The Insys that investors loved and which made its founder and chairman John Kapoor a billionaire is going away and, despite heroic efforts to rebrand itself as a research shop, its future will be less profitable, with little of the mercurial growth and compounding profits that defined its first four years.
The Southern Investigative Reporting Foundation interviewed two dozen then-current and former Insys sales staff, as well as six doctors and their staff, and their accounts paint a uniformly grim picture of the company’s prospects.
Its forecast is murky because Subsys prescriptions, Insys’s sole commercially viable product, are dropping and are likely going to continue to do so.
The ExodusPoint Partners International Fund returned 0.36% for May, bringing its year-to-date return to 3.31% in a year that's been particularly challenging for most hedge funds, pushing many into the red. Macroeconomic factors continued to weigh on the market, resulting in significant intra-month volatility for May, although risk assets generally ended the month flat. Macro Read More
The forces arrayed against Insys, from a Federal grand jury in Boston to, as described in our December 3 story, the mounting insurer scrutiny of Subsys prescriptions, are brutal, if possibly insurmountable, obstacles. A quick glance at Insys’ financial filings from 2012, when it was committed to marketing primarily to oncologists, is proof that playing by the rules is not very lucrative.
The IMS Health data through late November leaves little to the imagination, showing a decline of 10.4% quarter-to-quarter in the Subsys prescription count. Even allowing for the traditionally soft Thanksgiving week, this is a grim trend for a company that regularly gets around 99% of its sales from Subsys.
Dan Brennan, Insys’ new chief operating officer, admitted as much when he tried to rally the troops at the December 3 analyst presentation by alluding to some unspecified “commercial opportunities….that can stabilize and grow scripts.”
From an investor perspective, Insys’ decidedly mixed third-quarter earnings report offered a clear sign of Insys’ headaches. The seemingly impressive third quarter revenues were boosted by $6.6 million in distributor shipments which risk stuffing the channel, decreasing future sales and profits. More positively, lower unit demand of about 5% was offset by lower rebates and higher prices.
Absent this $8.4 million benefit, Insys would not have been able to report $91.3 million in revenues, allowing it to claim that it beat the brokerage community’s $83 million consensus estimate.
Flagging sales, however, are nothing compared to what the looming Department of Justice settlement negotiations might bring.
Having ploughed an entirely new furrow, regulatorily speaking, since early 2012, ready comparisons for Insys’ situation are hard to come by. The only real analogue might be Purdue Pharma’s 2007 settlement with the Department of Justice for misbranding Oxycontin. (Three Purdue executives also pled guilty and paid a combined $34.5 million in fines.)
Brokerage firm analysts expect Insys to pay a fine and perhaps agree to amended business practices, a version of the standard template for U.S. businesses accused of wrongdoing in the past decade. Despite some shockingly large settlements, especially in the pharmaceutical industry, the process of writing a huge check and issuing a guarded, conditional apology (without admitting or denying anything specific) is made more palatable as investors often bid share prices of these companies up on the view that “the bad news is now behind them.”
Our research suggests Insys’s case may be somewhat different.
To start, former employees say that no more than 10% of prescriptions were written on-label, an inconvenient fact when coupled with our December 3 investigation, which described in detail how a prior authorization unit executive (and her supervisor) allegedly spent the past three years developing new and improved ways for employees to gull insurers with misleading patient diagnoses and codes.
At market-leading prescription approval rates of between 85% and 90%, Insys’ PA unit’s alleged scheme easily cost insurers hundreds of millions of dollars. They are unlikely to write these losses off without a fight.
Moreover, federal prosecutors will be seeking recovery on behalf of their employer, the U.S. government. Data obtained via freedom of information act shows nearly 25% of Insys’s $576.5 million in Subsys revenues since launch, or $144.1 million, coming from Medicare and Tricare. While not every prescription was unlawful, at up to $10,000 per violation, the ones that were can quickly send liability into the eight figures.
One saving grace is Insys’s decent cash position at the end of the third quarter, with just under $94 million in cash and equivalents available, and another $61.5 million in short-term investments behind that.
