VRX Bausch Health Cos

By Jacquie McNish, Anne Steele and Christopher M. Matthews 

Valeant Pharmaceuticals International Inc. for a year has weathered a scandal over its relationship with a mail-order pharmacy that critics say helped it secure lofty prices for its drugs.

Now prosecutors say they have uncovered another troubling connection between the two companies. They alleged Thursday that two men -- one from each company -- enriched each other through a multimillion-dollar fraud and kickback scheme by directing more business and money to the pharmacy, Philidor Rx Services LLC.

Valeant and its shareholders suffered as a result, prosecutors said.

Former Valeant executive Gary Tanner and former Philidor chief executive Andrew Davenport were arrested at their homes early Thursday as the U.S. attorney's office in Manhattan alleged in a criminal complaint that they conspired to persuade Valeant to funnel its business to Philidor.

Philidor helped the Canadian drug company sell some of its higher-priced dermatology and other products by helping patients obtain insurance reimbursements and other forms of financial assistance for prescriptions.

Philidor's Mr. Davenport allegedly paid Mr. Tanner about $10 million in kickbacks for advocating for the pharmacy inside Valeant, according to the complaint. Meanwhile, Mr. Tanner allegedly facilitated deals that helped Mr. Davenport reap more than $40 million from Valeant, the complaint said.

The day after Mr. Davenport was paid about $31.4 million from Valeant, he transferred about $7.5 million to a company called Befrielse, which the complaint alleges was controlled by Mr. Tanner.

A month later Mr. Davenport transferred $2.2 million more to Befrielse, it says.

Mr. Tanner used funds he received from Mr. Davenport to retire debt, make investments and pay for personal expenses, including an additional home, according to the complaint. Mr. Davenport allegedly used his gains to settle outstanding financial obligations, purchase tens of millions of dollars in securities and buy luxury items, the complaint said. It is believed he spent about $50,000 to install a custom wine cellar with the gains, the complaint said.

Mr. Tanner's lawyer in a statement said, "It was Gary Tanner's job at Valeant to grow and promote Philidor," and 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, and Mr. Davenport couldn't be reached.

Valeant said Mr. Tanner stopped working as a Valeant employee in September 2015, and Mr. Davenport was never its employee. The company said it is cooperating with authorities.

Until a few years ago, Valeant was considered a pioneer in forging a new business model for the drug industry. It involved focusing less on discovering drugs and more on acquiring, pricing and selling them.

But last year a series of questions arose about Valeant's relationship with Philidor, which until then Valeant hadn't discussed with investors. The company faced accusations about its accounting over Philidor, which led to an internal review and earnings restatement. Meanwhile, last year, Valeant became a lightning rod for criticism over drug-price increases.

Valeant now faces a series of investigations and lawsuits over its ties to Philidor, as well as its financial reporting, drug pricing and other businesses. Valeant has said it is cooperating with the probes.

Manhattan U.S. Attorney Preet Bharara said Thursday at a news conference "the investigation is ongoing; we're still looking at a lot of different things in connection with Valeant and the relationship with Philidor."

Thursday's complaint said Mr. Tanner reported to a senior Valeant executive, whom it didn't identify, and that executive reported directly to Valeant's former CEO Michael Pearson, who stepped down in May.

The complaint 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 and another unidentified Valeant executive 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 used 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 Valeant's agreement in December 2014 to buy an option to acquire Philidor.

When Valeant began pushing Philidor for $50 million in overdue payments required under the option agreement, the complaint alleged, 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.

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 closed.

Write to Jacquie McNish at Jacquie.McNish@wsj.com, Anne Steele at Anne.Steele@wsj.com and Christopher M. Matthews at christopher.matthews@wsj.com

(END) Dow Jones Newswires

November 18, 2016 02:47 ET (07:47 GMT)

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