NBIX: The Tiger’s Stripes
“The Tiger cannot change his stripes”
– unknown
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Summary
We are short Neurocrine Biosciences (NASDAQ: NBIX). We see distinct risks that the company’s sales growth is fueled by the same type of kickback scheme that recently devastated Avanir Pharmaceuticals.
The architect of NBIX’s sales and marketing activities, Chief Commercial Officer, Eric Benevich appears to be “Executive 4” in the criminal information recently filed against Avanir by the government. Avanir is the disgraced subsidiary of Otsuka Pharmaceuticals, whose prescription volumes appear to have collapsed amidst investigations leading to a September 2019 agreement to pay $108 million in criminal and civil damages to the government. The government alleged that Avanir engaged in a wide-ranging fraud targeting elderly victims by paying kickbacks to physicians, disguised as speaker fees, to induce excess prescriptions of a drug named Nuedexta.
Benevich, who was “responsible for all aspects of marketing NUEDEXTA” at Avanir, appears to have brought “the band” back together to sell Ingrezza, NBIX’s flagship $70k per year treatment for side effects from anti-psychotic medications. NBIX has hired at least 64 former Avanir employees in primarily sales and marketing roles, including multiple alleged ringleaders of the fraud who are now identified in recently unsealed criminal filings or qui tam suits. NBIX’s current Zone Director (East), Denise Prindiville, appears to be “Executive 2” in the same criminal information filed by the government against Avanir. Detailed allegations of her role in the fraud, including an alleged scheme dubbed “Operation Barracuda”, have surfaced in the unsealed qui tam suits filed against Avanir. NBIX has not disclosed that one of her deputies, Frank Mazzucco, was just indicted by a Grand Jury in September 2019, while he was employed by NBIX as a Regional Manager, for allegedly engaging in a criminal kickback conspiracy while at Avanir. Even the longtime Chair of NBIX’s Audit Committee, who abruptly resigned last year, was also the former Chair of Avanir’s Audit Committee while the fraud was taking place.
Documents prove NBIX is now paying lucrative speaking fees to dozens of the exact same doctors that Avanir did, including alleged bad actors who appear to have now become NBIX prescribers. One top NBIX speaker even allegedly “was paid by Avanir to conduct sham speaker events”, according to a qui tam suit. Other qui tam suits have alleged that Avanir “systematically bribed” doctors and that Avanir “business managers consider use of speaking fees as the only way to produce prescription results that are acceptable to management” and “the only way to produce high-volume prescribers”. If many of the same Avanir managers and executives have migrated to hold key sales positions at NBIX, why should we believe their attitude to speaker fees would be any different? According to public disclosures, we calculate that NBIX paid $4.6 million in speaking fees in 2018, a total that exceeds the heyday of the Avanir fraud and includes a seamless transition of paid doctors from Avanir to NBIX that is uncanny. We calculate that of the top 20 highest paid NBIX doctors, each of whom has cumulatively received in excess of $110k from the company, 18 also have received money from Avanir/Otsuka. Of the top 40 highest paid NBIX doctors, each of whom has cumulatively received in excess of $50k from the company, 36 also have received money from Avanir/Otsuka.
The persistent allegations of illegal and unethical sales practices at NBIX that continue to swirl on an industry message board named Cafe Pharma only heighten our concerns. Avanir allegedly artificially inflated prescriptions of Nuedexta, a medication intended for a disorder marked by involuntary laughing or crying, by bribing physicians to “grossly expand” Nuedexta’s limited indication to more general behavior abnormalities, write prescriptions for off-label purposes, and even use the drug as a chemical restraint to sedate patients in nursing homes. Because Ingrezza is only indicated for Tardive Dyskenesia (“TD”), a condition that is also relatively rare, difficult to diagnose, and marked by involuntary muscle movements, we believe the drug could be susceptible to similar abuses by NBIX.
Avanir’s fraud appears to have enriched insiders at the expense of taxpayers, patients, and Japan’s Otsuka, who purchased the company at a premium valuation in 2015 apparently believing that sales would continue to grow strongly, only to be left holding the bag when the scheme unraveled. We believe the joke may now be on NBIX investors, who don’t appear to be aware of the risks we see building beneath the surface. As scrutiny of Avanir’s sales practices increased, documents indicate that payors began clamping down, Avanir’s prescriptions plummeted, and financial performance consistently fell far short of Ostuka’s expectations. Increased scrutiny of NBIX and its payments to doctors could prove particularly problematic since the company, by its own admission, is now facing “intense competition” from a Teva drug named Austedo that appears to have similar efficacy as Ingrezza. This also makes it easy for payors or physicians to switch away from prescribing Ingrezza, especially if a scandal were to develop at NBIX. With NBIX stock now trading near all-time highs and a premium valuation that anticipates Ingrezza continuing to grow rapidly, we believe that even the slightest miscue could lead to a massive re-rating of the stock price, which is precisely why we see so much downside potential.