From a practical perspective what almost four years of selling Subsys off-label looks like across the U.S. landscape is captured in the graph below.
It’s simple enough — we overlayed IMS Health’s tracked prescription counts for Subsys against SIRF’s culling of the FDA’s Adverse Events Reporting System data, listing fatalities where Subsys was listed as the probable candidate for triggering an adverse reaction.
As noted in previous investigations FAERS data is not authoritative, relying on medical professional informal assessments that are voluntarily reported. (Last week, the company put out a press release taking exception to our reporting and offering its own interpretation of what FAERS data does–and does not–mean.)
For more than nine months the Southern Investigative Reporting Foundation has documented Insys’s freewheeling, compliance-lite approach to selling Fentanyl. In the course of this reporting it became abundantly clear that Insys’s approach to building and managing its sale force was both the key to its explosive growth and its subsequent woes.
The experience of an Insys salesman named Tim Neely, a 43-year old former fireman from San Clemente, Ca., is illustrative of how good intentions and honest ambition got thwarted by the company’s drive for expanding earnings at all costs.
The Southern Investigative Reporting Foundation began talking to Neely while he was wrestling with the company over a bereavement leave dispute in the late summer; in October Insys fired him. He has retained a labor lawyer and in his words, “is examining his options.” In short, Neely is by no means a neutral observer.
Nonetheless, in addition to talking on the record, Neely provided documents, texts, emails and personal notes taken during calls with managers. Anything he discussed was checked with current and former Insys sales reps and managers, several of whom provided documents as well. Finally, he spent four days with a reporter in California confirming and corroborating this account.
All signs point to the fact that Neely was a very good sales rep for Insys.
Based on prescription value, he ranked within Insys’ top 15 sales representatives last year, good enough to place him in the “President’s Club,” where one perk was an all-expense paid Mexican beach junket with the other sales leaders. It was all the more impressive since he only began selling pharmaceuticals in October 2013.
He told the Southern Investigative Reporting Foundation that he earned $207,000 last year and based on documents he provided, was on track to earn between $170,000- $180,000 this year.
A proud daily surfer, in emails and texts Neely would tell beach buddies and his family that he had taken a lot of risk leaving the job safety and camaraderie of the firehouse for Insys, but that he was doing well and he felt good helping people who were in pain.
But late last summer Neely changed his mind in a big way about Insys.
While remaining a “true believer” in the potential of Subsys as a drug–a broken back a few years ago left him, he says, an expert on breakthrough pain–a series of mounting concerns over management’s integrity had begun to trouble him.
Specifically, Neely felt management pushed the salesforce to market Subsys “to anyone with a prescription pad.” Anyone who disagreed with that approach, he said, “was treated like garbage” and eventually fired.
Neely’s customers were several veteran surgeons who prescribed Subsys with regularity. Based on his documents and notes, he did what Insys trained him to do — become nearly indispensable to his clients. He had instructed patients on the proper use of the drug in doctors offices and had helped iron out countless headaches between patients and insurance companies. His doctors liked him enough to regularly allow him inside their suite of offices if he needed to make calls and schedule other appointments.
Like many a sales rep in all fields, Neely hustled to keep his doctors happy. In one case, Neely arranged the weekly rental of a basketball court in Beverly Hills for a regular pickup game with a doctor and his friends; in another, he celebrated a doctor’s birthday with sushi and tickets to a Los Angeles Kings hockey game.
And plenty of prescriptions got written, so much so that Neely says he takes pride in never having asked a doctor to prescribe the drug. Better still, the prescriptions were (usually) for cancer and post-operative trauma patients, keeping him far away from legal headaches.
But, as he describes it, that wasn’t good enough. Insys’s management wanted more and wanted him to somehow try to convince the doctors to move a prescribed dosage to 800- or even 1200 micrograms, even if the patient was doing well at 400 mcg. To Neely, this was destined to both hurt patients and strain lucrative relationships.
