Hands wearing blue surgical gloves hold brightly coloured pharmaceutical medication, including antibiotics, paracetamol, Ibuprofen and cold relief tablets, manufactured by a variety of companies in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Blink Health Wanted to Change the Way Drugs Are Sold. Then Things Got Messy

(Bloomberg) -- Six years ago, the Yale-educated Chaiken brothers, Geoffrey and Matthew, had an audacious idea: Upend the $333 billion U.S. prescription drug market by selling medicines online at big discounts and create a health-care startup that could stand alongside the giants of tech. One pitch included a slide that put their ambitions in the same league as Uber and Amazon.

It hasn’t worked out that way so far. Their company, Blink Health, has snared more than $165 million in venture capital, including from former Morgan Stanley Chairman John Mack. But the brothers and their startup have been entangled in lawsuits and shadowed by deals that saw industry partners turn from friend to foe, competition from two defecting employees, a threat from Amazon itself and no end of bad blood along the way.

The Chaikens’ goal was to offer cheaper prescription drugs to Americans, saving millions of people money. The pushback, they say, comes from entrenched middlemen who want to keep the status quo. “We got a huge allergic reaction from what I would call the industry titans,” said Geoffrey Chaiken, Blink’s 36-year-old chief executive officer, sitting in a glass-walled office at the company’s SoHo headquarters in New York in January, where visitors are greeted by a “Humans First” sign. “They, in a pretty coordinated way, did everything in their power to put us out of business.” 

But allegations made in lawsuits and interviews with more than a dozen former employees, partners and investors suggest Blink’s headaches were compounded by management turmoil, frequent turnover in the early days and the Chaikens’ naivete about how much resistance they would encounter.

To get better pricing from drugstores, the company made claims it was attracting outside funding for customers that never materialized, according to a lawsuit filed by Blink’s former benefits manager. The Chaikens told one investor that former Pfizer Inc. CEO Jeffrey Kindler would be on the board when he never agreed to that, another lawsuit alleged. 

Most of the cases have been settled on terms that weren’t disclosed. One that was brought against Blink was dismissed. Another is being challenged by Blink’s lawyers on the grounds of alleged misconduct. 

Geoffrey Chaiken declined to comment on some of the accusations, citing settlement agreements. He denied misleading anyone, acknowledged making mistakes and blamed some of the legal disputes on “two bad apples.” He said the suits have had “zero impact” on the business, which is now growing faster than ever. “I’m in a position where I can’t defend myself,” he said. “No one likes to have lies spread about him. At the same time, that is part of the job. So you have to take it on the chin.” 

Blink Health Wanted to Change the Way Drugs Are Sold. Then Things Got Messy

Geoffrey Chaiken long wanted to be a health entrepreneur. The oldest son of a Manhattan ophthalmologist, he co-founded his first company, Marinus Pharmaceuticals Inc., a biotech with an experimental epilepsy drug, while an undergraduate at Yale. He left Marinus in 2006, after finishing college and helping the company secure financing, and went to Harvard Business School.

By 2013, Chaiken was working for a private investment company and looking for a new venture. One day, while spitballing ideas with his younger brother Matthew, who also had a job on Wall Street, Geoffrey suggested a website where patients could purchase drugs online and pick them up at a local retailer. “That is the only good idea you have ever had,” Geoffrey recalled his brother telling him.

A former hedge fund manager, Michael Karsch, provided $1 million in 2014 to help get the company off the ground. Charles Jacoby, a friend of Geoffrey’s from Riverdale Country School, an elite New York City prep school, became general counsel. 

The Chaikens envisioned a website that would make shopping for drugs easier and prices more transparent. The model was simple. Blink would offer generic drugs at uniform low prices, appealing to uninsured patients and those with high deductibles or inadequate coverage. Customers would pay online and pick up prescriptions at any pharmacy. 

