The Gilead and the taxpayer Odyssey

by Michael West | Jul 13, 2017 | Finance & Tax, Government

How much can a multinational take before its social licence to operate in this country expires? How much corporate welfare is too much? We examine the case of Gilead Sciences and its “blockbuster” cure for hepatitis C.

Like its Big Pharma peers, Gilead Sciences enjoys lavish taxpayer subsidies via the Pharmaceutical Benefits Scheme (PBS). It also makes large profits but it pays little in the way of income tax in this country. Like its peers, Gilead is doubly subsidised by taxpayers in Australia: low income tax, high PBS.

Yet this US drug company has surpassed its peers in the pursuit of corporate welfare. It has set prices so high for Sofosbuvir, its “blockbuster” treatment for hepatitis C, that very few people in the world can afford to pay for the drug without monumental government subsidies.

UK activist group, Global Justice Now, estimates somebody dies of hepatitis C every 79 seconds; the same time it takes Gilead to make $US26,068 selling Sofosbuvir. More than 1.4 million people have died since Gilead took its hep C cure to market in 2014.

But what a cure it is. The success rate is 95 per cent. Sufferers don’t need to take the drug for their whole life, just for a 12 week course of pills. This drug is capable of eradicating a disease which kills nearly 500,000 people a year and infects more than 150 million people world-wide … were it not for the money.

Only wealthy patients and wealthy countries like Australia have the wherewithal to pay for it. And Australia, with its “soft-touch” PBS scheme which is unsustainable and skewed heavily in favour of drug companies, is a prime target for Gilead.

The Australian government forked out $1 billion in just four months last year to subsidise hep C cures Ledipasvir and Sofosbuvir. These were the two most costly items on the PBS; they cost almost $1 billion and paid for just 43,000 prescriptions, prescriptions which would have cost the customer $1,000 a pill had taxpayers not picked up the bill.

It was the extreme price of Gilead’s hep C cure which led Dr John Freeman to set up a buyers’ club, FixHepC, so his patients could import a generic hep C treatment from Asia and pay $US2,000 rather than the $US84,000 Gilead was charging for the treatment in America.

John Freeman’s son Dr James Freeman said this week he was apprehensive at first about importing a far cheaper generic from Asia but felt, as a doctor, he first owed a duty to heal his patients.

It was the patients who imported the drug and the results were stunning, and at a fraction of the price.

Patients of the Freemans were able get around patent laws on a personal use basis. Gilead, which has a 20 year IP stranglehold on the drug, is not happy about generic interlopers in its hep C monopoly – though the company declined to respond to questions for this story.

The rationale for keeping drug prices high while allowing those who can’t afford to pay to die is primarily one of risk, capital and markets. Unless there is a significant financial reward for undertaking developing pharmaceuticals, companies will not invest and therefore cures will not be found. But where is the line to be drawn between profits and lives?

James Freeman says Gilead has overstepped that line. The pricing isn’t based on cost – manufacturing is one per cent of the price – and it’s not based on needs either; people are dying. It is based, says Freeman, on “whatever the market will bear”. And when governments are your market … well, that’s a big market.

In any case, Gilead did not develop the IP itself, it was acquired by taking over a smaller company on the stock market, getting regulatory approval and then jacking up the prices.

Typically, a new drug costs between $US90 million and $US300 million to develop. Instead of developing the drug itself, Gilead acquired Nasdaq-listed stock Pharmasset for $US11 billion. It was framed as a “high-risk” acquisition at the time as Pharmasset had steered its drug through Phase II clinical trials but was yet to get approval from the US Food and Drug administration.

“Patent laws are supposed to help incentivise research and development by ensuring profits for new drugs. But Gilead did not invent Sofosbuvir,” wrote Freeman in a paper on the hep C cure. “The research for the drug was partly funded by American tax-payers and the investment that Gilead made in buying the rights for the drug was more than made back in their first year of its sale. So most of the money you pay for the drug now goes to marketing and to paying dividends to the shareholders … in California.”

Gilead got Phase III trials done, had the drug approved, and the rest is history.

“In the third quarter of 2013, Gilead had $US2.36 billion in cash and convertibles on its balance sheet,” says James Freeman. “Now they have $US32 billion. They only have one blockbuster so they have $US30 billion in cash profit”.

This sort of astronomical profit – a profit subsidised by the Australian taxpayer via the PBS – suggest Gilead should be accountable for its corporate activities in this country.

Like many Big Pharma multinationals which operate in Australia however, Gilead produces only “Special Purpose” financial statements, a statutory report which relies on the assumption that there is only one stakeholder interested in Gilead’s financials.

This is wrong. It is a narrow and arguably erroneous view of accounting standards which holds there is only one stakeholder is interested in Gilead’s financial statements; there are creditors, taxpayers, patients, myriad parties interested.

The reason for producing Special Purpose reports is reduced disclosure, secrecy. There is zero disclosure for instance of Gilead’s related party transactions with its parent company in Ireland – likely there are IP or service charges to Ireland – or with the ultimate parent company in the US. These are not revealed in the accounts and they fail to provide a “true and fair” picture of Gilead’s financial position as required by accounting standards and the Corporations Act.

An analysis of its financial statements shows that although Gilead booked $2.3 billion in cash receipts from its customers in Australia last year, it paid just $2.8 million in income tax and just $10.5 million over the past six years.

It should be said that tax expense, a forward estimate in the profit and loss statement is $86 million – reflecting the enormous cash injection from the PBS. It remains to be seen what actual tax will be paid. Tax as a percentage of revenue is 0.82 per cent – less than one per cent of sales – after billion dollar subsidies via the PBS.

Further, deep in the intestines of the notes to the financial statements is a provision to pay the Department of Health $1 billion. Never mind that this provision does not show up in “provisions” on the balance sheet – we have come to expect this sort of lousy accounting – but there is no explanation of the group’s arrangements with the government.

On the face of it, Gilead owes the government $1 billion but does not deem that the government is entitled to an interest in its financial statements, ergo Special Purpose reporting.

Gilead’s revenue last year was $483 million – it had soared from $186 million the year before – but it booked $2.3 billion of cash receipts from customers. How is it that cash of $2.3 billion amounts to five times disclosed revenue? No doubt there are complex rebate arrangements, though these are not explained by Gilead or its auditor EY.

Neither is the government’s reporting of its PBS arrangements adequate. Again, cloaked in secrecy. The PBS spend has almost doubled in a decade from $6 billion to $11.5 billion and is headed higher. The long-term cost of healthcare appears crushing and a first step to addressing this impending crisis in funding is transparency and disclosure.

As for Gilead’s social licence to operate in Australia, it hangs by a thread. This is a company which should be deemed an agent of its foreign parent and taxed as such. Its related party dealings should be detailed clearly.

The case of Gilead and Sofosbuvir is far from unique, says Dr James Freeman. “Across the world, hundreds of millions of people are priced out of accessing the medicines they need by big pharmaceutical companies with monopolies over essential medicines.

“It’s estimated that ten million people across the global south died from AIDS-related diseases while big drug companies tried to block the production of ‘generic’ versions of drugs that could be used to cheaply treat patients. In the UK the annual NHS drug spending has gone up by £3.8 billion in the last five years and the NHS increasingly has to reject or ration new drugs because of their costs, leaving patients without access to new treatments.”

MW has been funded by GetUp! and the Tax Justice Network to conduct an analysis of the tax affairs of 20 multinational companies operating in Australia.

This column, co-published by with The Conversation, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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