Insys Therapeutics is a company in a great deal of trouble.
The manufacturer of a Fentanyl spray called Subsys that clocks in at 100 times the strength of morphine, the Chandler, Az.-based Insys was the top-performing initial public offering of 2013. Analysts and investors adored the company’s fast sales and profit growth and dreamed of a future when its cash flow led to dividends and acquisitions.
As Insys’ market capitalization topped $3 billion, the milestones began to sail past for those who were in on the ground floor — founder Dr. John Kapoor became a billionaire and a host of company insiders, led by chief executive officer Michael Babich, became millionaires.
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
The first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More
Their joy was not to last.
It wasn’t long before the subpoenas began to pile up, with state and federal prosecutors from both coasts swinging into action; the U.S. Attorney’s office in Boston, for example, empaneled a grand jury — and grand juries rarely fail to return indictments. That’s not the end of it: Insys’s most frequent prescribers continue to be indicted and key executives have departed without notice.
Then came the lawyers.
In August Oregon’s Department of Justice struck a $1.1 million settlement with Insys that represented about twice its revenues in the state (in April the company settled a class action for $6.125 million.)
The Oregon settlement is stark reading, using depositions and emails to claim that the company misrepresented a key scientific study, encouraged off-label prescriptions (allegedly in violation of Food and Drug Administration guidelines) and ran its speakers program solely to reward frequent prescribers.
While Insys’ investors haven’t thrown in the towel–the share price is up a split-adjusted 50% in the past year (in some measure because Kapoor and his family’s trusts control 66% of the shares outstanding,) some cracks are beginning to show.
On November 2, CEO Mike Babich suddenly resigned on the eve of an earnings announcement — traditionally a major red flag for investors. Kapoor, who assumed the CEO title, told those listening on the conference call that “Mike decided that now is the best time to turn the page and focus on his family as well as pursue new opportunities.”
There’s more to the story than that though.
Babich was forced out by Kapoor, according to a senior Insys executive who was in regular contact with him in the days prior to the announcement. While both men are the subject of intense regulatory scrutiny, the founder and chairman bluntly told his lieutenant of 14 years that he was closest to the issues federal prosecutors are looking at and that a change had to be made should settlement talks became serious.
While Babich will be spending time with his young family, that’s also more complex.
Earlier this year, Babich began a relationship with Natalie Levine, a then Boston-area Insys sales executive, who soon became pregnant; they were married in the summer. Putting aside the unusual optics of a CEO of a publicly-traded company dating someone who reports to him–this was his second romance with a sales colleague; Kapoor has also dated two sales executives–there is another angle to their relationship to be considered.
It’s a sure bet the newlyweds will be monitoring the developments in a rapidly expanding criminal suit in the U.S. District Court in Hartford where Heather Alfonso, a nurse who was a high-volume Subsys prescriber for the past two years, pled guilty to accepting $83,000 in kickbacks. Federal prosecutors, in the transcript from the July plea hearing, allege that the kickbacks induced her to write $1.6 million worth of Subsys prescriptions.
What appears to have brought the wrath of federal prosecutors down upon the divorced mother of four was the baldness of the scheme. According to her plea, Alfonso was paid $1,000 each time she attended a series of Insys speaker’s programs, where she was supposed to discuss her clinical experience with Subsys to other medical professionals. In reality, however, no other prescribers were present and prosecutors said the events were nothing more than Insys-sponsored dinner and drinks for Alfonso and her co-workers.
Natalie Levine was one of the sales staff who called on Alfonso, and arranged and attended many of the 70 separate speaker program events. Babich, as the CEO, approved two years worth of budgeted payments to Alfonso.
(An interesting wrinkle: courts have traditionally recognized a spousal privilege and have declined to compel husbands and wives to provide testimony about each other, but the events in the Alfonso case occurred before Levine and Babich were married.)
