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Penumbra Inc.’s Catheter Fail: Broken Tips and Lost Lives

Few things vex a publicly traded company’s managers more than the prospect of admitting a mistake.

To acknowledge an error risks a stock selloff, bad publicity and possible litigation, as well as reduced executive pay and maybe even a few resignations. The alternative — covering up the blunder — could turn what is a professional embarrassment into a potential regulatory headache or even a criminal investigation.

The leaders of Penumbra, an extraordinarily successful Alameda, Californiabased manufacturer of neurovascular devices, have recently found themselves on the horns of this very dilemma.

Some surgeons have alleged that while they attempted to remove blood clots from patients’ brains, Penumbra’s newest catheter would occasionally break or fray, resulting in precious minutes spent addressing the fracture.

Penumbra’s answer baffled them: The company did not acknowledge the problem in any meaningful way; yet it did not fully deny it either.

On July 27, the company released a “Notification to Healthcare Providers,” reiterating its previous instructions for using the catheter, along with a warning against deploying it with non-Penumbra products.

But voluntary reports submitted to a Food and Drug Administration database, including entries from surgeons who have used the new catheter, paint a picture of a device whose safety problems Penumbra may be forced to address in more substantial terms than the July 27 release.

The launch of a modern medical legend

The device in question is the Jet 7 Reperfusion Catheter with Xtra Flex Technology, commonly known as the Jet 7 Xtra Flex.

Introduced with much fanfare at a key industry conference in July 2019, the Jet 7 Xtra Flex is an aspiration catheter designed for use in a procedure called a suction thrombectomy.

As shown in a brief Penumbra video clip, an aspiration catheter is a thin tube that can be inserted inside a person through an opening at the groin or wrist. Guiding the catheter to an arterial brain clot, a surgeon then uses suction to remove it. In this way, the artery’s blood flow can be restored.

In 2007 Penumbra received the first FDA approval to market an aspiration catheter designed to treat individuals who had experienced strokes. Following this, several clinical studies demonstrated the benefits of using an aspiration catheter for interventions after acute ischemic strokes, leading Penumbra to introduce several generations of its pioneering device.

The one-two punch of Penumbra’s being the first to market aspiration catheters with FDA approval and the rapid adoption of suction thrombectomy for the treatment of strokes has made the company’s devices ubiquitous in operating rooms.

From 2007 to 2018, some 80 percent of all the suction thrombectomies performed in the United States relied on Penumbra aspiration catheters, according to brokerage analysts.

Although much larger competitors like Stryker, Medtronic and Terumo introduced their own FDA-approved aspiration catheters in 2018, Penumbra still dominates the market: Penumbra aspiration catheters will play a leading role in nearly 65 percent of this year’s 45,000 to 50,000 suction thrombectomies in the U.S., according to projections by analysts during a Feb 25, 2020, Penumbra conference call.

From a business standpoint, Penumbra’s Jet 7 Xtra Flex catheter is a superstar, possibly accounting for at least 30 percent of the company’s sales last year. A research report that aggregated 2019 U.S. hospital purchasing orders put Jet 7 Xtra Flex sales to such facilities at $168 million, or 30.7 percent of the company’s total revenue. (An outside spokeswoman for Penumbra declined to provide specifics, citing the company’s policy of not disclosing precise sales figures.)

Penumbra’s success at improving its bottom line has propelled its share price ever higher, to its current $199.43, giving the 16-year-old company a gaudy $7.485 billion market capitalization.

MAUDE’s unflattering accounts

After Penumbra’s decade plus of success, the company now faces a very real quandary. The FDA’s Manufacturer and User Facility Device Experience (MAUDE) database lists 11 deaths that occurred after operations in January through the end of July that involved the Jet 7 Xtra Flex. The MAUDE database has one such report of a death after an operation last year; Penumbra rolled out the new catheter commercially in mid-2019.

MAUDE is an informal, voluntary reporting system for public tracking of adverse events like injuries and deaths involving any piece of medical equipment approved for use in the U.S. A wide array of individuals, including medical professionals, family members of people operated on, as well as company representatives, can submit entries to MAUDE, so the reports vary in their amount of detail. And unlike a clinical study or an autopsy, MAUDE entries are not necessarily recorded in a scientific or medical fashion.

(In this manner, MAUDE resembles another database, the FDA Adverse Event Reporting System, which is a repository of adverse pharmaceutical event reports. The Foundation for Financial Journalism used FAERS data to reveal a pattern of significant numbers of fatal drug reactions from products sold by Corcept Therapeutics, Acadia Pharmaceuticals and Insys Therapeutics.)

Despite their limitations, MAUDE records are certainly valuable for anyone hoping to detect a possible trend.

All 12 MAUDE entries detailing deaths after 2019 and 2020 operations that involved the Jet 7 Xtra Flex catheter mentioned the device’s distal tip suddenly expanding or fracturing. And eight reports noted at least one arterial rupture – with many of the ruptures cited as occurring in the internal carotid artery, which supplies blood to the brain and eyes. (One reported death, after an April 24 operation, involved a person with COVID-19, a condition that may have complicated that individual’s outcome.)


Reported Deaths After Use of Jet 7 Xtra Flex
Source: 2020 MAUDE data

When asked about the 11 deaths from January through the end of July listed in the MAUDE database, Penumbra’s marketing chief Gita Barry acknowledged that the company is aware of the reported deaths, stating, “Penumbra filed medical device reports for all adverse events with the FDA which are reflected in the MAUDE database.”

Barry added, “Following our investigation into the reports, we worked diligently to communicate directly with physicians.”

A formal investigation is not required before someone submits a MAUDE entry. And only two of the 11 reports concerning 2020 procedures entries about surgeries on June 8 and April 28 overtly alleged that the fatalities were linked to Jet 7 Xtra Flex problems. Three other entries categorized the relationship between the Penumbra catheter and a death as “unknown.”

Nine MAUDE entries describing 2020 operations, however, claimed the Jet 7 Xtra Flex either fractured or expanded shortly after a surgeon began a cerebral angiography. In the latter type of procedure, a catheter is injected with an iodine contrast dye to make the artery and the clot visible on X-rays. Angiography has been a standard component of clot-removal surgery for years.

To be fair, the Jet 7 Xtra Flex’s label — rendered in small print — clearly warns against injecting contrast dye into the catheter and also recommends it not be used with non-Penumbra products. Plus, anyone undergoing neurovascular surgery after having a stroke or an aneurysm is indeed at a heightened risk for having numerous complications, including death.

But Penumbra’s insistence that its catheters are safer to use when paired with other Penumbra products flies in the face of current medical practice, according to three neurovascular surgeons interviewed by the Foundation for Financial Journalism. (These doctors spoke on the condition of anonymity due to their employers’ prohibitions on talking with the press, and one surgeon had even received speaking fees from Penumbra.) All three doctors said use of Penumbra’s aspiration catheters with non-Penumbra devices is a “nearly universal practice” of surgeons performing thrombectomies.

“I like the Jet 7 [Xtra Flex catheter] well enough,” said one of the three physicians. “But I don’t like nearly anything else [Penumbra] has out. So I use a microcatheter, stents and coils from other companies.”

All 11 MAUDE reports detailing 2020 procedures referred to this mix-and-match practice. The entry about a March 15 operation, for example, noted the doctor had used a Jet 7 Xtra Flex alongside “a non-Penumbra microcatheter and non-Penumbra revascularization device.”

Since surgeons who treat strokes tend to live by the creed “time is brain” (meaning speed is of the essence when trying to prevent long-term neurological impairment), they are unlikely to want to swap out a Jet 7 Xtra Flex (after performing a suction thrombectomy) for another catheter to do the angiography.

Penumbra’s Barry, however, insisted that injecting contrast dye into an aspiration catheter is exactly what doctors should avoid doing. “Reperfusion catheters are designed for the removal of stroke-causing clots by aspirating or suctioning the clot out of the arteries in the brain, and not for contrast injection,” Barry said. Using the aspiration catheter for the dye task runs the risk of reintroducing a clot into the brain’s arteries, which could prompt an additional stroke, she added.

Two of the three surgeons interviewed by the Foundation for Financial Journalism said they do change catheters when performing an angiography during a suction thrombectomy. “But there is an expectation that the [aspiration] catheter can withstand an injection,” one doctor noted, adding that at times using the same catheter for both tasks is clinically valuable.

New wrinkles in the competitive landscape

Maybe the most problematic aspect for Penumbra concerning MAUDE lies with what is not described there: deaths related to competitors’ aspiration catheters. MAUDE carries no entries (filed through July 31) for Medtronic’s React 68 and 71, Stryker’s AXS Vecta 71 and Terumo’s Sofia Plus aspiration catheters.

And a key Penumbra competitor has seized on Jet 7 Xtra Flex’s troubles as a marketing opportunity. Medtronic has been running a digital advertisement on its neurovascular unit’s LinkedIn page, touting its aspiration catheter’s ability to “manually deliver contrast injections.” The logic behind Medtronic’s running the ad is simple: While few surgeons probably spend much time on LinkedIn, Penumbra sales staffers — unaccustomed to marketing a device whose safety profile is being questioned — might be weighing their career options, and some of them may be tempted to defect.

On Aug. 27, Piper Sandler research analyst Matt O’Brien hosted a virtual “fireside chat” for his firm’s money management clients with Stacey Pugh, general manager of Medtronic’s neurovascular unit. Boldly assessing her company’s performance this past summer, she said, “Candidly, we’ve been very pleased with our average daily sales [of aspiration catheters] since that notice went out,” referring to Penumbra’s July 27 missive.

Medtronic’s sales in Japan are being helped by what Pugh described as a “voluntary recall” of Penumbra’s Jet 7 Xtra Flex, she said. “There’s a void in the marketing of [Penumbra’s] product in Japan” that has created a built-in sales growth opportunity for Medtronic, she asserted. (Pugh’s candor may have been bolstered by the Piper Sandler event’s closure to the press.)

Asked about Pugh’s description of a “voluntary recall” in Japan, Penumbra’s Barry replied, “No, this is not true. The product has not been recalled in Japan.” Penumbra’s Japanese distributor “paused sales” while her company updated the Jet 7 Xtra Flex’s “instructions for use,” she said. After Japanese regulators approve the catheter’s new instructions, the device will be restocked, Barry claimed.

The Japanese market accounted for 7.8 percent of Penumbra’s sales in 2019, or $42.5 million, according to its annual report.

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Myriad Genetics: This Company Has Great Difficulties Telling the Truth

In early May several hundred investors, doctors and brokerage research analysts attended a dinner presentation after cocktails offered by the leadership of Myriad Genetics in Manhattan’s midtown. Salt Lake City–based Myriad, best known for its hereditary cancer tests, was in New York to tout new research on its increasingly popular GeneSight product during the American Psychiatric Association’s annual conference.

The APA conference is an important event for Wall Street as well as pharmaceutical companies because of the massive amount of money Americans spend each year on drugs and therapy for treating depression. A March 2017 American Psychological Association article estimated the annual cost of treating depressive disorders at $71 billion and rising; in May Myriad said the total cost of major depressive disorder was $100 billion a year. Thus, taking notice of the latest drug development news could potentially be very lucrative for companies and investors alike.

And following Myriad’s $225 million purchase of GeneSight’s developer Assurex Health in August 2016, managers had a story to tell about their newly acquired diagnostic test, which uses a patient’s genetic profile to guide a psychiatrist in selecting an antidepressant.

GeneSight assesses 12 different genes in a patient to rank medications according to their prospective usefulness in treating the person’s clinical depression. It is but one entry in the emerging field of pharmacogenomics, which is concerned with how someone’s genetics can affect his or her response to drugs. And GeneSight fits into a broader movement that has emerged over the past decade called “personalized medicine” or “precision medicine,” aimed at taking into account individual variation in genetic information, lifestyle and environmental factors when considering treatment options.

So as Myriad CEO Mark Capone sat with brokerage analysts at a table, Dr. John Greden, who directed a nearly six-month-long randomized clinical trial on GeneSight, crisply presented what the company touted as “landmark” research. Greden, the executive director of the University of Michigan Comprehensive Depression Center, was warmly received, especially when he emphasized data about patients’ response to GeneSight and the remission of major depressive disorder.

Adding to GeneSight’s cachet was an Oct. 1, 2015, local coverage decision by Centers for Medicare and Medicaid Services contractor Palmetto GBA guaranteeing full reimbursement of the test’s $2,000 price for Medicare patients. And if the clinical trial concluded with results showing the test’s efficacy, commercial health care plans were expected to quickly start covering the cost of GeneSight for their members.

The day after Myriad reported that its quarterly earnings had greatly improved from the period a year prior, the company’s market capitalization grew more than $319 million, when its stock price surged $4.57.

In many ways the Manhattan presentation was the perfect event, pleasing prescribers and investors alike.

Apart from a few tiny clues, nothing would have indicated to attendees that the event was just for show, a facsimile of how a major life sciences company proceeds when discussing vital research.

If Myriad had truly wanted the medical community to grapple with its research, though, it would have secured a formal slot at the conference to present Dr. Greden’s findings and take questions from guests or researchers without ties to the company.

Instead Myriad held an off-site “satellite symposium,” for an invitation-only audience largely composed of psychiatrists and primary care doctors in private practice who prescribed GeneSight as well as analysts and bankers seeking underwriting and advisory business with Myriad.

Myriad’s staging of the May session was clever in that executives could claim to have shared the trial’s findings at an APA conference, though it was just at a poster presentation, where Dr. Greden talked to whoever walked by. This is scarcely what one would expect after a study of a genetic test that a public company has repeatedly hailed as a “landmark” achievement.