“Serious doctors don’t want criticism on their dosing [protocols] from a sales rep and they don’t need [Insys’s] speaker program money,” Neely said. But, he continued, “the crappy ones” will and do. “There’s just a point where you can’t sell more Subsys without crossing some lines. It’s not a [skin care] product, it’s not like other drugs.”
Neely and other former Insys reps described the pressure to constantly generate new prescribers as unrelenting. Departures became the norm, with many veteran pharmaceutical sales reps leaving within weeks of being hired.
The pressure to generate sales revenue often reached absurd levels.
One ex-Insys sales manager, whose background included a decade of selling pain management drugs at other companies, said the sales leads the company gave his reps were culled from a database like the Yellow Pages and had no connection to either pain management or oncology. At varying times he said his reps had to call on a naturopathic healer, a self-described shaman, several chiropractors and a nurse midwife, none of whom were able to prescribe Fentanyl–let alone need to.
His complaints to management were ignored. After concluding that there was no real business plan the sales manager resigned three months later.
Another distinctive feature of life at Insys, Neely said, was adapting to what he described as a form of corporate schizophrenia: “Sales training and company-wide phone calls would be by the book, exactly like Merck or someone might do. Then your [district and regional] managers would pull you aside and tell you ‘Don’t worry about that. Just sell. Do what you need to do.'”
The “say one thing, do another” culture became apparent early on to Neely.
During his training week, after a series of discussions on Subsys’ chemistry, how it compared to rivals and its place within the TIRF REMS marketplace, Neely and his sales trainee colleagues were told they were taking a test the next day — and in case they didn’t get the message, failure would result in dismissal. A few hours later, a regional manager emailed them the answers to the exam — and the group was taken out drinking until the early morning by sales managers.
A core part of Insys’ sales training involved discussion of its policy against on wining and dining prescribers. Shortly after attending that presentation, a still green Neely wound up one night with a prescribing doctor (and his troop of thirsty friends) drinking and smoking cigars at a swank Beverly Hills club. The $530 bill was handed to him straightaway and he paid.
Pharmaceutical companies now disclose what they spend on physicians, either in terms of speaker program fees, research payments or on hospitality, per The Physicians Payment Sunshine Act. There was no record of Neely’s boozy evening being disclosed.
A few days after his Los Angeles outing, a district sales manager, Darin Cecil, told Neely that since the doctor was a good prescriber the company kept a credit card number available to help pay for just those sorts of expenses. Cecil told him that it had to be done “quietly,” and he was given the card number via text message, but that sales reps could use it to order sports and concert tickets. On other occasions, reimbursement would be made to the rep. Just as long as prescriptions got written afterwards, Neely was told, no one would have any problems with it.
It was a hidden reimbursement channel that Neely alone expensed thousands of dollars through — and he was not the only one, according to his former Insys colleagues. Neely said that he was led to believe that the then chief executive officer Michael Babich knew about it but he was instructed to never bring it up publicly.
Neely got his money every time.
Neely readily admits that while he may not have been aware of what other sales reps across the country were doing to sell Subsys, “I certainly felt some of the stuff [management] said was ok to do was probably not.”
One example: sales reps were told to seek permission from staff in doctors’ offices to go through patient files looking for likely Subsys candidates, which, depending on the circumstances, can be a violation of patient privacy standards under the Health Insurance Portability and Accountability Act.
“They treated HIPAA like it was a joke,” Neely said, describing how sales reps, managers and their assistants regularly sent each other emails discussing patient’s treatments, including their diagnoses and dosages. His files are indeed full of Subsys user data.
There were some reasons for that. The prior authorization program allowed Insys access to patient data so they could try to secure insurer payment, and the sales rep was usually the point of contact for the patient, telling them they were approved, the next steps in the prescription process, or if they were declined, how to initiate an appeal.
The weekly sales conference call in Neely’s district was an example of how Insys’ real-time data collection, when combined with the patient disclosures from the prior authorization program, could lead to potential disclosures of personal health information. Prior to the start of the call, his district manager would send around an email detailing a list of prescriptions that hadn’t been renewed, picked up or were canceled, indexed under the prescriber’s name. The idea was that the sales rep would call the prescriber’s office and try to get a renewal of the prescription or reverse a cancellation.
