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.
It wasn't long before subpoenas began to pile up, with state and federal prosecutors on both coasts swinging into action; the U.S. attorney's office in Boston, for example, impaneled a grand jury (and grand juries rarely fail to return indictments). Indictments of Insys' most frequent prescribers continued and key executives have departed without notice.
Then came the lawyers.
In August, Oregon's Department of Justice arrived at a $1.1 million settlement with Insys that represented about twice the amount of its revenue in that state. (In April, the company had settled a class action for $6.125 million.)
The proposed resolution from the Oregon Department of Justice makes for stark reading; it uses depositions and emails to claim that the company misrepresented a key scientific study, encouraged off-label prescriptions (allegedly in violation of U.S. 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 company's share price has risen a split-adjusted 50 percent in the past year, in some measure because Kapoor and his family's trusts control 66 percent of the outstanding shares), investor enthusiasm is starting to wane.
On Nov. 2, on the eve of an earnings announcement, CEO Babich suddenly resigned -- a move that typically raises a major red flag for investors. Kapoor, who assumed the CEO mantle, told those listening on the conference call, "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, though.
Babich was forced out by Kapoor, according to a senior Insys executive who was in regular contact with Kapoor in the days prior to the announcement. While both men are the subjects of intense regulatory scrutiny, the founder and chairman bluntly told his lieutenant of 14 years that Babich was closest to the issues that federal prosecutors were looking at and that a change had to be made should settlement talks became serious, according to the executive source.
While Babich may be spending time with his young family, his personal life is more complex.
Earlier this year, Babich began a relationship with Natalie Levine, then a Boston area Insys sales executive who subsequently became pregnant; they married in the summer. (This is Babich's second romance with a sales colleague; Kapoor has also dated two sales executives.) Aside from the fact that it's unusual for a public company CEO to date someone who reports to him, the Babich-Levine relationship had another dynamic to it.
The newlyweds will probably be monitoring the developments in a rapidly expanding criminal suit filed in the U.S. District Court in Hartford where Heather Alfonso, an advanced practice registered nurse who was a high-volume Subsys prescriber over the past two years, pleaded guilty to accepting $83,000 in kickbacks. Federal prosecutors, according to the transcript of the July plea hearing, allege that the kickbacks prompted her to write Subsys prescriptions worth $1.6 million.
What appears to have brought the federal prosecutors' intense scrutiny of the divorced mother of four was the baldness of the scheme. According to her plea, Alfonso was paid $1,000 each time she attended an Insys speakers event, where she was supposed to discuss with other medical professionals her clinical experience of Subsys. In reality, however, no other prescribers were present, and prosecutors said the events amounted to nothing more than Insys-sponsored dinners and drinks for Alfonso and her co-workers.
Natalie Levine was one of the sales staffers who called on Alfonso, and Levine arranged and attended many of the 70 speakers program events. As CEO, Babich approved two years' worth of budgeted payments to Alfonso.
(While courts have traditionally recognized spousal privilege and declined to compel a husband or wife to provide testimony about a spouse, the events in the Alfonso case occurred before Levine and Babich married.)
Alfonso is cooperating with the government, as might be expected for someone facing a possible sentence of 46 to 57 months in jail; her sentencing date has been pushed back twice, most recently for six months. In the plea hearing transcript, prosecutors offered a pretty big clue about where Alfonso's cooperation might be taking the investigation. For example, several Medicare Part D beneficiaries were described by prosecutors as ready to testify that she diagnosed them with having issues other than breakthrough cancer pain (the primary condition Subsys is indicated to treat) yet insurers still authorized the prescriptions.
As described in the transcript, Insys' prior-authorization unit changed Alfonso's diagnoses to cancer. Absent the alleged changes, the prosecutor asserted, the insurers would have never paid for the prescriptions.
And as the Southern Investigative Reporting Foundation wrote in July, Medicare and commercial insurers appear to have approved reimbursement of prescriptions for Subsys at vastly higher rates than those of its rivals in the Fentanyl marketplace.
The prior-authorization unit was set up to assist patients with complex insurance paperwork. Its value proposition was simple: The patient signs a few forms and Insys handles the messy paperwork. Patients would get the medicine, prescribers wouldn't have to scramble for an alternate medication and Insys would book thousands of dollars in revenue per prescription.
In reality what the prior-authorization unit did was take advantage of pharmacy-benefit manager inertia to work a type of bureaucratic alchemy, whereby a torrent of off-label Subsys prescriptions would be transformed into ones associated with medically urgent cancer diagnoses.
Unmistakably, the prior-authorization unit was the key piece in helping Insys double the size of the Fentanyl marketplace to more than $500 million in less than 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 was launched in January 2012, the FDA's Adverse Events Reporting System lists 203 deaths for which medical providers have fingered Subsys as the probable candidate for triggering an adverse reaction. Moreover, the pace of purported Subsys-related deaths has been accelerating, with the FDA's disclosing 52 deaths in the second quarter of this year alone.
