be certifying that there are no omissions. "How far down do you have to go to make sure all of the material facts are in there?" he said. "Do you have to go to each employee?" The answers weren't clear to any of the panel members.

Section 404 is a costly requirement. While a company's auditors can help with 90 percent of the new requirements, biotech officials will need to hire outside help to do the testing of the internal controls. Salas explained it would be a conflict of interest for the auditor to conduct the testing.

"This is not cheap," Mayer said. "On strict out-of-pocket [expenses], not including time, we will spend half or three-quarters of a million dollars for this process."

Patrick estimated MedImmune will spend $1 million to $1.5 million for the process.

Stanley Erck, president and CEO of Gaithersburg, Md.-based Iomai Corp., the sole private company represented in the panel, joked that he's fairly sure his company won't go public after hearing about the new requirements.

"My eyes are opened just sitting on this panel," he said, adding that the company likely will go public when the time is right. "But it's clear that we're going to have to be doing a lot more than we're currently doing."

Investors in the company's recent $56 million private placement asked that Iomai's executives begin complying with the new public requirements so that they are ready in the event the company does go public.

Sections 202, 301 and 407 focus on the need for an audit committee. Panel members agreed that the biggest challenge there is finding financial experts to be a part of the committee. Mayer stressed that there are more stringent requirements on who qualifies, and the penalties and risks are greater, but the compensation has stayed the same.

Nevertheless, all public companies must have a financial expert listed as part of the audit committee in the 2003 end-of-the-year filing.

"My biggest criticism," Mayer said at the end of the session, "is compliance is not easily done. You get a lot of experts; it costs a lot of money. You want to comply, but it's not always easy knowing how to comply."