Selling drugs is a relationship business. It's best to do it in person. That is why, on a summer evening in 2012, Alec Burlakoff was out for dinner with Steven Chun, the owner of Sarasota Pain Associates. Burlakoff was a sales manager for Insys Therapeutics, an Arizona-based pharmaceutical company with only one branded product, a new and highly potent opioid painkiller called Subsys. Chun was a doctor who prescribed a lot of opioids.
The location was a moderately expensive seafood restaurant in Sarasota, Fla., with linen tablecloths and large windows overlooking the bay. The sun was still high in the sky. Gleaming powerboats lined the docks outside, and a warm breeze rippled the water. On one side of the table were Burlakoff and Tracy Krane, an Insys sales representative. Krane was a newcomer to the industry, tall with dark brown hair in a bob. Burlakoff, then 38, with a slight frame and a boyish restlessness, was her new boss. He had years of experience in the opioid market. Colleagues marveled over his shameless push to make the sale, but he had a charisma that was hard to resist. Even people who didn't trust him couldn't help liking him.
Krane was there to learn the business, and the meeting made a vivid impression. Chun, then 49 and stout, had impeccable credentials: He was trained at the University of Washington, Cornell Medical College and the Memorial Sloan Kettering Cancer Center. He had been married at the Fifth Avenue Presbyterian Church in Manhattan, to a Juilliard-trained violinist who is the daughter of a former chief executive of Korean Air, but had since divorced. At Burlakoff's invitation, he had brought his girlfriend at the time, a woman in her mid-20s, to dinner.
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For Insys, Chun was just the right kind of doctor to pursue. In the late 1990s, sales of prescription opioids began a steep climb. But by the time Subsys came to market in 2012, mounting regulatory scrutiny and changing medical opinion were thinning the ranks of prolific opioid prescribers. Chun was one of the holdouts, a true believer in treating pain with narcotics. He operated a busy practice, and 95 percent of the Medicare patients he saw in 2015 had at least one opioid script filled. Chun was also a top prescriber of a small class of painkillers whose active ingredient is fentanyl, which is 50 to 100 times as powerful as morphine. Burlakoff's product was a new entry to that class. On a "target list," derived from industry data that circulated internally at Insys, Chun was placed at No. 3. The word inside the company for a doctor like Chun was a "whale."
In the few months since Subsys was introduced, demand was not meeting expectations. Some of the sales staff had already been fired. If Burlakoff and Krane could persuade Chun to become a Subsys loyalist, it would be a coup for them and for the entire company. The drug was so expensive that a single clinic, led by a motivated doctor, could generate millions of dollars in revenue.
Over dinner, Burlakoff grew expansive, Krane recalled. She marveled at the way he drew on a wealth of information about the doctor — intelligence gathered over the course of years — without letting on just how much he knew. Before he worked for Insys, Burlakoff worked for Cephalon, Insys's chief competitor, and he knew a bit about Chun's romantic history, Krane said. He also knew that Chun liked to visit the casinos up in Tampa, so Burlakoff made a point of talking about his own penchant for gambling, according to Krane. She had no idea if he was telling the truth.
It is unclear whether Burlakoff knew that Chun was also, at that moment, in the middle of an expensive legal battle. The previous year, two nurses who formerly worked for him secretly filed a whistle-blower suit charging "widespread billing schemes" intended to defraud the government, and federal agents executed a search warrant on his clinic. (Chun would later pay $750,000 to the Department of Justice to resolve the claims. He was never charged with a crime and denies all wrongdoing.)
What is clear is that Burlakoff thought that Chun was a tremendous prize. After briefly extolling the virtues of Subsys, Krane recalled, Burlakoff finally arrived at the true purpose of the dinner. He had a proposition to make. Insys wanted to sign Chun up, he said, for the company's speaker program, which was just getting underway.
Speaker programs are a widely used marketing tool in the pharmaceutical business. Drug makers enlist doctors to give paid talks about the benefits of a product to other potential prescribers, at a clinic or over dinner in a private room at a restaurant. But Krane and some fellow rookie reps were already getting a clear message from Burlakoff, she said, that his idea of a speaker program was something else, and they were concerned: It sounded a lot like a bribery scheme.
Burlakoff left the dinner in a great mood, Krane said, confident that Chun would come on board. The doctor did become an Insys speaker later that year, and sales did improve, not only in Chun's Florida office but also around the country, as more doctors signed on. By the next year, according to the company, net revenue from Subsys sales would increase by more than 1,000 percent, to $95.7 million.
But the new reps were right to be worried. The Insys speaker program was central to Insys' rapid rise as a Wall Street darling, and it was also central to the onslaught of legal troubles that now surround the company. Most notable, seven former top executives, including Burlakoff and the billionaire founder of Insys, John Kapoor, now await trial on racketeering charges in federal court in Boston. The company itself, remarkably, is still operating.
The reporting for this article involved interviews with, among other sources, seven former Insys employees, among them sales managers, sales reps and an insurance-authorization employee, some of whom have testified before a grand jury about what they witnessed. This account also draws on filings from a galaxy of Insys-related litigation: civil suits filed by state attorneys general, whistle-blower and shareholder suits and federal criminal cases. Some are pending, while others have led to settlements, plea deals and guilty verdicts.