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Our Research Process
We investigated NBIX’s activities and the backgrounds of certain NBIX executives, managers, employees, directors, and doctors who have been receiving payments from the company. We reviewed and extracted data from thousands of pages of public documents including court records, qui tam suits, sunshine act disclosures, and CMS prescription records. We also engaged a former Assistant United States attorney (“ former AUSA consultant”) who has over 15 years of experience focusing on health care law as well as a nationally recognized expert in health care regulation (“regulatory consultant”), both of whom helped us assess the potential risks facing NBIX. We also spoke to several physicians who rendered opinions about Ingrezza and its market positioning.
Background
In recent years, corrupt health care companies have deployed physician speaker programs as a clever method of disguising bribes to doctors as fees for “speaking engagements” or “training sessions”. As opposed to seeking out speakers based on their expertise, corrupt companies have artificially increased sales by strategically targeting physicians with these payments based on their actual or potential prescription-writing activity. Such payments run afoul of anti-kickback law, which prohibits payments to induce prescriptions provided under Medicare, Medicaid, and TRICARE programs. As a result, the regulatory consultant we spoke with explained that most pharmaceutical companies are acutely aware of the compliance risks associated with speaker programs and the government has mandated that such payments be disclosed. Indeed, a 2019 whitepaper authored by health care consultants at RSM states “in the last decade, more than five of the world’s largest pharmaceutical companies were fined more than $2.2 billion in judgments, settlements and penalties by the Department of Justice (DOJ), Office of Inspector General (OIG) and the Securities and Exchange Commission (SEC) related to speakers programs”.
In September 2019, the DOJ announced that Avanir agreed to pay more than $108 million in criminal penalties and civil damages. The government alleged that Avanir engaged in a wide-ranging fraud targeting elderly victims by paying kickbacks to physicians, disguised as speaker fees, to induce excess prescriptions of a drug named Nuedexta. In addition, certain Avanir managers allegedly taught employees to fraudulently complete pre-authorization forms for doctors with false diagnoses in order to secure improper reimbursement from payors. Avanir admitted to paying kickbacks by accepting as “true and accurate” criminal information (here) filed by the government as part of Avanir’s deferred prosecution agreement. Avanir resolved two qui tam suits, one filed in Ohio (here) and the other in Georgia (here), without admitting guilt. Two former Avanir employees were separately indicted along with two physicians (here). A third qui tam suit not mentioned in the DOJ press release was unsealed last week alleging Avanir “systematically bribed” doctors as part of a “massive” kickback scheme (here).
Senior NBIX Executives and Employees Allegedly Engaged in Fraud at Avanir
The architect of NBIX’s sales and marketing activities, Chief Commercial Officer, Eric Benevich, appears to be “Executive 4” in the criminal information recently filed against Avanir by the government. Prior to NBIX, Benevich worked for roughly a decade at Avanir and was appointed Vice President, Marketing in 2007, the exact same title the government associates with Executive 4 in the criminal information filing (below). Benevich was previously featured on Avanir’s website which stated he was “responsible for all aspects of marketing NUEDEXTA”. The criminal information filing cited text messages of Executive 4 discussing “changes in the payment for Avanir speakers and how that would adversely impact the company’s sales goals” that, in our opinion, demonstrate the executive’s detailed involvement with Avanir’s speaker program. For example, in one text message, Executive 4 declares “we will get past all this, I assure you” and that “I can personally call every single speaker that we are not extending a new contract to”. We find this revelation highly problematic because Benevich is now NBIX’s third highest ranking executive officer, and his NBIX biography states that he is “responsible for all aspects of commercial development, marketing and sales of the Neurocrine product portfolio”.
Source: Linkedin (Left section). Captures from criminal Information Filing (right section).
We found that NBIX has hired at least 64 former Avanir/Otsuka employees, including individuals who now hold key managerial and executive positions at NBIX despite certain of them being identified in criminal charging documents or qui tam suits describing the alleged Avanir fraud.
Source: Table prepared from internal analysis of Linkedin.
