BNET – March 1, 2011
by Jim Edwards
A whistleblower lawsuit filed against Johnson & Johnson (JNJ) didn’t get much attention in the media because the unproven accusations within it — paying kickbacks to nursing home pharmacy Omnicare (OCR) — sounded familiar. But the details in the complaint are worth exploring because they go further than the usual allegations of paying for no-work contracts to boost pharmacy distribution of their drugs.
Plaintiff Scott Bartz, a former sales compensation manager at J&J, alleges that the company is cooking its books in two ways, both of which could lead to prison time for senior managers if his allegations are true:
- The company is overstating its revenues by counting the discounts it pays to drug repackagers under the “cost of goods sold” line on its income statement. COGS are supposed to reflect manufacturing and shipping costs, not price discounts and rebates.
- The company is double-counting sales of the injectable antipsychotic Risperdal Consta as the drug passes through wholesalers and retailers. The double-counting is part of a “channel-stuffing” scheme in which the company falsely inflates its sales by counting shipments to wholesalers as if they were actual sales at the retail level.
J&J has yet to respond to the suit, which was unsealed in December and didn’t surface in regulatory filings until last week. The company will be comforted by the fact that the Department of Justice has so far declined to intervene. That doesn’t necessarily mean the DOJ believes the case is without merit; the DOJ chooses its cases based on a range of criteria, including policy priorities and available resources. Nonetheless, the accusations should be taken with a pinch of salt until J&J responds.
The last time channel stuffing reared its ugly head in the drug industry was when Bristol-Myers Squibb (BMS) settled fraudulent accounting charges with the SEC for $150 million. In that case, BMS’ former president and CFO were indicted for fraud and conspiracy, but the charges were dropped last year in favor of a pair of deferred-prosecution agreements and $400,000 in fines.
Bartz worked for J&J from 1999 to 2007 and had responsibility for analyzing J&J’s financial and sales data from companies such as IMS Health, a market research company whose information is used as an industry benchmark. In 2004 and 2005, Bartz noted an alleged discrepancy between the amount of Risperdal Consta J&J sold to three wholesalers and the amount that pharmacies actually sold to patients:
- J&J’s Risperdal Consta sales to wholesalers McKesson, Cardinal and AmeriSource Bergen
- 2004: $130 million reported; $75 million actually sold
- 2005: $285 million reported; $145 million actually sold
Bartz investigated, and found further alleged discrepancies. Alkermes, the company that makes Risperdal for J&J, reported worldwide sales to J&J’s Janssen unit worth $1 billion in 2005, Bartz alleges. But Janssen’s net sales of that drug in the same year were only recorded as $664 million; and sales from outlets and other distributors were $390 million, Bartz claims. J&J concealed its channel-stuffing scheme by counting the same sales twice, Bartz claims (click to enlarge):
The discrepancy between the sales J&J racked up with its wholesalers and actual sales at retail and pharmacy level did not go unnoticed, Bartz claims. An IMS Health executive said that there seemed to be “very little sellout” of some Risperdal Consta shipments that J&J had sent to McKesson:
Bartz alleges channel stuffing was widespread at J&J:
Plaintiff has also discovered that the practice of channel stuffing was used in all or most of the J&J products as a means to increase profit margins of distributors such as McKesson, Cardinal and AmeriSource Bergen.
For investors, the most serious allegation Bartz has to make is furnished with the least detail. He claims that J&J inflated sales of the Alzheimer’s drug Razadyne through a number of different schemes, including removing sales from the company’s books only to reinsert them once the books were closed at year’s end, and pretending that discounts J&J offers to repackagers on the drug are manufacturing costs:
That scheme would allow J&J to pretend it is making more money on the drug than it actually is, albeit at smaller margins. Oddly, the net effect of such a scheme on J&J’s bottom line would be a wash, but it would give outside observers the impression that the market for Razadyne is bigger than it actually is.
Bartz claims he was harassed and demoted after he complained to management that he believed the company’s accounting was false. He claims he had a stress-induced heart attack before he was finally terminated in 2007.
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