VRX Bausch Health Cos

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)

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