Opioid Settlements: Why Insys Is the Tip of the Iceberg

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Wharton’s Vincent Buccola and Drexel’s Robert Field discuss Insys Therapeutics’ filing for bankruptcy protection in the wake of opioid litigation.

After opioid maker Insys Therapeutics last week filed for bankruptcy protection five days after securing a $225 million settlement with the federal government, speculation has grown that other embattled opioid producers could take the same path. Insys makes the Subsys brand of the drug fentanyl, an opioid that is effective in easing pain for cancer patients. The justice department had accused Insys of using sham speaker programs to bribe doctors and their assistants to prescribe the drug and encourage addiction to it.

The justice department has pursued several other opioid manufacturers such as Purdue Pharma and drug distributors such as McKesson over charges that they helped fuel opioid addiction. However, as those companies face those claims along with lawsuits and mounting legal costs, filing for bankruptcy is a useful way to keep creditors at bay. Under Chapter 11 of the bankruptcy code, a judge overseeing the case would typically tally a company’s assets, including proceeds from sale of its assets, and divide the total among the various claimants, including the government.

Other drug manufacturers who face large settlements from the opioid crisis could follow the Insys example and file for bankruptcy protection, according to Robert Field, professor of law and professor of health management and policy at Drexel University. Field is also a lecturer in Wharton’s health care management department. One such company is Purdue Pharma, whose CEO Craig Landau told the Washington Post in March that filing for bankruptcy protection “is an option” as it faces multiple lawsuits over its OxyContin drug.

Insys is facing liabilities in excess of its asset valuations, and therefore its Chapter 11 filing makes sense, according to Vincent Buccola, Wharton professor of legal studies and business ethics. “It looks like a classic place where bankruptcy probably is a sound move [for Insys] – and there obviously are more liabilities to come,” he said. Insys declared assets worth $175 million and debts of $262 million in its bankruptcy filing. The bankruptcy filing could also mean that the federal government gets far less than the $225 million settlement it struck with Insys. The government may get “pennies on the dollar,” Buccola noted.

Field and Buccola discussed the likely directions of the opioid litigations on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

“It looks like a classic place where bankruptcy probably is a sound move – and there obviously are more liabilities to come.” –Vincent Buccola

Bankruptcy filings are helpful for companies in more ways than just getting creditors off their backs. “In some cases, a company would prefer to have a bankruptcy judge and a trained lawyer sort out liabilities rather than have juries in opioid-stricken localities assessing damages,” said Buccola, but he added that this may not be the case with Insys.

Another reason is that “it might be more efficient to deal with all claims in one place rather than bleeding away even more cash going to lawyers,” Buccola continued. The bankruptcy filing would also free Insys executives from deposing and being cross-examined, “so that could be an equally important part of its strategy,” said Field.

The Insys bankruptcy filing also means that the government will most likely have to “stand in line” with other creditors to collect on its dues, said Field. Those include the U.S. Attorney’s Office in Massachusetts with a $30 million claim, and law firms that defended the firm’s co-founder, John Kapoor, and former company executives, according to a Wall Street Journal report. Insys was also named in roughly 1,000 lawsuits from counties, states, Native American tribes and insurance companies over Subsys and the costs of addiction, the report added.

The bankruptcy court judge in the Insys case would decide if the federal government gets priority over other creditors, said Field. “In any event, it’s likely that the government will not receive all of the settlement that they had agreed to.” It is also not clear what funds may be allocated for programs to mitigate opioid addiction, he noted.

In cases like that of Insys, one option for the government is to disqualify the company from getting reimbursements under the Medicaid or Medicare programs, said Field. However, the government has not exercised that option with Insys because that would severely cripple the company’s revenues, and thereby its ability to pay the settlement, he added.

Insys makes 90% of its revenues from Subsys, and opioid litigation has cost the company dearly. In May 2019, a federal court in Boston had convicted Kapoor and other company executives of a racketeering conspiracy aimed at boosting the firm’s profits; they each face up to 20 years in prison.

“We’re seeing a drama that’s gradually playing out, and the [Insys] bankruptcy is just one chapter.” –Robert Field

In its latest quarter ending March 2019, Insys posted a net loss of $124 million on revenues of $7.6 million as it had to account for $74 million in “potential contingent losses related to outstanding legal matters,” and foot legal bills of nearly $26 million to defend Kapoor. In the same quarter in 2018, it had incurred a net loss of $20.4 million on revenues of $23.9 million. The company’s share price has plummeted from a high of about $635 in September 2000 to 34 cents last week. The Insys stock will be delisted from Nasdaq on June 19 following the bankruptcy filing.

A Common Occurrence

The practice of drug companies using funds earmarked for educating physicians in questionable ways is “fairly prevalent,” said Field. “There’s a thin line between trying to educate a doctor and trying to bribe a doctor, and sometimes the education can involve some inducements. You may bring pizza for their staff or give them ballpoint pens. In the case of Insys, it was well over the line. There are a lot of companies operating in that gray zone.” A ProPublica analysis in 2016 found that doctors who receive payments from the medical industry do indeed tend to prescribe drugs differently than their colleagues who do not.

Not surprisingly, over the years, several drug makers have faced enforcement actions over charges of improper marketing practices, including providing inducements to physicians and other health care providers. Johnson & Johnson is currently facing trials in Oklahoma for “oversupply” of opioid drugs in the state. Oklahoma’s attorney-general Mike Hunter had pointed out that more than 4,000 Oklahomans had died of overdoses from prescription opioids between 2007 and 2017, according to an NPR report. Purdue Pharma and Teva Pharmaceuticals had already reached settlements with the state of Oklahoma over alleged opioid marketing abuses.

Possible Outcomes

Field expected the opioid marketing controversies to bring about not just tighter regulation, but “the pendulum [could] swing the other way” with impacts on the standard of care. While overprescribing of medications has led to addictions, as with opioids, “under treatment” has also been a problem, with cancer patients and others who need such powerful medications not getting it, he noted. “[Now], we are beginning to see doctors becoming much more gun shy about prescribing opioids, and we undoubtedly will see some patients who will be denied medication that they truly need. It’s that balance that’s so tough to strike.”

“There’s a thin line between trying to educate a doctor and trying to bribe a doctor….” –Robert Field

The federal government has already collected from Insys $5 million of the $225 million settlement, but it may be forced to return some of that. Bankruptcy rules include “a look-back period” of two to three months where payments made in that period could be clawed back, said Field. “The idea is they don’t want the bankrupt company to be favoring one creditor over another. So if the government gets some of its money today and the bankruptcy goes into effect a few weeks from now, they may have to pay back some of that money.”

Field recalled that in previous mass litigation cases, especially the asbestos cases in the mid-1970s and later, some of the big manufacturers declared bankruptcy because they faced claims in the multiple billions of dollars. “In that case they were able to set up [trust] funds for the asbestos victims, which I think is the best ultimate outcome [of the opioids cases],” he said. Similarly, after the tobacco litigation, a nationwide pool was set up and a “master settlement agreement” crafted in 1998, which provided money for each of the states, he recalled.

Currently, opioid litigation is underway in many states, and many of those cases are consolidated in Ohio and Oklahoma. “These litigations go on for years or even decades,” said Field. “We’re seeing a drama that’s gradually playing out, and the [Insys] bankruptcy is just one chapter.”

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