Highlight:
Fagron confirmed they did receive civil investigative demands from the US Department of Justice though no claims have been asserted or filed by the US justice against the firm.
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KBC Bericht 12 november 2012:
News:
US Federal prosecutor investigations are focusing on the widespread fraud by compounding pharmacies in claiming too high charges. As part of the nation-wide investigation, Fagron has received questions though no claims have been asserted or filed.
Our View:
The US department of justice has initiated a nation-wide investigation towards compounding pharmacies that falsely billed the insurance program Tricare for expensive pharmaceutical creams and gels to treat pain, scars and other ailments. Amongst others, the prosecutors focus on fraud whereby employed salespeople paid doctors to write prescriptions to Tricare beneficiaries. In some cases, doctors would conduct telephone consultations with beneficiaries and then write them prescriptions, despite having not met with the beneficiaries in person, prosecutors said. Those prescriptions were illegitimate because they were not based on genuine doctor-patient relationships, a violation of the federal False Claims Act. Four Florida pharmacies have already agreed to pay $ 13m in settlements. Investigations are also performed in California, Texas and Mississippi.Billings from compounding pharmacies have soared for Tricare, the healthinsurance program for active and retired military personnel and their families. According to prosecutors quoted in a Wall Street Journal article, pharmacies charged Tricare between $ 10,000 and $ 40,000 for a one-month supply of compounded medication. Tricare paid $ 1.75bn for compounded drugs during its 2015 fiscal year that ended in September, 18 times the amount paid in 2012. Compounded drugs represented 19% of Tricare’s estimated $9.14bn on prescription drug budget in 2015, up from 1.3% in 2012.
We believe Fagron's Pharmacy Services (real name BellevueRX, acquired in 2Q14, Missouri based) is most vulnerable for these nation-wide federal investigations. The fraud cases underline the measures the Tricare took in April 2015 (for background, see our August company note on Fagron),
resulting in severe price and volume pressure in the market as of 2Q15. US defence officials say that 95% of the Tricare cost increases were related to inappropriate costs. To the best of our knowledge, we are not aware that Fagron (Pharmacy Services, PS) was engaged in the marketing approaches as described above, though it is known PS also had massive turn-over growth in recent years thanks to pain creams. Fagron confirmed they did receive civil investigative demands from the US Department of Justice though no claims have been asserted or filed by the US justice against the firm.
Conclusion:
The federal investigation shows the US compounding sector is being cleaned out from what could be considered an institutionalized fraudulent system and in a transition, most likely back to pre-2013 revenues (Tricare costs from $ 1.75bn in 2015 to a few $ 100m in 2013). We do note that this investigation relates entirely to the business-to-consumer activities in compounding, while Fargron’s future in the US is the B2B environment such as sterile and hospital compounding, which is more regulated (FDA 503b regulation) and less vulnerable to reimbursement/fraud. Tricare’s cost-cutting measures as of April 2015 are one of the key reasons for Fagron’s FY15 downwards revised figures and its current stress situation. No impact on valuation.