In the Insys case, prosecutors are looking to break new ground in holding the pharmaceutical and medical industry accountable in connection with the current opioid crisis. They're attacking both ends of the pharma sales transaction; 11 prescribers face charges or have been convicted over their ties to Insys, and Chun has recently been subpoenaed for medical records related to Subsys. In looking into Insys's relationship to providers like him, investigators are revealing just how opioids are sold at the point they first enter the national bloodstream — in the doctor's office.
THE OPIOID CRISIS, now the deadliest drug epidemic in American history, has evolved significantly over the course of the last two decades. What began as a sharp rise in prescription-drug overdoses has been eclipsed by a terrifying spike in deaths driven primarily by illicitly manufactured synthetic opioids and heroin, with overall opioid deaths climbing to 42,249 in 2016 from 33,091 in 2015. But prescription drugs and the marketing programs that fuel their sales remain an important contributor to the larger crisis. Heroin accounted for roughly 15,000 of the opioid deaths in 2016, for instance, but as many as four out of five heroin users started out by misusing prescription opioids.
By the time Subsys arrived in 2012, the pharmaceutical industry had been battling authorities for years over its role in promoting the spread of addictive painkillers. The authorities were trying to confine opioids to a select population of pain patients who desperately needed them, but manufacturers were pushing legal boundaries — sometimes to the breaking point — to get their products out to a wider market.
Even as legal penalties accrued, the industry thrived. In 2007, three senior executives of Purdue Pharma pleaded guilty in connection with a marketing effort that relied on misrepresenting the dangers of OxyContin, and the company agreed to pay a $600 million settlement. But Purdue continued booking more than $1 billion in annual sales on the drug. In 2008, Cephalon likewise entered a criminal plea and agreed to pay $425 million for promoting an opioid called Actiq and two other drugs "off-label" — that is, for unapproved uses. That did not stop Cephalon from being acquired three years later, for $6.8 billion.
Subsys and Actiq belong to a class of fentanyl products called TIRF drugs. They are approved exclusively for the treatment of "breakthrough" cancer pain — flares of pain that break through the effects of the longer-acting opioids the cancer patient is already taking around the clock. TIRFs are niche products, but the niche can be lucrative because the drugs command such a high price. A single patient can produce six figures of revenue.
Fentanyl is extremely powerful — illicitly manufactured variations, often spiked into heroin or pressed into counterfeit pills, have become the leading killers in the opioid crisis — and regulators have made special efforts to restrict prescription fentanyl products. In 2008, for instance, the F.D.A. rebuffed Cephalon's application to expand the approved use for a TIRF called Fentora; in the company's clinical trials, the subjects who did not have cancer demonstrated much more addictive behavior and propensity to substance abuse, which are "rarely seen in clinical trials," F.D.A. officials concluded. An F.D.A. advisory committee reported that, during the trials, some of the Fentora was stolen. The agency later developed a special protocol for all TIRF drugs that required practitioners to undergo online training and certify that they understood the narrow approved use and the risks.
Despite these government efforts, TIRF drugs were being widely prescribed to patients without cancer. Pain doctors, not oncologists, were the dominant players. This was common knowledge in the industry. Although it is illegal for a manufacturer to promote drugs for off-label use, it is perfectly legal for doctors to prescribe any drug off-label, on their own judgment. This allows drug makers like Insys to use a narrow F.D.A. approval as a "crowbar," as a former employee put it, to reach a much broader group of people.
That points to a major vulnerability in policing the opioid crisis: Doctors have a great deal of power. The F.D.A. regulates drug makers but not practitioners, who enjoy a wide latitude in prescribing that pharmaceutical companies can easily exploit. A respected doctor who advocates eloquently for wider prescribing can quickly become a "key opinion leader"; invited out on the lucrative lecture circuit. And any doctor who exercises a free hand with opioids can attract a flood of pain patients and income. Fellow doctors rarely blow the whistle, and some state medical boards exercise timid oversight, allowing unethical doctors to continue to operate. An assistant district attorney coping with opioids in upstate New York told me that it's easy to identify a pill-mill doctor, but "it can take five years to get to that guy." In the meantime, drug manufacturers are still seeing revenue, and that doctor is still seeing patients, one after another, day after day.
JOHN KAPOOR, the founder of Insys, has flirted with legal trouble throughout his long career as a pharmaceutical entrepreneur. Raised in India, where he was the first in his family to go to college, he immigrated to the United States to pursue a doctorate, he has said, with five dollars in his pocket. He amassed a fortune with a series of pharmaceutical ventures, mostly in the unglamorous arena of generic drugs. One of his companies, Lyphomed, drew sanctions from the F.D.A. related to manufacturing problems, leading to recalls and a consent decree. After he sold Lyphomed to a Japanese firm in 1990, personally reaping more than $100 million, the buyer sued him, claiming that he had been deceptive about the company's regulatory difficulties. He settled out of court. Another of Kapoor's big investments, Akorn, was delisted from Nasdaq during his tenure as chief executive for filing unaudited financial statements, but his stake, held in trust, is now worth hundreds of millions, despite new controversy over possible breaches of F.D.A. requirements at the company.
