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 Mylan’s 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.