London's Independent & the Rumsfeld-Tamiflu urban myth

I wrote yesterday about specious claims that U.S. Defense Secretary Donald Rumsfeld is making a fortune thanks to sales of the antiviral drug Tamiflu. I contend that, as usually presented, the Rumsfeld-Tamiflu story is a misrepresentation worthy of the title "urban legend." Further, I fear that it hurts pandemic planning.

Here's an example of these reports. The Sunday, March 12, 2006 edition of The Independent (London) carries a story headlined "Donald Rumsfeld makes $5m killing on bird flu drug." You can't get any plainer than that.

However, you can get more factually accurate.

Technically, reporters Geoffrey Lean and Jonathan Owen are correct in their opening paragraph when they say:

The US Defence Secretary has made more than $5m (£2.9m) in capital gains from selling shares in the biotechnology firm that discovered and developed Tamiflu, the drug being bought in massive amounts by Governments to treat a possible human pandemic of the disease.

Although the statement is technically correct, the emphasis on Tamiflu is misleading, as we'll see.

Unfortunately, this misplaced focus on Tamiflu continues in paragraphs 2-4. It's all the reporters talk about: what Tamiflu is used for ... how many countries have ordered Tamiflu ... the United Nations' estimate of pandemic-related deaths ... how much Tamiflu Britain has received ... Tamiflu was developed by Gilead Sciences ... Roche manufactures Tamiflu and pays a royalty to Gilead.

In fact, the only product mentioned is Tamiflu. So you might think Tamiflu represents all of Gilead's business and that - keeping with the article's opening premise - Tamiflu was the source of all of Rumsfeld's $5 million capital gain.

Quite to the contrary, Tamiflu accounted for only 7% of Gilead's revenues last year. (I don't know how much of that made it to the bottom line. For this discussion, it really doesn't matter.)

For some reason, this article never mentions the fact that Gilead has products other than Tamiflu, much less that Tamiflu is only a small slice of their total business.

That glaring oversight is not because the two reporters are ignorant of Gilead's business. Judging from paragraph 6, it's obvious they've examined the company's financial statements:

The firm made a loss in 2003, the year before concern about bird flu started. Then revenues from Tamiflu almost quadrupled, to $44.6m, helping put the company well into the black. Sales almost quadrupled again, to $161.6m last year. During this time the share price trebled.

In similar vein to paragraph 1, every statement in this paragraph is true - when viewed in isolation. But the statements are taken out of context and glued together to suggest a story that misrepresents the circumstances. In so doing, of course, the paragraph supports the premise that Tamiflu sales are making Donald Rumsfeld rich.

Just how important is Tamiflu to Gilead's results?

Look at this chart of Gilead's revenues and profits. What question comes to mind? "Hmmmm, revenues are growing strongly. Profits, too. But 2003 saw a loss. I wonder why?" Hold that thought.

As seen in the paragraph quoted just above, The Independent references Gilead's 2003 loss and implies the return to profitability in 2004 was driven by a quadrupling of Tamiflu sales due to "concern about bird flu." But the article conveniently fails to answer that obvious question about why the company had a loss in 2003.

Since Gilead had nice profits in 2001 and 2002 and since its revenues in 2003 were up 85% (with an increasing positive cash flow), the 2003 loss was very odd indeed. Did the Independent's reporters not wonder about this aberration? I did. And it took me just a few minutes to locate Gilead's 2003 annual report online and read the discussion about the 2003 loss. Ah, yes, here's the cryptic message buried all the way down in the third paragraph of the Management's Discussion & Analysis:

"Operating results for 2003 were impacted by the acquisition of all of the assets of Triangle [Pharmaceuticals, Inc.] in January 2003."

The annual report explains that Gilead paid $525 million to acquire Triangle.

"As a result of this transaction and the related in-process research and development charge, our operating loss for 2003 was $158.7 million versus operating income of $81.0 million in 2002." [Their NET loss was $72 million. -Chirp]

You can't get any plainer than that.

In Accounting 101, Gilead's purchase of Triangle would be termed a "one-time event." It's a nonrecurring development which doesn't reflect a company's ongoing business operations. Such one-time events sometimes cause out-of-the-ordinary spikes or dips in the "bottom line." Like in this case with Gilead.

Gilead's business wasn't bad in 2003. (Remember? Revenues were up 85%.) They simply had to account for a half-billion dollar purchase!!

Did The Independent's reporters not understand that? If they did, why do they imply Tamiflu was an important part of Gilead's return to profitability?

Setting the record straight

So, in response to The Independent's cockeyed account:

• Yes, Rumsfeld made more than $5 million in capital gains from stock in the company that developed Tamiflu. BUT it's not accurate to suggest Gilead's fortunes rest on Tamiflu (and Rumsfeld's profits center on Tamiflu), when 93% of their revenues come from other products.
• Yes, Gilead lost money in 2003, "the year before concern about bird flu started." BUT those two events were just a coincidence, not a cause-effect relationship. The unusual loss resulted from spending a half-billion dollars to buy another company.

Furthermore, the relatively small Tamiflu business was hardly the driving force behind 2004's profitability. (If every penny of Tamiflu royalties went straight to the bottom line, it accounted for less than 10% of Gilead's 2004 profits.)

How should a company be characterized?

Just what kind of company is Gilead Sciences? What business are they in?

As I noted yesterday, 69% of Gilead's revenues in 2005 came from three products to treat HIV. (Their next largest businesses - products for severe fungal infections and Hepatitis B - each generated more revenue than did Tamiflu.)

If you were going to describe a company in terms of just one thing - it's main product or service - wouldn't you say Gilead was an "HIV drug company?" That's where it makes most of its revenue, most of its profit - which, in turn, determines it's stock price.

Not so in this case. For whatever reason, The Independent characterizes Gilead as a bird flu drug company. (Remember? Tamiflu is the only product even mentioned in the article.) That's why the headline doesn't more accurately read, "Donald Rumsfeld makes $5m killing on HIV-AIDS drug." I guess that's not how Messrs. Lean and Owen and their editor saw it.

This is either slipshod reporting (absent the most basic fact-checking) or contrived reporting. (What other explanations are there?) Either way, it's inexcusable.

And, like I said yesterday, such distracting reports cause people to take the whole notion of a possible flu pandemic less seriously. Which is not good.