Caremark ( CMX) has a bitter pill toswallow. Turned back in its efforts to have a whistleblowerlawsuit dismissed, the giant pharmacy appears to beheaded for a high-stakes trial. Chicago attorney MikeLeonard told TheStreet.com on Monday that aFlorida court has ruled that a lawsuit accusingCaremark of serious misconduct can move forward. The lawsuit, being heard in the state's SecondCircuit Court in Leon County, claims that Caremarkwronged state customers by, among other things,falsifying prescription dates and resellingmedications that had been returned through the mail.Leonard, who filed the complaint on behalf of twoCaremark pharmacists and the state of Florida, hasestimated potential damages in the case at $100million. He says he hopes the case will go to trial bythe 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, thealleged business practices may have significantlyboosted Caremark's profits by triggering bonuses --rather than penalties -- for turnaround times anddoubling the amounts collected for resoldprescriptions. Florida is seeking triple damages forany losses it suffered as a result. And it could havecompany. According to the whistleblower suit, Caremark hasvictimized customers well beyond the Sunshine State.The case, recently bolstered by testimony from a topCaremark manager, alleges serious abuses in at leasttwo other states as well. In a sworn deposition citedby the plaintiffs, Illinois Caremark manager CarlosGonzales indicated that the company had engaged inquestionable behavior -- and then deliberately coveredits tracks -- in both his home state and Texas. Even Caremark's own legal counsel has allegedlyconfirmed that the company destroyed dated envelopesrevealing when prescriptions were actually received.The real dates, plaintiffs insist, would show thatCaremark often missed the turnaround requirements laidout in its contracts. "Caremark not only destroyed that direct evidenceof its own fraud in the state of Florida at theFlorida facility, but it also destroyed directevidence of its fraud at its other prescription drugprocessing sites," the plaintiffs state in theirresponse to Caremark's motion to dismiss. Caremark'sattorney "even audaciously requested
last week thatplaintiff's counsel agree that it is appropriate forCaremark to continue to engage in that activity."
Instead, Leonard said, the court clearly sidedwith the plaintiffs on three of four counts. It askedfor additional documentation, to be submitted within30 days, on a final charge that Caremark improperlyreported savings for the state and then collectedmillions of dollars in extra profits as a result. Up to now, the plaintiffs have been forced to relyon their own means to generate evidence. "Caremark has yet to produce even one document inresponse to plaintiffs'
requests, although theyclaim they will produce some unidentified documentsif, and when, the parties can agree to the entry of aprotective order," the plaintiffs' latest filingstates. "Given its threat-enforced control over theevidence and its actual deliberate destruction of someevidence, Caremark's argument that plaintiffs mustprovide more specifics is as bitter in its irony as aman murdering his parents and then begging the courtfor mercy because he is now an orphan. Like thatperpetrator of parenticide, Caremark deserves no mercyfrom this court." It apparently got little. According to Leonard'sstatements, Caremark still faces the same allegationthat has hurt rival Medco ( MHS) and possibly evenpushed some of Medco's business Caremark's way. Medcois battling a government lawsuit accusing it, too, offalsifying prescription dates. But the larger company,so far, has escaped a particularly damaging chargelodged against its competitor. Plaintiffs claim that Caremark engaged in the"even more alarming and potentially dangerouspractice" of reselling returned drugs to unsuspectingcustomers without first testing the medications forpossible damage. "Moreover, Caremark billed the Florida plan as ifthe prescriptions had never been returned," thecomplaint states. "Meanwhile, Caremark re-sold thosesame returned drugs to further increase its profits bydouble-billing." The whistleblowers also accuse Caremark of takinginappropriate steps to speed up the delivery ofprescriptions. Specifically, they claim that Caremarkroutinely failed to contact physicians aboutprescriptions with no dates and entered its own datesinstead. They go on to say that Caremark"incentivized" employees to avoid necessary -- buttime-consuming -- steps by implementing a quota systemthat punished those who missed their targets.
Still, the plaintiffs must better explain a finalleg of their complaint. They insist that Caremarkengaged in fraudulent practices -- such as improperlyswitching drugs and canceling prescriptions -- to pickup multimillion-dollar bonuses for "saving" the statemoney. "We're certainly willing to be more specific,"Leonard said. "It doesn't bother us." The entire lawsuit doesn't seem to bother thecompany, either. In past statements to the media,Caremark has characterized the whistleblowers'complaints as "baseless" and vowed to vigorouslydefend itself going forward. And in its latest annualreport -- filed just one day after its motions wereapparently denied -- Caremark failed to even list thecase among the slew of lawsuits it now faces. Instead, it offers details about other pendinglawsuits and then concludes with a general statementabout its legal risks. "Although we believe that we have meritoriousdefenses to the claims of liability or for damages inthe actions that have been made against us, there canbe no assurance that pending lawsuits will not have adisruptive effect upon the operations of our business,that the defense of the lawsuits will not consume thetime and attention of our senior management, or thatthe resolution of the lawsuits, individually or in theaggregate, will not have a material adverse effect onour 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 tojoin the whisteblower case, Leonard says that stateofficials have been "keenly interested" in theproceedings. According to the lawsuit, Caremark hascollected hundreds of millions of dollars from Floridasince the two parties started doing business togetherin early 2001. That lucrative Florida contract, the lawsuit states, is setto expire at the end of this year. Still, analysts are hardly worried. Thanks toMedicare's new prescription drug program, they expectCaremark to generate even more business. Thusthey recommend buying or, at the very least, holdingCaremark's stock. Caremark shares inched up 25 cents to a 52-weekhigh of $34.10 on Tuesday.