What happened

Shares of Insys Therapeutics (NASDAQ:INSY), a small-cap biotech with a focus on pain management, plunged as much as 30% on Wednesday after receiving a double whammy. One whammy was the arrest of the company's founder; another was negative commentary from President Trump regarding opioids in general.

So what

As very quick background: Insys' troubled lead drug Subsys, a synthetic opioid, has seen its sales slashed in half over the past two years, following allegations and lawsuits that management and its marketing team knowingly and willingly marketed the sublingual spray (approved to treat breakthrough cancer pain) for off-label indications. Some allegations suggest that up to 80% of Subsys' sales were for off-label uses. Insys has already been sued by the attorneys general of Massachusetts and New Jersey; it recently settled with Massachusetts for $500,000.

A closeup of a gavel in front of a judge's chair in a courtroom

Image source: Getty Images.

Today, Wall Street found out that the billionaire founder of Insys Therapeutics, John Kapoor, who still owns a majority stake in the company and was CEO as recently as January 2017, was arrested. He's been charged with engaging in conspiracies to commit racketeering, mail fraud, and wire fraud, based on the federal indictment filed in a Boston court. The charges, which Kapoor's attorney has denied, suggest that Kapoor and a handful of other executives devised a scheme to pay speaker fees and bribes to medical practitioners in return for prescribing Subsys to non-cancer patients. This was also a means to defraud insurers, according to the documents filed in Boston.

Adding insult to injury, President Trump also directed the Department of Health and Human Services (HHS) to declare the opioid crisis a public-health emergency. While the move might be short of a full-on emergency declaration from the president, it sets the wheels in motion for the HHS and regulatory bodies to limit access to opioid medicines. According to the American Society of Addiction Medicine, 20,101 people died in 2015 from prescription opioid-related overdoses.

Now what

What a mess.

The big issue with the arrest of Insys' founder, along with another former CEO, Michael Babich, is that it further clouds the near-term outlook for Insys. Subsys currently accounts for a majority of its sales, and the ongoing PR surrounding the company's marketing of this drug is liable to lead to weaker sales. Additionally, with other lawsuits potentially in the works, Insys could be subject to financial penalties and sales restrictions for its lead drug. In the very near term, it's quite likely that quarterly losses are going to steepen.

A cannabis leaf drawn between the hands of a doctor

Image source: Getty Images.

The only real saviors here are Insys' burgeoning portfolio and pipeline beyond Subsys. In August the company launched its oral dronabinol solution, Syndros, as a treatment for chemotherapy-induced nausea and vomiting (CINV), along with anorexia associated with AIDS. This synthetic version of tetrahydrocannabinol (THC) is entering a crowded CINV market, but it's a first-of-its-kind approved medicine, meaning it has a decent shot at $200 million or more in peak annual sales. Between Syndros and its recently filed new drug application for a sublingual buprenorphine spray -- assuming approval for the latter -- Insys could completely replace Subsys' sales in perhaps two or three years' time.

It's tough to see how things get better anytime soon for the company. But if it can manage to stabilize Subsys sales, even if those are well below $100 million annually, Insys could turn out to be a bargain for investors looking for a high-risk, high-reward stock.

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