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 in exchange for his promotion of Philidor's business, including by facilitating transactions that helped Mr. Davenport gain more than $40 million -- and potentially tens of millions of additional dollars -- 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 were arrested in their homes early Thursday morning, Mr. Tanner in Phoenix and Mr. Davenport in Pennsylvania, the Federal Bureau of Investigation said. Attempts to reach the men and determine any legal representation weren't immediately successful.

In the complaint, the U.S. attorney 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 later raised concerns with unnamed Valeant executives that Mr. Tanner had a financial interest in Philidor, the complaint said.

The complaint alleges that Mr. Tanner acted as a kind 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.

Once a Wall Street highflier, Valeant has been battered by a slate of problems including accounting issues, a brush with a potential debt default and investigations by Congress and federal regulators over drug prices.

In a statement, the Canadian drugmaker 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.

"The counts issued today include allegations that the charged parties engaged in actions to defraud Valeant as a company," it said in the statement. "Valeant continues to cooperate with all relevant authorities in this matter."

Mr. Davenport was a founding principle 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. The pharmacy helped patients fulfill prescriptions and sometimes obtain insurance coverage for certain Valeant drugs.

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 Valent's former CEO Michael Pearson, who left the company in May.

Valeant severed its ties to Philidor in 2016, and Philidor's operations have been shuttered.

The lawyers in the U.S. attorney's office in Manhattan were pursuing an unusual legal theory, The Wall Street Journal had reported in August, that Valeant and closely linked mail-order-pharmacy Philidor allegedly defrauded insurers by hiding their close relationship.

Valeant grew rapidly in recent years through acquisitions and drug-price hikes. But the stock has lost more than 80% of its value this year amid myriad issues facing the company. Shares rose 3 cents to $17.89 Thursday 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.

Earlier this month, Valeant cut its annual forecast again as the drug company, struggling to remake its business after a series of missteps, signaled its turnaround may take longer than expected.

Write to Anne Steele at Anne.Steele@wsj.com and Jacquie McNish at Jacquie.McNish@wsj.com

 

(END) Dow Jones Newswires

November 17, 2016 13:01 ET (18:01 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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