Sunday, May 11, 2014

Insys Therapeutics: drug dealers and the Feds. Can the business survive?

Insys Therapeutics (INSY:NASDAQ) is a seller of marijuana based anti-nausea drugs and super-strong opiates (Fentanyl) and nothing much else. Nothing has anything that resembles strong patent protection and their version of sublingual Fentanyl is a relatively new comer to the opiate scene - having only been on the market since early 2013.

Remarkably the market cap is over $1 billion. Here is a description from the last 10K. 
We are a commercial-stage specialty pharmaceutical company that develops and commercializes innovative supportive care products. We have two marketed products: Subsys, a proprietary sublingual fentanyl spray for breakthrough cancer pain, or BTCP, in opioid-tolerant patients and Dronabinol SG Capsule, a generic equivalent to Marinol (dronabinol), an approved second-line treatment of chemotherapy-induced nausea and vomiting, or CINV, and anorexia associated with weight loss in patients with AIDS. We market Subsys through an incentive-based sales model.

Drobinol is just marijuana extract. Subsys is a sublingual spray version of fentanyl - an opiate stronger than but shorter acting than heroin whose only legitimate use is to treat pain so sharp the morphine doesn't cut it.

Subsys - by far their important product - is a me-too product. It is - as the form 10K stated - the fourth Transmucosal Immediate Release Fentanyl (TIRF) product released in recent years. However very rapidly gained sales - indeed far more rapidly than any Fentanyl ever. Again to quote the 10K.

We launched Subsys as a commercial product in March 2012. Subsys is the fourth new branded product in the TIRF market over the last four years. Within the first four weeks of product launch, Subsys realized greater market share than the previous three branded products combined at their respective peak market penetration levels to date according to Source Healthcare Analytics. In December 2013, Subsys was the most prescribed branded TIRF product with 28.3% market share on a prescription basis according to Source Healthcare Analytics. Through our ongoing commercial initiatives, we believe we can continue to grow our market share and net revenue for Subsys. According to Source Healthcare Analytics, in 2013, TIRF products generated $421.2 million in annual U.S. product sales. The physician prescriber base for TIRF products is concentrated with approximately 1,850 physicians writing 90% of all TIRF product prescriptions in 2013, according to Source Healthcare Analytics. As a result, our commercial organization is able to promote Subsys using a highly targeted approach designed to maximize impact with physicians.
Now given that there is not a huge difference between TIRF products it is remarkable that Subsys immediately became the dominant TIRF product with a greater share than the three previous leaders combined. It is not entirely obvious how they did that.

But the key was quoted above - and I underlined it just to make sure you noticed. Insys markets Subsys through "an incentive-based sales model".

Its a little hard to work out what that actually means - but it is the key risk in this business. The 10-K only says this:
We market Subsys through our U.S.-based, field sales force focused on supportive care physicians. We utilize an incentive-based sales model that employs a pay structure where a significant component of the compensation paid to sales representatives is in the form of potential bonuses based on sales performance.
This is not well-described in the form 10-K. They state several times that the sales approach is similar to one used at Sciele Pharma - a company that management were previously associated with. Again to quote:
We commercialize Subsys through a cost-efficient commercial organization utilizing an incentive-based sales model similar to that employed by Sciele Pharma and other companies previously led by members of our board of directors, including our founder and Executive Chairman. We intend to market Dronabinol Oral Solution and other proprietary supportive care products, if approved, using the same approach and our commercial organization. 
Beyond that - and a description of the size of the marketing force - the marketing scheme is not well described. Here is the description of the size and extent of the marketing force. 
As of December 31, 2013, we had 145 full-time sales and marketing personnel. We expect the number of our sales and marketing personnel to increase as we seek to continue to increase our existing product sales and as any subsequently approved products are commercialized. We expect our sales and marketing expenses, along with our research and development expenses, to be our largest categories of operating expenses for the foreseeable future. In addition, because we use an incentive-based compensation model for our sales professionals, we expect our sales and marketing expenses to fluctuate from period to period based on changes in Subsys net revenue. Specifically, we expect our sales and marketing expenses to increase in 2014 to the extent that expected increases in Subsys net revenue are realized.
So, what have we got?