We wonder if NBIX and Benevich have intentionally hired bad actors from Avanir to promote Ingrezza, especially considering that the company has not disclosed that an NBIX Regional Manager, Frank Mazzucco, was just indicted by a Grand Jury in September 2019 for allegedly engaging in a criminal kickback conspiracy while at Avanir. The indictment specifically alleged that “MAZZUCCO arranged speaker’s bureau programs, many with little to no educational value” and “did knowingly and willfully offer to pay remuneration, that is, kickbacks and bribes” while at Avanir. The former AUSA consultant opined that doctors and individuals from a large company like Avanir getting indicted in a healthcare fraud case is “a big deal” because it doesn’t happen often, and the government doesn’t take it lightly.
Source: DOJ Press Release, Linkedin.
Mazzucco was a deputy of Avanir’s former National Sales Director, Denise Prindiville, who is now NBIX’s Zone Director (East) and was specifically identified in two unsealed qui tam suits that were filed against Avanir. One of the Qui Tam suits (here) specifically alleges that Prindiville was involved in “Operation Barracuda” to use speaker fees as a means to increase sales and describes a September 2014 email allegedly sent by Prindiville to sales staff. The qui tam further alleges that Prindiville “participated in Avanir’s kickback scheme” and “approves of Avanir’s use of speaking fees as inducement’s to physicians”:
Source: Linkedin, captures from qui tam allegations.
Although Prindiville has deleted her tenure at Avanir from her Linkedin page, we believe she is “Executive 2” in the criminal information filed by the government against Avanir. Documents show that Prindiville specifically held titles at Avanir matching the government’s description of Executive 2, including National Sales Director, Neuroscience and East Area Director. The criminal information filing specifically cites an email from Executive 2 to Avanir sales employees as evidence that “sales executives at Avanir intended for speaker fees to be used to induce prescribers” (below). The government also describes how Avanir executives even “sought to conceal communications from detection” referencing texts over Whats App (an encrypted messaging platform) in which Executive 2 asks “are texts not discoverable if deleted?”.
Source: Captures from Criminal Information filing
A current NBIX Account Specialist, Odelia Harel, is a former Avanir Area Manager who is also identified in a Qui Tam suit. The suit states that a relative of Harel, Dr. Idan Sharon, became Avanir’s second-highest ranked prescriber in exchange for speaking fees which Harel allegedly had the authority to arrange.
Source: Linkedin, captures from qui tam suit.
NBIX’s longtime Audit Committee Chair, Corinne Nevinny, presided as Chair of Avanir’s Audit Committee while the fraud was taking place from 2013 through the 2015 sale to Otsuka. The fact that Nevinny, who resigned last year from the NBIX board, was entrusted with overseeing NBIX as an independent “watchdog” for most of the past decade gives us no comfort. We also are not sanguine about the three current Audit Committee members. NBIX Director Richard Pops is also the CEO of Alkermes (NASDAQ: ALKS), whose shares have fallen more than 60% after drawing scandal in 2017 for lobbying efforts to profit from a treatment to opiate addicts. NBIX Directors Dr. Stephen Sherwin and George Morrow have lengthy ties to NBIX’s founder, Gary Lyons, having all previously served together on the board of Brickell Biotech (NASDAQ: BBI), an equity which has declined more than 97% in value since 2015.
NBIX Pays Millions of Dollars to the Same Doctors Who Reaped Windfalls from Avanir
In the heyday of the Avanir fraud, payments to doctors for speaking fees peaked at $4.3 million in 2016, according to sunshine act disclosures. NBIX began ramping up its speaker program in 2017 when it launched Ingrezza and has already surpassed this annual level, paying $4.6 million in speaking fees in 2018. A Qui Tam suit explained that Avanir “business managers consider use of speaking fees as the only way to produce prescription results that are acceptable to management” and “the only way to produce high-volume prescribers”. If many of the same Avanir managers and executives have migrated to hold key positions at NBIX, why should we believe their attitude to speaker fees would be any different?
Source: Open Payments, capture from Qui Tam suit.
On NBIX’s Q2 2018 conference call Benevich touted that:
“we’ve been doing a lot of work with our speakers’ bureau, bringing in, for example, neurologists to speak to psychiatrists’ audience, bringing psychiatrists to speak to psychiatrist audiences and so on”
What he didn’t explain is that NBIX is paying large amounts of money to many of the exact same doctors that Avanir did during his tenure. We calculate from Sunshine Act disclosures that of the top 20 highest paid NBIX doctors, each of whom has received in excess of $110k from the company, 18 previously received money from Avanir. Of the top 40 highest paid NBIX doctors, each of whom has received in excess of $50k from the company, 36 previously received money from Avanir. Are investors supposed to believe this is just a mere coincidence?