Cash-discount programs often involve a pharmacy benefit manager, or PBM, collecting a fee from a drugstore that’s split with a marketing company promoting the discount, according to Christopher Petersen, a benefit consultant and PBM veteran. 

Allowing customers to pay one low price in advance differentiated Blink from GoodRx, a startup that opened for business in 2011. GoodRx also offers discounts and transparency, but prices vary by pharmacy, and customers pay at the drugstore. Blink, like many others in the industry, doesn’t disclose how it shares revenue or what it makes on each prescription.

The Chaikens had little experience with drug supply chains. Early on, they hired a consultant, Brian Burk, who operated a small health-care technology firm. According to Burk’s version of events, as outlined in a lawsuit he filed against Blink, he introduced the Chaikens to numerous people in the industry and Geoffrey offered him a 1 percent stake in the company that would vest immediately. Burk said he signed an employment agreement in September 2014, but Chaiken never returned documents confirming the stake. A month later, Burk was fired.  

Burk claimed in his lawsuit that Blink reneged on its offer to give him a stake in the company. Blink’s lawyers said in court filings that Burk was fired because he didn’t deliver what he promised. In July, a New York judge dismissed the case, saying Burk had signed a separation agreement promising not to sue. Orin Snyder, a lawyer at Gibson Dunn & Crutcher who represents Blink, said Burk wasn’t offered the equity. “The entire lawsuit was a combination of fantasy and untruths,” Snyder said. “The court saw through the bogus allegations.” 

One thing Burk delivered, he said in court papers, was an introduction to MedImpact Healthcare Systems Inc.—though Geoffrey Chaiken disputed that as well, saying he didn’t need Burk to make the connection. Talks between the two companies resulted in an agreement, effective in April 2015, for MedImpact to become Blink’s partner, connecting the company to drugstore chains across the country. Ten months later, Blink officially opened its website for business.

Pharmacy benefit managers started decades ago as claims processors, but they gradually gained more control over drug purchases. Hired by employers, unions and health plans, the companies create lists of covered drugs and negotiate prices with stores and manufacturers. The three largest PBMs processed 76 percent of U.S. prescriptions last year, according to Drug Channels Institute, an industry research firm. 

While PBMs say their profit margins are low, they’ve been criticized for opaque pricing arrangements. The Pharmaceutical Care Management Association, a trade group, says its members “bring tremendous value to the health-care system” by negotiating discounts on drugs.

As a side business, PBMs have long offered discount cards for cash-paying patients with limited or no insurance, often in partnership with marketing firms. GoodRx aggregates such deals on its website, in addition to discounts offered by pharmacies on their own, making it easier for patients to find the best ones. Blink promised low prices, direct online purchases and an easy-to-use website. In early 2016, it advertised a month’s supply of generic Xanax for $4.39, less than half of what it said the retail price was at the time. 

Blink got off to a fast start. NBC Nightly News and the New York Times profiled the company. By June 2016, Blink said, more than 100,000 people had used the service. The Chaikens talked about how everyone was going to get rich, two former employees recalled. “This is not the way we communicate with our colleagues,” Geoffrey Chaiken said in an email. “People join most startups to make a lot of money, but people join Blink Health to save lives.” 

MedImpact, which was in charge of maintaining a network of pharmacies for Blink, extended its deal in May 2016, investing $13 million for a 10 percent stake. The PBM’s founder, Frederick Howe, became a board member. But the relationship soon soured. In October of that year, Howe, who’s no longer on the board, told Geoffrey Chaiken that Walgreens Boots Alliance Inc., one of the country’s largest drugstore chains, wanted to stop taking Blink patients, according to a lawsuit Blink filed against MedImpact. 

Walgreens wanted to be paid more. It learned MedImpact was reimbursing Blink claims at low rates reserved for commercial customers, such as big insurance companies, rather than the smaller price cuts Walgreens provided for drug-discount offers. Blink said in court papers that the service agreement signed with MedImpact never required Blink to obtain outside funding for its patients and that MedImpact didn’t complain about the matter until after Blink sued.  