As is expected for someone looking at a sentence of 46-57 months, Alfonso is cooperating with the government; her sentencing date has been pushed back twice, most recently for six months. In the plea transcript prosecutors offered a pretty big clue about where Alfonso’s cooperation may be taking the investigation. For example, several patients whom prosecutors described as Medicare Part D beneficiaries are ready to testify that she diagnosed them with issues other than breakthrough cancer pain (Subsys’s primary indication) yet insurers still authorized the prescriptions.
As described in the transcript, Insys’ prior authorization unit changed Alfonso’s diagnoses to cancer. Absent the alleged change, the prosecutor asserted, the insurers would have never paid for the prescription.
It is the first public explanation of the issue the Southern Investigative Reporting Foundation wrote about in July: Medicare and commercial insurers appear to approve Subsys prescriptions at vastly higher rates than those of its rivals in the Fentanyl marketplace.
The Southern Investigative Reporting Foundation spent the better part of a year reporting on Insys and our findings suggest that the federal prosecutors are on to something. The prior authorization unit was set up to assist patients with complex insurance paperwork. Its value proposition was simplicity itself: the patient signs a few forms and Insys handles the messy paperwork. Patients would get the medicine, prescribers wouldn’t have to scramble for a replacement and Insys would book thousands of dollar in revenue per prescription.
In reality what the PA unit did was take advantage of pharmacy benefit manager inertia to generate a type of bureaucratic alchemy, wherein a torrent of off-label Subsys prescriptions would be transformed into medically urgent cancer diagnoses.
Unmistakably, the PA unit a the key piece in helping Insys double the size of the Fentanyl marketplace to over $500 million in under two years.
Lost in the cascade of prescriptions, however, is the human toll from peddling Subsys like a new piece of software or an improved detergent. Since the drug launched in January 2012, the FDAs Adverse Events Reporting System lists 203 deaths where medical providers fingered Subsys as the probable candidate for triggering an adverse reaction. Moreover, the pace of purported Subsys-related deaths is accelerating, with FAERS disclosing 52 deaths in the second quarter alone.
(It bears noting that FAERS data is not definitive: it relies on voluntary medical-provider reporting so it may undercount actual incidents. Additionally, most reports represent a medical professional’s assessment and are not an official cause of death.)
These deaths are framed against a backdrop of a nationwide opioid abuse epidemic. According to the Centers for Disease Control, in 2013–the most recent year available–16,235 Americans died from prescription opioid overdose. It’s not getting any better either: Subsys is now the top-ranked “diversion drug of concern,”or most frequently stolen or fraudulently obtained, by the Department of Health and Human Services Office of Inspector General.
What follows below is what happens to a company when rule bending is institutionalized and making the sale is a matter of life and death.
Danielle Gardner worked in Insys’ prior authorization unit for a year and feels terrible about it. She’s convinced that by getting insurance companies to approve thousands of off-label Subsys prescriptions, some percentage of them became addicted or died.
Gardner would love to be told that she’s jumping to conclusions, that there’s no concrete proof of anything like that but the plain fact of the matter is that she is almost certainly right.
Danielle Gardner, for a piece of her professional life, woke up every day and went to a job with a single goal: do anything to make the employees who handled pharmacy benefits for insurers think that people who had been prescribed Subsys had cancer when only 1% of them did.
She and her seven or so colleagues did that one thing very well and many people made a great deal of money, both within her company and on Wall Street.
And then one day it just got to her.
[Editor’s note: Danielle Gardner is a pseudonym. For more information, please see here.)
Gardner’s PA unit odyssey began when an application submitted through a job hunting site led to an interview. A visit to Insys’s office found it busy and serious. To her it was a growing company whose only business, she was told, was “helping people beat cancer.”
“I liked the idea of helping people with the paper work, which can be the hardest part of healthcare, but mostly I needed a job and [$18-$20] per hour and benefits” was very good for [Phoenix,] she said. Better still, there were the prospects of bonuses. A veteran of several doctor’s offices, Gardner was well versed in obtaining insurance approval and she had never heard of a prior authorization unit getting bonuses. It was a “yes” or a “no” proposition — where money came into the equation baffled her.
