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Former Valeant and Philidor Executives Charged in Kickback Scheme Former Valeant and Philidor Executives Charged in Kickback Scheme
(about 7 hours later)
Federal prosecutors in New York announced on Thursday that they had arrested a former executive of Valeant Pharmaceuticals and the former chief executive of the mail-order pharmacy Philidor in what the prosecutors described as a multimillion-dollar fraud and kickback scheme aimed at personally enriching both executives. A secret relationship had made the two men rich: one, the head of a mail-order pharmacy, the other, an executive at a major pharmaceutical company who had promised to funnel millions of dollars to his partner in exchange for receiving millions of his own.
According to the federal complaint, the former Valeant executive, Gary Tanner, entered into a secret relationship with Philidor’s chief executive, Andrew Davenport. Under the arrangement, Mr. Tanner was secretly paid millions of dollars to promote the pharmacy’s interests inside Valeant, a major drug maker. The efforts, the government said, included persuading Valeant to buy an option to acquire Philidor, then a little-known mail-order pharmacy based in Hatboro, Penn. They celebrated over email like characters in a classic western movie — with one saying that they would soon “ride into the sunset” together.
Lawyers for Mr. Tanner and Mr. Davenport did not immediately respond to requests for comment. Those were the details laid out in a complaint announced on Thursday by federal prosecutors, which brought that cinematic tale to an inglorious end. The prosecutors charged the two executives — Andrew Davenport, the chief executive of the mail-order pharmacy Philidor Rx Services, and Gary Tanner, an executive at Valeant Pharmaceuticals International — with multiple counts of fraud and conspiracy for what prosecutors described as a multimillion-dollar scheme to enrich themselves.
In a statement, Valeant noted that the company and its top executives were not charged in the case, and said it was cooperating with the investigation. The arrests represent the first charges in multiple state and federal investigations into Valeant’s business practices, including inquiries by Congress and the Securities and Exchange Commission. As the questions have mounted over the last year, shares of Valeant, a major drug maker that was once a Wall Street darling, have fallen precipitously, putting the company’s future in doubt.
Valeant’s relationship to Philidor has come under intense scrutiny since last fall, when the previously undisclosed connection between the two companies was revealed. In the weeks that followed, there were several media reports on a host of tactics Valeant was said to have used to funnel its drugs through Philidor and increase sales, including altering prescriptions to specify that Valeant’s brand-name drug, and not a cheaper generic, be dispensed. It cut ties to Philidor in October of last year. In a statement, Valeant noted that the company and its top executives had not been charged in the case, and said it was cooperating with the investigation. A lawyer for Mr. Davenport said his client intended to defend himself, and a lawyer for Mr. Tanner said his client’s innocence would be demonstrated at trial.
The arrests announced Thursday represent the first charges in what are multiple state and federal investigations into Valeant’s business practices; they may not be the last. Federal prosecutors are also said to be looking into whether Valeant used its special relationship with Philidor to defraud insurers, and the company is also under investigation by the Securities and Exchange Commission. Of all the questions surrounding the company, its relationship to the small mail-order pharmacy Philidor drew perhaps the most scrutiny.
According to the complaint, which was filed on Wednesday in New York’s Southern District, Mr. Tanner and Mr. Davenport initiated their plan while Mr. Tanner was in charge of what was known at Valeant as “alternative fulfillment,” or the practice of using mail-order pharmacies to funnel prescriptions for brand-name drugs that otherwise may have been filled by cheap generic alternatives. In October 2015, Valeant revealed that it had bought an option to acquire Philidor in 2014 but had never disclosed that detail to investors. Several media outlets reported on a host of tactics Valeant was said to have used to steer its products through Philidor and increase sales, including altering prescriptions to specify that Valeant’s brand-name drug, and not a cheaper generic, be dispensed. It cut ties to Philidor that same month.
As their scheme developed, prosecutors said, Mr. Tanner resisted efforts by Valeant’s senior leadership to enter into relationships with Philidor’s competitors, and his efforts were critical in leading Valeant to enter into the purchase-option agreement in December 2014. According to the complaint, filed Wednesday in Federal District Court for the Southern District of New York, Mr. Tanner and Mr. Davenport were at the heart of this relationship. The government said the two concealed from Valeant a secret pact they had made to promote the pharmacy’s interests inside Valeant, including persuading Valeant to buy an option to acquire Philidor. The government contends Mr. Tanner used a secret email account, under the name “Brian Wilson” to communicate with Mr. Davenport.
Philidor profited handsomely from the relationship — prosecutors said it grew from a tiny start-up to an enterprise of 450 employees and tens of millions of dollars in revenue. Until Philidor was shut down in January, at least 90 percent of the drugs it dispensed were sold by Valeant, the complaint said. Prosecutors said Mr. Tanner and Mr. Davenport initiated their plan while Mr. Tanner was in charge of what was known at Valeant as “alternative fulfillment,” or the practice of using mail-order pharmacies to increase prescriptions for its brand-name drugs that otherwise might have been filled by cheaper generic alternatives.
Mr. Tanner, too, benefited from the arrangement, authorities said. According to the complaint, Mr. Davenport used a series of shell companies — including one called End Game — to secretly transfer a kickback payment to Mr. Tanner after the purchase-option agreement went through. As the scheme developed, prosecutors said, Mr. Tanner resisted efforts by Valeant’s senior leadership to seek out relationships with Philidor’s competitors, and his efforts were critical in leading Valeant into the purchase-option agreement in December 2014.