(This FDA data is not definitive: It relies on voluntary medical-provider reporting so the number of incidents may be undercounted. Additionally, most reports represent a medical professional's assessment and do not present an official cause of death.)
These deaths have occurred amid a nationwide opioid abuse epidemic. According to the Centers for Disease Control, in 2013 (the most recent year for which data is available), 16,235 Americans died from prescription opioid overdose. Subsys is now the top-ranked "diversion drug of concern"or the most frequently stolen or fraudulently obtained, according to the Department of Health and Human Services' Office of the Inspector General.
What follows below is a description of what happens to a company when rule bending is institutionalized and the pressure to make a sale has deadly repercussions.
Danielle Gardner worked in Insys' prior-authorization unit for a year and feels terrible about it. She is convinced that the unit's arranging for insurance company approvals for thousands of off-label Subsys prescriptions led to the addiction or death of a certain percentage of the patients involved.
Gardner, whose name is a pseudonym, 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.
For a portion of her professional life, Gardner woke up each day to perform a job with a singular goal: to do anything to make the employees who handled pharmacy benefits for insurers think that the people who had been prescribed Subsys had cancer when only 1 percent 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.
Gardner began her odyssey at the prior-authorization unit after her application submitted via a job-hunting site led to an interview. During her visit to Insys' office, she deemed its operations to be busy and serious. To her, Insys seemed to be a growing company whose only business, as she was told, was helping people beat cancer.
"I liked the idea of helping people with the paperwork, which can be the hardest part of health care, but mostly I needed a job and [$18 to $20] per hour and benefits" was very good for Phoenix, she said. Better still, there was the prospect of bonuses. A veteran of several doctor's offices, Gardner was well versed in obtaining insurance company approvals but had never heard of employees in a prior-authorization unit receiving bonuses. The decision was "yes" or a "no" proposition. How money came into the equation baffled her.
But her co-workers swore they were receiving the bonuses.
The bonus wasn't the only matter that Gardner had questions about, though. She didn't know why Insys' prior-authorization unit was located across the street from headquarters or why the lobby had no sign for the division. The unit had a different phone exchange and a separate email server.
But Gardner kept her mouth shut.
While her boss Liz Gurrieri who ran the prior-authorization unit could be friendly, she had made very clear to everyone that the best questions were about how to do the job better. Gurrieri had built the unit from the ground up in 2012 and was held in the highest esteem at headquarters. In just a few years, as the story around the cubicles went, Gurrieri's stock options had helped her become wealthy enough to build a six-bedroom house.
So everyone in the unit did things Gurrieri's way because the money was good.
After a brief training period, Gardner went to work. Each day Gurrieri handed out stacks with five patient charts to Gardner and her seven colleagues and they would dive right in to make calls.
Prior-authorization unit staffers had a very specific formula that governed their life. Individually they had to secure 25 Subsys approvals a week; during a Monday meeting, Gurrieri's boss, Michael Gurry from the corporate office, would tell the prior-authorization team the "group gate," or minimum number of total approvals expected for the week, usually at least 200.
Assuming that the minimum was met, for every additional approval Insys gave $7 to a "bonus pool." For example, if the prior-authorization unit received 300 approvals, then the bonus pool was $700 per person.
Plus there were individual bonuses: After a prior-authorization staffer secured 35 approvals, Insys gave the employee a $50 bonus and $10 for each incremental approval. So if Gardner received 47 approvals for the week, she would earn an extra $170 bonus on top of the $700 pool-based bonus. (A team member who failed to hit 25 was not eligible for a bonus.)
In a good week, Gardner found she could arrange for as many as 55 approvals; others achieved even more. After taxes, she was bringing home $3,000 to $3,500 a paycheck.
All she had to do, of course, was to change in the charts the insurance codes for the diagnosis of back or joint pain, organ problems, work accidents, military trauma or menstrual cramps into cancer ones.
Until the subpoena from the Department of Health and Human Services' Office of Inspector General arrived at the end of 2013, that proved to be easy for her.
Up to that point Gardner would reply yes to pharmacy benefit manager employees who asked if the patient had "breakthrough cancer pain," Gardner said. Then it was a slam dunk. Very few insurers wanted to be accountable for denying a cancer patient pain medicine. No matter what else changed, confirming a cancer diagnosis remained a requirement for any patient whose doctor was prescribing him or her Subsys for the first time, Gardner said.
Everything had been scripted per instructions from Gurrieri, with each phone call beginning with an identification of the prior-authorization unit staffer as being "from Dr. ____'s office."
No one argued with success as the prior-authorization unit's approval rates ran as high as 80 percent or more. They were limited only by the number of prescriptions written.