But her co-workers swore they were getting them.
Bonuses weren’t the only questions Gardner had though. She said didn’t know why Insys’ PA unit was across the street from the main headquarters and why there was no sign in the lobby for the office. They had a different phone exchange and a separate email server.
But Danielle Gardner kept her mouth shut and signed up.
Her boss, Liz Gurrieri ran PA and while she could be friendly, she had made very clear to everyone that the best questions were about how to do your job better. Gurrieri built the unit from the ground up in 2012 and was held in the highest esteem “across the street” at headquarters. In just a few years, the story around the cubicles went, Gurrieri’s stock options had helped her become wealthy enough to build a six-bedroom house.
So everyone did it Gurrieri’s way because the money was good and it was working.
After a brief training period, Gardner went to work. Gurreri handed out stacks with five patient charts to Gardner and her seven colleagues and they would dive right into making calls.
PA unit staffers had a very specific formula that governed their life. Individually they had to secure 25 Subsys approvals a week; the unit, during a Monday meeting with Gurrieri’s boss Michael Gurry from “corporate” would be told what the “group gate” or minimum number of total approvals expected from the PA team that week.
It was usually at least 200. Assuming the group gate was met, for every additional approval Insys gave $7 to a “bonus pool.” For example, if the PA unit got 300 approvals then the bonus pool was $700 per person.
Then there were the individual bonuses: At 35 approvals, Insys gave the PA staffer a $50 bonus and $10 for each incremental approval. So if she got 47 for the week, she would earn an extra $170 on top of the $700. (If the team member didn’t hit 25, then there was no bonus eligibility.)
In a good week, Gardner found she could get up to 55 approvals done; others did more. After taxes, she was bringing home between $3,000-$3,500 per paycheck.
All she had to do, of course, was turn patient charts whose insurance codes diagnosed back and joint pain, organ problems, work accidents, military trauma (and in two cases menstrual cramps) into cancer.
Until the subpoena came in the end of 2013, that proved surprisingly easy.
Gardner said that until the end of 2013 she would reply “Yes” to PBM employees who would ask if the patient had “breakthrough cancer pain.” It was a slam dunk. Very few insurers wanted to be accountable for denying a pain-wracked cancer patient pain medicine. (No matter what else changed, she said, confirming a cancer diagnosis remained an ironclad rule for any patient from a doctor writing Subsys for the first time.)
Everything had been scripted per direct instructions from Gurrieri, starting with every phone call beginning with the identification of the PA unit staffer as being “from Dr.____’s office.”
No one argued with success because the PA unit’s approval rates ran well into the upper 80th percentile, and sometimes higher. They were limited only by the amount of prescriptions written.
Incredibly, despite the sharply increasing volume of Subsys prescriptions by the turn of 2014, few if any PBMs had linked the PA Unit to Insys.
Then again, few details were overlooked in keeping the connection obscured.
Outgoing phone numbers were blocked to avoid showing up on caller ID and they were under orders to never use the company name when talking to anyone from an insurer or PBM; when pressed, they would only say that they “were working closely with Dr.____’s office.” When a return call was required, they gave a toll-free 800 number that would only be answered by one woman, a colleague named Shannon, who would quickly direct the call to the PA staffer without fielding any questions.
After the HHS subpoena, which Gurry assured the PA unit was just a routine federal inquiry that a certain amount of pharmaceutical companies underwent every year, Gardner said Gurrieri ordered a change of strategy.
Instead of answering “Yes” to questions about breakthrough cancer pain, PA unit staffers were to answer “Yes they have breakthrough pain” which was both an affirmative answer but ambiguous enough to mean virtually anything. There was also the issue of human nature at play: PBM call center employees, some of whom were located overseas and who had to meet their own hourly or daily quotas of calls handled, might mishear one or two words and consider the question properly answered. (That it may have been a factually false answer was not internally discussed at the PA unit.)
