In some ways, it was the corporate world equivalent of the infamous baptism scene in Francis Ford Coppola’s The Godfather, when, in a single 24 hours, the newly anointed don of the Corleone family executed a plan to simultaneously eliminate rivals in La Cosa Nostra.
In this case, however, the family was made up of generic-drug makers Teva Pharmaceuticals, Mylan, Actavis, Lupin, Novartis’ Sandoz, Taro Pharmaceuticals and others. On a single day, Friday, April 4, 2014, the scheme hiked the price on 22 generic drugs—ranging from cephalexin, a bacterial infection antibiotic, which jumped 185%, to ketoconazole cream, used to combat athletes foot and jock itch, which jumped 110%, to diflunisal, an anti-inflammatory, up as much as 182%.
In the annals of marketing, their concerted action was impressive. The move rubbed out price competition and profit erosion in an industry plagued by them—and created a windfall for those in on the game.
Details of this vast scheme were recently described in a massive civil lawsuit filed in federal court in Connecticut by 43 states against some 35 members of the pharmaceutical business, including Teva, which has denied wrongdoing. While the lawsuit is new, the general allegations against generic-drug makers have been around for several years.
For more than four years, federal and state prosecutors have been investigating the industry, trying to figure out why the prices of drugs that came off patent failed to decline, and in some cases actually soared, defying basic principles of supply and demand. Historically, the generics business was known to drive down the prices of pharmaceuticals by as much as 80%. Criminal charges have already been levied against a smaller company, Heritage Pharmaceuticals, and its founders, and a federal investigation of others remains ongoing. Heritage has entered into a deferred prosecution agreement with the federal government. Others have been implicated in an older civil lawsuit filed by the states, including former billionaire Satish Mehta and Mylan’s president, Rajiv Malik.
The allegations mostly revolve around conspiracy to fix prices in violation of the Sherman Antitrust Act in an effort to maintain market share and boost profits. Mehta, Malik and the drug companies have moved to dismiss the civil charges. Some of the companies, like Mylan, have said they have investigated the allegations and found no evidence of price fixing.
Although court documents don’t identify a mastermind behind this five-year-long price-fixing conspiracy, one person, Maureen Cavanaugh, a former senior vice president at one of the world’s largest generic-drug makers, Teva Pharmaceuticals, stands out as perhaps its most important capo. In the new lawsuit, the states accuse Cavanaugh, the highest-ranking Teva executive named, of colluding to raise prices on 107 different generic drugs. According to state attorneys, she held discussions with subordinates to go over price arrangements with competitors and at least once, in a bit of theatrics, put her hands over her ears, pretending not to hear what was being said.
The list of drugs whose prices Cavanaugh allegedly conspired to fix spans four pages in the complaint: chemotherapy drugs; medications for heart failure, chest pain and diabetes; treatments for epilepsy, schizophrenia, breast cancer; and many others. On one day, the price of a bladder medication called oxybutynin chloride rose by 1,500%, a fungal infection treatment by 1,570% and a blood pressure drug by 1,053%, state lawyers claim. She made hundreds of phone calls and text messages to alleged accomplices at generics companies like Actavis (which Teva subsequently bought), Amneal Pharmaceuticals, Zydus, Novartis’ Sandoz and Glenmark. Most of these communications were with Marc Falkin, an Actavis vice president with whom Cavanaugh had “a very strong relationship,” state government lawyers claim in the lawsuit, which also names Falkin as a defendant.
In the new lawsuit, the states accuse Maureen Cavanaugh, the highest-ranking Teva executive named, of conspiring to raise prices on 107 generic drugs.
Raised in the Philadelphia area, Cavanaugh, 59, is the daughter of a World War II veteran who worked as a mechanical engineer. She started making her way up the marketing and sales departments of several pharmaceutical companies like Sandoz and Bristol Myers-Squibb after getting an M.B.A. from Rider University in New Jersey. By 2007, Cavanaugh had landed in the suburban Philadelphia office of Israel-based Teva Pharmaceuticals, where she would spend the next 11 years. During that time Cavanaugh married a Philadelphia area funeral director, and according to state government lawyers and other public records, she lives in the same colonial house occupied by his funeral home.
According to state attorneys, Cavanaugh oversaw a broad conspiracy at Teva that by 2012 involved multiple companies. There were three other key people involved in the effort, according to the lawsuit: David Rekenthaler, a Teva vice president of sales, who is also accused of conspiring to raise the prices of 107 drugs; Nisha Patel, a foot soldier who was hired by Teva’s Philadelphia-area marketing department in 2013 and is alleged to have fixed the prices of 99 different drugs; and another, yet-to-be-identified marketing executive.
Patel’s role in the scheme was to identify which drugs Teva could raise prices on and tap into her longstanding industry relationships to make it happen, according to the suit. She kept all of her relationships with competitors on a spreadsheet and ranked them. Her alleged price-fixing communications took place by phone and via texts and social media. Patel relayed information about drug price increases and distributor allocations by a competitor to Cavanaugh, who approved the price increases, the states claim.
Such price fixing has had a significant impact, not only for patients but also for the schemes' beneficiaries. According to the attorneys for the states’ case, the cartel’s price increases in the summer of 2013 created a windfall of $937 million in additional quarterly revenue for Teva alone. Patel received a $37,734 bonus that year, plus some 9,500 Teva stock options.
According state attorneys, Cavanaugh held discussions with subordinates to go over price arrangements with competitors and at least once, in a bit of theatrics, put her hands over her ears, pretending not to hear what was being said.
Success in 2013 led Patel and others to come up with an even grander scheme for concerted price increases, all blessed by Cavanaugh, state government lawyers claim. This led to the April 4, 2014, price hike of 22 drugs. In the following year, Teva’s stock climbed 20%.
On June 21, 2017, the feds showed up at Patel’s home with a search warrant and seized her phone. Patel then used a different phone to alert Rekenthaler, who had left Teva to work at Apotex, another drugmaker. Rekenthaler immediately called Cavanaugh and spoke to her several times before calling his lawyer, the states allege.
Despite the sordid details and allegations laid bare in the lawsuit, Cavanaugh, et al. have been behaving as though they are Teflon Dons.
A few months after her house was raided, Patel left Teva and started working at Cipla, where she is now director of national accounts, according to her LinkedIn page. Cipla did not respond to requests for comment.
Likewise, Cavanaugh’s career continues to flourish. She is now chief commercial operations officer at Lannett, a small Philadelphia area generic-drug maker with a history of boosting prices. Lannett has also has been accused by state attorneys general of price fixing and denies wrongdoing.
“[Cavanaugh] fundamentally used to run the majority of the generics business at Teva,” boasted Lannett CEO Tim Crew in a speech to Wall Street investors soon after hiring her in April 2018.
Cavanaugh, who did not respond to several requests for comment, is overseeing sales and marketing, research and development, and regulatory affairs at her new company. Her former employer, Teva says in a statement to Forbes that it “vehemently denies the allegations and will continue to vigorously defend the company.”
