Pharma

How states are using the law to bring drug executives to heel

Lawyers and regulators are starting to get tough legally to bring generic drug executives to heel, as evidenced by two federal court lawsuits.

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The generic drug industry has come under fire the last couple of years because of staggering price increases.

Controversies arising from the 500% hike in the generic price of the EpiPen, used to deliver epinephrine for life-threatening allergic reactions, or the 5,400% explosion in the price of Daraprim for the treatment of potentially deadly parasite infections, have only fueled price-fixing accusations.

But now generic drug executives can expect to face tougher legal repercussions, as evidenced by two federal court lawsuits filed late last year—one in November brought by Eatontown, N.J.-based Heritage Pharmaceuticals Inc. against two of its former executives, Jeffrey Glazer and Jason Malek, using the Racketeer Influenced and Corrupt Organizations Act (RICO), and one in December that 20 states have filed against six companies, including Heritage, after a major antitrust investigation by the state of Connecticut.

“I think this is a new development,” said Daniel Anziska, an attorney with Troutman Sanders LLP in New York who specializes in antitrust cases. “This is kind of a new permutation. It’s been going on a couple years, the investigation. But this is kind of what’s starting to trickle out of it.”

For brother-in-laws Glazer and Malek, the legal problems started on Nov. 10, when Heritage filed its lawsuit in the U.S.District Court for the District of New Jersey against Glazer and Malek, claiming that they “looted tens of millions of dollars from Heritage by misappropriating its business opportunities, fraudulently obtaining compensation for themselves, and embezzling its intellectual property. Glazer and Malek accomplished this brazen theft by creating at least five dummy corporations, which they used to siphon off Heritage’s profits through numerous racketeering schemes.”

Then, on Dec. 13, the U.S. Department of Justice filed criminal charges against the two men for price-fixing. The DoJ nailed Glazer Heritage’s former CEO, and Malek, the company’s ex-president, with creating several dummy corporations so they could orchestrate elaborate racketeering schemes and pilfer company profits.

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On Jan. 9, Glazer and Malek admitted wrongdoing in the DoJ case and pleaded guilty to two felony counts in the U.S. District Court for the Eastern District of Pennsylvania. They will be sentenced on April 10.

But now lawyers may have another path for pursuing generic drug companies that are colluding in order to coordinate their activities and fix prices, thanks to a Dec. 14 lawsuit that 20 states filed against Glazer and Malek.

Connecticut, Delaware, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Nevada, New York, North Dakota, Ohio and Washington and the Commonwealths of Kentucky, Massachusetts, Pennsylvania and Virginia and their attorneys general filed a civil lawsuit against six drug companies in the U.S. District Court for the District of Connecticut after quietly gathering evidence in an ongoing investigation launched by Connecticut in July 2014. Sparking the probe were suspicious price spikes in some generic drugs.

The suit alleges that the companies—Heritage, Aurobindo Pharma USA Inc., Citron Pharma LLC, Mayne Pharma (USA) Inc., Mylan Pharmaceuticals Inc. and Teva Pharmaceuticals USA Inc.—manipulated drug prices either by fixing them or divvying up markets in an effort to elevate them. According to the complaint, the Connecticut probe revealed a “broad, well-coordinated and long-running series of schemes to fix the prices and allocate markets for a number of generic pharmaceuticals in the United States.”

The complaint describes a cozy industry culture, where schmoozy dinners and “Girls Night Out” meetings fostered the discussion and exchange of sensitive industry information, as well as providing a foundation for collusion between the companies and wholesalers to steer business towards Heritage. Trade shows and text and email messaging were also conduits for communications between employees at the companies involved.

Attorneys general in each state have the authority to bring action to protect the economic well-being of their jurisdictions.

“You look at these investigations and pretty quickly the regulators make a determination whether there’s smoke or there’s not,” Anziska says. “And if there’s smoke, then they burrow in and it takes a long time for it to unspool. Based on history and what one would expect, there will be more examples.”

Anziska notes that typical evidence in price-fixing cases involves communication between senior-level employees, combined with measurable changes in company conduct, such as price convergence. Heritage’s RICO suit in New Jersey includes such communications between Glazer and Malek, as well as other players (see sidebar).

Experts predict that these diverse types of lawsuits could ignite a legal domino effect. They also suspect that, as cases like these develop, they’ll expand to touch multiple prongs of the pharmaceutical industry, such as wholesale manufacturers and pharmacies.

“You see a trend, which is, investigations typically start more narrowly,” Anziska explains. “And then they send out the subpoenas, and all the market participants produce terabytes of data in emails and texts and what not, and then they conduct interviews. And typically out of those, things start to mushroom. And there’s broader nets that are cast. So following that template, the presumption is that this is the tip of the iceberg…So, I don’t think that this is the end. To me, this is the beginning of this next round.”

 Photo: Mykola Velychko, Getty Images 

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