Despite the sharply increasing volume of Subsys prescriptions by the start of 2014, few, if any, pharmacy benefit managers had linked the prior-authorization unit to Insys.
Then again, few details were overlooked in keeping the connection obscured.
Outgoing phone numbers were blocked to avoid showing up on a caller ID and staffers were under orders to never use the company's name when speaking to anyone from an insurer or a pharmacy benefit manager; if pressed, they would only say that they "were working closely with Dr. ___'s office." When providing a phone number for a return call was required, they gave out a toll-free 800 number that would be answered by a colleague named Shannon. She would quickly direct the caller to the prior-authorization staffer without fielding any questions.
After the arrival of the Health and Human Services subpoena, which Gurry assured the prior-authorization unit staff was just a routine federal inquiry that a certain number of pharmaceutical companies underwent every year, Gurrieri ordered a change of strategy, Gardner said.
Instead of answering yes to questions about breakthrough cancer pain, prior-authorization unit staffers were to answer, "yes, they have breakthrough pain," which was both an affirmative answer but ambiguous enough to mean virtually anything. Plus, pharmacy benefit management call-center employees, some of whom were located overseas and with hourly or daily quotas for handling calls, might mishear one or two words and consider the question properly answered. (The prior authorization unit never discussed the fact that insurers may have been given a false impression, according to Gardner.)
Through the spring of 2014, approval rates remained impressive, but pharmacy benefit managers began to push back, sometimes demanding to speak with the physician about the diagnosis. If the pharmacy benefit manager called the prescriber, that was a big problem in and of itself as the prior-authorization unit was in no way "from" any doctor's office.
Messy episodes sometimes occurred, Gardner said, with physicians angrily insisting that no one by the prior-authorization staffer's name worked at their office and that the patient in question did not have cancer.
Gardner said there were rarely long-term issues with pharmacy benefit managers, who would usually accept the prior-authorization unit's 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, the fortunes of prior-authorization staffers were changing. The subpoena that Michael Gurry had assured them was part of a standard procedure for pharmaceutical companies didn't go away and another arrived after Labor Day.
Given the legal issues that several key Subsys prescribers were experiencing, Gurrieri ordered Gardner and her colleagues to begin phone conversations by referencing "calling on behalf of Dr. ______'s office."
Even so, approval levels were dropping in the late summer of 2014 as pharmacy benefit managers 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 the prescriptions rolling in.
To reverse the trend of a slowdown in number of approvals, Gurrieri developed what prior-authorization staffers called "the spiel," a series of dialogues (to commit to memory), designed to address detailed questions about whether a patient had breakthrough pain and cancer.
When someone from a pharmacy benefit management office asked about a patient's having breakthrough pain from cancer, the prior-authorization staffer would reply, “The physician has stated that Subsys is approved for treating breakthrough cancer pain so (he or she) is treating breakthrough pain.”
While this response was wrestled with, prior-authorization staffers, per their instructions, would invent conversation to suggest 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 become 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, a condition of having difficulty swallowing that's related to illness. This served to box in the pharmacy benefit manager because a denial of a Subsys prescription could run the risk of starving a patient. This technique worked every time to secure an approval.
In addition, Gardner was ordered to intentionally mix up insurance codes, to substitute in, say, 338.30, associated with cancer-related chronic pain, for 338.29, which is for general chronic pain not connected to cancer.
Shortly after that, though, in the autumn of 2014, Gardner began to suffer anxiety related to performing what she was certain constituted unethical behavior, she said. She left the company shortly afterward.
"I couldn't take [the misrepresentation] anymore," she said, adding that she was "traumatized by thoughts of getting arrested."
Gardner told the Southern Investigative Reporting Foundation that she had cooperated "extensively" with federal law enforcement officials over the past year about the nature of her prior-authorization job at Insys but declined to say she was asked about.
Her description of events at Insys' prior-authorization unit was corroborated by other Insys employees, including sales representatives and managers, who had frequent contact with the group, a physician who was familiar with its operations, another prior-authorization unit employee -- and a description in the now-settled class action.
As is the case for all Southern Investigative Reporting Foundation articles, numerous attempts were made to reach all the people in this story and provide them with an opportunity to comment on what had been reported about them. In cases where an email address was unavailable, a detailed voice message was left with questions. Over the course of several months, five attempts were made to contact Michael Babich and Natalie Levine on their mobile phones by leaving detailed voice messages and sending texts. They did not respond.
A call to Insys was referred to the company's chief financial officer, Darryl Baker, and a voice mail was left on his office phone. A later call was placed and a message was left on his mobile phone as well. He never responded.
Michael Gurry did not reply to a voice message left on his office phone.
Multiple attempts to seek comment from Elizabeth Gurrieri were made that included messages being left on her cell phone and texts. On the one occasion she answered, she declined to comment, citing time constraints.