Check out this set of financial statements to see a live example of the pharmaceutical GIK issues – part 1

If you want to see an illustration of the issues surrounding valuation of GIK meds, check out the 2011 financial statements for Blessings International.  Many of the issues in discussion around the NPO community are visible in these financials.

This series of posts will be in 6 parts which will be posted over the next two weeks or so.

Their website went down a few weeks ago, so you can’t get the 990 or financial statements from their site. It is in operation again but only with a few pages working. You can find their website here.

You can find their 990 and audited financial statement for 2011 at the North Carolina Secretary of State’s web site. The specific page is here.

In case that link doesn’t work, you can go to the NC Secretary’s web site and use their search page, which is here.

Cover letter

Some time ago when the Blessings International website was up, I read a cover letter from the NPO’s president which was attached to the audited financial statements.  The report at the NC SoS site does not have that cover letter.  I will quote from the copy of the report I downloaded at the time. 

The March 7, 2012 cover letter from the president says in part:

For over twenty years Blessings has used nationally published average wholesale prices (AWP) to value its inventory of both donated inventory or purchases from pharmaceutical companies. Last fiscal year we did not receive any pharmaceutical donations. Rather we purchased all of our medicines. Furthermore in late 2010, generally accepted accounting principles (GAAP) changed. As a result our auditor qualified his opinion and recommended that we stop using AWP. This fiscal year we will be using cost to value our entire inventory.

What are the key points in that paragraph?

  • The organization uses AWP, which is obtained from the Red Book, same as has been used by most of the organizations with donated meds.
  • There were no donated meds in 2011. The organization acknowledges they were all purchased. This means we can focus on the issue of bargain purchase because all meds were purchased.
  • For 2012 the organization “will be using cost” for valuation. I infer that means they will drop the bargain purchase concept. I also infer that means they will use the amount they actually paid to value the medicine.

Introduction

I will go through the rest of the financial statements highlighting the places the valuation issue appears.

It is worth pointing out that all of the amounts and quotes mentioned in this series of posts are based upon publicly available information.  All calculations and comments are based on the same public information.

My hope is this series of posts will focus on the issue of valuing meds, not this particular ministry. It is my guess that the issues  and numerical relationships we can see in this set of financial statements are probably representative of what we could see if it were possible to dive this deep into the financials of other R&D NPOs.

For this post, amounts will be in millions and when I mention two numbers, the 2011 amount will be first with the 2010 amount following.

Auditors’ report

As I mentioned in an earlier post, the auditors issued a qualified opinion. Reason for the qualification is using average wholesale price instead of exit price in the principal market.

Statement of financial position

On the statement of financial position, page 5, pharmaceutical inventory is $27.6M and $15.3M (that is $27,600,000 for 2011 and $15.3 million for 2010).

That represents 83% and 74% of total assets.

The inventory represents 84% and 74% of net assets.

Next posts:

(links to other parts will be added as they are posted – in the meantime, above lines are spaceholders)

 

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