The reason for the dodge might be that from a scientific standpoint, GeneSight is a bust (although it is Myriad’s most important source of sales growth.) In an 1,167-patient trial whose findings the company announced on Nov. 2, 2017, (and published Jan. 4, 2019, in the Journal of Psychiatric Research), GeneSight failed to meet its primary endpoint of demonstrating superiority over established treatments and did not achieve 23 of its 25 secondary endpoints. The primary endpoint in a clinical trial is “the main result that is measured at the end of a study to see if a given treatment worked,” according to the National Cancer Institute.

The patients whose doctors used GeneSight reported a 27.2 percent reduction in symptoms of depression; in contrast, practitioners noted a 24.4 percent reduction for those who received treatment as usual.

Though a 2.8 percent point improvement may seem (narrowly) promising for GeneSight, for psychiatrists considering treating depression among large groups of patients, this difference is statistically indistinguishable from treatment as usual; the study’s p-value was .107. In most medical trials, 5 percent is considered the cutoff for significance. After factoring in the possibility of random or experimental error, no doctor could be certain that any benefit comes from using GeneSight.

So it was a lot safer for Myriad’s stock price that Dr. Greden and company executives spoke to a carefully curated audience about why positive results for two secondary endpoints were more significant than GeneSight’s failure to attain its primary endpoint.

Little of this might be obvious to investors and analysts because Myriad has kicked up enough dust over the years that they appear to have stopped demanding straight answers.

Then again, it’s hard to blame them since Myriad’s revelation that GeneSight’s randomized controlled trial went poorly appeared only in the last paragraph of its November 2017 press release — in a discussion of $185 million in clinical milestone payments owed Assurex’s former shareholders: “That clinical trial milestone payment will not be due because this endpoint did not achieve statistical significance in the entire study population.”

A seven-month Southern Investigative Reporting Foundation investigation of Myriad’s business practices raises the following question: What is the premium an investor should pay for a company’s ability to spin ever more fantastical nonsense — and to brilliantly navigate the opaque line between required disclosure and misdirection?


GeneSight and rival pharmacogenomic tests have caused a fair bit of controversy over the past year.

In April the American Journal of Psychiatry published a critical 14-page review of “the evidence base” behind the marketing claims of GeneSight and three competitors, finding numerous problems with the tests the companies have presented to validate their products. And in July the American Psychiatric Association’s Council on Research released a statement that echoed the journal’s finding.

In May the Journal of American Medical Association Psychiatry published a two-page opinion from a trio of high-profile psychiatry researchers, Drs. Barbara Sommer, Bruce Cohen and George Zubenko, that explored the marketing of pharmacogenomic tests. They concluded that the current array of pharmacogenomic tests, which assess a small panel of about a dozen genes, are of limited use in treating major depressive disorder. As an illness, depression is simply far too complex, with a spectrum of underlying causes; many have no genetic component at all, they argued.

Dr. Bruce Cohen elaborated on his observations in an interview with the Southern Investigative Reporting Foundation. “There is no scientific basis to order [pharmacogenomic] tests at the moment; they are a complete waste of money,” he said, adding that when even companies conduct their own research to back up their marketing claims, “they do the studies wrong anyhow.” He declined to name any specific companies.

The most problematic aspect to pharmacogenomic tests is that they are aimed at finding something that simply doesn’t exist in the case of major depressive disorder, according to Dr. Cohen: “There are no genes that determine [patients’] risk [with] or their response to medicine,” he said, adding, “No small panel of genes is going to tell you whether you have most diseases, let alone depression. Schizophrenia, for example, has around 8,000 different genes associated with it.”

Dr. Cohen said he fears that doctors, who often don’t have the latest training in psychiatric genetics, are ripe targets for “company sales reps who are very pushy.” Physicians might “mistakenly” use these tests to make scientifically dubious treatment decisions, he said.

Those sales representatives will now have to be mighty pushy to market this expensive product as the prospects of insurance coverage dim. GeneSight sports a lofty $2,000 price tag, but just 15 percent of the 313,000 tests purchased last year were reimbursed at full price, with only $100 repaid for the rest. On average the reimbursement for the test was about $412.

And one brokerage research analyst — a member of a group of professionals rarely accused of skepticism — is not shying away from voicing concerns about some of these issues.

Barclays Capital U.S. life sciences tools and diagnostics analyst Jack Meehan assigned an “underweight” rating to Myriad’s shares. Formally this means that he sees the company’s stock price as underperforming relative to its peers’; informally, it means shareholders should sell their Myriad stock or avoid it altogether. He wrote that insurance plans will be reluctant to include coverage for GeneSight.

In research reports issued on Sept. 5 and Nov. 7, Meehan and his colleagues argued that GeneSight’s failed trial and critical reception by an influential subset of academic researchers pose a formidable barrier to its coverage by non-Medicare health insurance plans. Asked to discuss this research further, Meehan declined to comment, citing his company’s policy.

On Jan. 4 Meehan held a conference call about GeneSight’s trial with his brokerage firm clients and Dr. Charles Nemeroff, a University of Texas Medical School professor and a co-author of both the American Journal of Psychiatry article and the APA statement.

Dr. Nemeroff described the trial as unsuccessful. “The most salient and most important finding in this study is the fact that it’s a failed study,” he said, adding that GeneSight’s benefit for patients, as measured in the trial, “wasn’t even close to being significant.”

During this call, Myriad chose to defend GeneSight’s merits in a highly unusual fashion, however. Its director of clinical development, Bryan Dechairo, spoke up on the call 30 minutes in and after reading a prepared statement, started peppering Dr. Nemeroff with questions; he even tried to query him about a 2006 medical study mentioned in passing. Dr. Nemeroff, who had been politely answering all Dechairo’s questions, quietly informed him that the premise of his last one “doesn’t hold water.”

Two portfolio managers told the Southern Investigative Reporting Foundation that they had never seen a public company’s representative do something like this on an analyst’s client call.

That evening, Scott Gleason, Myriad’s investor relations chief and its head of corporate strategy, sent a select group of money managers and brokerage analysts an email that drew attention to what the company alleged amounted to errors in Dr. Nemeroff’s remarks. Two hours after Meehan’s call, Myriad hosted its own call and reiterated its argument that what matters most to patients is remission from symptoms of depression.

(A decade ago Dr. Nemeroff encountered controversy of his own, although it was not related to his research or views. On September, 17, 2008, Sen. Charles Grassley made Dr. Nemeroff’s undisclosed consulting arrangements with large pharmaceutical companies the centerpiece of a hearing. Emory University then removed him as chairman of its medical school’s psychiatry department. Dr. Nemeroff did not respond to several emails and a phone call seeking comment.)

For his part, Meehan, along with his colleagues at Barclays Capital, has since September raised questions following the conclusion of GeneSight’s unsuccessful trial about whether the product is worthwhile enough for doctors to rely upon. He has floated the idea that the Centers for Medicaid and Medicare could re-examine the decision to reimburse the cost of GeneSight for Medicare patients.

When the Southern Investigative Reporting Foundation contacted Dr. Elaine Jeter, who led the assessment of GeneSight for Palmetto in 2015, she said she viewed her team’s coverage approval for the product as conditioned on a successful randomized clinical trial. Asked if this was a formal condition of the Centers for Medicare and Medicaid Services’ decision or merely her personal view, she declined to answer, saying she had retired from Palmetto two years ago.

One Palmetto official who does have current oversight responsibility for GeneSight, Molecular Diagnostic Services chief Dr. Paul Gerrard, responded to a question about his agency’s initial approval like this: “In the case of GeneSight, a number of studies were done, all supporting a similar conclusion. As such, the studies reviewed in the [local coverage decision] collectively provided sufficient evidence to support the clinical utility of the test for specific uses.” He didn’t further discuss the results of the randomized clinical trial.

Myriad spokesman Ron Rogers declined to comment on a series of questions sent via email. But he felt the need to ask, “Which hedge funds [is the Southern Investigative Reporting Foundation] working for or with related to this inquiry?”

Correction: In the initial version of this article, a paragraph discussing GeneSight’s clinical trial contained an inaccurate description of the clinical significance of the results. This has been corrected and the story updated.

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Myriad Genetics: It’s Good to Have a Pal in the Senate

To recognize what Myriad Genetics is today, it’s important to understand what happened on June 13, 2013.

The day began with Myriad having a patent-protected monopoly — its 2013 income statement is a testimony to the benefits of having no rivals — and a fearsome reputation for ruthlessly enforcing its patents.

Myriad had been awarded patents in 1994 and 1995 for two genes associated with a risk for breast cancer. But by 2009 the American Civil Liberties Union and the Public Patent Foundation legally challenged this, claiming genes are naturally occurring and thus not subject to patenting and that breast cancer research was being curtailed because of Myriad’s patents. (ACLU lawyer Tania Simoncelli subsequently discussed the suit in a November 2014 TED talk.)

Late that June 2013 afternoon, the Supreme Court ruled 9-0 in the plaintiffs’ favor, with Justice Clarence Thomas writing that the act of “separating [a] gene from its surrounding genetic material is not an act of invention.” He bluntly added, “Myriad did not create anything.”

By the time Myriad’s executives arrived home that evening, the company’s entire business model had been upended, with three companies announcing their entrance into the hereditary breast cancer screening business; more followed.

Since Myriad faced competition for the first time in its existence as a public company, the only certainty in its future seemed to be declining profits. But somehow Myriad’s stock price wasn’t decimated that day; it spent much of June 13 lifted by as much as $4.50 before plummeting 5 percent by the market’s close, to $32.01. (The month concluded with Myriad’s stock changing hands to land at a figure 20 percent lower than June 13’s $33.87 opening price, but the decline was orderly and played out over two weeks.)

That June Myriad demonstrated its genius for issuing remarks that are simultaneously absurd yet legally defensible. Consider the company’s statement on the Supreme Court ruling, released on June 13 at 12:25 p.m. EDT, headlined “Supreme Court Upholds Myriad’s cDNA Patent Claims.” The decision did allow patent protection for synthetic DNA, also called complementary DNA or cDNA, but this was a mere sideshow in the multiyear legal battle over whether genes could be privately owned. (The New York Times and The Christian Science Monitor discussed the ruling in starkly different terms.)

To meet the new challenge, Myriad did two things: It went on a five-year, nearly $900 million shopping spree in a bid to diversify its business line and started pleading for help in Washington, D.C.

The latter route appears to have been the most effective one.


For most companies, gaining legislative support or regulatory breaks in Washington can take years. But Myriad found relief in six months. To be fair, it had the advantage of being headquartered in Salt Lake City, squarely on the turf of a long-serving and powerful senator, Orrin Hatch. Until his retirement last week, the Utah legislator had chaired the Senate’s Finance Committee, which oversees the Food and Drug Administration’s budget and programs, including Medicare.

And Myriad, the first company to commercialize hereditary cancer screening in the mid-1990s, needed every last scintilla of a break it could get since its business was beset on all sides. A slew of new competitors had emerged, offering genetic screening for breast cancer at prices well below Myriad’s $3,000 price tag. The hammer stroke came when the Center for Medicare and Medicaid Services announced in December 2013 that it planned to trim its reimbursement for testing for the BRCA1 gene to $1,440 from $2,795.

The point man who pressed Myriad’s agenda in December 2013 wasn’t a K Street lobbyist but rather Daniel M. Todd, a staffer for Sen. Hatch who specialized in health care finance. Todd was no stranger to working very closely with large pharmaceutical companies to draft legislation, according to a January 2013 New York Times article.

Todd pushed the Centers for Medicare and Medicaid Services to amend its plan to cut its reimbursement for Myriad’s breast cancer genetic variant test. He made enough of a racket about the issue that Jonathan Blum, the agency’s deputy administrator and a self-proclaimed veteran of a great deal of congressional meddling, detailed their heated conversation in an email to himself.

In fairness to both Todd and Myriad, the agency had unilaterally pushed through the price cut outside the “process” that Blum described Todd as being concerned about. What especially aggravated Hatch’s staff was the circumventing of the standard 30- or 60-day comment period for interested parties to weigh in on a proposed policy change. Such a comment period, of course, gives any affected company some time to reach out to its stakeholders.

Blum’s account of the pressure he claimed Todd brought to bear on him and that Sen. Hatch applied to Marilynn Tavenner, then chief of the Centers for Medicare and Medicaid Services, later emerged in Blum’s testimony in an unrelated insider trading case.

Todd, who has been paid $680,000 by Myriad since his 2014 launch of a health care–focused strategic consulting business, declined to comment to the Southern Investigative Reporting Foundation on the record.

Blum did not return calls or respond to an email seeking comment.

Tavenner, reached by phone, told the Southern Investigative Reporting Foundation she had no recollection of the lobbying incident. Her former agency’s press office did not reply to an email.

In the end, the combined efforts of Sen. Hatch and Todd proved successful: The Centers for Medicare and Medicaid Services held off on the planned cut to the reimbursement level and in April 2014 took the highly unusual step of announcing an upward “revising” of its reimbursement for the BRCA1 test, to $2,184 from $1,438.

The agency’s reversal worked out nicely for Myriad: According to Centers for Medicare and Medicaid Services data, the change in policy for BRCA1 screening resulted in almost $16.5 million more in reimbursements in 2014 and 2015.

The math involved is fairly straightforward: In 2014 the agency’s reimbursement for each of Myriad’s 14,113 BRCA1 tests administered was $506 more than it would have been if the cost cut had prevailed. This amounted to $7.14 million.

For 2015, using the same calculations, the reimbursement differential was $9.41 million.

The episode surely represents yet another example of influence peddling along the shores of the Potomac. But why would Hatch, a Republican with an almost 88 percent lifetime rating from the American Conservative Union and one who has long raised concern about rising health care costs, demand that the government pay higher prices for a test?