One weekend after he got word that Walgreens wanted out, Geoffrey Chaiken recalls, he sat alone in his office, practically in tears. He said he feared “the dominoes would fall,” other drugstores would leave and Blink would fail. Then he got a call from John Mack, the Blink investor and adviser, who encouraged him to persevere. On the spot, Mack offered to put in an additional $500,000 as a vote of confidence. The pushback from large drugstore chains, Mack said in an interview, “that in itself to me was kind of a flag that they really have something here to make a difference.”

Walgreens said in a statement that it had offered to extend MedImpact terms while talks continued, but Blink declined. Geoffrey Chaiken said Walgreens’s offer was never conveyed to Blink. In court papers last year, Blink blamed MedImpact for cutting off its access to the drugstore chain. Walgreens, which stopped taking Blink customers in March 2017, said it remains open to discussions with Blink. 

Blink said in its MedImpact lawsuit that it spent millions of dollars transferring patients from Walgreens and other pharmacies to CVS Health Corp., another large chain. The Chaikens said they had received assurances from MedImpact that there was no risk of CVS pulling out, but in August, the chain said it would stop taking Blink customers. MedImpact said the only way to keep CVS would be to accept an almost 250 percent price hike with a bigger fee for MedImpact, according to Blink’s version of events. By the time CVS pulled the plug, it was filling more than half of Blink’s prescriptions.

CVS “made a business decision to end its participation in the Blink Health program following an internal review,” Michael DeAngelis, a spokesman for the company said in an email to Bloomberg News that didn’t elaborate further. “That decision has not changed.” 

The Chaikens, shaken again, decided to fight back. In November 2017, less than a month after CVS pulled out, Blink sued MedImpact for allegedly violating its contract, which promised that the pharmacy network wouldn’t fluctuate significantly. 

A few months later, MedImpact countersued, claiming it had been the victim of fraud. Among the allegations: Geoffrey Chaiken had told MedImpact executives in 2015, months before a contract was signed, that he had lined up outside sponsors to allow patients to tap into funding from nonprofits, employers, drug companies and loyalty-rewards programs. 

“This is not BS,” Geoffrey Chaiken wrote in a January 2015 email to a MedImpact executive. “This is a fully funded plan.” An attachment to another email sent to MedImpact the same day listed the American Heart Association, the American Diabetes Association, American Express, Diamond Resorts, drug companies Merck and Bausch + Lomb, and 10 other companies and nonprofits as sources of funding. A document sent to MedImpact that August displayed the logos of many of these organizations and said “multiple funding sources provide additional savings to users.”

The American Heart Association, the American Diabetes Association, American Express Co., Diamond Resorts, Merck & Co. and Bausch told Bloomberg News they were unable to locate records of deals or significant negotiations with Blink or its predecessor companies. Spokeswomen for the American Diabetes Association and Bausch noted that there had been extensive executive turnover at their organizations since 2015.  

Geoffrey Chaiken said Blink had conversations with every entity listed on the slides but couldn’t make a deal with any of them until it had an agreement with MedImpact. Blink eventually signed contracts with some of the organizations, he said, without naming them. “Blink misled no one, and there is zero evidence that was presented that we did,” said Snyder, Blink’s lawyer. The slides listed potential partners Blink was in talks with at the time, and the company never suggested to MedImpact that it had deals in place with those groups, he said. 

Blink tried to “stack the deck” in its negotiations with MedImpact, according to the PBM’s lawsuit. A Blink predecessor had hired William Barre, MedImpact’s head of business development, as a consultant in August 2014, several months before contract talks began, paying him $3,000 a month. Barre, still employed by MedImpact at the time, didn’t tell his employer about the arrangement, even as he negotiated key details, MedImpact said in court papers. MedImpact said it had no idea Barre was a “secret agent” and a “mole” for Blink until more than a year after it had signed a contract. 