Prosecutors said at one point, Mr. Davenport evoked images of Butch Cassidy and the Sundance Kid as he plotted with Mr. Tanner, saying in an email that the two would “ride into the sunset.” Mr. Tanner, for his part, replied that he would have to “keep playing the game,” which authorities said meant he would need to keep the relationship secret. Philidor profited handsomely from the relationship — prosecutors said it grew to an enterprise with 450 employees and tens of millions of dollars in revenue at the end of 2014 from a tiny start-up in 2013. Until Philidor was shut down in January, at least 90 percent of the drugs it dispensed were sold by Valeant, the federal complaint said.
Mr. Tanner was terminated by Valeant in August 2015, prosecutors said, and went to work for Philidor, where, they said, he began negotiating a consulting agreement to continue working for Valeant. The complaint said Valeant officials questioned Mr. Tanner several times about whether he had any financial relationship with Philidor and he said he did not. Mr. Tanner also benefited from the arrangement, the authorities said. According to the complaint, Mr. Davenport used a series of shell companies — including one called End Game — to secretly transfer a kickback payment to Mr. Tanner after the purchase-option agreement went through.
The series of negative developments over the last year have pummeled Valeant’s shares — pushing it down from nearly $100 a share last November to its current $17 a share. Its chief executive, J. Michael Pearson, stepped down in the spring, and the problems also led to a shake-up of the board. According to prosecutors, about $40 million from the deal between Valeant and Philidor went to Mr. Davenport, who, they said, sent about $10 million of that to Mr. Tanner.
The precipitous decline has punished a number of big hedge funds that hold large positions in Valeant — firms like Pershing Square Capital Management, Paulson & Co. and ValueAct Capital Management. The complaint said that Valeant officials questioned Mr. Tanner several times about whether he had any financial relationship with Philidor — and that he said he did not.
No hedge fund may have been hurt more than Pershing Square, the $11.6 billion firm led by the investor William A. Ackman. Mr. Ackman began buying Valeant shares in early 2015, when the stock was trading around $190, and he has remained a true believer. This year, well after concerns about Valeant’s business dealings with Philidor became apparent, he continued to insist the company had value and secured two board seats for his firm, holding one of them himself. Howard M. Shapiro, a lawyer for Mr. Tanner, said his client had simply been doing his job. “It was Gary Tanner’s job at Valeant to grow and promote Philidor,” he said in a statement. “He performed that job exceptionally well, greatly benefiting Valeant’s shareholders, and regularly communicated to his superiors what he was doing.”
Just last week, Mr. Ackman told his investors that he foresaw a comeback strategy for Valeant as it moves to sell off business divisions to reduce its debt obligation. He has even suggested that the company may rename itself in an effort to rebuild its reputation. Mr. Davenport’s lawyer, Jonathan Rosen, said Mr. Davenport had worked “with full transparency” and added, “Philidor also benefited Valeant, which is why Valeant and its highly sophisticated and active management team sought to buy it.”
Yet he has conceded that he and his firm could have done better due diligence on Valeant’s aggressive drug pricing practices — another business strategy that has prompted controversy and protests from federal legislators. Mr. Tanner was forced out of Valeant in 2015. Mr. Davenport remained at Philidor until the company shut down.
Mr. Ackman, in an emailed statement on Thursday, declined to comment on the criminal charges beyond the Valeant statement. Regardless of whether Valeant’s top executives were aware of the arrangement between Mr. Tanner and Mr. Davenport, Valeant benefited significantly from its ties to the pharmacy, allowing it to increase sales of ailing products and obscure more significant problems with the business, said Vicki Bryan, a senior analyst with Gimme Credit, a bond research firm.
She noted that Valeant paid Philidor $100 million to enter into the purchase agreement, then quickly paid it $33 million more, according to the complaint.
“This is how much Valeant valued this relationship, right off the bat,” Ms. Bryan said. When Valeant disclosed its relationship to Philidor last year, it said that the pharmacy had accounted for about 7 percent of its sales in the third quarter of 2015, or about $196 million.
Beyond the relationship between Mr. Davenport and Mr. Tanner, Valeant has said in public filings that the government investigations into Philidor could include looking into whether it improperly used its ties to the pharmacy to bill third parties, such as insurers.
Preet Bharara, the United States attorney for the Southern District of New York, said at a news conference on Thursday that the investigation was continuing, but he declined to discuss specifics. He would not say whether his office was looking into Valeant’s accounting practices.
A spokesman for Mr. Bharara said the office did not have any agreements with cooperating witnesses to make public at this time. His office has tended to make cooperation agreements public when an investigation is largely complete. The criminal complaint also refers to interviews with several unnamed former Valeant executives, but does not identify any of them as cooperating witnesses.
The series of negative developments over the last year have pummeled Valeant’s stock — pushing it down to its current $17 a share from nearly $100 a share last November. Its chief executive, J. Michael Pearson, stepped down in the spring, and the problems also led to a shake-up of the board.
The precipitous decline has punished a number of big hedge funds that hold large positions in Valeant — firms like Pershing Square Capital Management, Paulson & Company and ValueAct Capital Management.
No hedge fund may have been hurt more than Pershing Square, the $11.6 billion firm led by the investor William A. Ackman. Mr. Ackman began buying Valeant shares in early 2015, when the stock was trading around $190, and he has remained a true believer. This year, well after concerns about Valeant’s business dealings with Philidor became apparent, he continued to argue the company had value and secured two board seats for his firm, holding one of them himself.
Just last week, Mr. Ackman told his investors that he foresaw a comeback strategy for Valeant as it moved to sell off business divisions to reduce its debt obligation. He has even suggested that the company may rename itself in an effort to rebuild its reputation.
Yet he has conceded that he and his firm could have done better due diligence on Valeant’s aggressive drug-pricing practices — another business strategy that has prompted controversy and protests from federal legislators.
Mr. Ackman, in an email statement on Thursday, declined to comment on the criminal charges beyond the Valeant statement.