Through the spring of 2014, approval rates remained impressive, but PBMs began to push back, sometimes demanding to speak with the physician about the diagnosis. If the PBMs called the prescriber that was a big problem in and of itself as the PA unit was in no way “from” any Dr.’s office.
Messy episodes sometimes occurred, Gardner said, with physicians angrily insisting that no one by the PA staffer’s name worked at their office and that the patient in question did not have cancer.
Surprisingly, Gardner said that there were rarely long term issues with PBMs who would usually accept the PAs unit explanations of misread charts and human error as an explanation. Doctors, too, often accepted an apology from the sales rep or a district manager.
By mid-2014 fortune was changing for the PA unit. The subpoena Michael Gurry had assured them was standard procedure for pharmaceutical companies didn’t go away and another joined it after Labor Day.
Given the legal issues that several key Subsys prescribers were experiencing, Gurrieri ordered Gardner and her colleagues to begin calls as “calling on behalf of Dr.______’s office.”
Even so, the late summer of 2014 saw approval levels dropping as PBM’s began demanding more detailed answers about diagnoses for a Fentanyl prescription. The approval woes went unnoticed to the world however as a spike in newly hired sales reps kept prescriptions rolling in.
To reverse the trend, Gurrieri developed what PA staffers called “The Spiel,” a series of memorized dialogues designed to address detailed questions about having breakthrough pain and cancer.
When someone from a PBM asked about the patient having breakthrough pain from cancer, the PA staffer would reply, “The physician has stated that Subsys is approved for treating breakthrough cancer pain so (he or she) is treating breakthrough pain.”
As this response was wrestled with, the PA staffer was ordered to invent conversation that suggested they were right inside the prescriber’s office. Something along the lines of “You should see this guy. It’s a real sad case and the doctor is upset about it.”
Approval rates began to stabilize and even inch back up yet some of the biggest insurers began to be strident in their refusal to approve Subsys. Gardner said she told Guerrieri this, who pulled her into her office and instructed her to change the insurance code on patients charts to 787.20 on the most difficult cases.
That was the code for dysphagia, or a difficulty swallowing related to illness. It boxed the PBM in because to deny the Subsys prescription was to possibly run the risk of starving a cancer patient. It worked every time.
In addition, Gardner was ordered to intentionally “mix up” other insurance codes like substituting 338.30, associated with cancer-related chronic pain, for 338.29, a general chronic pain not connected to cancer.
Shortly after that though, in the autumn of 2014, Gardner began to suffer anxiety related to what she was certain was unethical behavior. She left shortly afterwards.
“I couldn’t take [the misrepresentation] anymore,” she said, and was “traumatized by thoughts of getting arrested.”
Prior to a series of discussions with the Southern Investigative Reporting Foundation this summer and fall, Gardner said she cooperated “extensively” with federal law enforcement about the nature of her PA job with Insys but declined our requests to discuss what she was asked about.
Gardner’s description of events at Insys’ prior authorization unit was corroborated against the accounts of other Insys employees, including sales reps and managers, who had frequent contact with the group, a physician who was familiar with its operations, another PA unit employee–who declined to have their account discussed–and the description laid out in the now-settled class action suit.
Like all of our investigations, multiple attempts were made to contact everyone named in this story. Over the course of several months, five attempts were made to contact Michael Babich and Natalie Levine through their mobile phones by leaving detailed voice messages and sending texts.
A call to Insys was referred to chief financial officer Daryl Baker and a voice mail was left on his office phone. A later call was placed, and a message left on his mobile phone as well.
Michael Gurry did not reply to a voice message left on his office phone.
Multiple attempts to seek comment from Elizabeth Gurrieri were made, including messages left on her cell phone and texts. On the one occasion she answered, she declined to comment, citing time constraints.