Controversial Mylan (MYL) 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.
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.
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.
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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. Here are three examples.
Profits and taxes
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 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% nominal corporate tax figure isn’t an accurate reflection of Mylan’s tax lien in the U.S. At all. 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 Coins2Day 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.”
Bresch’s compensation
One particularly head-scratching moment in last week’s hearing centered on Bresch’s and other Mylan executives’ lavish pay. Bresch told lawmakers that her $18 million package was “in the middle” range when asked how her compensation compared to peer pharmaceutical companies.
That doesn’t quite mesh with the available topline data. In fact, Mylan’s executive pay package for its top five highest-paid executives is the second-highest in America. In 2014, Bresch was the sixth highest paid biopharma CEO.
Mylan explained that Bresch’s “in the middle” comment referred to her compensation in relation to total shareholder return (TSR) during her tenure. But the package doesn’t seem nearly as modest if compared to other metrics such as Mylan’s $22 billion market capitalization, which is significantly lower than the value of companies like Johnson & Johnson (JNJ), Pfizer (PFE), and Merck (MRK).
Saving the U.S. $180 billion
House Oversight Committee members repeatedly questioned what Bresch had done to deserve a 671% compensation increase over eight years. Her answer? Mylan has saved patients and the American health care system boat loads of money — $180 billion over a decade, in fact. (She also cited the EpiPen’s life-saving nature and Mylan’s efforts to get it into as many schools as possible, which has also come under scrutiny.)
However, the company used a pretty odd metric to come to that figure. And the EpiPen played no part in these massive savings if you go by the logic employed by Bresch.
“According to the Generic Pharmaceutical Association’s 2015 Generic Drug Savings in the U.S. Report, from 2005 to 2014 generic drugs saved the U.S. Healthcare system $1.68 trillion,” Mylan told Business Insider when asked about the $180 billion stat. “During this time period, Mylan’s average market share of the generics market was about 11%, which equates to Mylan delivering approximately $180 billion in savings to the U.S. Healthcare system.”
In essence, Mylan and Bresch are arguing that the company’s very existence as a generic drug maker justifies its executive pay. But the EpiPen, which is a branded product, the company’s biggest seller, and its first $1 billion drug, plays no part in those generic drug savings.