A me-too drug - another sublingual Fentanyl - but with a marketing incentive scheme that works and that encourages people to sign up.

One way is that - like Galena - the company offers free samples. I have cut and paste the offer below:

But the main differentiation for this company is the "incentive-based pay structure" whereby "a significant component of the compensation paid to sales representatives is in the form of potential bonuses based on sales performance". 

Oh, of course the drug is wildly addictive and makes you massively high.

There is one more thing that makes this drug particularly susceptible to rapid but ultimately undesirable growth. I will leave that to later in this post.

This is kind of special - its a business model almost designed for something to go wrong - very wrong.

Very wrong of course is off-label selling and diversion to drug addicts. Worse still is the systematic creation of drug addicts by your sales force who are paid by incentives.

The beginning of the unravelling

On Friday in the late afternoon Insys stock rapidly dropped about 20 percent on no apparent news. Twitter had the story though - a story in a Michigan local paper about a doctor being arrested for allegedly defrauding medicare. 

The money quotes in the paper:
Medicare paid Awerbuch [the allegedly corrupt doctor] $6.9 million from Jan. 1, 2009, through Feb. 6, 2014, for Subsys he prescribed. The next highest amount a U.S. prescriber received was $1.6 million. 
"Awerbuch is responsible for approximately 20.3 percent of the Subsys prescribed to Medicare beneficiaries nationwide during this time," the affidavit stated. 
He wrote 1,283 prescriptions for the drug in five years, while the next closest prescriber wrote 203 prescriptions, the complaint stated.

Now there are something wrong with these dates - because Subsys was only marketed from March 2012 - but - if the paper is to be believed - a single doctor was responsible for over 20 percent of all Medicare Subsys prescriptions. And that doctor is not going to be prescribing any more.

This doctor took to prescribing Subsys very freely and if the story is to be believed contrary to the black-label warnings. He also allegedly defrauded private health care companies - so he is responsible for more of the sales. Allegedly the doctor also prescribed Subsys to the police officer. To quote:
On one visit, an undercover officer asked for a Vicodin prescription and attempted to bribe Awerbuch for the drug with $1,000. The officer told Awerbuch he would sell the drug to coworkers. 
Awerbuch refused the bribe and asked the officer not to sell Vidodin again. He also asked if the officer was a Drug Enforcement Administration for FBI agent. The officer said he was not, and Awerbuch issued him the Vicodin prescription. 
During a later visit, Awerbuch proscribed Subsys to the officer even though the officer had not been diagnosed with cancer.
The affidavit also talks about the doctor giving the "free 30 day trial" to people who are not cancer patients.

Increasing doses

Just in passing the affidavit mentions prescriptions to individual patients. They go up very rapidly consistent with addiction. If you want the bull case for the company that is it. Rapid growth based on addiction.


It doesn't take long prowling the internet to work out that there are other issues with Subsys. I am not going to lead you through the underground of drug-diversion websites - but it is not hard on the web to find people who have taken this drug intravenously and some of them report getting distributors to give them the thirty day free samples. Moreover - and this really is an issue - this is a sublingual spray - that is a liquid. The other forms of the drug (lollipops, rice-paper tabs etc) are not liquids. [However if you want a guide to extracting Fentanyl from patches look here... Never underestimate the ingenuity of an addict needing hit.]

It is much easier for a narcotics user to prepare a sterile liquid for IV use than a medicated lollipop. I have a pet suspicion - not proven - that one reason for the very rapid uptake of the spray version is that it is much more suitable for diversion.

Do the Feds close the company?

I am never fond of short-cases where the short seller is reliant on the government to close a business for them (see Herbalife). However this seems as good a candidate as any for government closure.

We have 
(a) easily detectable diversion [indeed we have the prescription of the drug to a police officer without cancer and who previously said that he planned to sell narcotics to his work colleagues],
(b) a drug that seems designed for diversion,
(c) an incentive system for sales people that encourages them to make sales regardless and who - because of their incentives - may be tempted to sell off label,
(d) a single doctor who prescribes a double-digit percentage of the Medicare total for the drug and who is currently under indictment.

Finally we have (e) a drug with perfectly good substitutes such that the loss of the company marketing the drug will mean no real loss to society or patients.  

