Therakos Settlement Keeps Private Equity in DOJ’s Crosshairs for FCA Liability

On November 19th the United States Department of Justice (“DOJ”) announced an $11.5 million settlement involving the alleged promotion of two drug-device systems for unapproved uses by Therakos, Inc.  The action was initiated by a whistleblower under the qui tam provisions of the False Claims Act. The settling defendants included Johnson & Johnson subsidiary Medical Device Business Services, Inc. and The Gores Group, a private equity firm that acquired Therakos from J&J in 2012. This settlement highlights DOJ’s continuing emphasis on holding private equity firms accountable for the actions of their portfolio companies.

The Therakos Settlement

The settlement with MDBS and The Gores Group revolved around Therakos’ promotion of its UVAR XTS and CELLEX extracorporeal photopheresis systems used to treat cancer for use in pediatric patients, although at no relevant time were the products approved by the FDA for pediatric use.  Such “off-label marketing” of drugs and devices by there is not permitted, and the improper promotion for unapproved uses leads to the submission of false claims to federal health programs.

Gores Investment in Therakos

Between 2006 and 2012, Therakos was owned by MDBS; it was then acquired by The Gores Group in 2012.  Gores apparently set about making significant changes to Therakos “partnering with [the] management team.”  “Under Gores’ ownership,” the private equity group writes, “Therakos redesigned the manufacturing process” and “significantly increased its investment in clinical activities.”  Reporting also states that the private equity group hired new executives for Therakos, including a new CEO and COO.  The result: three years after acquiring Therakos, Gores sold it to Mallinckrodt for $1.325 billion, earning a reported 10x return.

DOJ Targets Private Equity for Scrutiny

The settlement against Therakos is the latest example of DOJ targeting not only healthcare companies engaged in wrongdoing, but also their private equity ownership. In September 2019 private equity firm Riordan, Lewis & Haden Inc. paid a $21 million settlement for the alleged improper actions of a compounding pharmacy within their ownership portfolio.

Private equity ownership of healthcare and health services providers is on the rise. As we have previously written, the pressures that such private equity investment have been particularly apparent in the nursing home industry.  The private equity focus on profit rather than care can lead to health providers taking shortcuts, engaging in improper marketing, or otherwise acting improperly in ways that can lead to improper billing and patient harm.

The liability of private equity firms typically focuses on whether the investors were playing an active role in the management and operation of the alleged wrongdoer. Statements about The Gores Group role at Therakos suggest that it did indeed play an active role in the management and operation of Therakos.  Such active involvement can make private equity investors appropriate targets for FCA liability.  Private equity firms involved in management and operations of firms with government contracts are well advised to carefully select experienced management teams and consult with experts before investing or taking an active role.

Overall, the continuing trend of private equity ownership must be watched for its effects on patient treatment and the continuing scrutiny from federal regulators targeting private equity for the misdeeds of their portfolio companies.

READ MORE

• Florida Pharma Whistleblower Case Results in FCA Settlement by Private Equity Firm
• Private Equity Ownership of Nursing Homes Might Have Made Everything Worse
• The False Claims Act
• Constantine Cannon’s Whistleblower Team
• I think I have a whistleblower case
• Whistleblower FAQs

Tagged in: Defendants, FCA Federal, Healthcare Fraud, Medical Devices and DME, Off-Label and Unapproved Use, Whistleblower Case,