This is the seventh in a series of posts diving into the detail mentioned in the complaint by FTC and all Attorneys General against four named cancer charities. The complaint can be found here. My posts in this series are visible using the FTC tag.
This is the first of two posts on comments in the complaint addressing valuation at an overall level. Following paragraphs in the complaint go into detail by charity.
This will be a long post. Not sure how to conveniently break it into two or three separate discussions.
Corporate Defendants Improperly Reported the Value of GIK
Even assuming, arguendo, that in some instances Corporate Defendants could have properly claimed the GIK goods’ value as contributed revenue or reported it as program expense, in numerous instances, Corporate Defendants used improper valuation methods to inflate the reported values of donated goods. Corporate Defendants also failed to retain appropriate documentation of those valuations.
This is not going well. I think that paragraph asserts that none of the GIK shipments should have been included in revenue.
Furthermore, assuming shipments actually had variance authority there are two additional problems according to the complaint. First, goods were overvalued. Second, documentation is not retained to support the recorded valuation.
Corporate Defendants relied almost exclusively on INTERMEDIATE for valuation information. In numerous instances, INTERMEDIATE valued pharmaceuticals using the average wholesale price in the United States as listed in the “Red Book: Pharmacy’s Fundamental Reference.” That valuation method failed to consider numerous factors including the relevant market for the goods (i.e., whether they could be sold in the United States), the goods’ physical condition (including the expiration dates of pharmaceuticals), current market conditions, and the legally permissible uses for the donated goods. INTERMEDIATE’s methods, in numerous instances, resulted in inflated and unsubstantiated claims of value. For example, in numerous instances, INTERMEDIATE valued particular drugs at U.S. wholesale prices even when there was no U.S. market for the drugs because an upstream donor had restricted their use to a particular foreign country or because the drugs had expired. U.S. wholesale drug prices, in numerous instances, are much higher than prices in other markets, so assigning a value based on sale in a U.S. market results in a higher value than, for example, assigning a value based on a market in Africa or Central America.
This paragraph covers a host of valuation issues. In a very condensed form, it provides a framework to assess the valuation of any shipment. For any regulator or reporter starting to look at this issue, the paragraph provides a low-resolution aerial photograph of the route you can follow.
What are a few of the issues?
For starters, many shipments were valued based on only what the Intermediate provided. No effort by the named charities to value medicine calls into question the value and possibly the shipment itself. The complaint suggests there was zero effort to validate any amounts provided by the Intermediate.
(As a reminder, I am substituting the phrase “Intermediate” for the name of a for-profit company that allegedly arranged the shipments and allegedly created documentation for transactions. I choose not to explicitly mention the company. If you have any interest, you can quickly find their name. If you have been following the issue, you will recognize the company.)
For an unquantified portion of shipments the evaluation was Average Wholesale Price (AWP) from the Red Book. This is problematic for a long list of reasons.
In no particular order –
- AWP is a reference point.
- As I also understand, the AWP reference point is provided by manufacturers. If you are new to this whole issue, let me offer an analogy as you start pondering: consider the idea of manufacturer’s suggested retail price as an indicator of prices for obtaining goods you could otherwise buy at Amazon ™ or on E-Bay ™.
The methodology does not consider:
- Whether it is even legal to sell the medicine in the United States. That is a central issue for the entire GIK valuation issue since a severely large portion of the dollar value of reported medicine is from 500 mg mebendazole, which is not lawful to sell or distribute in the United States.
- Expiration date. Medicine approaching expiration has reduced value. Medicine passed expiration should be evaluated at zero since it is unethical to distribute. Any healthcare experts care to comment on whether it’s even legal to distribute? Such medicines may have some efficacy remaining, but seems to me as an accountant that if a charity recorded any value for an expired medicine there ought to be an assessment in the documentation of whether such medicines have clinical value.
- Physical condition. Are the medicines practically usable? I don’t know what issues are behind that comment in the complaint. Reminds me of a conversation many years ago with a development person at one of my clients who said it was common knowledge that containers of donated medicine often arrive so disorganized that it takes a tremendous effort to sort out the contents so they can be used. Packages of 50 caplets are in a box with bottles of 100 gelcaps along with couple boxes of different size bandages and sundry supplies. Some packages are broken open. Not likely to be an issue when drop shipped from the European wholesalers, but some variation of this issue exists according to the complaint.
- Medicine prices in the United States are higher than the rest of the world. There are economic reasons for this, I have learned. In a sentence, Americans essentially pay for the development costs of a new medicine and the rest of the world pays for the incremental production costs after development has been recovered via US sales. Using prices in the US are questionable in general when distributing medicine elsewhere, especially when distribution in the US is illegal.
- Volume. The value of 100,000 pills on a pallet from the manufacturer in Europe is different from the value of 2,000 pills in a carton at a wholesalers warehouse in the midwest, which is different from the value of five boxes sold to an independent pharmacy. A critical issue is what point in the distribution process should be used to estimate value. The FTC alleges that factor was not even considered, if I’m reading the paragraph correctly.
- Intermediates. From what I’ve seen in previous coverage, many of the shipments are drop shipped by big wholesalers in Europe to their ultimate destination. I will make a guess the named charities did not consider how much that affects valuation of pallet loads of medicine.
When a donor has placed a restriction that medicine is only to be used in a specific foreign country is not relevant when analyzing a transaction in light of accounting rules. For anyone applying logic instead of accounting requirements, such a restriction would seem to affect the valuation. That is a full discussion just by itself.
Pertinent to this discussion is that if an upstream donor placed a location restriction on a donation, it sure seems to me there should be a memo attached to the documentation for that shipment explaining that such restriction does not affect the accounting valuation. Based on the comments in the complaint, I am guessing there are no such memos in existence.
I am guessing this condensed paragraph does not cover all the valuation issues considered by the FTC. I know it does not list all the issues that exist.
Next: part 8 to complete the overview of valuation issues.