It seems like an okay short to me. At the minimum the Feds will investigate the sales practices and their link to the Michigan doctor. After all there was someone who was working with patients to get refund approval on many of these prescriptions and there was a salesperson paid a big incentive bonus for these sales.

Oh, and the company is trading at a big multiple of sales and of earnings.


Disclosure: unsurprisingly I am short. However I worry about shorting addictive products generally. So take that with a grain of salt.


Anonymous said...

Ugh, this sounds like QCOR all over again. Don't think I have the stomach for it.

Anonymous said...

How does this sound even remotely like QCOR?

Anonymous said...

Pfizer also gives out free samples of Viagra.

Lots of drugs can be easily abused.

When it is difficult for govt to detect prescription fraud?

Question: What % of Subsys prescriptions were covered by Medicare?

I'm not saying you are wrong, but you're making a lot of broad conclusions with very little evidence, similar to a blind long.

John Hempton said...

One difference between this and a blind long.

A. No patents.
B. Big multiple of revenue.
C. Suspect sales model.
D. Reverse merger.

Pretty hard to see why it deserved the nearly 1.5 billion market cap on which I originated the short.

But yes - Viagra is often given as free samples, but seldom medicare and is not addictive.

Addiction is a pretty big difference.

How do you feel about free samples of heroin? Here kiddies - get your drugs.

And don't say I am making it up because the doctor was allegedly giving free samples off label for an opiate stronger than heroin.


Anonymous said...

It's similar to QCOR in the way they set up a "Charity" to cover the Co-Pays.

INSYS stock will be under $10 by this Friday

This is what Management gets for hiring young reps with NO morals…They knew what he was doing and looked the other way.

Anonymous said...

1. If the arrested doc prescribed $7M of Subsys through Medicare alone, who knows what's the total amount he prescribed, including private insurance.
2. Idoubt the company failed to notice the fact that one doctor was such a large prescriber, 6 times higher than the second highest prescriber for Medicare. Seems odd they let it slide, especially given the public/political pressure on ZGNX for Zohydro (another non-abuse deterrent schedule II opiate with not even 1% of the Subsys scripts).
3. The arrested doctor prescribed Subsys off-label. Given the scrutiny and fines Cephalon was exposed to for off-label use/marketing of Actiq, the company should have been much more cautious, at the very least, that such a large prescriber wasn't prescribing the drug off-label. Instead, no activity from the company.
4. The comp of the INSY sales force is a clear conflict of interest. Free samples are unforgivable. This is an addictive opiate, not a boner pill.
5. If one doctor was doing this with Subsys, how many others did it too. I would not be surprised to see them stop before inviting the FBI at their doorstep.
6. Why did the arrested doctor over prescribe Subsys? There are other fentanyl products out there. What was the Insys sales rep doing to incentivize this doctor's use for Subsys? And how many other doctors were targeted in a similar way?

At the minimum, INSY deserves even more of the kind of public/political pressure we saw with ZGNX. ZGNX does not hand out free samples, Zohydro sales are nearly not in the same ballpark, and their sales force is not incentivized by sales made. Based on what happened to the ZGNX stock, INSY needs to go much much lower from these levels. No cash and a major overhang over the company's marketing practices, and future revenues at a major threat don't equate to the current valuation.

Anonymous said...

@anon 8:22: like QCOR, it is an easily replaced painkiller with promotional management and questionable sales incentives, high cost and potential abuse of copay assistance, and for the short to work payers or the FTC have to step in, while the company generates lots of cash flow in the meantime. Close enough!

Anonymous said...

Hi John,

I am a Aus based doctor and have enjoyed reading your blog for several years. I am not convinced by some of your posts on biotech- though the latest short thesis on INSY seems pretty reasonable if a single doctor is prescribing 20% of the drug!

A few points:
-I don't think the method of incentivisation for the sales team is an issue- the onus is on clinicians to prescribe the drug appropriately.

