Problem Statement

Press Release

Mylan to Pay $30 Million for Disclosure and Accounting Failure Relating to EpiPen

FOR IMMEDIATE RELEASE 2019-194

Washington D.C., Sept. 27, 2019

The Securities and Exchange Commission today announced charges against Pennsylvania-based pharmaceutical company Mylan N.V. for accounting and disclosure failures relating to a Department of Justice (DOJ) probe into whether Mylan overcharged Medicaid by hundreds of millions of dollars for EpiPen, its largest revenue and profit generating product. Mylan agreed to pay $30 million to settle the SEC's charges.

According to the SEC's complaint, Mylan classified EpiPen as a "generic" drug under the Medicaid Drug Rebate Program, which resulted in Mylan paying much lower rebates to the government than if EpiPen had been classified as a "branded" drug. The complaint alleges that in October 2014, the Centers for Medicare and Medicaid Services (CMS)

informed Mylan that EpiPen was misclassified as a generic drug. Starting in November 2014, and continuing for nearly two years, the DOJ conducted a civil investigation into whether Mylan misclassified EpiPen and thereby overcharged the government for EpiPen sales to Medicaid patients. During the investigation, DOJ issued multiple subpoenas and investigative demands, rejected Mylans arguments to close the investigation, and indicated its intent to sue Mylan if Mylan failed to make a settlement offer. As alleged in the complaint, Mylan produced documents and other information to DOJ, including providing potential damages calculations and making offers of settlement.

As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must (1) disclose the loss contingency if a loss is reasonably possible; and (2) record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation before October 2016, when it announced a $465 million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions, when CMS had already informed Mylan that EpiPen was misclassified, were misleading.

"As alleged in our complaint, investors were kept in the dark about Mylan's EpiPen misclassification and the potential loss Mylan faced as a result of the pending investigation into the misclassification," said Antonia Chion, Associate Director in the SEC's Division of Enforcement. "It is critical that public companies accurately disclose material business risks and timely disclose and account for loss contingencies that can materially affect their bottom line."

The SEC's complaint, filed in federal court in Washington, D.C., charges Mylan with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Without admitting or denying the SEC's allegations, Mylan has agreed to the entry of a final judgment ordering a $30 million penalty and permanently enjoining it from violating those provisions.

The SEC's investigation was conducted by Ian Dattner and Daniel Maher, under the supervision of Lisa Deitch, Peter Rosario, and Antonia Chion.

I saw these reports on internal control over financial reporting on the Mylan annual reports.

Management stated

2016 Company maintained effective internal control over financial reporting as

of December 31, 2016

Required:

Look at the press release and the reports on internal control over financial reporting. We dont know anything other than what is reported in the press release, so lets take the information as an adequate representation.

1. What would have been the financial affect of accruing the loss?

2. Why might management prefer not to record the loss? Feel free to pick one or more of the following thoughts or

   describe your own ideas. Management might not want to record the loss

   • because management was concerned with their reputation for competency or honesty, having misclassified

     drugs to the CMS,

   • because investors might react to the loss by reducing the value of the stock, making it more difficult to raise

     capital

   • because profits would be lower and the board might reduce or eliminate management bonuses.

3. What processes should be place to review for lawsuits that might need accruing? Whatever processes are in place, one of the most difficult challenges for any system is when top management overrides the internal control process.

   [COSO has this to say about a preferred process: Reviewing* the completed financial reporting checklist (which is periodically updated for changes in financial reporting rules and standards) to ascertain that material presentations and disclosures have been prepared in accordance with Generally Accepted Accounting Principles

   *Who should do the reviewing? Who has competency to know what should go in the 100 or more pages that comprise the annual report to the SEC? Who has the authority or status in the organization to challenge the draft of the annual report before it is filed?]

DELOITTE & TOUCHE LLP stated

our report dated March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting

2014	management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014	our report dated March 2, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
2015	management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015	our report dated February 15, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting