Controversy Over Drug Values at Aid Groups: A Look at a Key Player

Located in a brick building in a historic suburb outside of Washington, a drug company called MedPharm has for 20 years been providing essential medicines to nonprofit aid groups, United Nations programs, and government agencies around the world.

The generic drug supplier has a stamp of approval from the U.S. Agency for International Development. MedPharm’s Web site says the company has worked with global-health giants like the World Health Organization and the Bill & Melinda Gates Foundation.

But approaches to valuing MedPharm’s medicines—generic drugs that the company procures from India and elsewhere—shed new light on a growing controversy over how international aid organizations obtain and record in their financial statements pharmaceuticals they deliver overseas. While the debate about valuation has largely focused on different interpretations of accounting rules, MedPharm and nonprofits that work with it seem to have found ways to capitalize on the lack of clarity over drug values.

Unclear Rules

For years, many international aid groups have been valuing their medicines at U.S. average wholesale rates. Aid groups have had reason to do so because the accounting rules have been vague and the wholesale rates are published and easily accessible, unlike information on how much drugs actually sell for.

MedPharm and other drug suppliers get generic versions of the medicines from Indian and Chinese manufacturers for tiny fractions of their wholesale prices. They charge charities very low rates for the drugs. For example, a deworming drug that’s critical to fighting parasites in the developing world can cost as little as 2 cents per pill, but its published U.S. average wholesale rate can be as high as $16.25.

Some accountants, lawyers, and nonprofit officials say it’s misleading for aid groups to value drugs for which they pay pennies at $10 or $16 per pill.

They say that the practice of using wholesale rates for inexpensive medicines procured from MedPharm and its competitors has presented an exaggerated picture of how much good the organizations are providing. What’s more, they say that drugs procured from suppliers like MedPharm shouldn’t be counted as donations at all but as purchases.

Other nonprofits and accountants say they can count the medicines as donations and value them at higher rates because companies like MedPharm supply exclusively to governments, U.N. agencies, and nonprofits for prices that are lower than commercial buyers would pay. They say those transactions are different than a typical purchase because the suppliers have “donative intent,” or a desire to make a gift. Therefore, some accountants say the rates charged by the drug companies are much lower than the true value of the medicines.

That debate has heated up in the past year since a new accounting rule went into effect that laid out specific steps organizations ought to take in determining how to value their goods and products.

Wholesale vs. Purchase Price

That gulf between wholesale value and purchase prices for drugs has given an opening to MedPharm and nonprofits that work with it to seize a business opportunity.

For example, the company supplied drugs to organizations in Canada that were involved in a tax shelter through which donors received tax receipts for higher Canadian prices of medicines—even though they had donated only enough cash to buy drugs from MedPharm that cost a fraction of those rates.

Since July, The Chronicle tried to speak to MedPharm’s president. He did not respond to repeated messages by phone or e-mail.

Several aspects of the relationship between MedPharm and Medical Education Training and Development, or Metad, a charity that helps aid groups get access to medicines, are unclear.

One question is how close the ties are between MedPharm and Metad.

Several Web sites list Metad’s address as the contact for people who want to reach MedPharm.

In an e-mail to The Chronicle, Barbara Johnson, Metad’s director, declined to comment on why her charity is listed as the contact for MedPharm. But she said that MedPharm is one supplier to her nonprofit and that Metad acquires medicines from multiple sources. She said she could not disclose the other sources of medicines to her nonprofit because that information was “proprietary.”

Handling Fees

What is clear is that in some cases, at least, Metad gets access to medicines from MedPharm and offers ownership of the drugs for handling fees that exceed the cost of the pills.

Metad issues paperwork showing the higher wholesale rates. The nonprofit aid groups sometimes record the medicines as donations valued at those higher rates, meaning that drugs that could be purchased from a company like MedPharm for roughly $50,000 are recorded as donations worth $20-million.

The Web site of the Technical Exchange for Christian Health Care, which counts MedPharm among its sponsors, describes the process like this: “MedPharm has developed a program in which the non-profit is paying only a small fee for the medicines, but can leverage the value for matching grant applications and GIK [gift-in-kind] purposes.”

The drugs do not typically enter the United States. They sit in the warehouse of Amstelfarma, a Dutch drug supplier with which MedPharm is affiliated, before being shipped directly to an aid group’s programs overseas.

While it’s common for nonprofits to charge handling fees when they give drugs to other organizations, what’s unclear in Metad and MedPharm’s case is whether the fees are being used to buy the drugs and then cover other costs, instead of simply meeting the costs of processing donations.

Ms. Johnson said her group works as an intermediary but declined to say how its acquisition process works and whether it buys drugs, obtains them as a donation, or acquires them in some other way. Metad’s Web site says that the organization “facilitates the transfer/donation of pharmaceuticals to the developing world through purchases and corporation asks.”

Ms. Johnson told The Chronicle that her charity’s fees are based on its work helping organizations acquire drugs and also providing assistance with customs, freight forwarding, and other tasks.

On the question of how to value medicines, Ms. Johnson said that it’s up to relief groups to determine how they value the medicines they receive from her group. She notes that Metad’s paperwork says that it does not verify the values of the medicines and points out that most aid groups have been valuing their drugs at U.S. average wholesale rates for years.

Her group doesn’t record in its financial statements the value of the drugs it helps procure. Metad’s budget in 2009 was $2.2-million, nearly all of it from providing program services such as procurement of medicines, according to its informational tax return.

Metad donates money it earns beyond the costs of acquiring medicines to charitable projects in the United States and abroad, said Ms. Johnson.

Questioning Drug Values

At least one group that has received medicines from her organization and MedPharm says it believes the higher values for the drugs are inappropriate.

In 2009, Metad charged Islamic Relief, the aid group, $109,500 for medicines it was told were from MedPharm. A nonprofit could acquire those medicines from the drug supplier or its competitors for roughly $50,000. Metad’s paperwork listed the wholesale rates for the medicines as $20-million. That year, Islamic Relief got a total of $108-million worth of drugs through Metad, valued at the highest U.S. wholesale rates.

After The Chronicle raised questions about the transactions, Islamic Relief said the group had serious concerns about its work with Metad and was suspending its in-kind medicine program pending an internal investigation. In an e-mail, Abed Ayoub, the organization’s chief executive, said he did not realize a nonprofit could buy the drugs directly for so little.

The organization said it was not sure if the medicines had been purchased from, or donated by, MedPharm. The group said it was under the impression that Metad, which is run out of Ms. Johnson’s home in Michigan, was the nonprofit arm of MedPharm.

All of Islamic Relief’s work acquiring and delivering medicines has been managed by an outside contractor, Diana Sufian. Islamic Relief said that Ms. Sufian approached the nonprofit in 2005 with the idea of obtaining medicines and forged the nonprofit’s relationship with Metad.

Ms. Sufian has benefited significantly from that arrangement. In 2009, she was paid $668,729 to help procure and distribute the drugs the aid group valued at $108-million. By contrast, Mr. Ayoub received a salary of $130,215 that year.

When The Chronicle contacted Ms. Sufian, she said she was “obviously worth” the money and hung up the phone. She declined further requests for comment.

Canada Tax Shelters

While charity regulators in the United States say they are paying close attention to medicine valuation because it’s so easy to abuse, the issue has been of longstanding concern for Canadian regulators.

MedPharm has in the past been involved with Canadian organizations that have been questioned by Canada’s tax authorities over a tax shelter involving high values for medicines, according to several people familiar with the arrangements and an article in the Toronto Star. MedPharm planned to supply drugs to Canadian Gift Initiatives, a company that was said to be making controversial use of tax law, according to the 2003 newspaper article.

Canadian Gift Initiatives told the newspaper that it would buy inexpensive medicines from MedPharm and Amstelfarma. Then it would charge donors in Canada slightly higher prices for the drugs. According to the article, the donors would then agree to give the medicines to Canadian charities, which would issue them receipts for the much higher Canadian prices of the drugs. Donors could then get a bigger tax break.

Kevin O’Brien, executive director of Canadian Physicians for Aid and Relief, a nonprofit that fights poverty in Africa, said his group participated in such an arrangement from 2004 to 2007.

He said that Canadian nonprofits would donate on paper medicines to his group that were stored in Amstelfarma’s Netherlands warehouse. Other Canadian nonprofits would pay fees to his charity for the drugs and would then issue tax receipts to donors for the higher values.

Then Mr. O’Brien’s group would donate the medicines to U.S. nonprofit aid groups and other charities working in Africa. Once he decided which charities would receive them, they would be shipped from the warehouse in the Netherlands to programs overseas for distribution.

Mr. O’Brien said that Ms. Johnson, of Metad, was also involved in the effort. She helped MedPharm and nonprofits prepare the paperwork, handle customs, and make other arrangements, he said.

Mr. O’Brien said his nonprofit ended its involvement with the tax shelter in 2007 when the Canada Revenue Agency began to ask questions. “Better to be safe than sorry,” he said.

The medicine program helped provide vital drugs to many nonprofits working in Africa, he said. Mr. O’Brien said his group never furnished any receipts to individuals; its role was to help deliver medicines to other groups. He said the Canadian government crackdown on the program has resulted in fewer medicines getting to needy people.

Ms. Johnson of Metad declined to comment on such arrangements. She said that her charity’s process of getting medicines was proprietary but that it plays a key role in assisting many aid groups in procuring medicines.

Requesting Paperwork

People who have worked in drug procurement say that it’s not uncommon for nonprofit aid groups to request paperwork that classifies prices paid for drugs as handling fees.

Maarten Neve, a former sales manager at IDA Foundation, a drug supplier that competes with MedPharm and Amstelfarma, says that U.S. nonprofits sometimes asked his group to alter invoices to show that payments for drugs were instead handling fees. He said the aid groups did so to be able to count the drugs as donations. Mr. Neve said he told the nonprofits that his organization could not alter the paperwork in that way because it would be inaccurate.

But Amstelfarma, the Dutch company that works with MedPharm, does issue that kind of paperwork, according to an e-mail from the company that a nonprofit provided to The Chronicle. In the e-mail, an account manager from Amstelfarma, Stein van Engelen, says that the company frequently issues “dummy invoices” for “tax arrangements.” Two e-mails to Amstelfarma were not returned. A call to the office was not picked up, and it wasn’t possible to leave a message.

Tax-Agency Run-In

Ms. Johnson, of Metad, has also worked with another Canadian organization that has come under government scrutiny. Ms. Johnson is mentioned in the Canada Revenue Agency’s 2009 revocation of the tax-exempt status of Universal Aide Society, in British Columbia.

The Canadian government said that Universal Aide spent much of its cash on personal trips and other noncharitable activities. The government documents also say that Universal Aide issued paperwork to nonprofits for medicines and other goods whose values were exaggerated.

According to the revocation documents, Universal Aide paid Ms. Johnson small “finder’s fees.” She also received trips to Nice, France, and the Philippines, as well as perfumes, meals, and other gifts, the documents said.

In an e-mail to The Chronicle, Ms. Johnson defended the Canadian group’s work. She said she believed Universal Aide had received a positive ruling from Canadian courts in its effort to clear its name. She said that Metad continues to work with the organization.

But Universal Aide has not been reinstated as a nonprofit, according to the Web site of the Canada Revenue Agency. Calls to Universal Aide were not returned. The group’s director, Shirley Gremyachev, told a Canadian newspaper in 2010 that her organization had been treated unfairly.

The Canada Revenue Agency has taken a hard line on tax shelters. It says that abusive tax programs have issued about $321-million in falsified receipts in 2010, a significant drop-off from past years because of a crackdown on the efforts. The revenue agency also reports that it has been tightening up on cases in which nonprofits claim high values for goods they receive as donations from other charities.

Mark Blumberg, a Toronto lawyer who focuses on charity law, says that arrangements involving drug values have been the most common.

“People are basically taking advantage of an argument about valuation,” he said. “It’s a big problem here. The government has been somewhat successful in cracking down on them, but it’s still a very problematic thing.”

He says that medicines have been a particularly easy target.

“When people are buying a deworming drug for 5 cents and valuing it at $15 a pill, you can see there’s a huge markup, which can then be used for various purposes, such as inflating financial statements or issuing false receipts,” he said.