-I wouldn't get to hung up on fentanyl- it is a very good painkiller- and certainly not responsible for more deaths than oxycontin which is probably its main competitor. (Incidentally of interest is that it may have been the chemical agent pumped into the Moscow theatre to end two siege in 2002)

-The key point on Lemtrada/ Alemtuzumab is that this drug has been used for many years for treatment of leukaemia and in organ transplantation as Campath. Campath was withdrawn as they perceive that remarking the same substance with a different name/ license would result a bigger market (MS). They aimed to support approval of lemtrada with a poorly designed trial (and I disagree with your parachute theory)- properly controlled trials have been performed for plenty of drugs/ procedures with side effects. The main issue is is the poor quality of evidence used to support the application.

I would be very interested if you could write up a biotech company you think is trading on the basis of pseudo science rather than valuation.

Anonymous said...

So youre telling u put on short when market cap was around $45 (mid March), yet you waited so long to "publish" your short thesis??

Come on man, you bring up some decent points, no need to lie about your entry.

Shoot, half of your case seems to be be based on the fraudulent neurologist case, which was just revealed on Thurs.

John Hempton said...

To the person who accused me of lying about when I put the short on: my average is $40.22. Not $45.

And I will allow a prospective client to due-diligence that fact.



John Hempton said...

To the anonymous person who accuses me of lying. The average is 40.2260999

I know odd numbers.

Now next time you accuse me of lying can you do so without being anonymous?

Thanks in advance.

Moreover - if you look at our client letter for March you will see that we put on MANY biotech shorts in March. They were mostly pretty good so far I think...


Anonymous said...

The big question is: what was the incentive for this doctor to write that many Subsys scripts given all the fentanyls out there? Doctors get paid on procedures (which this guy was faking), not for writing scripts. Did he have a financial incentive to write as many scripts as possible, including off-label? If so, INSY is over.

Anonymous said...

Stocks go up because people would buy a stock, and those that own it won't sell thinking it'll go higher. I doubt anyone saying that this is overdone is buying here, and I doubt anyone that doesn't own it will jump in now.

Who own INSY given all the uncertainty?

Just sell, lock in profits if you have some, and buy any oversold names that have no issues. Not worth hanging in for one.

Anonymous said...

Point of clarification, SUBSYS isn't "A me-too drug"

Contrary to what your article says,there is NOT "another sublingual Fentanyl" on the market. The reason why SUBSYS was so successful was because of the clinical profile of the drug; 76% bio-availability, rapid onset, no prepping the admin site and no sugar unlike the lollipop.

It's a good thing the FDA is responsible for oversight and approval of such medicines and not left to the uneducated view of a blogger.

Anonymous said...

John -

Your description for use of Fentanyl is not accurate. It is not just about being "stronger" than morphine. The active dose of Fentanyl is orders of magnitude lower, meaning that it can be administered sublingually, transdermally, etc. (This would be difficult or impossible with morphine.) This is important for patients with severe nausea (such as many cancer patients) because they cannot keep pills down. Fentanyl is often the only option other than injectable opiates. Although Fentanyl certainly has risks, they are generally lower than those of opiate injections.

Side note: The 2002 Moscow theatre hostage crisis was ended when the Russians pumped Fentanyl through the ventilation system. (Though they used too high a dose, unfortunately.)

Anonymous said...

I do not know where you get you information from or your motivation for being inaccurate but as a patient who has used these drugs I know that Subsys is a significant improvement for a number of important reasons. That is why Doctors prescribe it.

What you are doing will ultimately hurt many people who are in severe pain. I fail to see your motivation in doing this.

For now I'll give you the benefit of doubt and attribute your inaccuracies to lack of research rather than some sinister motivation.

Unknown said...

I completely agree with your arguments about the incentive-based strategy, but it seems worth having someone non-anonymous point out that fentanyl in general is a bit more useful than you seem to give it credit for.

The big deal about fentanyl is that it is both very potent and relatively lipid-soluble, so it can be absorbed through the skin or mucous membranes in useful doses. This means it's uniquely useful for self-administration by someone who can't swallow pills, an important use case in cancer. [There are also other good reasons to use it, but not really relevant to this company]

As you note, the easy absorption also makes it easier to abuse, which is presumably why the approved indication for this product was in cancer, where verification is easier for honest physicians and detection easier for dishonest ones.

Anonymous said...

It is a well known fact that opioid derivatives are the best pain killers and sometimes there is no other choice left for the patient. The attempt to validate a short thesis by appealing to the moral authority seems misleading and blatantly hypocritical.

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