Insys Therapeutics Agrees to $225 Million Global Resolution of Criminal and Civil Investigations Into Fraudulent Marketing of Subsys, Then Declares Bankruptcy

On June 5, the U.S. Department of Justice announced that Insys Therapeutics, an Arizona-based pharmaceutical company, agreed to a global resolution to settle the federal government’s separate criminal and civil investigations into Insys’s marketing of Insys’s drug Subsys.  Under the terms of the criminal resolution, Insys agreed to enter into a five-year deferred prosecution agreement with the government, to have its operating subsidiary plead guilty to five counts of mail fraud, and to pay a $2 million fine and $28 million in forfeiture. Under the terms of the civil resolution, Insys agreed to pay $195 million to settle allegations that it violated the civil False Claims Act.

According to the Justice Department,

[b]oth the criminal and civil investigations stemmed from Insys’s payment of kickbacks and other unlawful marketing practices in connection with the marketing of Subsys. Insys’s drug Subsys is a sublingual fentanyl spray, a powerful, but highly addictive, opioid painkiller. In 2012, Subsys was approved by the Food and Drug Administration for the treatment of persistent breakthrough pain in adult cancer patients who are already receiving, and tolerant to, around-the-clock opioid therapy.

In connection with the criminal resolution, the United States Attorney’s Office in Boston filed an Information that charges Insys and its operating subsidiary with five counts of mail fraud.  The Information states that

from August 2012 to June 2015, Insys began using “speaker programs” purportedly to increase brand awareness of Subsys through peer-to-peer educational lunches and dinners. However, the programs were actually used as a vehicle to pay bribes and kickbacks to targeted practitioners in exchange for increased Subsys prescriptions to patients and for increased dosage of those prescriptions. One practitioner targeted by Insys was a physician’s assistant who practiced with a pain clinic in Somersworth, New Hampshire. During the first year that Subsys was on the market, the physician’s assistant did not write any Subsys prescriptions for his patients. In May 2013, the physician’s assistant joined Insys’s sham speaker program knowing that it was a way to receive kickbacks for writing Subsys prescriptions. After joining the sham speaker program, the physician’s assistant wrote approximately 672 Subsys prescriptions for his patients – many of which were medically unnecessary – and in turn, received $44,000 in kickbacks from Insys.

In addition, Insys entered into a five-year Corporate Integrity Agreement (CIA) and Conditional Exclusion Release with OIG.  The Department noted that “[b]ecause of the extensive cooperation provided by Insys in the prosecution of culpable individuals and its agreement to enhanced CIA requirements, OIG elected not to pursue exclusion of Insys at this time.” The CIA, which the Justice Department deemed “unprecedented,” includes several novel provisions.  Those include enhanced material breach provisions, designed to protect federal health care programs and beneficiaries.

Furthermore, Insys admitted to a Statement of Facts in relation to the CIA and acknowledged that the facts therein “provide a basis for permissive exclusion. OIG did not release its permissive exclusion authority, as it generally does for CIA parties in False Claims Act settlements. Instead, OIG will provide such a release only after Insys satisfies its obligations under the CIA.”

Shortly thereafter, on June 10, Insys filed for Chapter 11 bankruptcy protection, reportedly “amid mounting expenses driven by” the Department’s investigation.  Reuters stated that the Department “is now Insys’ largest unsecured creditor,” due to the criminal and civil resolution with the Department.  In a filing in the bankruptcy proceeding, Insys Chief Executive Officer Andrew Long “said that sales decline was more than Insys could withstand when coupled with the investigation and more than 1,000 lawsuits by municipal governments seeking to hold it responsible for the epidemic.”

Note:  On one level, the Insys criminal and civil resolution should be considered a significant victory for the Department of Justice in its litigation to combat the opioid crisis.  When considered with the May 2 criminal convictions of Insys funder John Kapoor and other former Insys executives for RICO conspiracy, the Insys corporate resolution appears to be a true example of a corporate criminal investigation in which both the company and responsible corporate officials were held accountable.

On another level, however, the bankruptcy filing, which took place only five days after the corporate settlement was reached, raises a serious question about the true value of the corporate settlement.  If the Department did not know, at the time of the settlement, about Insys’s plans to declare bankruptcy, Department prosecutors would have every right to be furious about the filing, which may place the Department in the status of an unsecured creditor and will likely delay the government’s receipt of at least some of the funds.  On the other hand, if the Department did know, prior to settlement, that Insys did plan to file for bankruptcy thereafter, that would create the appearance that the Department entered into the deferred prosecution agreement, knowing that actual receipt of the $255 million would be unlikely or impossible and therefore that Insys could not timely satisfy a material term of the DPA.

Although Insys has still more reasons for anxiety – for example, the drastic fall in its stock price after the bankruptcy filing and its anticipated delisting from NASDAQ as of June 19 – its decision to declare bankruptcy after the Justice Department resolution may prompt other pharma companies facing massive opioid-related litigation to consider bankruptcy more seriously as an option for forestalling or constricting potentially catastrophic damage awards.

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