Insys: Anthem Lawsuit Paves The Road For An Equity Raise And Continued Downside Pressure On The Stock

Summary

• Hours after we predicted insurance clawback lawsuits, Insys is sued by Anthem.
• Other insurers could easily follow as continued lawsuits could turn into a self-fulfilling prophecy.
• Insys doesn't have the cash balance, or the cash flow stream, to deal with significant legal costs.
• We believe almost all roads will lead to a dilutive equity raise for the company.

By Parke Shall

It was just hours ago that we wrote our last article on Insys (INSY), warning investors that the fallout and the bad news from the company's Subsys kickback scandal may be nowhere close to over and that INSY should be further avoided as an investment.

Yesterday afternoon it was announced that insurer Anthem was suing the company to clawback money for reimbursements made under false pretenses for Subsys. We wanted to do a quick recap of how this helps affirm our thesis as well as what the contents of the lawsuit contained, in today's article.

In was in our article out just hours ago that we stated,

We believe that there is now a clear path for not just the DOJ for additional criminal prosecution, but a clear path for insurance fraud claw-back by both commercial and government providers (CMS).

No sooner did we say that, than MarketWatch reported,

Health-insurer Anthem Inc. has filed a civil suit alleging that drugmaker Insys Therapeutics Inc. engaged in “fraudulent schemes” to secure reimbursement for the company’s fentanyl painkiller Subsys.

The suit, filed Wednesday in federal court in Arizona, alleges that Insys bribed doctors and lied to Anthem about patients’ diagnoses to win reimbursement for prescriptions that wouldn’t have been covered otherwise.

Anthem alleges that as a result of the fraud, it paid in excess of $19 million for Subsys prescriptions that shouldn’t have been reimbursed. A spokeswoman for Insys didn’t immediately respond for comment.

Anthem, based in Indianapolis, is seeking unspecified compensatory and punitive damages to be determined at trial, as well as an injunction barring Insys from continuing to engage in the alleged fraudulent conduct.

The opening to Anthem's lawsuit reads like validation to the concerns we have continually written about regarding INSY for the last year or so. It's concise and delivers the narrative that we've continually stated could be devastating to INSY's business from a PR perspective going forward.

Anthem's suit obviously sets the tone for not only possibly other insurers but others wrongfully harmed by the Subsys debacle to take legal action. Lawsuits of this nature can become somewhat of a self fulfilling prophecy, as claimants can sometimes rush to sue in hopes of being higher on the pecking order for cash when a company may not have a substantial amount left in the bank or a definitive cash flow stream going forward.

The lawsuit says Anthem was defrauded of $19 million which, in and of itself is not catastrophic for Insys, but when you consider that INSY has about $69M in the bank and their cash flow stream is in decline, the company needs every last bit of cash that it can hang on to.

INSY Cash and Equivalents (Quarterly) data by YCharts

If additional lawsuits are in fact prompted by this one, the company may very soon have to sell equity to create a foundation of cash. The dilutive affects of such an offering would likely be profound and, when combined with the deteriorating nature of the company's fundamentals, could still put meaningful pressure on the stock price which we think is likely heading toward mid single digits for the time being.

As we stated in our last article, the other big worry that INSY shareholders should have, aside from additional various lawsuits of different degrees, is whether or not the Department of Justice moves forward to seek additional criminal prosecution.

The upside scenarios for the company at this point pale in comparison of the potential risk that lies ahead. Bulls at this point are basically betting on a drug pipeline that would take years to start generating meaningful cash and would need to do so even in the face of the negative PR the company has faced over the last year or so. It's possible that more lawsuits follow and it is possible that the Department of Justice takes further strenuous action. The company will probably have to sell equity to bolster its cash position. We can think of very few positive catalysts for the stock at this point, barring some type of financial engineering or short squeeze, and we continue to believe that being long the stock here is far too significant of a risk.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.