Following the money trail is a good way to seek answers. Since 2011 Myriad and its executives and lobbyists have sent $130,400 to Sen. Hatch, through donations to his election committees or two nonprofit foundations he’s associated with, the Utah Families Foundation and the Orrin G. Hatch Foundation.

Hatch established the Utah Families Foundation in 1990 to provide grants to civic institutions throughout Utah. The Orrin G. Hatch Foundation, founded in 2014, is raising $40 million to create a repository for the senator’s papers and an affiliated public policy institute. Both organizations have drawn scrutiny because of their practice of fundraising from the pharmaceutical and biotech industries, despite Hatch’s influence over medical policy.

Myriad’s support for Hatch while a senator can be neatly divided into two chapters: one before the intervention with the Centers for Medicare and Medicaid and the other afterward. From 2011 to 2013, Myriad gave $30,500 to Hatch’s campaign fund and his the Utah Families Foundation. But from 2014 through last year, Myriad’s support ballooned, with the company granting his campaign fund and foundations a total of $99,900; some $90,000 of that figure came in block grants of $20,000 and $25,000 to the two foundations. A representative for Hatch did not return a phone call seeking comment.

This isn’t the only benefit that Myriad has wrangled from regulators, though.

The company’s revenue seems to have been enhanced by an apparent billing loophole for reimbursement for its breast cancer screening tests from the Centers for Medicare and Medicaid.

In the United States, all medical procedures, tests and consultations at both public and private facilities are documented and tracked according to five-digit Current Procedural Terminology codes. When procedures and tests are introduced, evolve or fall out of favor, regulators revise these codes.

In 2014 and 2015  the Centers for Medicare and Medicaid allowed for the billing of Myriad’s breast cancer-related gene tests with CPT codes 81211 and 81213. In 2016 the agency turned to a single code, 81162, for documenting both the BRCA1 and BRCA2 tests, that were jointly reimbursed for about $2,253.

Marketplace dynamics and technical advancements have resulted in practitioners offering tests that screen for a large panel of genetic variations associated with many different types of cancer. The many entrants into the genetic testing field have created somewhat of a price war.

In 2017 the Centers for Medicare and Medicaid responded to this by introducing CPT code 81432 for multi-gene cancer screening, to be reimbursed at $838, as well as code 81433 for another such test, reimbursed at $542. Myriad argued, however, its multi-gene cancer panel is so different from its competitors’ that it petitioned the agency so that its tests could have a higher reimbursement.

Sources: Myriad Genetics filings and Centers for Medicare and Medicaid data

As demonstrated by the chart above, Myriad has benefited from the Centers for Medicare and Medicaid’s reimbursing an estimated $27 million over the past two years as the old 81162 code was used.

When Myriad CEO Capone was asked about this billing discrepancy at a March conference, he replied that since the Centers for Medicare and Medicaid has his company’s myRisk multiple-gene panel tests “under technical assessment,” the 81162 code will be used until the public is otherwise informed.

(A technical assessment is the Centers for Medicare and Medicaid’s process for analyzing commercial tests for accuracy and prognostic value. Former agency officials told the Southern Investigative Reporting Foundation that a standard technical assessment should be completed in less than six months.)

None of this explains why a website run by Centers for Medicare and Medicaid contractor Palmetto GBA, using the agency’s data, lists Myriad’s myRisk test as fully covered under CPT code 81432.

One looming danger to Myriad’s pricing policy is if the agency examines the much lower price for multiple-gene panel tests offered by newer players when setting reimbursement levels: Invitae, for example, offers a test for $250 and Color Genomics is selling a similar one for $199.

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Teladoc Health: A CFO’s ‘Other Life’ Worked Out Nicely (For the Ex-Girlfriend and Her Boss? Not So Much)

Work-life balance, an ever elusive goal for many American corporate executives, has been given a fresh new meaning at fast-growing Teladoc Health, a provider of on-demand medical videoconferencing.

But don’t expect to hear about generous paternity leave or a slick new gym at headquarters; this is one benefit that Teladoc Health definitely isn’t advertising.

In a nutshell, for a little over two years Teladoc Health’s chief financial officer Mark Hirschhorn, 54, was having an affair with Charece Griffin, now 30 and an employee many levels below him on the company’s organizational chart.

At the end of it, the powerful, high-profile executive stayed with nearly nary a consequence, while his girlfriend — and her boss — hit the road.


Let’s start with this relationship’s unique optics, which appear designed to give a corporate lawyer a heart attack: While Griffin was not initially a direct subordinate of Hirschhorn, when he was given the additional title of chief operating officer in September 2016, that distinction was all but erased. Moreover, during their relationship, Griffin received a series of promotions over colleagues with either more industry experience or better credentials that stunned her former colleagues. She did well enough, records indicate, that she was able to trade out of a 7-year-old Kia and buy a late model Mercedes in February 2017. (In fairness to Griffin, several of her former colleagues spoke highly of her motivation and personality. Griffin didn’t reply to repeated attempts to seek comment through phone, text and email.)

From the perspective of power dynamics, it looks even worse.

Hirschhorn, a resident of tony Larchmont, New York, has been married since 1993, and along with his other duties, is responsible for managing the crucial relationships with investors, bankers and brokerage firm research analysts that have helped Teladoc Health raise nearly $1.3 billion in capital since March 2015. In turn, that money has enabled almost $625 million worth of recent acquisitions, which is driving the rapid revenue growth so beloved by money managers.

Accordingly, Hirschhorn has been well paid. (Hirschhorn did not reply to several voice messages left at his residence, nor to a pair of emails.)

Griffin, in a blunt contrast, is a single mother of two children who did not attend college and joined the company in May 2014 when Teladoc Health purchased Ameridoc. Working out of the Lewisville, Texas, office, she was in the unit that identified and enrolled doctors and nurses for its provider network. Former colleagues pegged her income as topping out at about $125,000.

With a tangled backstory like that, common sense suggests that the relationship be kept as low key as possible.

That’s not how it happened though: Griffin, according to her former colleagues, openly discussed her relationship with Hirschhorn. And if those co-workers initially harbored doubts about whether their CFO was really rendezvousing with Griffin, they were put to rest when Hirschhorn sent flowers to her desk after some of his Lewisville visits.

(Lewisville, about 25 miles north of Dallas, is where Teladoc Health’s non-executive operations are located, and thus given Hirschhorn’s dual COO and CFO role, he visited frequently.)

It appeared to have been a standard office romance — as familiar to many in real life as it is on TV — with them emailing each other, talking on the phone, going to dinner when Hirschhorn was in town; he even took her to Las Vegas for a few days. Except this was between perhaps the most important man in the company and a woman who, at least at the beginning of their relationship, was barely a mid-level employee.

There was one other aspect to their relationship that struck Griffin’s ex-colleagues as unusual, with very good cause: Griffin told them she and Hirschhorn liked to trade Teladoc Health’s stock together. More accurately, after Griffin received a stock grant, Hirschhorn would tell her when he thought there were good opportunities to sell some shares. His track record, she proudly told colleagues, was pretty good.

Unsurprisingly, this struck many of Griffin’s then-colleagues as massively unfair. As such, one after another they marched into the office of Amy McKay (she was Teladoc Health’s ninth employee) and the executive who was the clinical director and vice president of the payor relations unit — as well as Griffin’s ultimate boss — and loudly complained.

Long aware of the relationship, and shocked at the risk Hirschhorn had incurred as a married man with kids in college, McKay told these colleagues that trading your employer’s stock based on tips from your boyfriend — and the company’s CFO — was the last straw in a situation that in her assessment had become toxic. So in October 2016, McKay drafted an eight-page document that was a timeline of the relationship — and an enumeration of the things that she and her subordinates felt were most problematic about it — and submitted it to both the legal and human resources departments.

McKay, per three of her former subordinates, was pleasantly surprised when Teladoc Health’s legal department told her they had hired an outside law firm to conduct an independent review of her claims. After its conclusion roughly a month later, word got down to McKay that the law firm had substantiated her assertions, and that swift action would be taken to address it.

It’s not hard to imagine McKay’s shock when the promised action arrived on Dec. 27, 2016, in the form of an amended employment contract for Hirschhorn, bearing two new features that he was required to abide: A prohibition from violating the employee handbook, and for a period of one year, a suspension of the scheduled share vesting awarded to him as compensation.

That’s all.

Aside from a slight change in the lightly read legal boilerplate, Hirschhorn remained unscathed, with no other public or private sanction.

Regardless of what 2017 meant for Hirschhorn’s heart, his wallet had one hell of a year, with his total compensation nearly doubling to $3.27 million from $1.21 million.

That wasn’t (literally) the half of what he made though.

Through a Rule 10b5-1 plan set up in September 2016, Hirschhorn sold or exercised Teladoc Health options equivalent to 275,000 shares for almost $7.94 million, before commissions and taxes. According to the Securities and Exchange Commission Form 4 filings that list the securities transactions of corporate insiders, he’s been just as active this year: Through Nov. 2, he unloaded another 265,000 shares, or nearly 99 percent of what he held in January, for just under $13.02 million in proceeds.

(To be sure, there’s nothing inappropriate about an executive selling his stock, especially on a scheduled plan where they have ceded control over the timing of the trades to a broker. Nor is he alone among Teladoc Health’s senior managers in selling a lot of stock —  chief legal officer Adam Vandervoort also sold most of his common stock this year, which when combined with stock options he exercised, grossed over $8.42 million, and chief executive officer Jason Gorevic, whose sales brought him more than $14.89 million.)

Amy McKay, on the other hand, would come to view 2017 very differently.

After spending months “bitterly complaining and arguing with the HR and Legal departments over the [Mark Hirschhorn] decision,” according to two of her former colleagues who talked regularly with her during this period about these conversations, McKay was fired late one morning in October 2017. She said to her former colleagues that all she was told was, “It was a business decision.” The termination came nearly a year from the day she filed her eight-page document, and adding insult to injury, corporate security escorted her immediately from the office. (Within the following two weeks, nearly 20 percent of her unit would resign; three ex-colleagues of McKay put the total as high as 30 percent.)

Amy McKay’s departure cost her the opportunity to have made a good deal of money through stock and option grants, especially given the sharp appreciation in the price of Teladoc Health’s stock over the past year. She would eventually sign a nondisclosure agreement as part of her severance package and she didn’t return numerous phone calls seeking comment. McKay still works in the Dallas area, albeit in a different industry.

Charece Griffin, in contrast, resigned quietly in late 2017 and now sells real estate in the Dallas area.

Andrew Dunlap, an Irving, Texas-based attorney who represented Griffin during the negotiation over her exit from Teladoc Health, said the terms of her severance agreement prohibit him from discussing it in any detail. He did, however, confirm his client’s relationship with Hirschhorn.

Speaking broadly about the circumstances of his representation, Dunlap said, “A settlement was the best combination of fairness and closure open to her.” He said filing a suit and going to trial could have meant a great deal of expense and stress for Griffin, and with the Dallas-Fort Worth area’s tradition of cultural conservatism and a history of racial division, he felt there was a “lot of risk” in asking a jury to side with a black woman who had been in an extramarital relationship with a rich white man.

Dunlap said he is still astonished at the accountability differential between how his client was viewed and treated, and what Hirschhorn experienced.

“After the agreement was signed and I was on my way out of the room, [Teladoc Health’s] outside counsel at Proskauer Rose told me that Hirschhorn was definitely going to ‘feel punished,'” he said. He added, “I took that to mean the company was angry about his conduct and judgement. I didn’t think she meant there would be nothing.” (Dunlap declined to name the Proskauer lawyer he was referring to.)

The aspect of the Griffin and Hirschhorn matter that Dunlap is able to talk more freely about, primarily because he says it wasn’t covered in the settlement agreement, is the trading in Teladoc Health’s stock.

“My own work led me to conclude that at the very least, this was a violation of a bunch of [Teladoc Health’s] own employee conduct clauses,” he said. “I’m not sure why they tolerated the CFO doing that.”

The Southern Investigative Reporting Foundation sought out Dr. William Frist, a former U.S. senator from Tennessee and a key Teladoc Health director since September 2014, to see what (if anything) he and fellow board members knew about Hirschhorn’s conduct. As of the time of publication, Erin Rogus, a policy advisor and spokeswoman for Dr. Frist, had not returned an email seeking comment.


Over the course of reporting this article, as noted above, the Southern Investigative Reporting Foundation made repeated attempts to contact Hirschhorn, Griffin and McKay using phone, text and email. None of them commented for this story.

To make Teladoc Health aware of the foundation’s reporting and to give company leadership a chance to comment, chief legal officer Adam Vandervoort and Chief Executive Officer Jason Gorevic were included in the emails sent to Hirschhorn. See them in two batches. The company did not reply.

Vandervoort did not return two additional phone calls seeking comment; Gorevic, reached on his cell, angrily declined to comment.

With respect to sourcing, seven former payor relations unit employees — all of whom worked closely with both Amy McKay and Charece Griffin from 2014 to the end of 2017 — provided information to the Southern Investigative Reporting Foundation through numerous interviews, as well as their notes of relevant meetings.

Because of their concern over litigation or professional repercussions, these former executives were not named in the article.

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DaVita Inc.: Warren and Charlie’s Excellent Insurance Gambit

Veteran card players pride themselves on their ability to discern what’s known as “the tell,” a series of involuntary mannerisms that can betray a rival’s strategic deceptions and even suggest a possible next move.

On rare occasions a tell metastasizes into a red flag, a clear indication that something is terribly wrong.

An example of the first is buried deep in a transcript of DaVita Inc.’s annual “Analyst/Investor Day” presentation in New York City.

