How Medicaid Paid $30M for an Unapproved Skin Ointment That Didn't Work

Medicaid paid $30 million for a skin ointment that didn't work, was unapproved by the FDA, and was declared "less than effective" by the feds in 1970 -- all because drug companies figured out that the government doesn't check its billing records properly, according to a recent lawsuit filed by the Department of Justice.

Prosecutors backed their complaint with internal emails from one of the companies, HealthPoint, in which executives admitted "we have little or no clinical safety and efficacy data" for the drug, Xenaderm, and their existing data is "cruelly insufficient" for FDA approval.

The new suit is derived from a previous whistleblower complaint that alleges dozens of companies including Abbott Labs (ABT), Actavis, Shire (SHPGY), Warner Chilcott, and Watson rooked taxpayers for more than $500 million by pretending that popsicles, vitamins and other non-drug products were prescription pharmaceuticals in Medicaid reimbursment paperwork.

HealthPoint, which continues to make and sell Xenaderm for bed sores, is one of the defendants in that suit and is the sole defendant in the new DOJ complaint. The feds allege that in 1970 the FDA officially designated Xenaderm's active ingredient, trypsin, "Less Than Effective," making it ineligible for Medicaid reimbursement. Yet for most of the last decade, the suit claims, HealthPoint has been selling Xenaderm to nursing homes on the basis that Medicaid reimburses the cost. "Healthpoint's product line consists almost entirely of unapproved drug products," the feds allege.

The HealthPoint emails are shocking because they appear to show that executives at the company knew their product was unbacked by clinical data and unapproved by the FDA. Here is a selection:

By 2003, Xenaderm was healthPoint's single largest product, the emails show, but the company was receiving "inquiries" from people threatening to go to the FDA because Xenaderm's trypsin-based balsam peru oil product was unapproved. Mark Celeste, HealthPoint's director of quality and technical operations, wrote (click to enlarge):

In 2004, HealthPoint R&D vp Christopher Hensby told a colleague who had suggested a clinical trial for Xenaderm that the company had little or no data for the product and what data existed was "cruelly insufficient" for the FDA:

In 2006, senior director of regulatory affairs Bobbi Drais wrote to a colleague that Xenaderm was "considered unapproved" and "can be the subject of FDA enforcement any time":

In 2007, svp sales and marketing Rob Bancroft told a colleague that "a final determination is still pending" as to whether Xenaderm was "a safe and efficacious healing agent," even though the company had been selling it for years:

Although HealthPoint is the current target of the DOJ suit, the feds appear to be picking off defendants in the original whistleblower case one by one. Forest Labs (FRX) and Schwarz Pharma have already settled. So who is next? Well, Abbott's alleged sale of popsicles to Medicaid under the pretense they were prescription products seems like one of the more blatant claims in the case. But there are four other companies that allegedly did the exact same thing as HealthPoint: Mylan (MYL), Teva, Rugby and Qualitest. Here's how much they earned from their versions of Xenaderm, per the whistleblower suit (Teva earned $68,403):

The five companies received a total of $30 million in reimbursements for trypsin-based products over the years, the suit claims. HealthPoint did not immediately respond to a request for comment.

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