By Anne Steele and Jacquie McNish
Federal prosecutors filed charges against former Valeant
Pharmaceuticals International Inc. executive Gary Tanner and former
Philidor Rx Services LLC Chief Executive Andrew Davenport, alleging
they engaged in a multimillion-dollar fraud and kickback
scheme.
The U.S. attorney's office alleged the two men conspired to
promote Philidor to Valeant to win and control its business,
according a complaint. Mr. Davenport allegedly paid Mr. Tanner $10
million in kickbacks for his promotion of Philidor's business,
including by facilitating transactions that helped Mr. Davenport
make more than $40 million -- and potentially tens of millions more
-- from Valeant.
The complaint alleges the two worked without Valeant executives'
knowledge to shut out other mail-order pharmacies from getting
Valeant business and helped persuade Valeant to buy an option in
Philidor.
Both men were arrested in their homes early Thursday morning --
Mr. Tanner in Phoenix and Mr. Davenport in a Philadelphia suburb --
the Federal Bureau of Investigation said.
In a statement, Mr. Tanner's lawyer said, "It was Gary Tanner's
job at Valeant to grow and promote Philidor" and that 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.
The criminal charges are the latest turn in a series of
investigations and lawsuits targeting the Canadian drugmaker's ties
to Philidor, as well as its financial reporting, drug pricing and
other businesses. A breakdown of the legal challenges, which
includes civil probes by Justice officials in more than 6 states,
securities investigations in the U.S. and Canada and a
congressional review, filled 10 pages in Valeant's latest quarterly
report.
Valeant says it is cooperating with regulators and rule
makers.
In addition to the legal onslaught, the company is also trying
to remake itself by changing its culture and business model, and it
is under pressure to trim about $30 billion of debt, a portion of
which is set to be repaid in 2018. The Wall Street Journal reported
early this month that Valeant is advanced talks to sell its Salix
stomach drug unit for about $10 billion to Japan's Takeda
Pharmaceutical.
The U.S. attorney alleged in the complaint Thursday that
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 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 acted as a sort of double
agent for Philidor, using 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 an
option agreement in December 2014 that required Valeant to pay
about $300 million for the right to acquire Philidor.
When Valeant began pushing Philidor for $50 million in overdue
payments required under the option agreement, 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.
Mr. Tanner used funds he received from Mr. Davenport to retire
debts, make investments and pay for personal expenses, including an
additional home, according to the complaint. Mr. Davenport used his
gains to settle outstanding financial obligations, purchase tens of
millions of dollars in securities and buy luxury items. It is
believed Mr. Davenport also purchased an additional home and spent
about $50,000 to install a custom wine cellar with the gains,
according to the complaint.
In a statement, Valeant pointed out its former CEO Michael
Pearson, former CFO Howard Schiller, and current executives haven't
been charged. The company said Mr. Tanner's employment ended Sept.
13, 2015, and Mr. Davenport has never been an employee there.
Manhattan U.S. Attorney Preet Bharara emphasized Thursday that
the investigation continues.
"I made it more clear here than even I usually do that the
investigation is ongoing, were still looking at a lot of different
things in connection with Valeant and the relationship with
Philidor," Mr. Bharara said at a news conference.
Mr. Davenport was a founding principal and a significant
shareholder in Philidor, which was founded in Hatboro, Pa., in 2013
as a pilot project to sell Valeant drugs, according to an April
letter from a lawyer for Philidor that was submitted to a Senate
committee.
By 2015, Philidor was selling a portfolio of more than 50
Valeant drugs with the help of a network of pharmacies, according
to the letter. Valeant didn't discuss its relationship with the
pharmacy until the fall of 2015, following reports that revealed
the two companies' close ties.
Philidor's rapid growth was overseen by a small group of
employees Valeant inherited from its 2012 acquisition of Medicis
Pharmaceutical, the letter said. The team included Mr. Tanner, who
had worked on a similar pharmacy project at Medicis, the letter
said.
The complaint Thursday said Mr. Tanner reported to Mr. Pearson,
who left the company in May.
Valeant senior executives were counting on Mr. Tanner to promote
Valeant's interests at Philidor after the option agreement. In an
email to then CEO Mr. Pearson, one Valeant executive said,
"ultimately we have to trust the management team and the people
that we have providing oversight to do their jobs and make sure
this is running correctly."
Valeant briefly reigned as one of Wall Street's most favored
drugmakers, with a soaring stock price and profits stoked by a
growth strategy favoring acquisitions and drug-price increases.
Philidor helped Valeant sell some of its higher-priced dermatology
and other products by helping patients obtain insurance and other
forms of financial assistance for prescriptions.
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 shuttered.
Valeant's stock has lost more than 80% of its value this year
amid its myriad issues. Shares fell 9 cents to $17.77 Thursday
afternoon and have recently traded near their lowest levels in six
years; Valeant's all-time closing high was $262.52, set on August
5, 2015.
The Wall Street Journal reported in August that the lawyers in
the U.S. attorney's office in Manhattan were pursuing an unusual
legal theory that Valeant and Philidor allegedly defrauded insurers
by hiding their close relationship.
Earlier this month, Valeant cut its annual forecast again as the
drug company signaled its turnaround may take longer than
expected.
Christopher M. Matthews contributed to this article
Write to Anne Steele at Anne.Steele@wsj.com and Jacquie McNish
at Jacquie.McNish@wsj.com
(END) Dow Jones Newswires
November 17, 2016 15:34 ET (20:34 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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