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Donato v. Insys Therapeutics Inc.

United States District Court, D. Arizona

August 1, 2017

Richard Di Donato, et al., Plaintiffs,
v.
Insys Therapeutics Incorporated, et al., Defendants.

          ORDER

          Neil V. Wake Senior United States District Judge.

         TABLE OF CONTENTS

         I. FACTUAL ALLEGATIONS ..................................................................................... 1

         A. Insys and Subsys ...................................................................................................... 1

         B. The Underlying Fraud .............................................................................................. 2

         C. Public Statements ..................................................................................................... 4

         D. News of Criminal Fraud Allegations ..................................................................... 10

         E. Plaintiffs ................................................................................................................. 11

         II. LEGAL STANDARDS ............................................................................................. 11

         A. Motion to Dismiss: Securities Fraud Pleading Standards ...................................... 11

         B. Section 10(b) and Rule 10b-5 ................................................................................. 12

         C. Section 20(a) of the 1934 Exchange Act ................................................................ 12

         III. ANALYSIS ............................................................................................................... 13

         A. Judicial Notice ........................................................................................................ 13

         B. Section 10(b) and Rule 10b-5 ................................................................................. 14

         1. Material Misrepresentation or Omission .......................................................... 14

         2. Scienter ............................................................................................................. 24

a. Kapoor ......................................................................................................... 26
b. Baker ........................................................................................................... 27

         3. Connection with Purchase or Sale of a Security ............................................... 28

         4. Loss Causation .................................................................................................. 30

a. First and Second Disclosures: November 27, 2014 New York Times Article and April 24, 2015 Southern Investigative Reporting Foundation Article .......................................................................................................... 32
b. Third and Fourth: May 20, 2015 Indictment of Two Physicians and June 23, 2015 Guilty Plea of Heather Alfonso (and New York Times Article Two Days Later) .......................................................................................... 32
c. Fifth: November 4, 2015 CNBC Article ..................................................... 33
d. Sixth: November 5, 2015 Resignation of Babich ........................................ 33
e. Seventh and Eighth: December 3, 2015 and January 25, 2016 Southern Investigative Reporting Foundation Articles .............................................. 35
f. Ninth: April 11, 2016 Press Release ........................................................... 35
g. Tenth: December 2016 Indictment .............................................................. 38

         C. 20(a) ........................................................................................................................ 39

         IV. SUMMARY .............................................................................................................. 39

         Before the Court is a Motion to Dismiss filed by defendants Insys Therapeutics Incorporated (“Insys”), Michael L. Babich, Darryl S. Baker, John N. Kapoor, and Alec Burlakoff (collectively “Defendants”). (Doc. 85.) Clark Miller (“Plaintiff”) is the lead plaintiff for the proposed plaintiff class in this action. He filed a response (Doc. 87), and Defendants filed a reply (Doc. 95). The Court now considers these and all accompanying briefing.

         I. FACTUAL ALLEGATIONS

         For this motion to dismiss, the following facts from Plaintiff's second amended complaint are assumed to be true.

         A. Insys and Subsys

         Defendant Insys is a publicly traded pharmaceutical company headquartered in Arizona that makes and sells pain management drugs. (Doc. 77, ¶ 1.) Defendants Babich, Baker, Kapoor, and Burlakoff all served as high level executives at Insys during the relevant class period, between 2014 and 2016. (Doc. 77, ¶¶ 30-33.)

         Since 2013, roughly 98% of Insys's net revenue has come from a product called Subsys, an under-the-tongue fentanyl spray designed to treat cancer pain in adult patients already taking opioid pain medication (known as “opioid-tolerant adults”). (Doc. 77, ¶ 2.) The power of fentanyl cannot be overstated. The highly addictive drug is 80-100 times stronger than morphine and 40-50 times more potent than heroin. The Drug Enforcement Agency has classified fentanyl as a “Schedule II” substance under the Controlled Substances Act. (Doc. 77, ¶ 73.)

         The Food and Drug Administration approved Subsys in 2012 only for opioid-tolerant adults and only for what is known as “breakthrough” cancer pain, intense episodes amid otherwise-steady levels of pain. (Doc. 77, ¶ 6; Doc. 85 at 5.) The FDA also required that any healthcare professionals prescribing, dispensing, or distributing Subsys must first enroll in a program called the Transmucosal Immediate-Release Fentanyl Risk Evaluation and Mitigation Strategy Access Program (the “Access Program”). (Id.) Among other things, the Access Program enabled Insys to monitor all sales of Subsys. (Id.) Additional FDA regulations prohibit marketing approved drugs for “off-label” uses, i.e., any uses other than the ones for which the drug was actually approved. Subsys therefore could not be lawfully marketed for anything other than breakthrough cancer pain treatment in opioid-tolerant adults. (Doc. 77, ¶ 10.)

