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 Pennsylvania -- the
Federal Bureau of Investigation said. A lawyer for Mr. Tanner said
he planned to issue a statement; attempts to reach Mr. Davenport's
lawyer 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 also 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."
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. 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 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."
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
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.
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 14:00 ET (19:00 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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