These meetings were once a love fest for Kent Thiry, the kidney care provider’s colorful chief executive officer, with every year a new opportunity to showcase DaVita’s rapidly expanding earnings per share to an audience of brokerage analysts and portfolio managers. In the fall of 2011 Berkshire Hathaway disclosed it had taken a stake in the company, eventually accumulating just under 38.6 million shares, or 20.2 percent of the company’s public float, perhaps the biggest endorsement a management team can receive.

Shareholders, as the chart below indicates, took a cue from Berkshire and began purchasing DaVita stock hand over fist in the autumn of 2011 at its post stock-split prices in the low $30 range.



Those meetings are a little less rosy now, however.

At the May meeting, an analyst asked Thiry how much revenue DaVita generates from dialysis patients whose private (more formally known as commercial) health care insurance premiums are paid by the American Kidney Fund’s Health Insurance Payment Program.

Thiry’s response may be studied by future generations of reporters and investors: “We’re not [and] have not and it would not be in your best interest for us to start providing all sorts of detail on that other chunk.”

The Southern Investigative Reporting Foundation, which is attracted to executive prevarication like a large health care corporation is to a dubious insurance billing gambit — and whose interests assuredly lie in exposing undisclosed risk — took Thiry’s non-answer as a challenge.

After all, a limelight-loving CEO suddenly getting cold feet when asked a basic question about revenue breakdown is a pretty clear “tell” that whatever the answer is, it can’t be too good.

The answer looks terrible for DaVita’s investors. The company’s finances, according to a Southern Investigative Reporting Foundation accounting analysis, appear to be massively levered to an opaque nonprofit, the American Kidney Fund, that may provide up to half of its operating profits. They should define HIPP as a “gravy train,” albeit one perhaps soon to be modified by the word “imperiled” as a combination of civil litigation and regulatory shift poses an existential threat to this cozy relationship.


The definition of HIPP is unusually subjective, depending largely on whether you provide or receive dialysis, or insure those who undergo it.

To the former, the AKF and dialysis clinics — especially the larger chains — it’s an elegant solution to an end-stage renal disease conundrum of longstanding: With the one-two punch of its steep financial costs and the physical exhaustion emerging from treatment, working is often not an option, and many patients exhaust savings or go deeply into debt to maintain their private health care insurance policies. As a function of that, AKF’s HIPP pays its recipients monthly insurance premiums for the duration of their dialysis treatment.

For the latter, mostly insurance companies offering health care to the public, HIPP is a financial headache of a scale eclipsed only by its sheer evil brilliance.

They argue that in the AKF, dialysis providers created a low-risk gambit that exploits a narrow Department of Health and Human Services provision allowing third parties — that is, themselves — to donate hundreds of millions of dollars tax-free to the AKF. The fund then enrolls patients (primarily from its largest donors) who receive the same quality of dialysis care at the same providers alongside Medicare patients. But because a small segment of patients have HIPP, the dialysis providers — two of whom control almost three-fourths of the market — can bill insurers many times the roughly $250 per treatment that Medicare will pay.

Using DaVita’s Securities and Exchange Commission filings, the AKF’s Internal Revenue Service annual Form 990 filings and a little extrapolation, the Southern Investigative Reporting Foundation estimates that at a minimum, AKF’s support helps generate between 40 percent and 45 percent of the Kidney Care unit’s estimated earnings before interest and taxes, or at least $339.4 million through June 30, after a one-time $526.8 million legal settlement with the Veterans Affairs Department is backed out of its results. For 2016, it was more than $728.5 million.

(DaVita has two units: Kidney Care, providing patient dialysis and related lab services, and DaVita Medical Group, which owns physician practices. The Kidney Care unit’s earnings, given DaVita Medical Group’s consistent losses, are thus the company’s profits.)

What makes the AKF’s role so astounding is that those handsome profits come from a base of about 9,000 dialysis patients, barely more than 4 percent of DaVita’s 194,600 patients.

Last October, in response to insurer outrage over skyrocketing dialysis reimbursement levels on commercial policies purchased from the Affordable Care Act’s Health Insurance Marketplace, DaVita announced that it would no longer support patient applications for AKF premium assistance on those policies.

SoSurces: DaVita and AKF public filings and Southern Investigative Reporting Foundation estimates
Sources: DaVita and AKF public filings and Southern Investigative Reporting Foundation estimates


Where DaVita’s own figures weren’t available, conservative assumptions were made, like pegging the growth rate of dialysis patients — historically 3.8 percent — at 1.9 percent through June 30. Given that over 78 percent of the AKF’s $309.8 million in donations last year came from either DaVita or Fresenius Medical Care, the German medical conglomerate that is its primary competitor in dialysis services, the Southern Investigative Reporting Foundation estimated that at least 40 percent of the AKF’s HIPP grants went to DaVita patients.

(Both DaVita and the AKF declined to answer the Southern Investigative Reporting Foundation’s on the number of HIPP recipients receiving dialysis in its clinics, but based on interviews with executives at rival dialysis providers the 40 percent figure was deemed “very conservative.”)

DaVita, in its 2016 Capital Markets presentation, disclosed that privately insured patients are between 110 percent and 115 percent of the Kidney Care unit’s earnings before interest and taxes. To obtain the value of the AKF’s premium support to the company’s profitability, the quotient of the AKF’s commercially insured patients and the company’s commercially insured patients was multiplied by 113 percent.

Seen narrowly, given Thiry’s ownership of more than 2.54 million shares, refusing to discuss the question of AKF’s value to DaVita certainly served his “best interests.” Similarly, as an 18-year veteran of these presentations, he is surely aware that portfolio managers, trained to value a company based on a multiple of its future earnings per share, rarely pay 17 times earnings for a company whose profit growth is slowing and where 40 percent of the operating profit is dependent upon a charity and its circular donor scheme.

Another way to read Thiry’s reticence is as a function of the fact that the AKF relationship is — in the parlance of value investors — DaVita’s sole moat, or a sustainable economic advantage separating it from competitors.

DaVita is an unusual addition to Berkshire Hathaway’s portfolio because its moat isn’t a function of managerial acumen, such as GEICO’s efficiencies (which drive its lower-costs), or the pricing power resulting from global recognition of the Coca-Cola brand. The AKF relationship is a loophole, in the purest sense of the word, made fully legal as the result of a 1997 Department of Health and Human Services advisory opinion permitting donations to the AKF from the major dialysis providers.

Ted Wechsler, an investment manager at Berkshire Hathaway overseeing about $10 billion, didn’t discuss the AKF relationship when he elaborated on his thinking about owning DaVita to CNBC in March 2014.

Ironically, one of Berkshire’s leading lights was blunt with his contempt when offering an assessment of a much higher-profile insurance premium payment gambit at Valeant Pharmaceuticals International during a May 2016 Fox Business News interview.

Charlie Munger, Berkshire’s 93-year-old vice chairman, who has long been a student of what he calls the psychology of human misjudgment, said, “The main thing that Valeant did that was unbelievably clever was to pay the consumers part of the deductible for the drugs they were selling. . . . They paid the consumer share of the deductible and tried to pretend that it was a charitable contribution, when really it was the functional equivalent of bribing the other fellow’s purchasing agent.”

It’s not clear if Munger thinks the AKF is “unbelievably clever” also since he didn’t respond to a request for comment at publication time, but the carve out enabling donations to the AKF did two very important things: It appeared to seal off the fund and the so-called large dialysis organizations — then, as now, primarily DaVita and Fresenius — from prospective kickback allegations. It also enabled both companies to reap the fruits of their multiyear roll-up of competitors.

In a nutshell, insurance companies are required to offer dialysis coverage under network adequacy standards. This is no small matter given that the U.S. government annually spends an estimated $34 billion on dialysis suggesting that commercial insurers — often about 12 percent of the dialysis pool — may spend up to another $5 billion.

The consolidation of dialysis providers and the proliferation of commercial health insurance payors means that in most markets, a patient with end-stage renal disease in need of dialysis might only have DaVita and Fresenius to choose from, affording the company an unusually strong negotiating position.

So how favorable were the deals? The 2017 Medicare base payment for one dialysis treatment is $231.55, although a $250 “blended rate” that takes into account the Medicare Advantage program is likely closer to actual payment levels. For 2016, brokerage analysts estimated that DaVita’s received $1,050 per treatment from commercially insured patients. Even with 88 percent of their patients on Medicare or Medicaid, blended revenue of $346.98 (per treatment) through June 30 led to a 27.4 percent EBITDA margin.

Remarks from Thiry in January at the J.P. Morgan health care conference in San Francisco shed light on how some of these commercial contracts came to be so lucrative.

In a word: outlier contracts.

Seemingly unaware the microphone was still running, at about the 23 minutes 20 seconds point Thiry said that a few commercial insurers this year became aware that their dialysis contracts were so far above market that they chose “to do dramatic things” and “crash and burn” rather than quietly renegotiate. Fortunately, he said, “we’ve had those kinds of contracts for 17 years” and that there “are still a few” of these sharply above market contracts in place.

Source: DaVita Inc. filings
Source: DaVita Inc. filings


Having a few outlier contracts in force adds up, and quickly: Assuming three dialysis treatments a week for one patient, that $8oo daily differential between commercial and government reimbursement becomes $9,600 in a month and over a year, $115,200.

DaVita’s business imperative thus becomes simplicity itself: obtain as many commercially insured patients as possible, a plan congruent with its insistence that at current Medicare rates they lose money on 88 percent of their patients.

Enter the AKF.

As gambits go, the AKF relationship is tactically a stroke of genius: the donations to the foundation are tax-free and given an estimated break-even threshold of $250 per dialysis treatment, DaVita’s ability to collect over $1,000 per session generates a heroic return on its capital.

The connection between the HIPP program remaining in effect exactly as it is and the happiness of DaVita shareholders is essentially the union of two sets — should HIPP be curtailed, or a hard cap of two or three times the Medicare rate be placed on commercial insurance payments, its investors could see earnings per share cut in half.

What’s remarkable about this daisy chain is that the AKF only has one condition to satisfy. In the 1997 opinion, the HHS stipulated that the AKF had to make the HIPP program available to qualified patients with end-stage renal disease, and as part of the evaluation process, were forbidden from using the level of support given the foundation by the patient’s dialysis provider as a criteria.

A growing chorus of voices, however, are alleging that the AKF has not lived up to this obligation.

A New York Times investigation last December described social workers at independent and smaller dialysis organizations as having difficulty in obtaining AKF grants for their dialysis patients. In several instances, according to the Times, social workers said that their patients weren’t eligible for HIPP because of their clinic’s inability to donate.

Additionally, a St. Louis Post-Dispatch story last October cited internal DaVita emails in which dialysis clinic-based social workers appear to have been prompted to steer dialysis patients to commercial insurance policies, away from Medicare and Medicaid.

The relationship between DaVita and the AKF prompted the U.S. Attorney for the District of Massachusetts to issue a subpoena to the company in January.

Dr. Teri Browne, a professor at the University of South Carolina’s College of Social Work, told the Southern Investigative Reporting Foundation that as a 10-year veteran of clinic-based nephrology social work for Fresenius and Gambro Healthcare (a company DaVita purchased in 2004), that DaVita patients were encouraged to leave government insurance for commercial plans solely to improve dialysis revenues. In her view, she felt that this was distorting the mission of the social workers to deliver the best information for the dialysis patient.

(Last September, in response to a Centers for Medicare & Medicaid Services request for Information from end-stage renal disease stakeholders on whether patients were being inappropriately steered to Marketplace plans, Browne filed this statement alleging that this practice was occurring on a regular basis, especially at large dialysis organizations.)

Referring to the current debate over whether DaVita is using donations to the AKF to boost its revenues, Dr. Browne said that as she interpreted it, “The 1997 [HHS] ruling was originally written to help people with the supplemental charges in Medicare and Medicaid plans.” She noted, “Based on what I from interviewing dialysis patients, and what my email listserv [of nephrology social workers] is discussing daily, steering patients away from Medicare is now a closely tracked part of their business.”

And “no one is saying that the AKF or its policies are all bad,” she said, “but [the fund] is [incentivized] to expand clinic-centered dialysis. The large dialysis organizations, who give the fund most of its money, are the obvious beneficiaries.”

Asked what the biggest concern she has with the state of dialysis today, Browne argued that dialysis patients switching to private plans from Medicare/Medicaid are often put at major financial risk should they get a transplant. (The AKF’s premium assistance doesn’t cover transplants.)

“Higher premiums and co-pays are the patient’s obligation if they get a transplant,” said Dr. Browne, who added “patients can harm their listing eligibility for transplants by switching.”

Both the AKF and DaVita have strongly denied, to the Southern Investigative Reporting Foundation and other press organizations, any linkage whatsoever between donations and HIPP enrollment. The AKF said it has taken a series of steps to clarify its policies rejecting any quid pro quo, and it submitted this statement to the CMS last September in defense of its practices.

DaVita’s Thiry, in a Sept. 17 question-and-answer session at a R.W. Baird conference, defended premium assistance as functioning exactly as intended, with everything “totally above board,” while acknowledging “[HIPP is] precipitating quite a political football.”

Thiry also used the R.W. Baird conference as an opportunity to defend the broader concept of switching to commercial insurance, describing the coverage offered dialysis patients as being “vastly superior” to Medicare/Medicaid. (There is no data to suggest that private payers have any better clinical outcomes with dialysis than those on Medicare or Medicaid.)

DialysisPPO, a Malvern, Pennsylvania, dialysis consultancy that offers insurance plan and third-party administrators guidance in reducing dialysis costs, published a November 2016 white paper that argued a line broadly supportive of dialysis provider practices:

“When you lose money on 75% of your volume, you have to make extraordinary profits on the remaining minority. On average, our clients are charged 2,100% of the Medicare allowable amount for the same services. The average monthly charges for each [end stage renal disease] patient is $67,000 across our client-base. It is not unusual for monthly dialysis charges to exceed $85,000.”

