Valeant Pharmaceuticals is the type of company that tends to make even the simplest things complex. The contract of Howard Schiller, its new chief executive officer, is evidence the first. On January 6 Valeant's board of directors gave Schiller the role of Interim CEO; the company previously had an hoc, three-man "office of the chief executive" created on December 28 in the wake of the disclosure that founder and then-CEO Michael Pearson had taken a medical leave of absence of indefinite duration. Notwithstanding the fact that Valeant has become the most closely followed company in the capital markets--attributable in part to the Southern Investigative Reporting Foundation's revelations of its hidden ownership of Philidor--it was reasonable to have expected a filing several days after Schiller's appointment that disclosed relevant compensation package details. But that announcement only came on February 1, three weeks after Schiller assumed control.
Executives at Insys Therapeutics have continued to pressure its employees to develop new ways to mislead insurance companies into granting coverage to patients prescribed its drug Subsys, even as the Food and Drug Administration's Office of Criminal Investigations issues a stream of subpoenas to former employees. As reported in a December Southern Investigative Reporting Foundation story, Insys' prior authorization unit (also known internally as the insurance reimbursement center) employees were trained and rewarded for saying anything, including purportedly inventing patient diagnoses, to get Subsys approved. The revelations illuminated the answer to the conundrum raised in our previous stories: how does a company marketing a standard Fentanyl spray formulation, under a strict FDA usage protocol, easily double the insurance approval rates of its more established competitors? Internal Insys documents and an audio recording of a PA unit meeting show that as recently as the late autumn executives were frantically brainstorming new ways to get around increasingly stringent pharmacy benefit manager rule enforcement. "[PBMs] had begun to deny Insys' [PA] requests in the early autumn to the point where it was rare to get more than two dozen approvals per week for the unit," said ex-PA staffer Jana Montgomery (a pseudonym) and something that began to accelerate after the CNBC reports came out.
The Insys that investors loved and that made its founder and chairman John Kapoor a billionaire is going away and, despite heroic efforts by company officials to rebrand it as a research and development-driven shop, its future will probably 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 the number of prescriptions for Subsys, Insys' sole commercially viable product, is dropping and likely to continue to do so. The forces arrayed against Insys, from a federal grand jury investigation in Boston to, as described in a Dec. 3 Southern Investigative Reporting Foundation story, mounting insurer scrutiny of Subsys prescriptions, represent brutal, if not 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.
Insys Therapeutics is a company in a great deal of trouble. The manufacturer of a Fentanyl spray called Subsys with 100 times the strength of morphine, Chandler, Ariz.-based Insys scored the top-performing initial public offering of 2013, according to CNBC. Analysts and investors adored the company's fast sales and profit growth and dreamed of a future when Insys' cash flow would lead to dividends and acquisitions. As Insys' market capitalization topped $3 billion, those who got in on the ground floor, investing early on, shared in its success: Founder Dr. John Kapoor became a billionaire and a host of company insiders, led by CEO Michael Babich, became millionaires. Their joy was not to last.
Poland seems a most unlikely place for the next chapter of Valeant Pharmaceutical's saga to play out. Weighing in at about 3% of sales, the Polish operations are seemingly a modest contributor to Valeant's fast growing bottom line. But Valeant's Eastern European operations have recently been the source of a good deal of message board rumor, which in turn has prompted the company to quickly respond. So the Southern Investigative Reporting Foundation set out to see whether Valeant's units in Eastern Europe are as robust as their North American brethren. We chose Poland to start with because it's the third largest geographic segment and, along with Russia, a core component of the company's Emerging Markets unit (which represented 25% of sales last year.) Just as importantly, unlike Russia, Poland doesn't have a rich civic tradition of killing investigative reporters or the people working with them.
On Valeant Pharmaceutical’s conference call on November 10, embattled chief executive Michael Pearson offered several defenses of his company’s internal controls and procedures. Similarly, in defending both himself and Valeant from the now constant drumbeat of controversy, one of Pearson's constant refrains has emphasized his commitment to transparency. A March 14, 2014 Securities and Exchange filing suggests Pearson and Valeant have a long way to go on both of these fronts. Put bluntly, a footnote in a Valeant filing over 18 months old appears to show how Pearson made a handsome profit through what is referred to as an unspecified "error." How handsome?
The Southern Investigative Reporting Foundation's story looking at Valeant Pharmaceuticals' well-concealed relationship with Philidor Rx Services, struck a nerve. Briefly, the story explored the ways in which Philidor, a specialty pharmacy whose sole customer is Valeant, used opacity and some misdirection to try and build a national pharmacy network. Additionally, SIRF uncovered how Valeant had sought to conceal its control of Philidor. A Valeant conference call scheduled for Monday morning, October 26 is designed to explain these previously hidden relationships and, more importantly, calm the very frayed nerves of its battered shareholders. But recently uncovered documents from a litigation between Philidor and R&O Pharmacy are probably going to have the opposite effect, in that they illuminate what can only be described as a bizarre effort to circumvent California regulations.
If the name Valeant Pharmaceuticals International doesn’t ring a bell, its business practices should. The Quebec-based drug manufacturer's policy of implementing regular price increases that often run north of 100% has generated plenty of anger, a congressional investigation, constant press coverage and a subpoena from the U.S. Attorneys offices in both the Southern District of New York and the District of Massachusetts. But as strange as it may seem, a slim legal filing in California federal court is poised to make Valeant's world rockier still. The story starts 50 miles northwest of Los Angeles in Camarillo, Ca. with R&O Pharmacy, a modestly-sized operation co-owned by veteran compounding pharmacists Russell Reitz and Robert Osbakken.
The Southern Investigative Reporting Foundation has successfully concluded a litigation arising from its September 2014 story on Southern California-based medical device entrepreneur Anthony Nobles. Readers may recall that the investigation centered on Nobles, a high-profile Ferrari collector whose elaborate Halloween parties are regularly profiled in the press, whose affluence allowed him to own multiple homes, make large charitable donations and buy a $200,000 ticket on Virgin Galactic's first commercial space flight. Our reporting revealed that Nobles claimed a series of graduate degrees that were likely purchased from a notorious online diploma mill whose founder pled guilty to issuing fake diplomas and will be sentenced in November, according to a recent Department of Justice filing. Additionally, we reported that Nobles’ previous efforts with publicly-traded companies were mired in controversy and investor litigation. On October 1 Nobles filed suit against the Southern Investigative Reporting Foundation and the two authors of the article, summer intern Keith Larsen and myself, alleging defamation and libel per se.
Slowly but surely answers to the many riddles of how Insys Therapeutics could achieve its mercurial success are beginning to emerge. The Scottsdale, Ariz.-based pharmaceutical company has only one commercial offering, a sublingual Fentanyl formulation called Subsys, whose sales growth has managed to double its market’s size, to more than $500 million from an estimated $225 million since its approval and launch in March 2012, according to executives at rival companies. In turn, the upward march of the company’s share price has turned its growing legion of supportive brokerage analysts and money managers into minor geniuses. (Southern Investigative Reporting Foundation readers will recall Insys from an April 24 investigation of the drug’s mounting number of lethality cases and the company’s unusual marketing efforts.)
Therein lies the rub. Subsys is approved only to treat breakthrough cancer pain.