By Jacquie McNish, Anne Steele and Christopher M. Matthews
Valeant Pharmaceuticals International Inc. for a year has
weathered a scandal over its relationship with a mail-order
pharmacy that critics say helped it secure lofty prices for its
drugs.
Now prosecutors say they have uncovered another troubling
connection between the two companies. They alleged Thursday that
two men -- one from each company -- enriched each other through a
multimillion-dollar fraud and kickback scheme by directing more
business and money to the pharmacy, Philidor Rx Services LLC.
Valeant and its shareholders suffered as a result, prosecutors
said.
Former Valeant executive Gary Tanner and former Philidor chief
executive Andrew Davenport were arrested at their homes early
Thursday as the U.S. attorney's office in Manhattan alleged in a
criminal complaint that they conspired to persuade Valeant to
funnel its business to Philidor.
Philidor helped the Canadian drug company sell some of its
higher-priced dermatology and other products by helping patients
obtain insurance reimbursements and other forms of financial
assistance for prescriptions.
Philidor's Mr. Davenport allegedly paid Mr. Tanner about $10
million in kickbacks for advocating for the pharmacy inside
Valeant, according to the complaint. Meanwhile, Mr. Tanner
allegedly facilitated deals that helped Mr. Davenport reap more
than $40 million from Valeant, the complaint said.
The day after Mr. Davenport was paid about $31.4 million from
Valeant, he transferred about $7.5 million to a company called
Befrielse, which the complaint alleges was controlled by Mr.
Tanner.
A month later Mr. Davenport transferred $2.2 million more to
Befrielse, it says.
Mr. Tanner used funds he received from Mr. Davenport to retire
debt, make investments and pay for personal expenses, including an
additional home, according to the complaint. Mr. Davenport
allegedly used his gains to settle outstanding financial
obligations, purchase tens of millions of dollars in securities and
buy luxury items, the complaint said. It is believed he spent about
$50,000 to install a custom wine cellar with the gains, the
complaint said.
Mr. Tanner's lawyer in a statement said, "It was Gary Tanner's
job at Valeant to grow and promote Philidor," and he "regularly
communicated to his superiors what he was doing. Today he has been
charged with a crime for doing his job. We will demonstrate his
innocence at trial."
Mr. Davenport's lawyer didn't respond to requests for comment,
and Mr. Davenport couldn't be reached.
Valeant said Mr. Tanner stopped working as a Valeant employee in
September 2015, and Mr. Davenport was never its employee. The
company said it is cooperating with authorities.
Until a few years ago, Valeant was considered a pioneer in
forging a new business model for the drug industry. It involved
focusing less on discovering drugs and more on acquiring, pricing
and selling them.
But last year a series of questions arose about Valeant's
relationship with Philidor, which until then Valeant hadn't
discussed with investors. The company faced accusations about its
accounting over Philidor, which led to an internal review and
earnings restatement. Meanwhile, last year, Valeant became a
lightning rod for criticism over drug-price increases.
Valeant now faces a series of investigations and lawsuits over
its ties to Philidor, as well as its financial reporting, drug
pricing and other businesses. Valeant has said it is cooperating
with the probes.
Manhattan U.S. Attorney Preet Bharara said Thursday at a news
conference "the investigation is ongoing; we're still looking at a
lot of different things in connection with Valeant and the
relationship with Philidor."
Thursday's complaint said Mr. Tanner reported to a senior
Valeant executive, whom it didn't identify, and that executive
reported directly to Valeant's former CEO Michael Pearson, who
stepped down in May.
The complaint said Valeant's chief compliance officer became
concerned about Mr. Tanner's financial ties to Philidor after Mr.
Tanner sought approval to lease the pharmacy a property he owned.
The request was rejected, the complaint said. The compliance
officer and another unidentified Valeant executive later raised
concerns with unnamed Valeant executives that Mr. Tanner had a
financial interest in Philidor, the complaint said.
The complaint also alleges Mr. Tanner used his role as a Valeant
executive to discourage the company from doing business with other
pharmacies. At the same time, the complaint alleges, Mr. Tanner
privately counseled Mr. Davenport on how to negotiate better terms
for Valeant's agreement in December 2014 to buy an option to
acquire Philidor.
When Valeant began pushing Philidor for $50 million in overdue
payments required under the option agreement, the complaint
alleged, Mr. Tanner urged his employer to allow for more time.
Shortly after he secured the delay, the complaint said, Mr.
Davenport sent Mr. Tanner an email likening themselves to the Wild
West robbers Butch Cassidy and the Sundance Kid. "Can picture our
butch and sundance ride into the sunset (or off the cliff as in the
flick) as our wiggle room/ability to operate independently gets
whittled down," the message said.
While Philidor, now defunct, was in operation, at least 90% of
the drugs it dispensed were from Valeant, according to the
complaint. Valeant severed its ties to Philidor in 2016, and its
operations have been closed.
Write to Jacquie McNish at Jacquie.McNish@wsj.com, Anne Steele
at Anne.Steele@wsj.com and Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
November 18, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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