Sarah Summer, associate general counsel and director of state policy for Blue Shield of California, took the opposite tack in this interview, claiming that “inappropriate third party payments” via AKF HIPP grants were part of “fraud gaming abuse” imperiling the health of insurers in the ACA Marketplace. Her arguments were amplified in Blue Shield’s Request for Information filing last September. Elaborating on the massive costs the San Francisco-based insurer alleges are shifted upon them, its statement described dialysis providers as using the AKF for “payment arbitrage” to capture up to $170,000 in payments per patient.

Blue Shield of California also stated that the burden of HIPP costs make it nearly impossible to remain economically vital: “Assuming a one percent operating margin for Blue Shield, it takes 3,800 members enrolled for 12 months to make up for a single dialysis patient enrolled by the American Kidney Fund.”

Notwithstanding the very real complexity of treating kidney failure, the fact of the matter is that DaVita made over $1.8 billion last year and its filings show that it hasn’t seen a sub-25 percent operating margin in ages. Those profits, common sense would suggest, come from its ability to push prices ever northward. The New England Journal of Medicine’s Catalyst blog, in an article in June, referenced a 2012 study from a trio of healthcare economists who, in analyzing the effect of competition on the quality of dialysis care for the National Bureau of Economic Research, found that’s pretty much what’s going on.

According to these economists, “average spending for DaVita and Fresenius patients rose about 50% from 2005 to 2009, to about $120,000 annually. Spending for dialysis patients in Medicare rose about 20% during that time, but reached only about $60,000 a year.”

More importantly, statistically speaking it doesn’t seem to matter who pays for treatments since U.S.-based dialysis patients face odds that are measurably slimmer than their peers across the globe. According to the University of California San Francisco’s Schools of Pharmacy and Medicine’s Kidney Project, as many as 25 percent of U.S. dialysis patients die in the first year of treatment, and only 35 percent survive as long as five years. The figures are even more stark when compared to a five year mortality rate of three percent for transplant patients.


The commercial insurers are not sitting on their hands and have taken to the courts to begin the work of pressing their interests, which mostly center around filling in DaVita’s moat.

The first shots were fired in a lawsuit filed last July when UnitedHealthcare of Florida sued DaVita competitor American Renal Associates.

Given that UnitedHealthcare’s primary line of legal attack is to frame the relationship between American Renal Associates and the AKF’s HIPP as a dubious “pay to play scheme” designed only to drive dialysis provider profits and not improve lives, the possible implications for DaVita and its interests are clear.

UnitedHealthcare alleges that the AKF’s administration of HIPP left little to the imagination about how little the fund adhered to the intent of the 1997 Department of Health and Human Services ruling, pointing to its “HIPP Honor System” whereby in the event dialysis providers were unable to “make fair and equitable contributions [to the AKF], we respectfully request that your organization not refer patients to the HIPP program.”

Through last autumn, UnitedHealthcare alleges in an exhibit attached to a filing made in June, this policy allegedly connecting HIPP grants to dialysis provider contributions was posted on the AKFs website.

Aetna is taking a different approach to addressing its costs from the AKF’s HIPP grants, at least for now. In April, it sued DaVita in Pennsylvania’s Montgomery County Court of Common Pleas to enforce what it claims are provisions in its contract with the company that allow it to examine data related to AKF HIPP grants awarded to Aetna members.

DaVita, naturally, disagreed that the contract has that provision and claimed that Aetna hadn’t followed the proper dispute resolution procedures. On the second-quarter conference call in May, Javier Rodriguez, the DaVita executive who runs its Kidney Care unit, told analysts that Aetna’s request was denied.

This isn’t the full picture of where things stand between Aetna and DaVita, though.

A Montgomery County judge rejected the emergency component of Aetna’s request but the balance of its litigation was left to proceed, a state of affairs Rodriguez termed “working with Aetna.”


Spokeswomen for both the AKF and DaVita declined to make executives available for phone interviews but provided written replies to emailed questions. DaVita was provided with the model used to determine the connection between AKF HIPP grants and its profitability, as well as the clip of Thiry talking at the J.P. Morgan conference. While dismissive of the Southern Investigative Reporting Foundation’s questions as biased, a spokeswoman declined requests to elaborate on what, if anything, was incorrect.

Corrections: The original version of this story carried an incorrect number for DaVita’s U.S. patients. According to the company’s third-quarter 10-Q, it is 194,600 not 214,700. Additionally, a reference to a published report that provided an inaccurate estimate of the combined Fresenius and DaVita market share was deleted.  

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Globus Medical’s Inside Job

In February of last year spinal orthopedic device maker Globus Medical purchased Branch Medical Group, a key supplier and contract manufacturing operation based just 3 miles away from its Audubon, Pennsylvania, headquarters.

The BMG deal was announced on the same day Globus released fourth-quarter and 2014 earnings and little attention was paid to what looked like another instance of a high-profile, larger company merging with a small, privately held one.

But with a $52.9 million all-cash price tag, the purchase of BMG was not so small for Globus, which had just reported $474 million in sales for the prior year. Moreover, it was no ordinary deal: In the bloodless language of business law, the BMG purchase was known as a related-party transaction. On paper, as referenced in several annual reports, the families of Globus’ top three executives owned 49 percent of BMG and management enthusiastically proclaimed a good opportunity to take control of the production process. In reality, however, a stroke of the pen allowed those same Globus executives to legally transfer $25.9 million in shareholder cash to themselves.

(It should be noted that while the majority of related party dealings — where the company conducts business with insiders like board members and senior executives — are often as benign as employing an executive’s son or daughter, they have also been at the center of numerous instances of self-dealing and abuse.)

As far as the Securities and Exchange Commission is concerned, the BMG purchase was legal and met the requisite disclosure standards. Since the 2012 initial public offering filing, Globus had acknowledged that the families of its chief executive officer David Paul and senior vice president of operations David Davidar, as well as former president and chief financial officer David Demski, owned the 49 percent stake in the then-unnamed “third-party” supplier.

It’s how very little the disclosure rules really mandate that should trouble Globus investors.

A Southern Investigative Reporting Foundation investigation found that the purchase price — it increased in under eight weeks to $68 million — is very difficult to explain when compared to what a Globus competitor paid for a key vendor under two years prior.

BMG has a host of other issues that merit investor concern, including the undisclosed financial relationship between David Paul and BMG’s ex-CEO and the inability of the supplier’s supposedly remarkable margins to meaningfully contribute to Globus’ earnings.


While the concept of purchasing a key supplier has merits in a time when insurance plans are forcing a movement to capitation, or flat fee payments per patient — thus setting off concentric rounds of price-cutting throughout the health care system — Globus’ BMG deal has a big head-scratcher: the price.

Unusually, the $52.9 million price in the February press release became $68 million when the Proxy was filed in late April, a 22 percent increase. The reason given: working capital adjustments from $9 million additional cash in a BMG bank account and $5 million in accounts receivable. To be sure the deal’s legal provisions did note that the price was “subject to adjustment to certain working capital items.” Most every acquisition has a provision for it — examples include tardy customers finally paying up or some inventory getting written down as a project is cancelled.

A 22 percent working capital adjustment upwards, however, would appear to be exceptionally rare.

How so? One of the first things the suitor verifies in the due diligence process is cash balances. Obviously any company would want to know what’s in the bank; less obviously, cash accounts have often been the proverbial canary in the coal mine with respect to operational or governance problems. Inexplicable swings up or down in cash balances, or large payments to or from unknown entities, can suggest a host of looming problems. So this part of the vetting process often gets granular quickly as one team of finance executives grills the other about the minutiae of their payment cycles and receivables portfolio payments.

For a company that did $21.9 million in revenues in 2014, $9 million cash is a great deal of money to surface over an eight-week period. The Southern Investigative Reporting Foundation sought clarification from Globus on the specifics of the working capital adjustment.

Globus president Anthony Williams, in answering a question about the working capital adjustments, took exception to the Southern Investigative Reporting Foundation’s characterization of the BMG deal’s price as having increased. He said the net expense to Globus remained $52.9 million given that the $9 million in cash, $5 million of accounts receivable and another minor adjustment effectively canceled the roughly $15 million price spike. (See his full answer here.)

In any event, by several yardsticks the BMG deal is remarkably expensive.

At the time of purchase BMG had $24.3 million of net assets — $14.9 million of which was plant, property and equipment — and over 60 percent of the allocated purchase price was goodwill. Despite interviews with former BMG officials who point to the supplier’s equipment being both modern and well-maintained, at the end of a day, paying over 2.5 times net assets for a contract manufacturer is considered remarkably expensive.

Looking at the purchase another way, during the Globus conference call discussing 2014 annual results, the interim chief financial officer David Demski said Globus planned on pumping “approximately $15 million to $17 million” into BMG to double its “sourcing.” If taken as an approximation of replacement value, this implies that between $15-$17 million would allow someone to replicate the supplier’s existing production capacity. So a $68 million price means that Globus paid 4.3 times replacement value. Investment bankers who work in the medical manufacturing sector told the Southern Investigative Reporting Foundation that twice replacement value is standard.

Then there are transactions within Globus’ marketplace.

NuVasive, a Globus competitor in the spinal orthopedic market, beat it to the punch when it purchased one of its own key contract manufacturers, ANC, in 2013 for $4.5 million. ANC is about two-thirds BMGs size, with 65 employees and 35,000 square feet of production space to BMG’s 110 staff and 50,000 square feet. Their economics were broadly similar, according to their last available financial filings — ANC did $19.5 million in revenue in 2013 and BMG reported $21.9 million in 2014.

Globus’ Williams said that an independent committee of Globus’ board of directors had hired Houlihan Lokey to do a fairness opinion. The investment bank concluded that comparable transactions were done between 5.5 times and 7 times 2014 EBITDA, making the BMG deal, he said, at 5.7 times its EBITDA a bargain for Globus shareholders.

The Southern Investigative Reporting Foundation asked Williams for a copy of Houlihan Lokey’s fairness opinion and received no reply; he was also asked why Globus, unlike many other companies, didn’t include a copy of the opinion when the merger documents were filed. In reply he said, “In my experience we took all of the steps that would be appropriate for an acquisition of this nature.”

A call to Houlihan, which does not list the BMG deal on its website’s list of advisory clients, was not returned as of publication time. (Williams’ full response is here.)


Buying BMG created an interesting dynamic rarely seen in the world of mergers and acquisitions: a husband and wife on the opposite sides of the negotiating table. While this sounds more dramatic than it likely was, David Paul’s wife, Sonali Paul, was the designated shareholder representative for BMG’s investors, according to the merger agreement; she was also BMG’s designated representative.

There is some evidence to suggest the deal had been long planned for. Spine Therapy Technologies LLC, the North Carolina holding company she used during the BMG sales process, was created in January 2014. Don Reynolds, the lawyer from Raleigh, North Carolina’s Wyrick, Robbins, Yates & Ponton law firm who set it up, is a longtime Globus adviser who was listed on its IPO prospectus (and Anthony Williams’ former law partner).

In response, Williams said that the use of entities like Spine Therapy Technologies is standard in mergers and that Don Reynolds’ law firm had represented BMG since its inception. (See here for his full response.)

One oddity of the merger has been BMG’s minimal contribution to Globus’ bottom line, despite having disclosed $9.1 million in adjusted EBITDA in 2014. IBMG’s 39 percent adjusted EBITDA margin was almost three full percentage points better than Globus’ so it should have been an immediately visible contributor to profits.

Using pro-forma numbers, released in Globus’ quarterly filings which include BMGs results, the supplier would have added only $816,000 in income in 2014. That’s a difficult number to understand — assuming a standard 35 percent corporate tax rate, and eliminating interest (BMG had no debt) this leaves only depreciation as a culprit, but a three- or four-year depreciation schedule on modern equipment is very unusual.

Asked about this, Williams said, “The profit and loss benefits take time to realize based on accounting principles. As we’ve publicly stated on several occasions, BMG’s profit becomes part of Globus Medical’s inventory and is recognized on our income statement as that inventory is sold.” (See his full statement here.)


BMG began life as BCD Manufacturing Group LLC in March 2004, started operations the following year with a $2 million loan from Globus and was located in Globus’ headquarters building for five years; in February 2008 its name was changed to Branch Medical Group. (Anthony Williams, then a lawyer for the Wyrick, Robbins firm above, handled the paperwork.)

Through March of 2009, David Paul was BMG’s president and CEO. Within a year after Paul stepped down, his wife Sonali, as well as David Davidar’s wife Janet, became board members. David Demski, who would become Globus president and chief operating officer, was also a BMG board member and its treasurer.

Globus classified BMG as a variable interest entity, meaning that the supplier’s revenues were kept on its books — but presented separately. That changed in late December 2009 when an investor — the company refuses to disclose who — made a $2 million investment and the company became independent.

After Paul gave up BMG’s helm in March 2009, Mahboob Khan, a childhood friend of his, moved to America and was appointed the supplier’s choice. Despite the pair’s personal bonds, he was not an intuitive choice to run a a complex orthopedic device business, having run a shoe business in India. In reply to a question about Khan’s qualifications to run BMG, Williams said, “Mr. Khan did much more than just run a leather shoe factory in Chennai. Mr. Khan’s expertise was in a large-scale manufacturing operations supplying a global market. He ran factories with thousands of employees.” (See Williams’ full reply here.)

Khan and Paul must be truly close friends because when Khan and his wife bought a very attractive 7,900 square foot house in Phoenixville, Pennsylvania, on 2.5 acres, Paul co-signed two mortgages worth $836,000 (one for $804,000 and another for $32,000). In May 2011, when Khan refinanced the property, Paul assigned his one-third interest in the property to Khan and his wife for $1.