Kapoor, now 74, bankrolled Insys almost entirely on his own for over a decade, shepherding Subsys on the long road to approval by the Food and Drug Administration. What motivated him, he has often said, was seeing his wife, Editha, suffering from metastatic breast cancer, before her death in 2005 at 54.
Often called Dr. Kapoor, he more closely resembles an academic than a business titan, with glasses and a signature mop of graying hair. But employees found that Kapoor could be aggressive and unyielding. At Insys he was known to pound the table; he dressed down a manager in front of colleagues. People who worked for him speak of the need to "survive" him.
Kapoor believed that he had the best product in its class. All the TIRF drugs — for transmucosal immediate-release fentanyl — deliver fentanyl through the mucous membranes lining the mouth or nose, but the specific method differs from product to product. Actiq, the first TIRF drug, is a lozenge on a stick. Cephalon's follow-up, Fentora — the branded market leader when Subsys arrived — is a tablet meant to be held in the cheek as it dissolves. Subsys is a spray that the patient applies under the tongue. Spraying a fine mist at the permeable mouth floor makes for a rapid onset of action, trials showed.
Once the F.D.A. gave final approval to Subsys in early 2012, the fate of Insys Therapeutics rested on selling it in the field. The industry still relies heavily on the old-fashioned way of making sales; drug manufacturers blanket the country with representatives who call on prescribers face to face, often coming to develop personal relationships with them over time.
To carry out a delicate sales campaign, Insys made some unusual choices. Overseeing the launch under Kapoor, then the executive chairman, would be his 36-year-old protégé, Michael Babich, who had been named the Insys chief executive. A tall Chicagoan, Babich had worked for Kapoor in various roles since he was in his 20s, when Kapoor recruited him from an asset-management firm. Kapoor introduced Babich to the staff as a rising talent, but he had never led a sales effort for an F.D.A.-approved drug. According to former Insys managers, Babich tended to defer to Kapoor, who was, after all, putting up his own money.
To build the sales force, Insys hired a number of notably attractive people in their 20s and 30s, mostly women — not an uncommon tactic in the industry. But Insys reps tended to be particularly inexperienced, often with no background in pharmaceutical sales. "They were hiring people straight out of college," said Jim Coffman, who worked as a regional sales trainer at Insys in 2012. "So there was a certain naïveté, which played into their objectives and goals." The company was offering salaries well below market rates — typically paying a rep $40,000 when other companies would offer twice that amount — but dangling the lure of stock options and unusually large commissions.
Examining detailed TIRF sales data purchased from third parties, Insys executives zeroed in on an important fact: The entire market was anchored by a relatively small pool of prescribers. Winning the business of a handful of carefully selected practitioners per state could be enough to make Insys the market leader. The names at the top of the chart were well known in the field.
Insys managers divided the existing base of TIRF prescribers into deciles, according to how many scripts they wrote. The "high decile" practitioners tended not to specialize in treating cancer pain, according to the Boston indictment, but Insys went right after them. Sales reps were instructed to call on them multiple times a week, to the point of sitting in their waiting rooms for hours, angling for a moment with the doctor. As one manager told me, "You fish where the fish are."
A SPEAKER PROGRAM was in the works at Insys from the start, but in the first months after Subsys hit the market, it had not gotten underway. During that period, Kapoor was disappointed by the sales of the drug, according to former employees. Managers thought the expectations were unrealistic, given that the company had beginner reps and entrenched competitors, but Kapoor didn't want to hear it. He and Babich would soon meet with each regional sales manager one on one at the home office, and some meetings would be contentious. Turnover in the sales staff was running high.
It was then that Alec Burlakoff arrived, asking about a job. Burlakoff had a history that might have put off some potential employers. In 2002, Eli Lilly fired him as a sales rep amid an investigation by the Florida attorney general's office into a supposed scheme to send unsolicited pills — a slow-release form of Prozac — to patients through the mail. When Burlakoff and two other fired employees sued Lilly in return, claiming the plan was approved by management, they gained media attention nationwide. Burlakoff said in a court filing that his reputation in the industry was permanently scarred. (The case was settled.) When Burlakoff later sold Actiq and Fentora at Cephalon, he was based in the Southeast region, a hot spot in the investigations into the promotion of both those drugs.
Former Insys employees consistently describe Burlakoff's arrival as a turning point. Insys initially hired him to head the Southeast region, but within three months, he was promoted to run the entire sales force. The speaker program swiftly became the centerpiece of the sales effort, and Burlakoff made it clear how he wanted it to work.