Snyder, Blink’s lawyer, disputed this account, saying MedImpact was aware Barre was working as a Blink consultant and that there was nothing unusual about the relationship. 

MedImpact and its lawyers didn’t respond to emails seeking comment. Barre no longer works with either Blink or MedImpact and declined to comment about his role. But in a brief phone interview last year, he said he thought Blink was a good idea at the time, and he still thinks so. The two companies settled their lawsuits late last year on terms that weren’t disclosed.

The Chaikens worked grueling hours and expected employees, who were paid well, to do so too. One former employee said Matthew would wander around the office after 6 p.m., wondering out loud where everyone had gone. 

In those early days, turnover was high. Workers were let go when they clashed with the brothers or didn’t meet expectations, said people familiar with the company’s operations. One former employee recalled a meeting where Geoffrey gathered a few dozen workers not long after a series of departures and promised Blink would be like a family going forward. Within two years, all but a handful had left. Chaiken said his management team has been stable for more than a year and that Blink’s turnover rate was in line with other startups. He said he didn’t recall the meeting.

One person who left the company was Eugene Kakaulin, a former Harvard Business School classmate who became Blink’s chief financial officer. He alleged in a lawsuit filed in federal court in New York in October 2016 that he was bothered by the Chaikens’ maneuvering to buy back shares from an early investor for a low price when the company had already lined up new investors at more than four times the valuation. Kakaulin said in legal filings that he was worried something similar might happen to him.

Kakaulin claimed he was stripped of his responsibilities after he told the Chaikens they might be violating securities laws by misrepresenting financial statements and fabricating statistics. He said in his lawsuit that Geoffrey asked him to use unrealistically high revenue projections to fit what investors wanted to see. Snyder, Blink’s lawyer, said the Chaikens “never did such a thing and never would.”

In his court filings, Kakaulin said a clause in his contract gave him the right to cash in his shares when the founders did. When he learned they planned to take as much as $6 million for themselves in a new round of financing in 2016, he asked for $1 million for himself, according to his lawsuit. The brothers refused, saying investors would balk if the CFO was selling, Kakaulin’s complaint said. He was fired a few weeks later.

Details of the lawsuit, including a text message allegedly sent to Kakaulin by a former girlfriend of Geoffrey’s, were splashed in the New York Post under the headline, “Generic Viagra peddler accused of stiffing business partners.”

The case was settled in early 2017. Terms weren’t disclosed. Kakaulin and the Chaikens declined to comment.

One lawsuit that hasn’t been resolved was brought in 2017 in federal court in New York by Michael Karsch, the early backer. He claims his $1 million investment in the form of convertible debt was returned in 2015 against his wishes. Karsch said in a court filing that the Chaikens tricked him into thinking his money would convert into a stake of no less than 5 percent, which would now be worth at least $30 million, when all along they planned to dump him for other investors once the valuation increased.

Blink responded in court papers that the money was a loan and that Karsch had asked to be repaid. “Karsch has only himself to blame for his decision,” Blink’s lawyers wrote. 

Karsch also said Geoffrey Chaiken misled him by suggesting that Kindler, the former Pfizer CEO, would be on Blink’s board. In a slide sent to Karsch eight days before he invested, Kindler was listed as a vice chairman of the nascent company, with his biography placed directly below Geoffrey Chaiken’s, according to the lawsuit. 

Chaiken said he had extensive talks with Kindler that didn’t lead to the bigger role he envisioned. Kindler said in a text message that he never served on the board, but he didn’t respond to questions about the nature of his talks with the Chaikens. 

“Nothing was misrepresented or concealed from Mr. Karsch,” said Snyder. Karsch “knew that plans had shifted.” 

In a March 1 court filing, Blink accused Karsch and his lawyer of destroying evidence, including emails from the period under dispute, and asked the judge to end the case. Karsch’s lawyer denied the allegations. A hearing is scheduled for this month.