A personal guarantee of the magnitude Paul extended Khan could have conceivably raised questions about Khan’s ability to aggressively stand up for BMG’s interests.

The reason relationship wasn’t disclosed, according to Williams, is because Paul did not pay any amounts under the initial mortgages and he had only co-signed in the first place because his friend didn’t have the requisite credit history to obtain a loan.

Khan had an ownership stake in BMG, Williams said, but he declined to specify how much. Pressed on why its owner group remained hidden, Williams said the supplier had goals of doing business with other large medical device manufacturers and its owners argued to Globus that publicly disclosing their relationship in the IPO prospectus might alienate prospective customers.

As it emerged, BMG had few customers, prospective or otherwise, apart from Globus which regularly accounted for between 90 percent to 95 percent of its revenues, according to Securities and Exchange Commission filings. (See Williams’ full response here.)


The Southern Investigative Reporting Foundation spent a week seeking answers to its questions via phone and email from a series of Globus executives named in this story, as well as Brian Kearns, its new investor relations chief.

(If Kearns’ name seems familiar, it’s likely because of the 2009 SEC complaint brought against him related to his stint as CFO of MedQuist, a failed medical billing operation. As part of a settlement, he paid $50,000.)

Neither Sonali Paul nor Mahboob Khan replied to a series of detailed voice messages left on their mobile phones.

In fact, no Globus executive replied to messages sent to them except Anthony Williams. He gave these answers to questions posed to him.

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Irreproducible Results Inc.

The press release went out at 1:05 p.m. on March 26, and heralded big things for OvaScience, a barely 3-year-old company based in Cambridge, Massachusetts, that is making quite a splash peddling a pair of seemingly revolutionary procedures to assist women struggling with conception.

The company, which didn’t exist five years ago outside of the ideas in a Harvard Medical School professor’s journal articles, touted its 53 percent success rate in one of the first fertility clinics offering its AUGMENT treatment, and appeared to have once again checked off a box on what has been a very fast track to success.

Indeed, by any yardstick, OvaScience’s first few years of existence should make any management team green with envy. Wall Street’s brokerage analysts are supportive of the company’s every move, investors had bid its share price steadily northward and national media provide a ready forum for management’s message.

At the center of it all is the Longwood Fund, a small venture capital outfit that raised the seed capital to get OvaScience launched. A pair of equity offerings
later, the fund’s three partners have a 19.5 percent ownership stake in the company currently then worth just above $185 million.

(Stripped down, AUGMENT is a procedure where mitochondria — the energy-generating organelles within a cell — are co-injected with sperm during an in vitro fertilization procedure called intracytoplasmic sperm injection, or ICSI. The company’s theory is that the mitochondria injected from the women’s ovarian lining stem cells stimulates eggs whose energy levels are diminished.)

From a business perspective, with a frantically motivated patient base and at a cost of up to $25,000 per treatment (in addition to the $10,000-$15,000 a patient can expect to pay to her physician for IVF), it’s clear AUGMENT could be potentially lucrative.

But a funny thing happened on March 27: As OvaScience’s chief executive officer, Michelle Dipp, began a conference call around 10 a.m., recounting what the company described as encouraging news about AUGMENT’s effectiveness, the company’s shares were beginning a price collapse that would see them drop nearly 10 percent on the day, or $4.82, to $43.47.

It was a long week indeed at Longwood’s offices on Boston’s Boylston Street, as the price collapse knocked almost $300 million of market capitalization off the stock, $58 million or so of which belonged to Dipp and her partners.


So what spooked investors?

A good place to start was OvaScience’s release itself. The company claimed that 17 women had received the embryo transfer and 9 became clinically pregnant for a 53 percent success rate. But reading the release more closely shows that 26 women got the treatment and, of them, 7 were able to maintain a pregnancy for slightly less than a 27 percent success rate.

Investors, it appears, drew a very different conclusion of what these results meant.

More important, given the absence of a control group, or a group of women who didn’t receive OvaScience’s treatment, discerning whether these results are troubling or promising is unknowable. Since it’s not a formal study, calculating results that might ordinarily depart from industry norms, like ignoring the full amount of women receiving the treatment, is perfectly feasible. The results can then be interpreted in a host of different ways which Dipp seized on, proclaiming at the end of the release: “Our AUGMENT treatment is having a positive impact on pregnancy rates in a variety of women who are struggling with infertility.”

Notwithstanding the difficulty posed by the absence of a control group, the Centers for Disease Control’s archive of assisted reproductive technology statistics suggests at least a broad idea of what the press release’s reported effects mean.

The median age of the women receiving OvaScience’s treatment in the Toronto clinic was 33, with an average of two previous IVF treatment cycle failures.

According to the CDC in 2012 — the most recent year available for data — of the women studied who were 35 and younger who failed two prior IVF treatment cycles and received IVF with fresh non-donor eggs or embryos, 33 percent were expected to deliver a live birth.

Digging further into CDC data, with the same conditions applying, for women between 35 and 37 years old, the figure is 28 percent; between 38 and 40 years old, it is 22 percent.

Source: CDC
Source: CDC

The lack of data would be odd for most companies touting a revolutionary treatment for one of humanity’s most vexing issues, but OvaScience is different: Its website lacks presentations from analyst days or investor conferences, there are no speeches from its executives or scientists and, per above, there are no formal studies.

One window into the OvaScience management team’s thinking is a recent article from quoting Dipp as saying, “The [fertility] industry just doesn’t do trials.” Additionally, Dipp indicated that the company — whose $60 million in cash was bolstered by a January offering that raised $132 million — readily cover the costs of any study — is unlikely to launch a trial in the near future as it is not in anything other than “a low-level ongoing dialogue” with the Food and Drug Administration.

It is no mean feat trying to reconcile what Dipp meant by “the fertility industry doesn’t do trials” with the fact that she is both a medical doctor and Ph.D. holder intimately familiar with both medical research procedure and the Food and Drug Administration regulations. To provide just one example, every physician prescribed oral contraceptive — and a host of other fertility assistance drugs — have been studied in formal scientific trials.

So why does a company with “Science” in its name apparently not want its own science put to the rigors of a formal scientific evaluation?

At one point OvaScience actually did (sort of) want that.

In September 2013, OvaScience announced that the FDA sent the company a letter informing them it was questioning their decision to pursue approval as a human cellular tissue product, or HCT/P, and instructing them to file an investigational new drug application. The FDA’s review process for a drug is vastly more thorough (as well as time-consuming and expensive) than what OvaScience had been seeking. In response, the company said it anticipated further discussions with the FDA, suspended its then-nascent U.S. study and began to look for international testing opportunities.

For investors, Dipp’s confirmation that for the foreseeable future the company will not have access to the affluent U.S. market probably did little for their enthusiasm.

This is not the first time Dipp and her Longwood partners, Christoph Westphal and Richard Aldrich, have been under the spotlight for launching companies whose heavily touted prospects have been called into question.

Frankly, it’s not hard to discern a pattern of sorts in how the Longwood trio handle their investments. Partner with high-profile researchers from prestigious institutions, incorporate with a mix of venture capital outfits and local celebrities, quickly cash out investors by going public, obtain fawning press coverage, leverage multiple underwritings into research analyst support, and in two instances discussed below, profitably sell the company before critical scientific flaws surface.

In April 2008, Christoph Westphal was then CEO of Sirtris Pharmaceuticals when he brokered a sale of the company to GlaxoSmithKline for $720 million. Two and a half years later, the giant British drugmaker shut down research into SRT501, the company’s primary drug that was being analyzed for the treatment of multiple myeloma, or cancer of the white blood cells. By 2013, all but a handful of Sirtris’s remaining employees had been let go.

Prior to the shuttering of the Sirtris unit, however, matters took a surreal turn.

In August 2012, Westphal and Dipp were caught using the Healthy Lifespan Institute, a nonprofit foundation they had set up the year before, to sell synthetic supplements that were broadly similar to the SRT501 drug (at $540 for a year’s supply) they sold to GlaxoSmithKline. The day after Dipp confirmed it to Xconomy, a Boston pharmaceutical and biotech industry news site, broke the news that GlaxoSmithKline ordered them to cease selling the supplement. The company did, however, follow through with its commitment to make an initial investment in Longwood.

Another deal brokered by the trio that proved painful for a major pharmaceutical company was the July 2010 sale of the Westphal and Aldrich-founded Alnara Pharmaceuticals to Eli Lilly for $180 million. The deal was all the more impressive in that Alnara’s primary drug, Liprotamase, had been licensed to the Cystic Fibrosis Foundation in 2009 when its developer Altus Pharmaceuticals couldn’t fetch any buyers. Less than a year later, in April 2011, the FDA rejected Liprotamase for its intended purpose of treating exocrine pancreatic insufficiency. Ultimately Lilly took a $205 million write down to discontinue these operations (this figure also includes discontinuation costs for another drug).


Concerns about the efficacy of OvaScience’s treatment program pale in comparison to the controversial history of the science — and scientists — behind the company.

OvaScience is based on the research of a pair of Ph.D.s, David Sinclair and Jonathan Tilly, former Harvard Medical School colleagues (Tilly has since become the chairman of Northeastern University’s biology department) whose research interests have combined stem cells and their fields of, respectively, aging and reproductive biology.

In August 2004, a Tilly-led research team published an article in Nature magazine that pointed to stem cells in female mice that potentially regenerated eggs after birth. The importance of the claim is difficult to understate. If it were replicated, his finding would turn accepted science on its ear, given the 50-year-old axiom that all female mammals, including humans, are born with their lifetime’s supply of eggs. A follow-up article one year later in the academic journal Cell described these ovarian stem cells as possibly residing in bone marrow and creating new eggs in as little as one day.

The articles kicked off an experimental frenzy as researchers on several continents sought to replicate Tilly’s findings.

Unfortunately for Tilly, they appear to have failed. What’s worse is that they began the reproductive biologist equivalent of a flame war, with a series of articles from fellow academics that took him to task for his conclusions.

The most potent criticism of Tilly’s work came from his then Harvard colleagues Dr. Amy Wagers and Dr. Kevin Eggan, whose research for a 2006 Nature article described their inability to induce a pair of mice — the test subjects for Tilly’s work — to produce more eggs.

The debate became so protracted that Nature wrote an editorial about it in 2006, summarizing the depth of skepticism about Tilly’s findings. To be sure, the editorial did note Tilly’s pointed objection to the Wagers/Eggan findings — that they did not precisely replicate his study — and that the egg count of the mice Wagers and Eggan worked on remained steady over time, as opposed to declining.

Dr. Roger Gosden, a recently retired co-author on the 2006 Wagers-Eggan paper, told the Southern Investigative Reporting Foundation that he stands by the research investigating Tilly’s claims.

“Nothing I have seen — and very few labs are doing this work — suggests that these eggs are regenerating,” Gosden said. “Even if [Tilly] was correct in some broad fashion, other labs surely would have seen seized that research foundation and built on it. That’s not the case.”

Gosden said the inevitable attention that Tilly’s hypothesis generated in the business and media worlds raised a great deal of hope among women who were desperate to conceive.

“If there isn’t proof of replicability for a claimed discovery or process, then the scientist has an obligation to note that, even though feelings are hurt.”

Another who disputes OvaScience’s scientific premise is former Jackson Laboratory scientist John Eppig, who like Gosden is a recently retired veteran of decades of reproductive biology research. “Within the reproductive biology community, there is very little support for what [Dr. Tilly] has asserted,” he said. “I suspect he misidentified [egg-like] cells that are not functionally reproductive.”

“There is also a broader question that needs to be answered from this work: Why do women go into menopause at all if there are these stem cells present?”

OvaScience’s other co-founder, Dr. David Sinclair, is no stranger to scientific controversy either. The first to theorize that Resveratrol — an organic compound found in the skin of red-wine grapes — might activate sirtuins, the proteins that influence cellular processes like aging and inflammation, his work became the framework for Sirtris Pharmaceuticals.

As noted above, while nothing short of a boon for Sinclair financially, the work proved highly controversial. In January 2010, researchers from Pfizer very publicly stated that it could not replicate any of Sinclair’s results from his original Nature paper; a month earlier, in December 2009, Amgen had more quietly challenged the very scientific premise of the drug.

When Nature magazine wrote a piece analyzing the criticisms of Dr. Sinclair’s theory, he was quoted suggesting that Pfizer’s chemists had made some elementary mistakes in attempting to replicate his work.

It would get worse: In 2011, Nature ran a study from the laboratory of MIT biology professor Dr. Leonard Guarente — Sinclair worked in Guarente’s lab prior to joining Harvard — that sharply reduced the estimates of theoretical life extension benefits from sirtuin to 10 percent to 14 percent from 15 percent to 50 percent.

Finally, as noted above, GlaxoSmithKline abandoned drug trials on Sirtris’ SRT501 in 2011, stating the drug “may only offer little efficacy” and could possibly worsen kidney problems.

Sinclair told the Southern Investigative Reporting Foundation that a series of papers he has released in the past several years, specifically one published in Science in 2013, have effectively cleared the matter up and “that the dispute you mention is no longer an issue among scientists.” Additionally, on the topic of Sirtris’ being shut by GlaxoSmithKline after clinical testing was halted, he said the company is fully engaged within the field of sirtuin research. (See here for the questions posed to Sinclair and his responses.)

The bitter criticism from both academic and corporate scientific colleagues sure hasn’t hurt either of their pocketbooks though: In the S-1 filing prior to OvaScience’s initial public offering, both professors were listed as owning 701,927 shares in addition to annual consulting deals. Tilly, who has resigned from the company’s board of directors, was paid $180,000 last year as a scientific adviser; the most recent proxy filing does not mention Sinclair’s name, but in response to the suggestion that his absence from the filings meant he had sold his stock, he said that the notion was “completely false.”

