The opioid crisis has dominated the national news cycle for several months. According to the Centers for Disease Control and Prevention opioid overdoses spiked 30% from July 2016 to September 2017. Some experts believe the crisis could have been caused by the proliferation of opioid prescriptions. Last week five doctors were indicted for accepting kickbacks in from Insys (INSY) in exchange for fentanyl prescriptions:

Insys paid the doctors, in some cases more than $100,000 annually, in return for prescribing millions of dollars’ worth of the company’s painkiller product, the indictment said. It charged that Insys funneled the illicit payments to the doctors through a sham “speakers bureau,” in which the doctors were paid for purportedly giving educational presentations about the drug that, in many cases, were mere social gatherings at high-end Manhattan restaurants.

Such gatherings involved no educational presentation, and attendance sign-in sheets were often forged to include the names of health care practitioners who were not actually present, the authorities said.

“These prominent doctors swore a solemn oath to place their patients’ care above all else,” said Geoffrey S. Berman, the United States attorney for the Southern District of New York. “Instead, they engaged in a malignant scheme to prescribe fentanyl, a dangerous and potentially fatal narcotic 50 to 100 times more potent than morphine, in exchange for bribes in the form of speaker fees.”

The allegations against the doctors are pretty alarming. There has been speculation that in certain cases drug makers offered financial incentives to doctors in exchange for writing opioid prescriptions or for prescribing them for additional indications. I believe the indictments could create more risk for Insys.

Recent Arrests Could Impact Insys's DOJ Investigation

Insys manufactures and markets two main drugs - subsys and syndros. Subsys delivers fentanyl, an opioid analgesic used for the treatment of breakthrough pain caused by cancer ("BTCP") in opioid-tolerant patients. Syndros oral solution is approved for the second-line treatment of chemotherapy-induced nausea and vomiting ("CINV") and anorexia associated with weight loss in patients with AIDS. Subsys makes up about 98% of the company's total revenue.

In Q4 2017 subsys revenue was about $32 million, down 46% Y/Y. It was up 3% sequentially which implies its revenue could be stabilizing. In 2015 subsys generated annual revenue of $329 million; this equates to a quarterly run-rate of over $80 million. Subsys appears to be right in the middle of the opioid crisis. The government's attempt to tamp down rising opioid prescriptions likely led to the free fall in the drug's revenue.

In Q4 2017, John Kapoor, the founder and majority owner of Insys, was arrested and charged with conspiracy to profit off the illegal distribution of Fentanyl spray intended for cancer patients. Insys is also under investigation by the Department of Justice ("DOJ") pursuant to its commercialization of subsys. Insys has set up a reserve of $150 million which it could to pay out pursuant to the investigation. The company estimates it could pay out the $150 million over five years.

Dr. Jerrold Rosenberg Admitted To Taking Kickbacks From Insys

Dr. Jerrold Rosenberg, a doctor from Rhode Island, was sentenced to four years in prison in March after admitting he took over $180,000 in kickbacks from Insys. Dr. Rosenberg's testimony could potentially be used to strengthen the DOJ's case against the company.If lawmakers can turn one or two additional doctors against Insys it could potentially further strengthen the DOJ's case.

That said, the $150 million the company has reserved for claims under the DOJ investigation could be potentially understated. The company currently has $163 million in cash and equivalents. INSY bulls are inherently betting the company's currently liquidity and future cash flows will be enough to cover potential claims pursuant to the DOJ. That could be a risky bet.

Arrests Could Draw More Scrutiny From Senator Claire McCaskill

State attorneys general and other lawmakers are investigating the role Insys and other opioid distributors played in the opioid crisis. To parse through drug makers' potential role Senator Claire McCaskill requested information from Teva (TEVA), Mallinckrodt (MNK), Allergan (AGN) and Endo (ENDP), among others. In September, McCaskill detailed how Insys Therapeutics spiked approval of subsys for inappropriate off-label use:

“There is extensive evidence that Insys aggressively pressured its employees and the entire medical system to increase the use of a fentanyl product during a national epidemic that was taking the lives of tens of thousands of Americans a year in order to make more money—it’s hard to imagine anything more despicable,” McCaskill said. “Their attempts to manipulate the prescription approval process for this drug appear to have been systemic, and anyone responsible for this manipulation deserves to be prosecuted.”

As part of its investigation, the minority staff received an audio recording of conversations between an Insys employee and pharmacy benefit manager representatives related to a Subsys prescription for Sarah Fuller, who later died from an alleged fentanyl overdose. This recording suggests the Insys employee in question repeatedly misled Envision Pharmaceutical Services to obtain approval for Ms. Fuller’s Subsys treatment—heavily implying she was employed by the prescribing physician and misrepresenting the type of pain the patient was experiencing.

Dr. Rosenberg's recent admission that he prescribed fentanyl in exchange for kickbacks from Insys could bolster McCaskill's investigation. If additional doctors testify under oath to taking kickbacks from Insys it could prompt McCaskill to take additional action. Such action(s) could involve fines and penalties in addition to any potential payouts under the DOJ investigation.