What was unwritten was that the sales reps likely knew–or at least could take an educated guess about–the names of many of those patients from the prior authorization process. This led to, in several instances, sales reps contacting the patients directly and encouraging them to ask the prescriber for another, stronger Subsys prescription.
Then there were the absurdities, episodes so far outside the industry norms, that they appeared surreal.
At a cocktail party during a sales retreat in 2014, according to three of the attendees, one sales manager told her colleagues about an NBA star prescribed Subsys for post-operative pain. This revelation stunned those who heard it into silence until a wag remarked, “Well at 800 micrograms for 90 days I guess he won’t be back for the playoffs.”
In another instance, the Southern Investigative Reporting Foundation obtained a text from a pharmacist who sought a manager’s help locating a sales rep named Brook Spangler. The text described how Spangler had purportedly–and inexplicably–been given a patient’s Subsys prescription but hadn’t dropped it off.
(Contacted for comment, Spangler denied every aspect of the story — “I have never had a patient script in my hands, ever.” When read the contents of the text, she said it was a mistake. Messages left for the pharmacist were not returned.)
The Insys executive who suggested examining patient files–albeit with the permission of office staff–and the biggest proponent of using a so-called secret credit card for entertainment expenses was national sales chief Alec Burlakoff.
Burlakoff’s vision for sales reps at Insys pushed the boundaries of what defined pharmaceutical sales. He wanted them to be so integral to the patient’s experience with Subsys that a doctor would not think of prescribing other drugs. Sales reps who had worked under him said his rationale for searching through patient files was that it was a win-win proposition: Insys could get additional prescriptions written and the doctor could receive Speaker program fees.
A man of incalculable energy and a dynamic speaker, Burlakoff has been a frequent topic in our reporting on Insys. His effect on new sales reps was, as Neely put it, “incredibly powerful.”
Also powerful was the effect of his sales policies upon Insys’ income statement. When Burlakoff departed in July, sales were at an annual run rate of $300 million; when he became sales manager in early 2013, the company had just reported around $16 million in revenue.
By the time Burlakoff was lecturing Neely’s late October 2013 training class on his sales views, his strategy was generating tremendous returns in the form of double and triple-digit quarterly sales increases.
So when he spoke, everyone at Insys listened. Which seen with a few years hindsight was the problem.
The central aspect of Burlakoff’s strategy was simplicity itself.
“If you can keep [patients] on [Subsys] for four months, they’re hooked,” he told Neely’s training group. “Then they’ll be on it for a year, maybe longer.”
(Privately Neely would ask him if by “hooked” he meant addicted. In reply, Burlakoff gave him a puzzled smile and would only say, by way if clarification, “It’s not addicted if [the patient] is in pain.”)
Like many sales managers, Burlakoff used popular culture to drive home his goals. In early 2014, at a sales meeting Neely attended, he told a group of several sales reps that if they hadn’t seen the then newly released movie “The Wolf of Wall Street” they needed to see it right away.
“It’s the best sales training video in history,” he said (albeit one in which the sales lessons can result in federal prison sentences.)
Another video that Burlakoff found inspiring was something he showed Neely toward the end of his training week. In a break after a session, Neely was pulled aside and shown a video of a man using a dildo to pleasure a woman. After the smartphone-shot clip ended, Neely found himself speechless.
“Alec,” he said, “what’s that about?”
To which, Neely said, Burlakoff only smiled and walked away.
Burlakoff had a very specific vision about the people he wanted at Insys.
For instance, he rejected the framework of hiring and training practices of what he derisively called “Big Pharma.” An example was his apparent preference for hiring sales people used to making quotas or facing dismissal; prestigious colleges weren’t very important for that skill set. A sales rep who needed to get three prescriptions written in four days (or else) would push Subsys without dwelling overmuch on too many other things.
Because all that Burlakoff valued was sales–not sales ability, to be clear, but generating prescriptions–he made hiring choices that tax the ability of a reporter to describe them.