As detailed in Sirtris’ filings, Sinclair had a $150,000 per year consulting contract, was a board member and owned 242,000 shares, worth just over $5.4 million when the acquisition closed.


Over the course of two weeks in late March, repeated attempts were made by both phone and email to contact both Christophe Westphal and Michelle Dipp.

An OvaScience communications staffer, Cara Mayfield replied two days prior to publishing that the company “won’t be able to meet your timeline” and would not be replying to questions.

Dr. Jonathan Tilly did not reply to a pair of emails seeking comment.

Corrections: The original version of this story did not calculate the size of the Longwood fund (and its three partners) in OvaScience, nor its value, using the most recent documents. It is about 19.5 percent of the 27.12 millions shares outstanding, worth just over $185.2 million. The seven women in the Toronto test were clinically pregnant but have not delivered children. Additionally, a reference to the company’s cash position has been changed to include the announced proceeds from a January equity offering. The Southern Investigative Reporting Foundation regrets the errors.

Posted on 50 Comments

The Invention of Professor Dr. Anthony Nobles

Reader, let’s not mince any words about Dr. Anthony Nobles, a 50-year-old inventor, teacher, community leader, entrepreneur and soon-to-be space tourist: His life is vastly better than yours.

Hailing from Michigan, Nobles didn’t start with much but using his pair of biomedical engineering doctorates he developed a patented heart suture technology that he claims has saved thousands of lives; it certainly saved his bank account, because he has been able to buy residences in Steamboat Springs and a seaside borough of Orange County’s Huntington Beach. How many biomedical engineering doctorates do you have, reader? None? The Southern Investigative Reporting Foundation thought so.

A man of enterprise, Nobles has folded these patents into a host of public and private companies he has launched over the years — about two dozen at last count (including a private equity firm that raises money to invest in companies Nobles already runs).

But let us not get bogged down in commerce and instead celebrate how this man lives so much more fully than the rest of us.

For instance, perhaps you enjoy decorating your house at Halloween, maybe making an extra trip to the store to get cardboard skeletons and a few hanging spiders?

Silly reader, you are not even in the game: Nobles oversees one of the largest Halloween displays in California, with 30,000 people coming to his 2012 effort, which featured 15 actors, 40 robots and one year cost upwards of $250,000. Does your Halloween display have actors and robots? Of course it doesn’t. Did you drop $250,000 on it? How silly are we for even asking?

So you like going to the museum? Good for you, but you should know that Nobles built his very own, “the Nobles Family Auto Museum,” housing his collection of 105 vintage and rare cars, (including racing legend Michael Schumacher’s 2001 Formula 1 race car and, he said, 38 Ferraris). No need to be difficult about it, but if you were going to build a museum, dear reader, it would probably have things like your uncle’s uniform from the Korean war, not cool stuff like race cars.

So if you had a “bucket list,” loyal reader, what would be on it? Whatever it is, the Southern Investigative Reporting Foundation is sure that it doesn’t include getting awarded the Nobel Prize for curing “disease states.”

Maybe you fancy yourself tech savvy and like to keep up on the latest gadgets?

Well, the next time you use a portable computer or electronic book, please offer a silent word of thanks to Anthony Nobles because he helped develop them which, let’s face it, could not have been easy when studying for two doctorates and running a lot of companies.

While dominating this mortal coil, Nobles takes time out to be a civic-minded fellow, with he and his wife donating so much money to their town’s community center refurbishment project that it was renamed the “Nobles Family Community Center.” Shortly after it was renamed, Nobles stood for a seat on the town council and won. It is a safe bet, of course, that you, dear reader, did not donate enough cash to your town’s community center so that it was named after you.

Putting it bluntly, comparing the life of Anthony Nobles to ourselves is a fool’s errand — most of us would be happy to vacation near a beach in Southern California, or to
spend a few minutes behind the wheel of a Ferrari; Anthony Nobles calls that “Tuesday.”

Incredibly however, lurking here and there, are a ragged band of malcontents and embittered cynics who don’t see Anthony Nobles as a real life Tony Stark or even a community-minded entrepreneur.

Heretics all, they see a businessman whose true vocation is selling ideas and investible notions that never emerge as promised.

A better word for these people is “investors” and with few exceptions, they appear to be correct. Anthony Nobles has a storybook life yet, according to Southern Investigative Reporting Foundation research, it appears most (if not all) of the capital he has raised has failed to earn a return.

Over the course of two months the Southern Investigative Reporting Foundation investigated Anthony Nobles and his business career, conducting interviews with a series of his former investors and colleagues and analyzing documents from both his public and private ventures.

What follows are the broad strokes of how Nobles used a combination of imagined and overstated credentials about his schooling, his teaching career, and his success as a entrepreneur to craft his greatest invention — the legend of himself as a medical technology renaissance man.

Time and again, for more than two decades, high-profile and sophisticated investors have reached for their checkbooks.

In the main, based on what the Southern Investigative Reporting Foundation can determine, most of those investors don’t do terribly well and, according to several sources, Nobles has been actively trying to expand his investor base, especially in Asia and Europe.

What follows below is how he does it.


Anthony Nobles is a man eternally on the hunt.

What he seeks is capital to grow his many ventures, businesses that in turn have provided him the lifestyle discussed above.

His many businesses, in other words, require a long ton of cash.

It’s not an irrational concern because Nobles’ enterprises compete against the world’s largest biomedical technology companies, whose research departments are staffed into the thousands with annual budgets of many hundreds of millions of dollars.

And those Ferrari Formula 1 racing cars start at $1 million each.

Anyone looking for big venture capital money needs a sell, that thing which instantly sets them apart and gets a foot in the door. For those who compete on the perception of superior brains and creativity, having little to point to educationally, especially when the others guys have platoons of Ph.D.s, is probably not so easy to explain away.

So Anthony Nobles came up with what video game players call a “cheat,” or a shortcut around an otherwise complex problem, like, for instance, a lack of the academic credentials that make investors comfortable with medical device entrepreneurs. So he launched what might be called “an academic arms race.” If research scientists elsewhere had Ph.D.s, he would have two. If those scientists publicly used the honorific “Dr.,” Nobles used “Professor Dr.” in his communications.

Evidence the first: Nobles claimed to have earned two Ph.D.s, both in biomedical engineering, from Glendale and Redding universities. For years the dual doctorates were the centerpiece of Nobles’ credentials. Click to see what the biography page of his website looked like and for a reference to them in a Securities and Exchange Commission filing.

(Over the past few months, Nobles has been carefully amending his once flamboyant online profile and has been removing many of the mentions of his so-called degrees.)

It worked. Nobles’ implicit assertion that he was among the most credentialed people working in the medical device industry was at least tacitly accepted, and few, if any, asked what kinds of schools Redding and Glendale universities are.

Because if someone had, it would take the person maybe three minutes to see that they were online diploma mills: Give them your credit card number and you instantly have a degree in most anything.

As it emerges, both schools have fallen on hard times, with federal prosecutors charging James Enowitch, the Connecticut man who founded both Redding and Glendale, with mail fraud. In May he pleaded guilty to selling $5 million worth of fake diplomas.

Central to Enowitch’s diploma mill scam, according to prosecutors, was setting up a phony degree verification service and for an additional fee, allowing the purchaser to select the courses and grades to be featured on the fake transcript.

The cost to Nobles for all of this ersatz educational experience? According to federal prosecutors, $550 for a doctorate and 50 percent off for a second diploma, so figure about $825 all in. (A 2006 New York Times article presents a clear picture of how diploma mills operate.)

Let’s be perfectly clear: Glendale and Redding are not accredited, and do not have faculties, curricula or campuses. No one with a “degree” bearing their names can say they learned — or earned — anything. The schools only employ sales staff, who pitch computer-generated diplomas and a few fake transcripts.

Here are the diplomas and here is an analysis of Nobles’ Redding degree by Harv Lyter, an Idaho State Board of Education official who had looked at the school when Redding claimed, at one point, to have a school in Idaho.

There are several things noteworthy about the documents. Absurdly (and impossibly) both schools share the same president and chairman of its board of trustees. Secondly, Nobles managed to be awarded all those diplomas on the same day, Feb. 14, 2007. While this made for a potentially memorable Valentine’s Day dinner for Nobles and his wife, as an academic achievement it is rather improbable.

Finally, in a truly surreal twist, Nobles entered copies of his fake diplomas as evidence that he had doctorates — and used the “Dr.” title — in a very real legal filing he submitted as part of an ongoing defamation suit he has brought against a pair of private investigators who had posted online that (among other things) his academic credentials are bogus. (Online sleuths, however, sussed out Nobles’ dubious Redding and Glendale doctorates years ago.)

Controversy over fake degrees is old hat to Nobles, though, having been nailed for making up a series of degrees before.

In the early 1990s, the Vancouver Sun first broke the news that Nobles — then the founder and chief executive of privately held Surgical Visions Inc. — was lying about having a bachelor’s degree in physics from the University of Texas at Arlington and a Ph.D., from the University of California, Los Angeles in electrical engineering.

Much like using the fake doctorates as evidence in a legal filing, Nobles apparently was convinced that he would not be caught. John Rogitz, a former in-house attorney for Nobles who sued him in 1993 for breach of contract, claimed that he prominently displayed the fake UCLA and University of Texas diplomas in his office. (The case was settled and terms not disclosed.)

Being publicly exposed levied some rough justice on Nobles: The $5 million investment from another company that was the centerpiece of the deal was pulled, the public listing was halted, he was forced to resign and was later sued by an investor, Dr. Joseph Litner.

A physician who provided a declaration to the defense team in Nobles’ litigation against the private investigators, Dr. Litner asserted that Nobles, circa 1992, knew very little about human anatomy and even when trying to stage a demonstration on a cantaloupe (at a business meeting at a restaurant) could not clearly assert what his technology was designed to do.

Nobles would later publicly acknowledge that the degrees were fake but argued that he was put up to it by some of the characters advising him, which included legendary Vancouver Stock Exchange stock tout Harry Moll, whose promotions over the years have run the gamut from self-watering plant minders to mega pearls harvested from a giant clam.

Moll, whose stock pumping days are over, is now firing back at Nobles, and he is not shooting blanks.

Here is Moll’s declaration (entered by the defense in the aforementioned defamation case) about his experience with Nobles.

To wit: Moll, in laying the groundwork for a possible listing for the Nobles-helmed company, had commissioned a Kroll Associates background investigation of Nobles after getting a tip that his background might not be what he was claiming — that he had a Ph.D. and was a medical doctor.

The tip was spot on, and Kroll found no evidence of either the medical training or college degrees, and Moll confronted Nobles about it.

Moll said the then 27-year-old Nobles explained the discrepancies away by telling him that the Central Intelligence Agency had purged all of his academic records a few years prior. This, he said, occurred during his tenure as a physician “working on aliens” at a secret facility in Roswell, New Mexico, so his work and credentials would have to remain classified.

Space aliens and the CIA are rare combinations in a business story. To get to the bottom of this Southern Investigative Reporting Foundation called the 80-year-old Moll, now living in retirement in Nevada, and rather forcefully demanded an explanation.

Moll was blunt and measured in his insistence that his signed declaration is accurate, that the conversation between he and Nobles occurred in that exact fashion and there was more to the story but he kept the filing brief. It was made and sworn to in late January when he was approached by a lawyer for the investigators and he was relieved, he told the Southern Investigative Reporting Foundation, to finally establish the record about what Nobles had said.

(Finally, he let the Southern Investigative Reporting Foundation have it with both barrels for questioning his honesty; the remarks were truly unprintable.)

“He said every word of this and more. He had a lot to tell me about this super secret project and was really afraid that I would tell people about it,” said Moll, who alternately said he is still baffled and angry about Nobles and what he called his “bullshit story.”

“[Nobles] thought I would quietly tell investors that he worked on a super-secret CIA project and [his lies] would be OK,” he said. “I walked out of the room and couldn’t believe that he thought this kind of insane bullshit was acceptable. I lost a lot of money — another guy lost almost $500,000” and he was making up something about flying saucers.

Moll insisted that he would happily defend his entire declaration in court if called upon to and that he wasn’t paid any money to write it.

“My big regret is that I didn’t go public with [Nobles’] excuse sooner since he would have been ruined,” he told the Southern Investigative Reporting Foundation. “I sat on the truth and feel badly about that; maybe I could have saved people money.”

Another former Nobles colleague told the Southern Investigative Reporting Foundation that Nobles had referenced a stint working with the CIA in discussing his background.

In the late 1990s, Nobles met with Alfred Novak, the former chief financial officer of Cordis Corp. (Nobles had done some contract work for Cordis in the mid-’90s) to discuss a possible investment in his then-company, Sutura. As part of their conversation, Novak told the Southern Investigative Reporting Foundation, Nobles told him about working with the CIA “in a special program” but would not discuss it further; Novak said he turned the conversation quickly to business and the matter was dropped.

The CIA has not responded to a request for comment regarding Nobles’ claims.

(Novak, along with friends and a private equity fund would eventually invest $11 million in Sutura in 1999; in 2005 the group sued Nobles and the company alleging a host of operational and governance problems. The suit was settled in 2007 and their investment was lost as Sutura collapsed.)


The “professor” part of “Professor Anthony Nobles” is only slightly more accurate.

As part of a court submission (see page 11), Nobles described how affiliation with a college lent prestige and attracted investors: “The credibility afforded me as a university professor or lecturer aids immeasurably in building the credibility I need to build my company and complete the pending investment under diligence.”

