In the summer of 2015, Michael Babich noticed a marked change in his relationship with John Kapoor, the man who had mentored him and made him CEO of his opioid manufacturing company.
Kapoor, the founder of Insys Therapeutics, used to call him six or seven times a day, Babich testified in federal court Thursday, but now was only calling occasionally. And Babich was no longer being invited to Kapoor’s weekly meetings, even though they were held in the office next to his or in the nearby conference room.
In the fall of 2015, Kapoor asked Babich to get a drink.
“I knew that was D-Day in my world,” Babich testified. “He told me that every company goes through its struggles. When things like that happen there is always a fall guy, and he said, ‘You’re going to be the fall guy.’ ”
Insys Therapeutics, which had profited wildly from the sale of a powerful fentanyl spray known as Subsys, was by then being investigated by federal prosecutors for its marketing practices. Former employees were filing whistle-blower complaints in courthouses nationwide.
Babich, who has pleaded guilty to one count of mail fraud and one count of conspiracy, is now a key witness in the racketeering prosecution of Kapoor and four other former executives and sales directors.
It was the third day of testimony for Babich, 42, who was CEO of Insys from 2011 to 2015 and presided over an aggressive marketing campaign to sell Subsys, a painkiller that had been approved to treat severe pain of cancer patients. Prosecutors said company leaders conspired to funnel millions of dollars to practitioners who prescribed the drug to people who did not need it.
On Thursday, Babich testified that Kapoor, 75, was part of regular conference calls that detailed how Insys employees were essentially lying to insurance companies about the true conditions of patients so that Subsys prescriptions would be approved.
“Anytime you got approval for a scrip, that was money in our pockets,” Babich said.
Under persistent cross-examination, Kapoor’s lawyer, Beth Wilkinson, sought to undermine Babich’s credibility by questioning how much money he walked away with after he was fired.
Babich had testified during direct examination by Assistant US Attorney K. Nathaniel Yeager that he received a year's salary, a partial bonus for his last year, 18 months of health insurance, and 90 days to exercise his remaining 300,000 stock options. He said he sold half of them, making $4 million to $5 million after taxes.
All told, Babich said he made $27 million after taxes working for Insys.
But during cross-examination, Babich acknowledged he had actually made $45 million after Wilkinson presented internal company documents that showed Babich frequently exercised his stock options while he was still with the company and had 957,000 stock options when he left.
“You lied to make that $45 million, didn’t you?” Wilkinson asked.
“I followed the direction of my boss,” Babich replied.
Wilkinson also pointed out that under his agreement with prosecutors, Babich would have to forfeit only $3.5 million of his wealth, which would still leave him with a considerable fortune when he is released from prison.
Wilkinson pointed out that as Babich awaits sentencing in May, he is living at home in Phoenix, golfing regularly at a country club.
Babich, who described himself as a stay-at-home father, said prosecutors have been clear that the government could seize more of his assets.
“At this point, it’s not my decision how much more money I’m going to have to relinquish,” Babich said, adding that he is also the subject of myriad civil lawsuits.
Wilkinson implied that Babich had an incentive to testify against Kapoor to receive a good deal from prosecutors.
“If you were going to cooperate and get a deal from the government, the only person you could point the finger at was someone who was above you,” Wilkinson said. “John Kapoor was above you, right?”
“He was certainly my boss, yes,” Babich replied.
Watching from the back of the courthouse was Deborah Fuller, whose daughter Sarah was prescribed Subsys in 2014 for chronic back and neck pain. She died 18 months later from complications of the drug. She was 32.
Fuller said her daughter did not know the spray was supposed to be used only by patients suffering from cancer pain.
“She had no idea,” said Fuller, who is suing the company on behalf of her daughter’s estate. She and her other daughter, Barbara, flew in from New Jersey with their lawyer, Richard Hollawell, to watch the trial.
“I’ve seen photos of all the defendants. I wanted to see them in person,” Fuller said during a break in the testimony. “What they’re being charged with is exactly why my daughter died.”