He explained it all to Tracy Krane on the first day they met, she told me, while they were sitting in her white Cadillac CTS. It was a conversation she later recounted, she said, in a grand-jury proceeding in connection with the Boston criminal case. Burlakoff had traveled to her territory to join her on a "ride along," coaching her through sales calls on an oppressively sunny day, and they had just left Chun's office. The ostensible purpose of a pharma-speaker program, as Krane understood it, was to spread the word about the drug through peer-to-peer marketing. With "honorariums" changing hands, the potential for a subtle corruption is clear, but Burlakoff was not subtle. He told Krane, she said, that the real target was not the audience but the speaker himself, who would keep getting paid to do programs if and only if he showed loyalty to Subsys. It was a quid pro quo or, as the Department of Justice later called it, a kickback. "He boiled it right down," Krane recalled: We pay doctors to write scripts. That's what the speaker program is.
Krane didn't know all the rules, she told me, but this didn't sound right. She turned to Burlakoff and asked, "Isn't that illegal?"
He brushed off the question, Krane said, with a tone she likened to patting a child on the head and telling her not to worry — the worst that could happen was the company would have to pay a settlement. If Burlakoff in fact said this, he had some reason. It was during his time at Cephalon that the company handily survived its penalty for engaging in illegal promotional schemes.
Emails that have surfaced in court and public-records requests give the flavor of the sales messages that top executives were sending. One week after Burlakoff was hired, Babich, the chief executive, wrote an email to his sales managers, directing them to make sure that reps understood "the important nature of having one of their top targets as a speaker. It can pay big dividends for them." Burlakoff urged on his sales staff, peppering them with emails and texts that alternated between the tropes of motivational speaking ("we are all starting a new opportunity to be our very best when we get out of bed tomorrow!") and arm-twisting reminiscent of "Glengarry Glen Ross." "PROGRAMS ARE THE ONLY THING THAT MATTERS," he wrote. "WHY DO SOME OF YOU REFUSE TO ACKNOWLEDGE THIS PROVEN FACT?"
The speaker events themselves were often a sham, as top prescribers and reps have admitted in court. Frequently, they consisted of a nice dinner with the sales rep and perhaps the doctor's support staff and friends, but no other licensed prescriber in attendance to learn about the drug. One doctor did cocaine in the bathroom of a New York City restaurant at his own event, according to a federal indictment. Some prescribers were paid four figures to "speak" to an audience of zero.
Burlakoff appears at first to have tried to shield Kapoor from the details of the Insys speaker programs, or I.S.P.s, as they were sometimes called in-house. "I need your guidance on how to present to Dr. Kapoor I.S.P.'s in a way — where he won't get involved," he wrote to Babich in an email obtained through a public-records request. Babich replied, "You got it." Top executives, however, soon prepared documents for Kapoor, according to the Boston indictment, that explicitly calculated the I.S.P. "return on investment" for each speaker and indicated that underperformers could be culled from the program. Prosecutors have not yet presented evidence that Kapoor in fact saw the documents.
But Kapoor also had a direct contact out in the field, a New Jersey rep at the bottom of the hierarchy named Susan Beisler, who left a paper trail that could present legal difficulties for Kapoor. Beisler, then in her late 30s, seems to have had a close relationship with Kapoor, signing one email "many hugs and kisses," according to a pending lawsuit filed by the New Jersey attorney general. Beisler complained to Kapoor that the speaker money "being thrown" at certain doctors was giving an unfair edge to their reps, particularly Burlakoff's "friends," according to the suit. Burlakoff had hired a number of Cephalon alumni he knew, reps who had pre-existing relationships with key doctors. As early as the summer of 2013, according to a federal indictment, an Insys rep — possibly Beisler — wrote to Kapoor that it was "so not right" that one high-prescribing doctor was "getting $2,500 a pop to eat at fancy steakhouses in NYC often," adding, "I don't think anyone even goes to his 'programs." The following year, according to the Boston indictment, Insys quadrupled the budget devoted to the speaker program to $10 million. In the end, the Top 10 speakers each made more than $200,000.
INSYS WASN'T JUST winning over top TIRF prescribers from the competition. It was creating new ones. One star rep in Florida, later promoted to upper management, told another rep that when she went in search of potential speakers, she didn't restrict herself to the top names, because, after all, any doctor can write scripts, and "the company does not give a [expletive] where they come from." (Some dentists and podiatrists prescribed Subsys.) She looked for people, she said, "that are just going through divorce, or doctors opening up a new clinic, doctors who are procedure-heavy. All those guys are money hungry." If you float the idea of becoming a paid speaker "and there is a light in their eyes that goes off, you know that's your guy," she said. (These remarks, recorded by the rep on the other end of the line, emerged in a later investigation.)
Unsurprisingly, tactics like these attracted some questionable figures to the program. In an email that surfaced in a lawsuit brought by the Illinois attorney general, a sales rep in the state reported directly to Babich about a pain-management doctor named Paul Madison: "Dr. Madison runs a very shady pill mill that only accepts cash," the rep wrote. "He is extremely moody, lazy and inattentive. He basically just shows up to write his name on the prescription pad, if he shows up at all." Insys was not deterred, it appears. According to the Boston indictment, Babich and Burlakoff hired a former exotic dancer named Sunrise Lee as a sales manager, and she helped court Madison as an Insys speaker. The company paid Madison tens of thousands dollars even after he was indicted on insurance-fraud charges that are still pending. (He pleaded not guilty.) According to the Illinois suit, which Insys later settled, he single-handedly accounted for 58 percent of the Subsys prescribed in Illinois over a three-year period.