Source: Sunshine Act disclosure database found at https://openpaymentsdata.cms.gov/. The “payments” columns reflect the disclosed “general payments” cumulatively received from each respective company through the end of 2018.
For example, one of the top earners is Dr. Romeo Isidro, who has cumulatively received more than $100k in payments from NBIX in 2018 alone, and became a top 20 prescriber of Ingrezza in 2017, according to CMS data tracking Medicare prescriptions (2018 data is not yet publicly available). A Qui Tam Suit alleges that Isidro “was paid by Avanir to conduct sham speaker events for his own staff. Avanir paid these speaker fees as an inducement to prescribe off-label” (below). Furthermore, a 2017 CNN investigation exposing Avanir’s misconduct in nursing homes specifically profiled Dr. Romeo Isidro, who received more than $500k in cumulative payments from Avanir, in a section titled “the pill pushers”. An unverifiable allegation on CafePharma states that a former Avanir employee is “running the same racket with Isidro and his facilities” at NBIX.
Source: captures from qui tam suit and CNN investigation.
Another top NBIX speaker is Dr. Jason Kellogg, who has received approximately $124k from NBIX. A qui tam suit alleges that from 2014-2017, “Dr. Kellogg received $624,968.16 from Avanir and Otuska. These payments were made to induce Dr. Kellogg to write (or to reward his having written) Nuedexta prescriptions off-label”. Furthermore, “in 2016, Dr. Kellogg gave sixty-six Avanir sponsored speaking programs in which he promoted Nuedexta, including during two Avanir funded trips to Hawaii”.
Source: qui tam suit
Dr. Gustavo Alva was a top Avanir speaker who “Avanir would send around the country”, according to a Qui Tam suit which also alleges that Denise Prindiville made sure Alva would be asked about off-label uses of Nuedexta at one speaking engagement. NBIX has paid Dr. Gustavo Alva approximately $57k, after he cumulatively received $597k from Avanir/Otsuka, according to OpenPayments data.
The regulatory consultant opined that the biggest single warning sign for regulators would be if many of a company’s speakers are also high-volume prescribers of the drug they are promoting. This could create the appearance that the company might be selecting speakers for their prescribing activity, rather than their scientific and subject matter expertise. We calculate that 8 of the 15 highest volume physician prescribers identified in the 2017 CMS Medicare prescription data received at least $14k in payments from NBIX. Because Ingrezza was launched in April 2017, this list reflects the “early adopters” of the drug and could look substantially different now. But at the time, one of the most prolific Ingrezza physician prescribers appears to be Dr. Robert Morton, who was paid $53k by NBIX after cumulatively receiving $254k from Avanir/Otsuka. Incidentally, Morton is the Medical Director at Rolling Hills Hospital, which we profiled in an earlier report as one of the worst facilities in Acadia Healthcare’s entire network, in our view.
The former AUSA consultant explained that a common defense from physicians is that they are speaking about a drug they prescribe simply because they believe in it. But, in our opinion, it strains credulity to believe that the seamless transition that has occurred here, with so many doctors who spoke for Avanir immediately switching to speak for NBIX, is not financially motivated. The AUSA consultant opined that, based on the facts we shared with him;
“If I were the prosecutor that’s something I would be salivating about, and if I were the defense attorney it’s something that would have me probably saying, again, if any other factors were there indicating wrongdoing. They’d have me saying, ‘We got to get in there and get ahead of this because that’s going to look real bad.’”
We See Significant Undiscounted Risks That NBIX Sales Have Been Artificially Inflated
After NBIX hired Benevich in 2015, CEO Kevin Gorman touted that Benevich “launched NUEDEXTA” and “brings a really important track record of success in an area that is not dissimilar to TD”.
Source: September 2015 Earnings Call
But the problem is that Avanir’s “success” appears to have been achieved by allegedly bribing doctors to expand Nuedexta’s limited indication, for a disorder marked by involuntary laughing or crying, to more general behavior abnormalities, write prescriptions for off-label purposes, and even use the drug as a chemical restraint to sedate patients in nursing homes. Because Ingrezza is only indicated for TD, a condition that is also relatively rare, difficult to diagnose, and marked by involuntary muscle movements, we believe the drug could be susceptible to similar abuses. The reality that Benevich and many former Avanir employees and speakers are now employed or paid by NBIX only increases the risk that NBIX has deployed Avanir’s playbook, in our opinion.