In the interview at Blink’s office in January, Geoffrey Chaiken, dressed in black, said he considered shutting the company many times. But he continued because of the “hundreds of thousands of patients who are completely relying on the service to survive.” That forced Blink to come up with a new way of doing business, he said, one that cut out all middlemen to create a company “purely aligned with interests of patients.”

Last year, Blink partnered with former Express Scripts Holding Co. employees to set up Blue Eagle Health, which it calls a pharmacy benefit administrator. Blue Eagle maintains a network of more than 35,000 pharmacies, including independent stores, regional chains and Walmart outlets. Susan Lang, a former Express Scripts executive, is now Blink’s chief strategy officer. Blink also hired several e-commerce veterans who previously worked at Kayak.com. It won back a supermarket chain, Publix Super Markets Inc., which had stopped taking Blink customers in 2017.

“We are growing faster than we were before our dispute with MedImpact and before we lost CVS and Walgreens,” Chaiken said. He wouldn’t disclose revenue or prescription numbers but said the company had almost quadrupled its headcount in the previous 16 months. 

Blink’s realized gross revenue, which peaked at more than $700,000 a week in the summer of 2017, fell by about one-third over the next several months, according to a performance report viewed by Bloomberg News. It started climbing again last year, and as of early 2019 was above $500,000—higher than at the beginning of 2017, before the big pharmacy chains pulled out, but well below the peak. Blink said it couldn’t comment on revenue numbers.

Meanwhile, competitors aren’t standing still. GoodRx, the aggregator of cash-discount offerings, said it had revenue of more than $200 million last year and that more than 25 million people have used its discounts since it started in 2011, including 3.5 million in January. Blink said that month that more than 500,000 customers had used the site since its launch. Its mobile app had 200,000 downloads in 2018, a fraction of the 3.1 million for GoodRx, according to analytics firm App Annie.

Another potential competitor is online pharmacy PillPack, which Amazon bought for about $1 billion in June. It has pharmacy licenses in 50 states and focuses on patients taking multiple drugs who need help keeping track. If it decides to emphasize low-cost generics, it could be a threat to companies like Blink.

And then there’s Kakaulin, the spurned former CFO, and Jacoby, Chaiken’s former prep school pal, who also left Blink after disputes with the Chaikens. They’ve formed their own discount-drugs company, Hippo Technologies LLC, with offices 20 blocks north of Blink’s in lower Manhattan. Their site, which launched in February with $10 million in venture funding, allows people to get a text message discount card that can be used at drugstores, including CVS and Walgreens. Hippo plans to market its service to employers, health plans and other membership organizations.

Last March, Blink sued Hippo in federal court in New York, alleging it stole trade secrets, including Blink’s computer code. It listed three other former Blink employees and contractors as co-conspirators. The suit was settled in October on terms that weren’t disclosed. Kakaulin said the lawsuit interfered with Hippo’s fundraising for the better part of a year, but now that the case is over, Hippo will surpass Blink “very quickly.” 

Blink has modified its one-low-price-everywhere strategy and now offers its best deals at select drugstores. It calls them “Blink Smart Deals” and guarantees the lowest price for prescription generic drugs in a particular area or it will refund the difference. It also added a free mail-delivery option that is sometimes even cheaper. Blink, Hippo and GoodRx all advertise big discounts on typical full-cash drugstore prices.

Some industry experts wonder whether companies like Blink and Hippo are taking on a problem that technology can’t solve. They are fighting an uphill battle against giant drugstore chains and middlemen that aren’t about to let go of their profit streams.

The Chaikens and their backers aren’t conceding anything. Blink is “on the side of angels,” said venture capitalist Kimmy Scotti of 8VC, Blink’s lead outside investor. “The incumbents really want to keep prices high and, more importantly, profits for themselves. There is no incentive for them to make any changes in a system they have benefited so greatly from.”

©2019 Bloomberg L.P.