In a March 2013 email to the sales force, Burlakoff singled out five reps at the top of the company leader board and noted that they "literally have their entire business being driven by basically one customer." These "customers" were the top five Subsys prescribers in the nation, according to a pending lawsuit brought by the state of Arizona, and all were well-compensated Insys speakers. Three have been convicted of felonies; one has not been charged but had his license revoked. Only one remains in practice.
As a result of Insys's approach to targeting doctors, its potent opioid was prescribed to patients it was never approved to treat — not occasionally, but tens of thousands of times. It is impossible to determine how many Subsys patients, under Kapoor, actually suffered from breakthrough cancer pain, but most estimates in court filings have put the number at roughly 20 percent. According to Iqvia data through September 2016, only 4 percent of all Subsys prescriptions were written by oncologists.
Jeff Buchalter, 34, a decorated Iraq war veteran, was one off-label Subsys patient. His doctor, William Tham, a paid Insys speaker, prescribed the drug to treat pain stemming from Buchalter's wartime injuries, eventually raising the dose well beyond the maximum amount indicated by the F.D.A. Buchalter was taking it 12 times a day, not four to six, and alternating between the two highest doses, a medical chart from Tham's clinic shows. Eventually, he had to be put under sedation in intensive care at Fort Belvoir, Va., while he went through withdrawal from Subsys and other prescription drugs. "I am frankly astonished at the amount of opioids the patient has been prescribed," a hospital specialist noted in his records. Buchalter is suing Insys and Tham. (Tham's lawyer, Andrew Vernick, told me, "He has done nothing wrong in this case, and he is not involved in any of the allegations that have been raised against Insys throughout the country.")
Buchalter said Subsys gave him relief from pain, but it changed him into someone he did not recognize. He had always defined himself as a hard worker with integrity. With his eyes darting around the room as he spoke, he told me he became an addict, his day revolving around the next dose: He slept under his desk at the office, where boxes of Subsys filled the drawers, and his house went into foreclosure. Buchalter looked troubled and tired when we met. His hands were visibly dirty. "I've been absent from my life for years," he told me. "What I remember is who I was when my daughter was born, and when I was a soldier."
THE PREVALENCE OF off-label prescribing, while legal, did initially present Insys with a challenge. Owing to the risk and expense of Subsys, nearly all health insurers required prior authorization and would pay for the drug only for its sole approved use: breakthrough cancer pain. Only about one-third of Subsys prescriptions were being approved for reimbursement in late 2012. So Insys created an internal division dedicated to improving that number.
According to a former employee and multiple court filings, including a manager's guilty plea, the company offered to relieve doctors' offices of insurance hassles and take on the task of getting prescriptions covered. Insys' "prior authorization specialists" — workers who the company motivated with bonuses — would contact insurers or their contractors, giving the impression they were calling from the prescribing doctor's office. They used what managers called "the spiel," which led insurers to believe that patients had cancer when they did not. Sometimes they would falsify medical charts and outright lie, former staff members have acknowledged. Babich, the chief executive, was involved in arranging for this unit's phone system to block Caller ID to disguise the fact that calls were not coming from the doctor's office, according to the Boston indictment.
The initiative worked. By the following spring, a company estimate pegged the approval rate for commercial insurers at 87 percent.
With insurance approval now catching up with prescriptions, Insys revenue and market share were climbing sharply, but a serious threat was brewing within. Within six months of the Subsys launch, one rep based in Texas, Ray Furchak, started to consider reporting Insys to government authorities. The speaker program, he felt, amounted to a thinly disguised kickback scheme, and he was also concerned that management was pushing an overly high dose of Subsys to first-time patients, despite boldface F.D.A. warnings of the dangers. Furchak began to collect emails and texts as evidence.
He soon filed a whistle-blower complaint against the company, as well as John Kapoor. But the defendants did not know they had been sued for months — the case proceeded under seal.
While Insys's fortunes were on the rise, Furchak's suit was under review at the Justice Department. In cases like his, called qui tams, a whistle-blower sues on behalf of the government, claiming fraud, and stands to share in any recovered funds. Justice Department lawyers quietly conducted interviews, weighing whether to intervene and join the plaintiff in the suit. It was one of hundreds of decisions like it that qui tam investigators face at any given time. An investigator at the Department of Health and Human Services, Michael Cohen, told me the federal government faces an overwhelming amount of health care fraud: "We call it a tsunami."
Fortunately for Insys, the Justice Department declined to intervene in Furchak's case. A lawyer familiar with the decision cited the difficulty of proving significant damages; Insys was not a big fish yet. Furchak did what most people do in this situation: He dropped the suit. The judge ordered his complaint unsealed, but the media took no notice at the time. Insys was free to go on doing what it was doing. It would be a long time before the law caught up to it.