         In addition, a federal anti-kickback law prohibits anyone from paying a doctor to order a good or service reimbursed by a federal healthcare program. (Id.) See 42 U.S.C. § 1320a-7(b)(2). According to Insys's own SEC filings, sales of Subsys at all relevant times “depend[ed] in significant part on the coverage and reimbursement policies of third-party payers, including government payers such as Medicare and Medicaid, and private health insurers.” (Doc. 77, ¶ 9.) Coverage decisions would depend in large part on “pharmacy benefit managers, ” entities within insurance companies that maintain lists of covered drugs, contract with pharmacies, negotiate prices with drug manufacturers, and process prescription drug claims. (Doc. 77, ¶ 93.)

         Because of these tight regulations, only specialty pharmacies can distribute the drug. The resulting scarcity has fueled skyrocketing prices. Even a small quantity (30 doses at 100 micrograms per dose) will run a patient about $1, 000 per month. (Doc. 77, ¶ 77.) A larger, more potent quantity (240 doses at 1, 200 micrograms per dose) can exceed $21, 000 per month. (Id.)

         B. The Underlying Fraud

         The class period in this action spans from August 12, 2014, through December 8, 2016. During that time, Insys reported increasing revenues each quarter and attributed most of its upward trajectory to the sale of Subsys. (Doc. 77, ¶ 11.) Company executives publicly attributed the drug's success to vigorous marketing efforts and the company's diligent negotiations with pharmacy benefit managers, third-party payers, and insurers. (Doc. 77, ¶ 12.) The company made no mention of unlawful practices actually taking place. Defendants at different times said (or were reported to have said) that Insys was “only selling a breakthrough cancer pain drug, ” that “no one at Insys wants to see anyone taking [Subsys] for anything other than cancer pain, ” and that Insys was “committed to complying with the laws governing [Subsys's] sales, marketing and promotional practices.” (Doc. 77, ¶ 99.) The defendants told investors that they “properly communicate with all major [insurance] plans and the [pharmacy benefit managers] to ensure proper access for Subsys.” (Doc. 77, ¶ 211.)

         According to the complaint, however, Insys was actually raking in large profits because of extensive criminal fraud: the company had made a practice of paying doctors bribes and kickbacks in exchange for prescribing Subsys off-label, which boosted the company's sales and, consequently, its stock price. (Doc. 77, ¶¶ 14, 201-08.) Many of these doctors have been federally indicted beginning as early as 2012, and several have pled guilty to violations of federal anti-kickback statutes. (Doc. 77, ¶¶ 15, 158.)

         Central to the fraud was Insys's “Insurance Reimbursement Center, ” a unit the company created ostensibly “to interact with third-party payers to obtain prior authorization and insurance coverage for invariably expensive Subsys prescriptions.”[1](Doc. 77, ¶ 16.) To ensure coverage for Subsys, employees of the Insurance Reimbursement Center would falsify patient diagnoses, lie to insurance companies using canned scripts written by Insys executives, and even pose as employees of the prescribing doctors. (Id.) Insys paid employees bonuses for doing these things, and for securing more Subsys prescriptions. (Doc. 77, ¶ 20.) During the class period, Insys informed investors that the Insurance Reimbursement Center existed but disclosed nothing else beyond its advertised purpose of working with insurers to cover Subsys. The company did not disclose any of the fraudulent conduct in which the Insurance Reimbursement Center was actually engaging. (Doc. 77, ¶ 212.)

         The fraud also extended to what Insys called its “speaker series, ” which it passed off as a series of educational talks by doctors invited (and compensated) to speak about the benefits of Subsys. (Doc. 77, ¶¶ 14, 101.) In reality, however, these events were usually nothing more than social gatherings devoid of any substantive content used as vehicles to funnel cash payments to prescribing physicians. (Doc. 77, ¶ 149.) Insys sales representatives sometimes even forged attendance sheet signatures to make it appear as though the speakers had given presentations before an audience. (Doc. 77, ¶ 164.) Defendant Burlakoff said of the speakers hired by Insys, “[T]hey do not need to be good speakers, they need to write a lot of [Subsys prescriptions].” (Doc. 77, ¶ 14.) Insys's stock continued to climb as all this was going on.

         Despite these actions, Insys maintained that it was “taking market share from other competing . . . products and expanding the usage of Subsys for [breakthrough cancer pain] by building awareness among oncologists.” (Doc. 77, ¶ 111.) The company touted its “very unique programs within the oncology setting” for increasing sales, all while executives were specifically steering sales representatives away from doctors who prescribed the drug for breakthrough cancer pain. (Doc. 77, ¶¶ 111-12.) Less than 1% of Subsys prescriptions were actually written by oncologists. (Doc. 77, ¶ 112.) Instead Insys pushed its own sales force to cajole doctors into prescribing Subsys for off-label uses, pressuring salespeople to use aggressive tactics and paying them meager base salaries with commissions tethered to their success generating prescriptions. (Doc. 77, ¶¶ 132-33, 139.)

         C. Public Statements

         From the beginning of the class period, Insys made a number of public statements regarding its revenue figures and stock price. Plaintiff points to the following statements in the second amended complaint:

         1) On August 12, 2014, the first day of the class period, Babich stated in a press release that a 200% sales growth compared to the same time the previous year was “largely driven by the successful execution of our Subsys strategy.” (Doc. 77, ¶ 251.)

         2) On a conference call with investors the same day, Babich stated, among other things, “We believe the success to date of Subsys is the result of a clinically superior product, coupled with the focused market penetration strategy, ” and “[t]he majority of patients have access to Subsys through their insurance plans.” (Doc. 77, ¶ 252.) The company later made materially similar statements regarding their earnings the next two quarters. (Doc. 77, ¶¶ 261, 267.) Babich also told investors, “[W]e continue to properly communicate with all the major plans and the [pharmacy benefit managers] to ensure proper access for Subsys.” (Doc. 77, ¶ 253.)

         3) In its Form 10-Q for the second quarter of 2014, Insys stated, “The increase in Subsys revenue is primarily as a result of increased prescriptions and change in mix of prescribed dosages as Subsys was a relatively new product during the three months [and six months] ended June 30, 2012 and also price increases in January 2014 and April 2014. …” (Doc. 77, ¶ 254.)

         4) On November 11, 2014, Insys issued a third quarter press release reporting “another strong quarter, in which our revenue and gross profit doubled largely driven by the continued, successful execution of our Subsys strategy.” (Doc. 77, ¶ 260.)

         5) In a conference call on the same day, Babich stated, “We continue to proactively work with managed care providers to ensure coverage for our patient population. We maintain Tier 3 coverage under nearly all major commercial plans, and the majority of patients have access to Subsys through their insurance plans.” (Doc. 77, ¶ 261.)

         6) The next day, in its Form 10-Q for the third quarter of 2014, the company reported, “[T]he increase in Subsys revenue is primarily as a result of increased prescriptions and change in mix of prescribed dosages as Subsys was a relatively new product during the three months ended September 30, 2013 and also price increases in January 2014 and April 2014.” (Doc. 77, ¶ 262.)

         7) On a March 3, 2015 conference call with analysis, Babich said of the company's high fourth quarter earnings, We keep hitting new highs in the number of new doctors that we activate on a weekly basis.

We have some very unique programs within the oncology setting that we continue to execute on and any growth that we see in this overall [drug] class is specifically coming from Subsys.

(Doc. 77, ¶ 268.)

         8) Also on March 3, 2015, Insys filed a Form 10-K for the fiscal year 2014. Among other things, the company asserted,

Subsys has been, and will likely continue to be, subject to these restrictions and impediments from third-party payers, administrative patient support assistance, in large part through our patient services hub, which provides administrative support assistance to help patients work with their insurance companies.

(Doc. 77, ¶ 269.) The company made similar statements amid a similar growth in revenue throughout the class period. (Doc. 77, ¶¶ 284, 293, 302.)

         9) The Form 10-K also stated, “[W]e commercialize Subsys through a cost-efficient commercial organization utilizing an incentive-based sales model similar to that employed by” some of its competitors. (Doc. 77, ¶ 271.)

         10) Among “key factors” in its growth, Insys identified the following:

taking market share from other competing . . . products and expanding the usage of Subsys for [breakthrough cancer pain] by building awareness among oncologists of its rapid onset of action, improved bioavailability, most complete range of dosage strengths and ...

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