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Insys Therapeutics: HHS Investigation Complete?

|Includes:Insys Therapeutics, Inc. (INSY)

Last December Insys (INSY) put out this press release:

PHOENIX, AZ--(Marketwired - Dec 12, 2013) - Insys Therapeutics, Inc. (NASDAQ:INSY) announced today that it has received a subpoena from the Office of Inspector General of the Department of Health and Human Services ("HHS") in connection with an investigation of potential violations involving HHS programs. The subpoena requests documents regarding Subsys®, including Insys' sales and marketing practices relating to this product. Insys intends to cooperate with the investigation.

A subsequent shareholder class action was dismissed per this press release:

PHOENIX, AZ--(Marketwired - Feb 21, 2014) - Insys Therapeutics, Inc. (NASDAQ:INSY), a specialty pharmaceutical company with a focus on supportive care products for cancer patients, today announced that the previously reported stockholder class action lawsuit (Hillier v. Insys Therapeutics Incorporated et al) that had been filed against the Company and certain of its officers and directors in U.S. District Court for the District of Arizona was on February 20, 2014, voluntarily dismissed by the plaintiff and thereafter terminated by the court. No payment or consideration of any kind was made by any of the defendants in connection with the dismissal.

Today INSY dropped 20% when a report came out that Dr Gavin Awerbuch was arraigned for Medicaid fraud for activities including excessive prescriptions of Insys sublingual opioid spray, Subsys.

This timeline is interesting in that the investigation of Dr Awerbuch was for activities dating back to 2011. INSY was subpoenaed at end of 2013 and has reportedly cooperated with HHS to date. The dropping of the class action lawsuit could be evidence that there is no suggestion that HHS has concerns with INSY as a potential contributor to this fraud.

This is a story worth watching closely. INSY is profitable and growing quickly with a very reasonable forward PE. This sell off seemingly provides potential investors with 3 reasonable outcomes:

  1. INSY had no involvement and the excessive use of Subsys did not significantly impact the reported revenues of the company. In this case, this appears to be an opportunity to pick up shares at a significant discount.
  2. INSY had no involvement but the historical revenues were materially higher than true demand. In this case forward guidance absent this incremental revenue will need to be reviewed to ascertain whether this selloff is reasonable or excessive.
  3. INSY had involvement in this fraud. This outcome seems highly unlikely, but if true it represents an opportunity to short the stock as this sell off is likely just starting.

Insys is expected to release earnings on Tuesday May 13th. Should be an interesting conference call.

Disclosure: I am long INSY.

Stocks: INSY