In May 2013, two months after the Justice Department decision, the company went public. At an event at the Nasdaq MarketSite in Times Square, Kapoor and Babich stood smiling, surrounded by a group of cheering Insys executives.
By the end of 2013, Subsys would become the most widely prescribed branded TIRF, according to a company S.E.C. filing. In an ebullient "State of the Union" message to the sales force that October, Babich joked about hiring midget wrestlers to perform at the next national sales meeting. Now the competition was going to come after Insys, he said. "One problem they have ... they don't have a chance in hell!"
Insys became the year's best-performing initial public offering, on a gain of over 400 percent. That December, the company disclosed that it had received a subpoena from the Office of the Inspector General at Health and Human Services, an ominous sign. But a CNBC interviewer made no mention of it when he interviewed Babich a few weeks later. Instead he said, "Tell us what it is about Insys that has investors so excited."
BY THEN, THOUGH, Insys management had identified a potential worry in the Southeast region. Xiulu Ruan and John Patrick Couch, each a well-compensated Insys speaker, jointly owned and operated a pain clinic in Mobile, Ala., that served thousands of clients. Their main location occupied a one-story brown building on a commercial strip on the western outskirts of the city, adjacent to a Shell station.
Ruan was able to successfully recommend an Insys rep for their territory, a 27-year-old named Natalie Perhacs. Ruan had been asking her out to dinner for several months, to no avail; now she would be in his clinic several times a week. In her previous job, Perhacs's salary was just over $30,000, but in two years selling Subsys almost exclusively to Ruan and Couch, she made $700,000. (Perhacs later pleaded guilty to conspiracy to violate a federal anti-kickback statute.)
Ruan and Couch had many patients legitimately in need of pain treatment. But it would be difficult to miss, from regularly visiting the clinic or from prescribing data alone, that something was awry. "Oh, everybody knew it," a nurse at a different Mobile practice told me.
In 2014, the doctors each averaged one prescription for a controlled substance roughly every four minutes, figuring on a 40-hour week. A typical pill mill makes its money from patients paying in cash for their appointments, but Ruan and Couch had a different model: A majority of their scripts were filled at a pharmacy adjacent to their clinic called C&R — for Couch and Ruan — where they took home most of the profits. The pharmacy sold more than $570,000 of Subsys in a single month, according to Perhacs's criminal plea. Together the two men amassed a collection of 23 luxury cars.
Two former patients told me that people approached them to buy or sell prescription drugs in the clinic's parking lot. "There was always one or two out there," Alice Byrd Jordan said.
One patient, Keith Bumpers, told me that he had thought his doctor at the clinic was "Dr. Justin." Justin Palmer was a nurse practitioner who testified that he routinely forged Couch's name on prescriptions. He was one of three medical staff members at the clinic who were personally misusing painkillers at work. One of them died by suicide; the other two admitted seeing patients while impaired. A patient named Tamisan Witherspoon, who was prescribed Subsys off-label and became addicted, testified that a nurse practitioner at the clinic, Bridgette Parker, spoke incoherently and collapsed asleep in an exam room in front of her. Witherspoon recognized the state Parker was in, because she had been there herself, she said, from taking Subsys. "I started to cry," Witherspoon said on the witness stand, "because I realized that she was in trouble and so was I."
In court testimony, Perhacs acknowledged that in late 2013, there was a "sense of panic" at Insys regarding the situation at the clinic in Mobile. The problem was that the clinic wasn't generating enough money for the company.
"Dr. Ruan and Dr. Couch are way down," Burlakoff wrote to Perhacs. "Can you assist please. ... This was the topic of conversation today with Dr. Kapoor and Mike."
In fact, Couch and Ruan were still writing a lot of Subsys scripts. But they had started prolifically prescribing a Subsys competitor too: Abstral, then made by Galena Biopharma. One reason Insys was losing out on potential sales, according to the Boston indictment, was that C&R Pharmacy was having trouble getting enough Subsys from distributors to keep it in stock — because of measures designed to combat the opioid crisis.
The flow of controlled substances through distributors, which are the middlemen between drug companies and pharmacies, is strictly regulated, and distributors have paid hefty settlements for failing to notify the Drug Enforcement Administration of "suspicious orders" of controlled substances from particular pharmacies. Couch and Ruan's pharmacy was hitting caps with their distributor, according to Perhacs's testimony — an "enormous barrier," a manager wrote to her. In internal emails cited in the Boston indictment, leadership scrambled to find a way to beat the competition and get around the caps at the same time. One executive wrote that "certain parties would be at risk" if they were not careful. Sales reps in the region felt they needed assistance. A manager wrote to Perhacs, "Hopefully with a little help from above we can land this."
On Feb. 13, 2014, the help arrived. Two men flew to Alabama to have dinner at a steakhouse with Couch and Ruan and their pharmacists, booking rooms for the night at the Renaissance Hotel by the Mobile River. The two men who flew to Mobile for this meeting were the chief executive, Michael Babich, and the billionaire founder of Insys Therapeutics, John Kapoor.
