Mylan CEO Bent Truth About Epipen Profit; Sadly Follows Path of Valeant, Turing Pharma

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Controversial Mylan NV (Amsterdam) CEO Heather Bresch was grilled in a marathon committee hearing about the EpiPen’s pricing before Congress last week. But it turns out that several of her statements would require some serious financial gymnastics and creative accounting to be considered accurate, according to Fortune.

Bresch testified before the House Committee on Oversight and Government Reform last Wednesday and defended her company’s massive price hike on the life-saving EpiPen device since acquiring it in 2007. She said that Mylan’s decision to raise the price from about $100 for a two-pack (which has to be replaced almost every year) to $608 over the course of a decade was “fair” and blamed high health insurance deductibles and co-pays for Americans’ struggles to afford the product.

Testimony by Mylan CEO Heather Bresch full of financial gymnastics and creative accounting Click To Tweet

Bresch also argued that Mylan’s take from that $608 wholesale cost is far lower after considering its discounts to benefit managers, insurers, and patient assistance programs. But Congress wasn’t buying it. Numerous lawmakers, including committee chair Rep. Jason Chaffetz of Utah, told Bresch that her numbers didn’t add up.

“It just doesn’t smell right,” said Chaffetz. “It doesn’t pass the basic sniff test.”

The committee asked Mylan to produce more detailed documents about the EpiPen’s related costs and profits and clarification on how the company got to its figures.

Some of that clarification has now arrived. And it reveals that several key elements of Bresch’s testimony last week might be considered misleading at best, says Fortune. Here are three examples. Bresch repeatedly emphasized that Mylan realizes a $274 cut out of the $608 wholesale acquisition cost for the EpiPen which has caused so much controversy. After considering multiple other costs, including helping patients avoid some out-of-pocket spending, the company’s profit comes out to about $50 per device, she said.

What Bresch didn’t tell Congress was the $50 figure relies on assuming a 37.5% marginal corporate tax rate, the Wall Street Journal reported on Monday. Mylan actually nets about $83 per device without that cost folded in, a more than 60% profit boost from what Bresch told lawmakers. (Mylan issued clarifying documents to Congress and the Securities and Exchange Commission on Monday noting that the stats were after-tax and explaining its approach.)

But the 37.5% marginal corporate tax figure isn’t at all an accurate reflection of Mylan’s tax rate in the U.S. The company actually paid a negative effective rate in America last year, according to the Journal, and its effective global rate was just 7.4%. A Mylan spokesperson called the Journal’s report “very misleading” in an email to Fortune and defended the company’s accounting methodology of using the statutory tax rate as “standard.”

“Just as we did not use a blended global tax rate, we also did not allocate corporate expenses associated with running the business, which would have further reduced its profitability,” said the company in a statement. “We believe it is most appropriate, and conservative, to focus entirely on EpiPen Auto-Injector specific costs and associated taxes.”

Steve’s Take: Quite a few years ago I somehow passed the CPA exam and started working for one of the big accounting firms in their tax department. Although some of the guiding principles for establishing the cost of products being sold by a company may have changed a little, there are some fundamental (and rather simple) ways a pharmaceutical company CEO such as Ms. Bresch would ordinarily characterize a product like EpiPen to inquiring members of Congress in direct testimony. Since she would be under oath, one would think Ms. Bresch would do everything possible to give Congress the clearest, simplest picture of the EpiPen’s “cost,” which is all they wanted.

But she didn’t.

Here is what I would have counseled Ms. Bresch to say about EpiPen. (N.b.: I make no claim whatsoever to know how Mylan actually reports its taxes, so this is a completely hypothetical statement. Nor am I suggesting had she adhered to the following statement, she would have avoided the onslaught that ensued.)