The existence of persistent allegations of illegal and unethical sales practices at NBIX that continue to swirl on an industry message board named Cafe Pharma heightens our concerns. Indeed, Cafepharma postings repeatedly allege that NBIX is seeking to expand the diagnosis of Ingrezza to cover other conditions with one posting stating that reps have been directed to “Don’t say TD just say Movement Disorders.” We suspect that other movement disorders could include akathisia, general chorea, Huntington’s disease, Tourette’s, Restless leg syndrome, and various tic disorders, none of which Ingrezza is indicated for. We note that even NBIX’s own 10-K warns that “We could face liability if a regulatory authority determines that we are promoting INGREZZA, or any of our product candidates that receives regulatory approval, for “off-label” uses”.
Source: Cafepharma captures
One post even alleges that NBIX reps are being coached to “comb through long term care facilities looking for defense-less patients that they can get a script from”. Others state “reps were doing patients paperwork” and “the things I have heard being done here are mind blowing”. Yes, Cafepharma posts should be taken with a grain of salt, but we note that Avanir was also the subject of serious allegations on CafePharma (see examples here, here, here) that later proved quite prescient when the indictments and qui tam suits were unsealed.
Source: Cafepharma captures
These factors strike us as highly problematic considering that NBIX shares trade at such a premium valuation and most investors, who appear to anticipate that Ingrezza sales will grow strongly in perpetuity, don’t seem to be aware of the risks we see building beneath the surface. This is precisely why we see such enormous downside potential. Indeed, when the fraud at Avanir unraveled, our research shows it had a devastating impact that extended well beyond the government fines and associated disruptions and reputational damages. According to Bloomberg data (from Symphony Health), which in our experience tends to be inexact but directionally correct, Avanir’s total prescriptions of Nuedexta have fallen by roughly 40% and units dispensed are down 35% from their peak in 2017 (below). The data indicates that prescriptions began to decline rapidly after October 2017 when scrutiny began to intensify after CNN published its investigation exposing malfeasance.
Source: Internal Graphic derived from Bloomberg Intelligence Data (Symphony)
After growing sales by more than 50% in 2014, Avanir was acquired by Otsuka in 2015 at a premium valuation that led to financial windfalls for Avanir’s management. Otsuka appears to have been fooled into believing that Nuedexta sales would continue to grow strongly well into the future, with documents showing that Otsuka’s management expected 40% growth in 2016. But instead, Nuedexta results have consistently fallen far short of Otsuka’s internal expectations and the business has languished. Even though Otsuka appears to have aggressively raised prices of Nuedexta in an attempt to combat falling prescriptions, revenues still fell in 2018 and our research indicates Avanir recently conducted another round of large layoffs.
We believe NBIX is now likely to face increased scrutiny over coming quarters, which could prove problematic. Just the recent unsealing of the civil and criminal lawsuits against Avanir, coupled with the indictments of two doctors, may create a “chilling effect” in the marketplace. According to the former AUSA consultant, based on the information we shared with him, “you almost have to assume the government’s going to be watching these people [former Avanir employees now at NBIX] from day one”. The consultant explained that “It’s easy for DOJ, it’s easier if the person has a history and they’re more likely to go show up on the radar in the first place”. Furthermore, because Ingrezza is quite expensive, priced at approximately $70k per year, commercial and government payors may also ramp up scrutiny of claim submissions. We note that less than a year after CNN published the results of its investigation, a subsequent article reported that payors began clamping down on submissions and the US government began “warning insurance companies to be on the lookout for suspicious prescriptions” of Nuedexta.
The other problem for investors is that, by NBIX’s own admission, Ingrezza is now facing “intense competition” from a Teva drug named Austedo, which came to market shortly after being approved by the FDA in April 2017 for TD and Huntington’s disease indications. An experienced psychiatrist we spoke to, who stated that he has not been paid by either company, suggested that efficacy of the two drugs is very similar for TD. A different physician we spoke to, who has received compensation from NBIX, described the comparison as “Coke versus Pepsi”. The existence of an alternative drug to treat TD means that payors and physicians currently prescribing Ingrezza could easily switch away, especially if a scandal were to develop at NBIX. Consistent with our view, in April 2019, Express Scripts placed Ingrezza on its preferred formulary exclusion list, and placed Austedo as its preferred alternative (which is slightly cheaper). While Express Scripts represents a very small portion of NBIX’s revenues, we see the exclusion as symptomatic of how easy it could be for such a switch to be made.
Conclusion
In recent years, the public markets have witnessed the rise of a certain underclass of predatory companies that have chosen to bilk the healthcare system at the expense of taxpayers and patients. Our research leads us to conclude that NBIX may prove to be the latest company to have embraced this ethos. We therefore believe that the risks facing investors are extremely elevated and see enormous downside potential.
All investors are encouraged to do their own due diligence into these factors.