Over dinner, according to the Boston indictment, Kapoor and Babich struck a remarkable agreement with the pharmacists and the doctors, who were operating a clinic rife with opioid addiction among the staff: Insys would ship Subsys directly to C&R Pharmacy. An arrangement like this is "highly unusual" and a "red flag," according to testimony from a D.E.A. investigator in a related trial. As part of the terms of the deal, the pharmacy would make more money on selling the drug, with no distributor in the loop. And there would be another anticipated benefit for all involved: Everyone could sell more Subsys without triggering an alert to the D.E.A.
IT WAS NOT long after that dinner in Alabama that the troubles at Insys came more clearly into public view. Early in 2014, according to a former employee at Insys headquarters cited in a shareholder suit, top executives learned that a major Subsys "whale" based in Michigan, Gavin Awerbuch, was under investigation. Awerbuch was a well-paid speaker and, by a large margin, the top prescriber of Subsys to Medicare patients. Further details have emerged in the Boston indictment and other court filings. Burlakoff had personally cultivated Awerbuch, flying to Michigan to take him out to dinner and then writing an email to colleagues: "Expect a nice 'bump' fellas."
As it turned out, unfortunately for Insys, Awerbuch was under the eye of authorities even before Subsys went on the market. He was submitting insurance claims for bogus tests and liberally writing opioid scripts. As investigators closed in on him, his fondness for a new drug called Subsys caught their eye. He prescribed it to one patient complaining of mild to moderate back pain. That patient was an undercover agent.
Awerbuch was arrested in May 2014 and charged with illegally prescribing Subsys and insurance fraud. Insys's stock took an immediate hit, on heavy trading volume.
In an email the previous September, Burlakoff had written to Babich and others, "Let's make some money," adding that it was the Awerbuchs "of the world that keep us in business, let's get a few more." Now Insys executives scrambled to distance themselves from the doctor. Subsys was not sold directly to doctors, who make their own decisions, they explained in a news release: "Insys only sells Subsys through D.E.A. approved wholesalers who monitor and track prescribing activity."
With news of Awerbuch's arrest, the New Jersey sales rep Susan Beisler wrote to a friend: "Yup. [Expletive]." When the friend responded that it was bad for the doctor but not for Insys, Beisler replied: "The thing is they bribed the [expletive] out of that guy to write. The complaint shows ten other docs they also bribed."
It was a telling remark: In fact, the Awerbuch criminal complaint merely presented a chart of the Top 10 Subsys prescribers to Medicare patients. Names were withheld, but other details were provided. An executive at Galena, then the maker of Abstral, sent a screenshot of the list to Ruan, who was easily identifiable. The next day, Ruan began redirecting his Insys speaker fees to philanthropic purposes. "He runs away from that Insys money as fast as he can," the assistant United States attorney Christopher Bodnar later told a jury.
With Awerbuch's fall, Beisler apparently thought that Insys was done, but for her bosses, and for their investors, this wasn't over. After a dip, revenues recovered and the stock resumed its climb. Insys kept paying speaker fees to physicians with disciplinary histories — and doing so out in the open, because a newly implemented provision of the Affordable Care Act meant that drug makers' payments to doctors were now publicly posted. Burlakoff continued on the job for more than a year. Investors shrugged over the Awerbuch news and the bad press surrounding the speaker program. The subpoena Insys had received about its sales practices was "not particularly unusual," one bullish Wall Street analysis noted later that year, adding, "we're pretty sure that the worst-case outcome for Insys is some sort of fine." The first hard-hitting reportof several by Roddy Boyd of the Southern Investigative Reporting Foundation, in April 2015, jolted the stock, but again it recovered and moved higher, with sales still climbing.
Insys sustained another blow when federal agents descended on Ruan and Couch's clinic in Mobile in May 2015. They were there to seize evidence and arrest the doctors, Kapoor and Babich's dinner companions the previous year.
The local medical community felt the impact of the raid. Because refills are generally not allowed on controlled substances, patients typically visited the clinic every month. For days, dozens of them lined up outside in the morning, fruitlessly trying to get prescriptions from the remaining staff or at least retrieve their medical records to take elsewhere. But other providers were either booked up or would not take these patients. "Nobody was willing to give the amount of drugs they were on," a nurse in the city said. Melissa Costello, who heads the emergency room at Mobile Infirmary, said her staff saw a surge of patients from the clinic in the ensuing weeks, at least a hundred, who were going through agonizing withdrawal.
Two months after the raid in Mobile, Insys' stock reached an all-time high.
AT DAWN ONE MORNING LAST OCTOBER, several S.U.V.s entered a gated community in Phoenix and drove up a mountainside road. Federal agents climbed out and entered a sprawling house with their weapons drawn. They took John Kapoor into custodyat 7 a.m. When he appeared eight hours later in federal court, surrounded by indigent defendants being arraigned at the same time, he was wearing untied running shoes and gym shorts that appeared to be on backward.