Ms. Bresch: “Our business is taxed on its profit at the end of the year. In a very elementary description of our accounting process, we determine our profit as follows:

  • Our sales constitute our Total Revenue.
  • Our beginning inventory plus the items we buy or produce each year minus our ending inventory constitute our Cost of Goods Sold (“COGS”).
  • What we have not sold by the end of the year, valued at our cost, is our Inventory.
  • Total Revenue minus COGS = Profit
  • We are then taxed on our Profit.
  • How do we value our inventory for tax purposes?
  • Our inventory is valued at our purchase cost or production cost, in the case of the EpiPen. (I’m leaving out any discussion of “worthless” items, etc.)
  • The IRS accepts these three ways of valuing our inventory:
  • Cost; Lower of cost or market; and Retail. (I’m leaving out a discussion of FIFO and LIFO.)
  • We use the Cost method for EpiPen.”

Now back to reality.

During her appearance, Bresch’s responses to direct questions about how much the EpiPen autoinjectors brought in for the company often circled around a direct reply, but she was delighted to repeat one figure repeatedly: Despite the high price tag of $600 for a pair of pens, the company reaped only $50 per pen in profit.

According to the Wall Street Journal, the company tweaked that number around by adding the highest marginal corporate tax rate of 37.5% to those calculations. Without that assumption, the company’s take on a pair of pens leaps from the $100 per two-pack that Bresch cited to about $160 per two-pack. Even with that assumption, new filings from the company after Bresch’s Congressional committee appearance put that $100 value at $104 instead.

According to Bresch’s testimony, the company sold “roughly” 4 million of the two-packs in a single year (reports put it at 4.1 million). So that incorrectly reported value would have been low by $264 million for a year’s worth of profit without the tax rate deducted and by $16 million using Mylan’s newly filed figures with the tax deducted.

That tax rate is essentially imaginary and doesn’t reflect the actual tax rate Mylan pays. Members of the House Oversight Government Reform Committee who questioned Bresch asked detailed questions about the company’s tax rate, especially in the face of its infamous inversion gambit in which it re-domiciled on foreign shores (in this case, the Netherlands) to elude high taxes. It was never quite clear from Bresch’s responses what the company’s U.S. tax rate is, although she cited a global value in the teens.

According to the L.A. Times, Mylan’s effective tax rate was 16.2% in 2013. The WSJ cites analysts who said that the company had: a low 7.4% overall tax rate last year and a negative effective tax rate in the U.S.

That assertion might explain the CEO’s reluctance to specify before Congress how much the company paid in U.S. taxes. It does not, however, explain why Mylan’s bean counters decided to tack on a 37.5% tax rate in their calculations for the company’s take on the EpiPen. Updated: In a statement, Mylan has called this calculation “standard.”

We know the history of the price of the EpiPen. However, my final take on the matter of the EpiPen’s “cost” and Mylan’s resulting “profit” is simply this. Mylan could make the argument that the cost of producing the EpiPen (i.e., the “cost of goods sold”) deservedly consists of the cost of the raw materials comprising each EpiPen–plus the sales tax! But under no circumstances in my experience would Mylan be allowed to add the 37.5% marginal tax to the EpiPen’s COGS and then represent that with a straight face to Congress.

Steve's Take: Even Heather Bresch's Senator father can't help with her 'smoke and mirror' routine Click To Tweet

Elijah Cummings, the Maryland representative who chairs the House oversight committee, compared Mylan’s actions to Turing Pharmaceuticals AG and Valeant Pharmaceuticals International Inc.–two pharmaceutical companies that faced recent high-profile criticism for increasing the price of their drugs by 4,000% and 5,000%, respectively. Martin Shkreli, Turing’s former CEO who is commonly known as “Pharma Bro,” faced the House oversight committee in February for his role in increasing the price of a life-saving drug from $13.50 to $750.

“They (Shkreli and former Valeant CEO Michael Pearson) used a simple, but corrupt, business model that other drug companies have repeatedly use–find an old, cheap drug that has virtually no competition and raise the price over and over and over again as high as you can,” Cummings said during the hearing.

Sadly, Ms. Bresch is now being lumped in with the likes of Messrs. Shkreli and Pearson. Some criticism was surely warranted on the EpiPen price issue. But if she counted on her father’s stature as a U.S. Senator helping her coast through the Congressional hearing while using some accounting smoke and mirrors? That apparently would have been a big mistake.