In April, for instance, the Southern Investigative Reporting Foundation reported on his decision to hire a woman named Sunrise Lee and in short make her sales chief of the Midwest region. Before Insys, they had known each other when Lee worked as a stripper in Miami and apparent owner. Lee’s job centered largely around socializing with prescribers. Memorably, in the April story, Burlakoff described Lee’s professional skill as “More of a ‘closer’.”
To Burlakoff’s credit he hired numerous women into key sales roles. Following in the footsteps of many pharmaceutical companies, the women were uniformly attractive and several of them had unique backgrounds–few more so than Amanda Corey Emhof, sensuous entertainment a former reality TV show star–who also won $477 on an episode of “Judge Judy” and had once considered becoming a sex therapist.
Prior to selling Fentanyl, Emhof posed for Playboy (NSFW) and co-founded Thrive Model Management, a business providing models for marketing campaigns and private parties where she is the head of “model managing.” Reached on her cell phone the day before Thanksgiving, she declined to comment.
Hiring women based on their looks, with extraordinary economic incentives to sell the drug, and seemingly zero corporate prohibition against it, led to our uncovering a good deal of complicated sales rep-doctor episodes revolving around sex. None more so than in 2013 when the wife of a high-volume Subsys prescriber found a revealing photograph of an Insys sales executive on his phone. Located not far from headquarters, she drove there and raised a ruckus; she was assured that all appropriate measures would be taken against the rep.
The sales rep was promoted soon after to sales trainer; the doctor no longer prescribes much Subsys.
While Burlakoff’s laissez faire sales approach led to a great deal of revenues, there are its doubters. Dr. Ken Bradley, a Torrance, Ca.-based pain management physician, said that he disagreed with Insys’ sales approach.
“Not a lot of doctors are going to write a [drug] whose rep doesn’t understand it very much and dangling speaker programs in front of them doesn’t make up for that,” he said, referring briefly to a sales rep he had who had worked in auto leasing before joining Insys.
Bradley added that he had, upon joining a practice, “inherited several patients” using Subsys but that after their course of treatment was completed, he declined to further prescribe the drug. (To be fair, he said the drug worked as it was supposed to.)
“The high-pressure sales tactics became annoying and were just another reason to not deal with [Insys’] sales staff,” he said.
Dr. Bart Gratz, a Boynton Beach, Fla. based pain management doctor with multiple offices, said that the regulatory and insurance headaches associated with prescribing Subsys have “made it impossible to prescribe,” adding that he didn’t think he had written five prescriptions for the drug this year.
Coming from him, that’s devastating news for Insys: Gatz was the sixth leading prescriber of Subsys under Medicare in 2013 and was Insys’ fourth highest recipient of speaker program fees in 2013 and 2014, collecting more than $154,000.
“I’ve seen this a few times before where a company just grows too fast and does stupid things, gets some doctors to write inappropriately and the Feds come down all over them and everybody else,” he said. “That’s what happened here. It’s over.”
Gatz added that he liked Subsys and that it worked well with patients that couldn’t swallow or digest easily during chemotherapy regimes, but that insurers proved so difficult about authorizing payment throughout the year that he switched his patients off the drug.
Asked about his Insys sales coverage, Gatz mentioned that “she hadn’t been coming around very much” since he stopped writing. He said that it was difficult beginning a dialogue with her about Fentanyl products given that her previous job was as a cashier at a Publix supermarket.
Everyone named in the story was contacted for comment by phone, email and if possible, text message — often multiple times. Except where noted, no replies were received. In all cases detailed messages were left about the nature of our inquiry.
Insys Therapeutics, despite its profitability and current high-profile, is unique in that it doesn’t have either an internal media relations staff nor an external advisor. Calls seeking comment were directed to chief financial officer Daryl Baker, who did not return a call and text message sent to his cell phone.
The sentence “Following in the footsteps of many pharmaceutical companies, the women were uniformly attractive and several of them had unique backgrounds–few more so than Amanda Corey Emhof, sensuous entertainment a former reality TV show star–who also won $477 on an episode of “Judge Judy” and had once considered becoming a sex therapist” has been amended.