Prosecutors had advanced from targeting lower-level employees toward the heart of the company, securing some guilty pleas along the way, including one from Michael Babich's wife, Natalie Levine, a former Insys rep, on bribery charges. Babich, Burlakoff, Sunrise Lee and three other former senior Insys executives were indicted simultaneously on bribery and fraud charges, and months passed while Insys insiders wondered whether Kapoor would go untouched. Now they had their answer.
Kapoor and the six other executives charged in Boston have pleaded not guilty and await trial, scheduled for January. For prosecutors at the Department of Justice, this is uncharted territory. When pharmaceutical companies have been heavily penalized over marketing schemes and fraud, their leaders have typically settled the cases — or, more rarely, pleaded to misdemeanors — and walked away. The Insys defendants not only face criminal prosecution but stand accused of racketeering under the RICO Act, a law more commonly invoked against organized-crime families and drug gangs. The industry will be paying attention.
Kapoor's lawyer, Beth Wilkinson, declined to comment in detail on the case, but did say, "We will vigorously defend Dr. Kapoor in court." Lawyers for Burlakoff, Babich, Lee, Levine and Madison either declined or did not respond to detailed requests for comment. A lawyer for Beisler, who has not been charged with a crime, also declined to comment. Awerbuch pleaded guilty to accepting bribes and health care fraud and has been sentenced to jail time. Ruan and Couch were convicted on multiple felony counts and are in prison. They have appealed. Krane was fired by Insys in November 2012; the company cited poor sales performance. She no longer works in the drug industry.
Insys itself is still producing Subsys, though sales have fallen considerably. (Overall demand for TIRFs has declined industrywide.) The company is now marketing what it calls the "first and only F.D.A.-approved liquid dronabinol," a synthetic cannabinoid, and is developing several other new drugs. Some analysts like the look of the company's pipeline of new drugs and rate the stock a "buy." In a statement, the company said its new management team consists of "responsible and ethical business leaders" committed to effective compliance. Most of its more than 300 employees are new to the company since 2015, and its sales force is focused on physicians "whose prescribing patterns support our products' approved indications," the company said. Insys has ended its speaker program for Subsys.
In Florida, Dr. Steven Chun is still seeing patients. The indictment against the Insys executives details the company's relationship to 10 unnamed Subsys prescribers. Having worked to identify all of them, I was virtually certain that Chun is "Practitioner #9." Three others have already been sentenced to prison time; Chun has not been charged with any crime. In February, after multiple attempts to contact him, I visited his Florida clinic unannounced.
Chun works out of the third floor of a two-tone stucco building flanked by palm trees, in prosperous Lakewood Ranch, a master-planned community. Adjacent to the medical complex housing his clinic is a tidy outdoor retail and entertainment area called Main Street at Lakewood Ranch. In Chun's orderly waiting room, when I visited, an elderly man with a walker and a plaid shirt sat silently under the fluorescent lights. The clinic looked nothing like the pill mill that I had stopped by a few days earlier. It looked like a doctor's office.
I did not expect Chun to agree to see me, but I was led down a long hallway into his personal office. Wearing dark blue scrubs with his name embroidered at the breast, he shook my hand and motioned for me to sit on a red leather sofa while he sat back in his chair, taking a sip from a thermos. A framed diploma hung on the wall behind him.
The practice of pain management has changed since Chun was in training in the 1990s, he said. There are so many regulations. People in pain have fewer and fewer places to go. And now, he said, he's caught up in this Insys case.
Chun said that his prescribing of Subsys had nothing to do with the money that Insys paid him (more than $275,000, according to the Boston indictment). He believed in the product and he enjoyed doing the speaker programs. It suited his ego to take a teaching role, he said, smiling.
Asked for comment at press time, Chun defended his practice, saying he has never been accused of malpractice or disciplined by the state of Florida. He has complied with subpoenas related to Subsys, he said, and he has not been contacted directly by investigators in connection with Insys. He said a vast majority of his TIRF prescriptions are on-label, for patients with cancer or a history of cancer. He said he always tells patients, "Unless you have cancer, I'm not going to prescribe this for you."
Chun said Subsys prescriptions went up 10 percent at most after he joined the speaker program. (The Boston indictment contradicts this account.) He said he only heard about the Insys "scam" after he left the program and saw no reason he was being associated with doctors who participated. He concluded, "I follow the rules."
While Chun and I were speaking, staff members knocked on the door and entered every 30 minutes or so, carrying pieces of paper for Chun to sign. Chun explained that the nurse practitioner he worked with is not licensed to prescribe Schedule II controlled substances, the most tightly regulated category of legal drugs. The sheets of paper were prescriptions, and he signed them two to four at a time without pausing to read them over. As soon as the knock came on the door, without looking down, he would make a swift motion with his hand to retrieve his pen from his breast pocket and click the button on the top.
Down the hall, patients were presumably making the trip, in that cycle familiar to us all, from the waiting room to the exam room and finally home. Naturally the patient in the next room had no idea what Chun and I were discussing. He probably did not see that a sales rep stopped by and brought lunch for the clinic staff, getting a wave from Chun through the open door. It's very likely that a pharmacy rang up a prescription for that patient on his way home, but the real sale had already happened, out of his sight.