Valeant’s Philidor woes expand as FBI arrests former execs

Investigators spell out purported multimillion-dollar kickback scheme

Valeant Pharmaceuticals International Inc. continues to be haunted by its ties to the Philidor specialty pharmacy as former executives from both companies face charges in a multimillion-dollar kickback scheme.

Former Valeant executive Gary Tanner and former CEO of Philidor Rx Services LLC Andrew Davenport were picked up by the FBI Thursday morning, accused of trying to consummate a purchase option agreement between the two companies that resulted in about US$40 million pocketed by Davenport and close to US$10 million in secret payments to Tanner.

FBI documents say Tanner used the position he held at Valeant until August 2015 to not only promote Philidor, but to resist efforts to diversify until the company became overly dependent on the one specialty pharmacy to achieve sales and growth targets. The FBI alleges that in email communications regarding the scheme Davenport evoked images of the 1969 Western Butch Cassidy and the Sundance Kid, saying that they would “ride into the sunset,” once they had finished.

“I believe Tanner meant he would keep pretending to act solely in Valeant’s interest, while in fact advancing Davenport’s and Tanner’s personal interest,” the legal complaint says.

This news comes as Valeant itself tries to ride into the sunset and leave its Philidor days in the dust. When the companies’ relationship, once shrouded in secrecy, was exposed, it contributed to Valeant stock losing more than 90 per cent of its value from briefly being the largest public company by market cap on the Toronto Stock Exchange, trading at $335.32 in July 2015.

The U.S. attorney’s office is also investigating whether the Laval, Que.-based company defrauded insurers by shrouding its ties to the mail-order pharmacy in order to boost sales of its drugs.

“It shows a real underbelly of the health care system,” said Andrew Left, the activist shortseller whose online investment newsletter Citron Research helped fuel Valeant’s stock decline when in October 2015 he compared the company to a “Pharmaceutical Enron.”

In a news release, the company distanced itself from Tanner and Davenport, saying that Valeant — its former CEO Michael Pearson, former CFO Howard Schiller and current executives — have not been charged at this time.

“The counts issued today include allegations that the charged parties engaged in actions to defraud Valeant as a company. Valeant continues to co-operate with all relevant authorities in this matter,” said a Valeant news release Thursday.

Wells Fargo analyst David Maris says that according to its most recent SEC filing, Valeant is currently facing 12 government and regulatory investigations with several of these legal proceedings getting underway in 2017, though the company has not reserved funds for any potential legal liabilities.

“We continue to believe that the many legal cases against Valeant and its affiliated business partners could turn out to be a major risk for Valeant and investors,” wrote Maris in a note to investors.

Under Pearson, in just several years Valeant grew on a business model highly scrutinized for relying on serial acquisitions and price hikes, rather than research and development.

Following the dramatic crash in the company’s share price, in early 2016 Valeant replaced its CEO, CFO and other members of the executive while also severing its ties with Philidor.

In April 2016, Valeant hired former Perrigo Company PLC executive Joseph Papa as its new CEO with a mission to drastically change the way the company operated by limiting drug price hikes and selling its assets to help pay down its staggering US$30-billion debt.