OIG Excludes K-V Chairman Pursuant to New Guidance

As previously reported, the Department of Health and Human Services Office of Inspector General (OIG) recently issued new Guidance on permissive exclusion of individuals, including owners, officers, and managing employees.  Accordingly, “if the evidence supports a finding that an owner knew or should have known of the conduct, OIG will operate with a presumption in favor of exclusion.”

On November 17, K-V Pharmaceutical (K-V) announced that Marc S. Hermelin, a member of its board of directors and son of K-V founder Victor Hermelin, had resigned and was being excluded from participation in federal health care programs.  He is the first pharmaceutical company official to be excluded who was not also convicted of a crime.

The exclusion by OIG took place within a month of the new Guidance, but follows almost two-years of compliance problems for K-V with the Food & Drug Administration (FDA).  As Larri A. Short of Arent Fox LLP told BNA:

This is an important development since it represents the OIG’s first use of its permissive exclusion authority under 42 U.S.C. 1128(b)(15)(A)(ii) and comes within a very short time after the OIG publicly announced its intention to begin using its discretion to exercise this authority after a company has been sanctioned. … The excluded individual is not just a board member, he was the Chairman of the Board and the majority stockholder with about 48 [percent] of the company’s stock. If he were not selling his stock and resigning, it appears that the OIG was also prepared to exercise its discretion to permissively exclude K-V itself under its authority at 42 USC 1128(b)(8)(A) and (B).

The history of K-V pharmaceuticals indicates under what circumstances OIG may pursue a permissive exclusion.  Also, the actions taken by Mr. Hermelin and K-V Pharmaceutical upon learning of his impending exclusion may be of some value to other organizations and individuals who may find themselves in a similar position.

K-V Pharmaceutical’s History with HHS

A 2008 FDA inspection determined that K-V was (1) not complying with a 2007 FDA enforcement notice requiring pre-market approval for a time-release drugs containing guaifenesin, and (2) manufacturing and distributing unapproved new drugs.  As a result, the FDA filed a civil forfeiture action in the Eastern District of Missouri in July of that year and seized $24.2 million in unapproved new drugs.

In December 2008, Mr. Hermelin left K-V after 35 years with the company.  K-V announced that Mr. Hermelin was being investigated for mismanagement and had been fired for cause.  Mr. Hermelin announced that he had chosen to retire.

In January 2009, K-V voluntarily suspended manufacture and distribution of all products and voluntarily recalled most of its products.  Under a consent decree announced in March 2009, K-V was barred from resuming manufacture and distribution until FDA officials and an independent expert inspected and certified that K-V facilities were in compliance.

In February 2010, Ethex Corp., a wholly-owned subsidiary of K-V, pled guilty to two felony counts for allegedly misbranding and adulterating drugs and not disclosing to the FDA that it had been producing oversized painkiller tablets.  K-V agreed to pay an administrative forfeiture and restitution in the amount of $27.6 million.  K-V received FDA approval to introduce its first drug to market this past September.

K-V Pharmaceutical’s Reaction to Mr. Hermelin’s Exclusion

When the owner of a company participating in federal health care programs is excluded by OIG, it places the entity in a precarious position.  Mr. Hermelin and K-V Pharmaceutical took immediate steps to avoid any adverse impact on the company.

K-V confirmed through counsel that OIG had notified Mr. Hermelin of his impending exclusion.  According to the company’s SEC filings:

If a director of our Company, or a shareholder with an ownership interest of five percent or more, is excluded from participation in federal or state health care programs, then the Department of Health and Human Services, Office of Inspector General (”HHS OIG”) has discretionary authority also to exclude the Company from such participation.

According to a K-V Press Release, in order to prevent the discretionary exclusion of K-V, Mr. Hermelin:

• resigned his position on the board of directors on November 10;
• resigned his position as trustee on all family trusts holding K-V stock; and
• agreed to divest his personal ownership of Class A Common and Class B Common stock pursuant to a divestiture plan and schedule approved by OIG.

Notice of Mr. Hermelin’s exclusion was posted on the OIG website.

Seton Hall Law Announces Frank Pasquale as the Schering-Plough Professor in Health Care Regulation and Enforcement

Seton Hall University School of Law has announced the appointment of Frank Pasquale as the Schering-Plough Professor in health care regulation and enforcement. Professor Pasquale has been a member of the Seton Hall Law Faculty since 2004 and is the Associate Director of the Center for Health & Pharmaceutical Law & Policy. He has distinguished himself as an internationally recognized scholar in health, intellectual property, and information law. He has made numerous academic presentations at universities across North America and at the National Academy of Sciences. A prolific writer, Professor Pasquale’s work has been featured in top law reviews, books, peer-reviewed journals, and online blogs, including Health Reform Watch, of which he is Editor-in-Chief. A frequent media presence, he has appeared in the New York Times, San Francisco Chronicle, Los Angeles Times, Boston Globe, Financial Times, and on CNN, WNYC’s Brian Lehrer Show, and National Public Radio’s Talk of the Nation.

Professor Pasquale has testified before Congress and before the New York City Broadband Advisory Commission. He has presented before the Task Force on Competition Policy and Antitrust Laws of the House Committee on the Judiciary, appearing with the General Counsels of Google, Microsoft, and Yahoo.

At Seton Hall Law, Professor Pasquale has taught courses in health care finance and regulation, intellectual property law, and administrative law. He received his J.D. from Yale Law School, his M.Phil. from Oxford University, and his B.A. summa cum laude from Harvard University.

As the Schering-Plough Professor in Health Care Regulation and Enforcement, Professor Pasquale will contribute scholarship which will include public policy analysis of issues related to administrative law, the regulatory and enforcement concerns of providers and patients, FDA law, and drug and device innovation.

This Professorship was made possible by a $2.5 million endowment from the former Schering-Plough Corporation and the Schering-Plough Foundation. The Schering-Plough Foundation supported the advancement of health, education, public policy, and community initiatives.