Feds hit former Valeant, Philidor execs with multimillion-dollar fraud and kickback charges

Valeant

Authorities have been trying to find out what really happened at Valeant Pharmaceuticals and its closely linked specialty pharmacy Philidor since a short seller leveled allegations at the pair last October.

Now, federal prosecutors think they know: They’re charging former execs from both companies for engineering a multimillion-dollar fraud and kickback scheme.

The U.S. Attorney for the Southern District of New York, Preet Bharara, announced charges against former Valeant exec Gary Tanner and former Philidor CEO Andrew Davenport Thursday.

According to the FBI special agent handling the investigation, Tanner received $10 million in kickbacks, Evercore ISI analyst Umer Raffat relayed in a Thursday note to clients. Excerpts from DOJ documents say that the kickbacks, issued by Davenport, were "laundered through a series of shell companies and transcactions designed to conceal" the illicit payments.

Valeant, for its part, emphasized that the company itself had not been charged—and moreover, that "the counts today include allegations that the charged parties engaged in actions to defraud Valeant as a company."

Prosecutors had been probing whether Valeant defrauded insurers by hiding its close relationship with Philidor, which in turn ramped up sales of the Canadian drugmaker’s pricey meds by helping patients snag insurance coverage, The Wall Street Journal reported in August.

The investigation had focused on whether the specialty pharmacy made false statements to insurers about its ties to Valeant; at issue was whether insurers thought Philidor was neutral, rather than in Valeant’s service.

Philidor’s business practices—including the use of rebates and other compensation to Valeant customers—were also under the lens.

The Valeant-Philidor connection has been in the spotlight since last year, when short seller Citron Research accused the Quebec-based pharma of using Philidor to inflate its top line. After Valeant revealed that it had secretly purchased an option to acquire Philidor, an internal investigation revealed $58 million worth of accounting blunders on Valeant’s part.

In the wake of Citron's claims, Valeant severed ties with Philidor, which then closed down completely. Valeant’s CEO and CFO at the time, J. Michael Pearson and Howard Schiller, also left in subsequent months, and Bloomberg recently reported that both former execs could face prosecution.

Other reports continued to question Philidor’s business practices and the level of connection between the two companies. Last November, Reuters reported that Valeant’s staffers worked with Philidor's founders to set up the business and widen its operations. According to the news service’s sources, Tanner traveled frequently between Philidor's Pennsylvania and Arizona offices and Valeant's U.S. headquarters. He also played a key role in Philidor's operations, the news service said.

In one 2014 instance described by Reuters, Tanner and colleague Bijal Patel—both of whom used fake names in their email communication within Philidor—were copied on an email with an attachment detailing how Philidor employees could resubmit rejected insurance claims at different price points in order to bill the highest amount an insurer would pay.

Former Philidor workers also told the publication they were sometimes instructed by their supervisors to alter prescriptions from physicians, allowing the pharmacy to fill a script with a Valeant drug rather than a low-cost copycat med.

Meanwhile, Valeant has been struggling under a host of other problems unrelated to the Philidor saga. It’s faced political pricing pushback and a Congressional investigation into its price-hiking strategy, and it’s also struggled under the mountain of debt it built up with M&A-happy Pearson at the helm. For Q3, it took its already-lowered guidance down another notch after missing EPS and sales marks.

And as Wells Fargo analyst David Maris wrote in a note to clients, he left the DOJ press conference "feeling that there could be more to come" on the Philidor front, too. "It remains an active investigation with significant resources from multiple government agencies, including the District Attorney's office and the FBI," he noted.

Editor's note: This story has been updated with information from the complaint and excerpts from analyst notes.