Caremark ( CMX) has a bitter pill to swallow. Turned back in its efforts to have a whistleblower lawsuit dismissed, the giant pharmacy appears to be headed for a high-stakes trial. Chicago attorney Mike Leonard told TheStreet.com on Monday that a Florida court has ruled that a lawsuit accusing Caremark of serious misconduct can move forward. The lawsuit, being heard in the state's Second Circuit Court in Leon County, claims that Caremark wronged state customers by, among other things, falsifying prescription dates and reselling medications that had been returned through the mail. Leonard, who filed the complaint on behalf of two Caremark pharmacists and the state of Florida, has estimated potential damages in the case at $100 million. He says he hopes the case will go to trial by the end of 2004 or at least next year. Caremark spokesman Gerard Carney told TheStreet.com on Tuesday that "these allegations and the complaint are without merit and we will vigorously defend ourselves against them." If the claims against Caremark are upheld, the alleged business practices may have significantly boosted Caremark's profits by triggering bonuses -- rather than penalties -- for turnaround times and doubling the amounts collected for resold prescriptions. Florida is seeking triple damages for any losses it suffered as a result. And it could have company. According to the whistleblower suit, Caremark has victimized customers well beyond the Sunshine State. The case, recently bolstered by testimony from a top Caremark manager, alleges serious abuses in at least two other states as well. In a sworn deposition cited by the plaintiffs, Illinois Caremark manager Carlos Gonzales indicated that the company had engaged in questionable behavior -- and then deliberately covered its tracks -- in both his home state and Texas. Even Caremark's own legal counsel has allegedly confirmed that the company destroyed dated envelopes revealing when prescriptions were actually received. The real dates, plaintiffs insist, would show that Caremark often missed the turnaround requirements laid out in its contracts. "Caremark not only destroyed that direct evidence of its own fraud in the state of Florida at the Florida facility, but it also destroyed direct evidence of its fraud at its other prescription drug processing sites," the plaintiffs state in their response to Caremark's motion to dismiss. Caremark's attorney "even audaciously requested
last week that plaintiff's counsel agree that it is appropriate for Caremark to continue to engage in that activity."
Instead, Leonard said, the court clearly sided with the plaintiffs on three of four counts. It asked for additional documentation, to be submitted within 30 days, on a final charge that Caremark improperly reported savings for the state and then collected millions of dollars in extra profits as a result. Up to now, the plaintiffs have been forced to rely on their own means to generate evidence. "Caremark has yet to produce even one document in response to plaintiffs'
requests , although they claim they will produce some unidentified documents if, and when, the parties can agree to the entry of a protective order," the plaintiffs' latest filing states. "Given its threat-enforced control over the evidence and its actual deliberate destruction of some evidence, Caremark's argument that plaintiffs must provide more specifics is as bitter in its irony as a man murdering his parents and then begging the court for mercy because he is now an orphan. Like that perpetrator of parenticide, Caremark deserves no mercy from this court." It apparently got little. According to Leonard's statements, Caremark still faces the same allegation that has hurt rival Medco ( MHS) and possibly even pushed some of Medco's business Caremark's way. Medco is battling a government lawsuit accusing it, too, of falsifying prescription dates. But the larger company, so far, has escaped a particularly damaging charge lodged against its competitor. Plaintiffs claim that Caremark engaged in the "even more alarming and potentially dangerous practice" of reselling returned drugs to unsuspecting customers without first testing the medications for possible damage. "Moreover, Caremark billed the Florida plan as if the prescriptions had never been returned," the complaint states. "Meanwhile, Caremark re-sold those same returned drugs to further increase its profits by double-billing." The whistleblowers also accuse Caremark of taking inappropriate steps to speed up the delivery of prescriptions. Specifically, they claim that Caremark routinely failed to contact physicians about prescriptions with no dates and entered its own dates instead. They go on to say that Caremark "incentivized" employees to avoid necessary -- but time-consuming -- steps by implementing a quota system that punished those who missed their targets.
Still, the plaintiffs must better explain a final leg of their complaint. They insist that Caremark engaged in fraudulent practices -- such as improperly switching drugs and canceling prescriptions -- to pick up multimillion-dollar bonuses for "saving" the state money. "We're certainly willing to be more specific," Leonard said. "It doesn't bother us." The entire lawsuit doesn't seem to bother the company, either. In past statements to the media, Caremark has characterized the whistleblowers' complaints as "baseless" and vowed to vigorously defend itself going forward. And in its latest annual report -- filed just one day after its motions were apparently denied -- Caremark failed to even list the case among the slew of lawsuits it now faces. Instead, it offers details about other pending lawsuits and then concludes with a general statement about its legal risks. "Although we believe that we have meritorious defenses to the claims of liability or for damages in the actions that have been made against us, there can be no assurance that pending lawsuits will not have a disruptive effect upon the operations of our business, that the defense of the lawsuits will not consume the time and attention of our senior management, or that the resolution of the lawsuits, individually or in the aggregate, will not have a material adverse effect on our operating results or financial condition," Caremark's annual report states. To be fair, the company said last November in the wake of the suit's filing that "we have apprised and been in regular contact with our client, the State of Florida, regarding these baseless claims and stand by our commitment to provide the State and its employees with the highest levels of service, integrity and value. We welcome any formal review or audit of our services on the State of Florida's behalf as we are confident in the outcome of any such proceedings." Although the Florida attorney general has yet to join the whisteblower case, Leonard says that state officials have been "keenly interested" in the proceedings. According to the lawsuit, Caremark has collected hundreds of millions of dollars from Florida since the two parties started doing business together in early 2001. That lucrative Florida contract, the lawsuit states, is set to expire at the end of this year. Still, analysts are hardly worried. Thanks to Medicare's new prescription drug program, they expect Caremark to generate even more business. Thus they recommend buying or, at the very least, holding Caremark's stock. Caremark shares inched up 25 cents to a 52-week high of $34.10 on Tuesday.