For several years Nobles’ website claimed he was a “visiting professor” at the University of California, Irvine but the reality is less exalted: never a faculty member, he was part of a volunteer mentor program working with students in the biomedical engineering department and had spoken in several classes.

According to emails reviewed by the Southern Investigative Reporting Foundation, the prominence of Nobles’ claimed UC Irvine affiliation occasioned a mini revolt within the department in the early fall of 2013. After Nobles asked to join the faculty as a visiting professor, red flags emerged when, upon being asked to submit a resume to begin the formal consideration process, what he provided was what someone in the School of Engineering’s dean’s office described as “a list of accomplishments. . . . It was like he had no idea what a resume is.”

Concern among faculty members soon spread as professors unearthed his diploma mill degrees and the Vancouver controversy and one suggested hiring a private investigator to dig into his background.

Ironically, the faculty emails show the professors were less concerned over Nobles’ lack of academic credentials than they were about his track record of making them up.

“No one cares if you don’t have a degree. Look at Steve Jobs/Bill Gates/Mark Zuckerberg,” wrote another professor. “So why does he have all these fake degrees and everyone calls him “Prof. Dr. Nobles?’”

While there existed a consensus to bring the Nobles matter up more formally in a department meeting, in early November the dean’s office — which, in other emails read by the Southern Investigative Reporting Foundation, had sought to build a donor relationship with Nobles — ordered the biomedical engineering department to terminate the mentor relationship with Nobles.

A second university relationship that Nobles asserts he has, with the West Saxon University of Applied Sciences in Zwickau, Germany, a vocational university, appears to be accurate.

Nobles’ resume looks impressive but a closer look is telling. He has indeed contributed to several articles and textbook chapters, but a good deal of his conference attendance was at “scientific poster sessions,” involving the public presentation of a display and answering questions about your procedure or device. Note also the 16-year hiatus in conference attendance and research presentations.

Moreover, not much effort is required to raise questions about how meaningful a role Nobles played in the development of the electronic book and portable computer.

Trying to discern the reality of where Nobles’ work stands in the marketplace is not easy.

An initial search of the U.S. patent office surfaces six patents held in his name and a search using “Sutura” provides another few dozen references, broadly supportive of his claim to have 31 patents. But searching the National Institute of Health’s U.S. Library of Medicine Pub Med directory — an authoritative index of published medical research whose records go back decades — and there is no mention of Anthony Nobles, his companies or any of his devices.

One unabashed proponent of Anthony Nobles’ work is John Wyall of Orem, Utah, who was the first U.S. recipient of the “Noblestitch” procedure to close the patent foramen ovale, the tunnel between the left and right side of the heart. He told the Southern Investigative Reporting Foundation that he had the procedure done in France by an associate of Nobles and that he no longer suffers from the pain and exhaustion that had led him to be bedridden for as long as 16 hours a day.


Investors would likely forgive Nobles’ being a fabulist if he was able to generate a return on their capital. Unfortunately for them, based on the available evidence, it would appear that this is something that occurs rarely.

Consider Nobles’ experience with public companies. There was the debacle surrounding the attempted Surgical Visions merger in 1992, likely costing investors over $1 million prior to the deal’s collapse.

The $11 million invested in Sutura by the Synapse fund et al. is entirely gone, but not before, per the Chiu declaration above, Nobles borrowed corporate funds from Sutura and bought the building that now houses the Noble Family Automotive Museum — the partnership that owned it charged Sutura over $27,000 per month in rent — and put his wife on the payroll as a consultant. (When private, Sutura had around $9 million in additional investor capital apart from Synapse that also did not fare too well.)

Starting in 2004, Whitebox Advisors, a Minnesota-based hedge fund that rocketed to fame when it bet correctly on the then-emerging credit crisis, began a series of investments in Sutura that totaled over $20.5 million. In a series of newsletters to investors, it expressed confidence that Nobles, despite the Vancouver woes, would prove competent in the job.

The Whitebox investment started out in trouble and rapidly went downhill.

In 2005 the company lost $12.3 million; in 2006 it was just over $12 million. David Teckman, a Whitebox director with medical industry management experience, was brought in as CEO at the end of September 2006; by February 2008 he had been dismissed and had sued Nobles and Sutura. (The suit appears to have been settled for back pay of just over $520,000 plus shares of stock and reimbursement for legal fees.)

In December of 2008 Sutura effectively wound down operations with Nobles buying (back) all Sutura’s noncash assets and $3 million in cash for $6.75 million.

Reached by phone, a Whitebox spokesman declined to comment.

One curiosity: In 2007 Sutura negotiated a $23 million settlement in a patent violation suit brought against Abbott Labs, Shortly after, according to the company’s 2007 10-K annual report, $11.96 million in marketable securities were purchased at a point that year. Who got custody of these assets is not clear.

While tallying up Whitebox’s profit or loss is no easy thing because of the different ways they were exposed to Sutura, such as with common stock and interest-bearing loans, it’s easier to render an accounting for the experience of Loni Pham, an Orange County resident who met Nobles in July 2004. In a suit filed in 2007, she alleged that Nobles began courting her investment by claiming he was a medical doctor who had used Sutura’s product on a personal friend, saving his life.

According to her suit, she said Nobles told her that a sale to Johnson & Johnson was looming, but that he sought a greater value for the company by “going public,” something she claimed Nobles said was a few months away, pending her $250,000 investment.

In an interview with the Southern Investigative Reporting Foundation, Pham said that as part of that pitch, Nobles sketched out for her on a piece of paper how she would make the “two to four times” her initial investment in under six months. She said when she had questions about what his illustration meant, Nobles became frustrated and threw it out. (She retrieved it from the wastebasket.)

Pham told the Southern Investigative Reporting Foundation that Nobles used an initial list of Sutura shareholders as an example of the sophisticated investors that had backed him. The shares she ultimately was given under what she claimed Nobles described as “the friends and family plan” valued Sutura, pre-initial public offering, at $27.16 per share, a remarkable valuation for a company with little operating history.

After months of delays, even after Sutura’s reverse merger with a near dormant penny stock gave them a stock listing, Pham’s suit claimed Nobles told her that her shares were not freely tradable for a year; Nobles purportedly offered twice to buy her shares back for $250,000, but the exchange never occurred. (The suit was forced into arbitration in 2008 where she eventually dropped the matter because of legal expense.)

Looking back at the episode, Pham, who works as an asset lender, said she should have paid more attention to issues like the lack of employees at Sutura’s office and Nobles’ refusal to talk with her when she had questions after she had handed over the money.

Another investor, Croatian investor Bruno Mlinar, who met Nobles when both were in Europe racing Ferraris in 2008, gave Nobles $2.5 million for a stake in Nobles Medical Technology and a new venture, Gyntlecare, after Nobles assured him that his company was going to be worth over $150 million pending some Food and Drug Administration approvals.

Fast forward to 2010, and after what Mlinar claims was more than a year of frustrated calls about not getting stock certificates, he received shares in a company called Nobles Medical Technology II, which he said he had never heard of and hadn’t invested in. He also received $435,000 in cash from one Karen Glassman at Gyntlecare (who also appears listed as a representative of HeartStitch and other Anthony Nobles entities). The problem is, Mlinar’s suit about the matter asserts, one of the companies he thought he was investing in, Nobles Medical Technology, had been sold to Medtronic for $15 million in 2010 and Mlinar didn’t profit because he was given shares in a different company.

For Mlinar, it gets worse in that Nobles also talked him into shipping him a Ferrari worth what he claimed was $750,000 on the view that Nobles would use it as collateral for financing (but somehow preserving Mlinar’s ownership). In short order, he alleged, a bill of sale was forged and Nobles took delivery of the car. Nobles, in a response, argued that Mlinar signed forms stipulating that the car was worth $200,000 and that there was no preservation of ownership clause.


The Southern Investigative Reporting Foundation reached out to Anthony Nobles four times via phone to his work and cell phone numbers and left a series of detailed messages about this article but no calls were returned.

Attempts to reach him via email were moderately more successful, although the Southern Investigative Reporting Foundation did not ultimately secure an interview.

The Southern Investigative Reporting Foundation also sought answers from Nobles’ attorney, John van Loben Sels, but he did not respond to a detailed voice message at his new firm, Fish & Tsang LLP. He did, however, file a declaration in Los Angeles Superior Court about the Southern Investigative Reporting Foundation’s attempts to contact both of them with questions.

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Kindred Healthcare Chairman Snares Loaded Retirement Sendoff

This is a cross-posting of a piece that appeared on the Kentucky Center for Investigative Reporting’s website.

At Kindred Healthcare Inc., retirement gifts have gone way beyond the farewell cake, the cheap wristwatch and the sendoff reception at the local sports bar.

Last December the Louisville, Kentucky-based hospital and nursing home chain announced that its chairman, Edward Kuntz, would be quitting the board of directors after its annual shareholders meeting in May. Kuntz is 68 and has been chairman since 1999. Until 2004, he was also the publicly traded company’s chief executive.

“He has served as a mentor to me and others in our organization, and I will miss his guidance and advice,” Kindred CEO Paul Diaz said in a Dec. 13 press release.

Actually, he won’t. One day before his retirement was announced, Kuntz agreed to a two-year consulting deal that will pay him $120,000 a year. The contract, buried deep in the Kindred (NYSE: KND) annual report filed with the Securities and Exchange Commission on Feb. 28, permits  Diaz or the board — whoever needs him — to tap Kuntz up to 12 days per year. For every day of work beyond that, Kindred will pay him $10,000. Per day.

The contract contains no usage limits. If Kindred puts him to work for 30 extra days, Kuntz will  make $300,000, or almost as much as his current $315,000 annual salary as chairman. If he puts in 100 extra days, he’ll make $1 million.

Paul Hodgson, an independent corporate governance analyst in Maine, was baffled by the consulting deal.

“This kind of situation is relatively common if the CEO is new and has been brought in from the outside and doesn’t have the knowledge or experience of running a company,” Hodgson said. “I can’t see the need for any hand-holding in this situation. It doesn’t seem particularly necessary for accessing the former CEO and chairman.”

Kuntz’s open-ended, $10,000-per-day consulting deal could become quite an expense, Hodgson said. “I can see that mounting up to $300,000 fairly quickly.”

Kuntz’s contract affords other perks, too. Kindred will give him access to its company jet, a twin-engine, 13-passenger Cessna 560XL. Whether he takes the private jet or not, Kuntz will recoup all travel expenses while working for the company. When he’s consulting from his home in Houston, he’ll have an office — and an administrative assistant — paid for by the company. (Read the consulting deal)

Kuntz could not be reached and did not return a phone call. Kindred spokeswoman Susan Moss would not answer questions about the consulting deal.

“Why is that news?” she asked.

It was news to Graef Crystal, Bloomberg News’ compensation expert and author of six books on the subject. He reviewed Kuntz’s consulting contract for the Kentucky Center for Investigative Reporting.

“The thing that jumps out of the page is the $10,000 per day,” Crystal said. “I’ve never heard of anything like that. I don’t know why they’d want to do that.”

Kindred is one of the biggest companies headquartered in Kentucky. With rehab hospitals, nursing homes, other health care centers and 63,000 employees in 47 states, Kindred calls itself the “largest diversified provider of post-acute services” in the nation.

But Kindred could use some treatment itself — for financial hemophilia. In the last three years, Kindred lost a combined $262.3 million. It racked up $4.9 billion in sales in 2013 — more than half of which came from Medicaid and Medicare billings — only to show a bottom line loss of $168.5 million. And although its stock price, at about $22, is again showing a heartbeat and rebounding from a three-year slump, it is no higher than where it was in 2011 and 2008.

It isn’t clear from the consulting agreement why, exactly, Kuntz’s counsel would be so vital. Diaz, 52, has served as Kindred’s CEO for more than 10 years, a little longer than the average 9.7-year tenure of departing U.S. CEOs in 2013, according to a Conference Board study.

Diaz is also generously compensated for his leadership. His 2013 pay hasn’t been reported to the Securities and Exchange Commission yet, but during the four preceding years, he received $21.4 million in total compensation. His 2012 gross of $4.6 million made him the fifth highest-paid executive of a publicly traded company in Kentucky, according to the AFL-CIO’s Executive PayWatch survey.

Kuntz’s availability as a consultant might provide some continuity in dealing not only with business issues, but legal issues as well.

As of last Nov. 20, the U.S. Justice Department was investigating a whistleblower’s claim that Kindred and two other companies had taken millions of dollars in kickbacks for promoting the use of Amgen Inc.’s Aranesp anemia drug over a competitor’s brand. The widely publicized whistleblower suit was filed in federal court in South Carolina in 2007. Amgen cut its losses by settling out of court last April and agreeing to pay $24.9 million.

As for Kindred and its Louisville-based spinoff, PharMerica Corp., the lawsuit accuses them of taking $20.6 million worth of Amgen incentive money — euphemistically described as “rebates” — from 2003 to 2008.

“Amgen paid kickbacks to long-term care pharmacy providers Omnicare Inc, PharMerica Corp. and Kindred Healthcare Inc. in return for implementing ‘therapeutic interchange’ programs that were designed to switch Medicare and Medicaid beneficiaries from a competitor drug to Aranesp,” the government said in its summary of health care fraud enforcement actions in 2013.

The companies deny the allegations.

Facing a Nov. 20 court deadline, the Justice Department could not make up its mind about assuming the role as lead plaintiff against the companies. It chose instead to stay in the background and investigate on its own. Meanwhile, Cincinnati-based Omnicare settled its case last month by agreeing to pay a $4.19 million fine to the government.

That left the two Louisville companies as the remaining targets of the fraud suit. Reuben Guttman, the Washington, D.C., attorney who filed the suit for Amgen whistleblower Frank Kurnik, said that the government is “significantly interested” in Kindred and PharMerica.