Katie Thomas and Matthew Goldstein
Federal prosecutors in New York announced on Thursday that they had arrested a former executive of Valeant Pharmaceuticals and the former chief executive of the mail-order pharmacy Philidor in what the prosecutors described as a multimillion-dollar fraud and kickback scheme aimed at personally enriching both executives.
According to the federal complaint, the former Valeant executive, Gary Tanner, entered into a secret relationship with Philidor’s chief executive, Andrew Davenport. Under the arrangement, Mr. Tanner was secretly paid millions of dollars to promote the pharmacy’s interests inside Valeant, a major drug maker. The efforts, the government said, included persuading Valeant to buy an option to acquire Philidor, then a little-known mail-order pharmacy based in Hatboro, Penn.
Lawyers for Mr. Tanner and Mr. Davenport did not immediately respond to requests for comment.
In a statement, Valeant noted that the company and its top executives were not charged in the case, and said it was cooperating with the investigation.
Valeant’s relationship to Philidor has come under intense scrutiny since last fall, when the previously undisclosed connection between the two companies was revealed. In the weeks that followed, there were several media reports on a host of tactics Valeant was said to have used to funnel its drugs through Philidor and increase sales, including altering prescriptions to specify that Valeant’s brand-name drug, and not a cheaper generic, be dispensed. It cut ties to Philidor in October of last year.
The arrests announced Thursday represent the first charges in what are multiple state and federal investigations into Valeant’s business practices; they may not be the last. Federal prosecutors are also said to be looking into whether Valeant used its special relationship with Philidor to defraud insurers, and the company is also under investigation by the Securities and Exchange Commission.
According to the complaint, which was filed on Wednesday in New York’s Southern District, Mr. Tanner and Mr. Davenport initiated their plan while Mr. Tanner was in charge of what was known at Valeant as “alternative fulfillment,” or the practice of using mail-order pharmacies to funnel prescriptions for brand-name drugs that otherwise may have been filled by cheap generic alternatives.
As their scheme developed, prosecutors said, Mr. Tanner resisted efforts by Valeant’s senior leadership to enter into relationships with Philidor’s competitors, and his efforts were critical in leading Valeant to enter into the purchase-option agreement in December 2014.
Philidor profited handsomely from the relationship — prosecutors said it grew from a tiny start-up to an enterprise of 450 employees and tens of millions of dollars in revenue. Until Philidor was shut down in January, at least 90 percent of the drugs it dispensed were sold by Valeant, the complaint said.
Mr. Tanner, too, benefited from the arrangement, authorities said. According to the complaint, Mr. Davenport used a series of shell companies — including one called End Game — to secretly transfer a kickback payment to Mr. Tanner after the purchase-option agreement went through.
Prosecutors said at one point, Mr. Davenport evoked images of Butch Cassidy and the Sundance Kid as he plotted with Mr. Tanner, saying in an email that the two would “ride into the sunset.” Mr. Tanner, for his part, replied that he would have to “keep playing the game,” which authorities said meant he would need to keep the relationship secret.
Mr. Tanner was terminated by Valeant in August 2015, prosecutors said, and went to work for Philidor, where, they said, he began negotiating a consulting agreement to continue working for Valeant. The complaint said Valeant officials questioned Mr. Tanner several times about whether he had any financial relationship with Philidor and he said he did not.
The series of negative developments over the last year have pummeled Valeant’s shares — pushing it down from nearly $100 a share last November to its current $17 a share. Its chief executive, J. Michael Pearson, stepped down in the spring, and the problems also led to a shake-up of the board.
The precipitous decline has punished a number of big hedge funds that hold large positions in Valeant — firms like Pershing Square Capital Management, Paulson & Co. and ValueAct Capital Management.
No hedge fund may have been hurt more than Pershing Square, the $11.6 billion firm led by the investor William A. Ackman. Mr. Ackman began buying Valeant shares in early 2015, when the stock was trading around $190, and he has remained a true believer. This year, well after concerns about Valeant’s business dealings with Philidor became apparent, he continued to insist the company had value and secured two board seats for his firm, holding one of them himself.
Just last week, Mr. Ackman told his investors that he foresaw a comeback strategy for Valeant as it moves to sell off business divisions to reduce its debt obligation. He has even suggested that the company may rename itself in an effort to rebuild its reputation.
Yet he has conceded that he and his firm could have done better due diligence on Valeant’s aggressive drug pricing practices — another business strategy that has prompted controversy and protests from federal legislators.
Mr. Ackman, in an emailed statement on Thursday, declined to comment on the criminal charges beyond the Valeant statement.