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Two charged over illegal kickback scheme at Valeant

Federal prosecutors have charged a former Valeant manager and the former chief executive of Philidor, a defunct pharmacy chain, alleging the pair operated an illegal kickback scheme to personally enrich themselves to the tune of tens of millions of dollars.

New York prosecutors alleged that Gary Tanner of Valeant and Andrew Davenport of Philidor secretly worked together to promote a deal under which the Canadian drugmaker purchased a $100m option agreement in the clandestine chain of mail-order pharmacies.

The deal “resulted in tens of millions of dollars for Davenport personally … and close to $10m in secret kickback payments to Tanner,” according to a criminal complaint made public on Thursday.

Mr Tanner used his position as a Valeant executive to lobby for the drugmaker to buy the option in Philidor, which resulted in a $40m windfall for Mr Davenport, prosecutors alleged in the complaint.

“In exchange for Tanner’s efforts to advance Davenport’s interests … Davenport kicked back approximately $10m to Tanner. The payments were made in secret and were laundered through a series of shell companies … to conceal the illicit source of the funds,” the complaint said.

In an email to Mr Tanner, Mr Davenport likened their illicit partnership to the film Butch Cassidy and the Sundance Kid, and talked of how they would “ride into the sunset together”, according to the complaint.

The pair were arrested on Thursday morning and charged with multiple counts, including wire fraud and conspiracy to launder money.

Preet Bharara, US attorney in Manhattan, said at a press conference that the pair used Philidor as a “vehicle for personal profit”. Mr Tanner “agreed to puff up Philidor’s business” to Valeant executives so that the company would spend $100m for the right to buy the secretive chain of pharmacies, Mr Bharara said.

Mr Tanner repeatedly lied and said he had no personal interest in Philidor, even after his superiors at Valeant started to become suspicious. “In fact, he had a huge interest,” said Mr Bharara.

After Valeant agreed to buy the option, Mr Davenport and Mr Tanner “illegally converted shareholders’ money into their own personal nest eggs”.

They were quick to spend their ill-gotten gains, Mr Bharara said. Days after the deal was consummated, Mr Tanner wired himself $6.5m, $2m of which he put into his retirement plan. Mr Davenport spent his portion of the proceeds on a new house and a $50,000 wine cellar.

The pair took care not to use official Valeant email accounts and instead created a false account for Mr Tanner using a fake name.

Mr Bharara strongly hinted that the prosecution of Mr Davenport and Mr Tanner would not be the last word in his sprawling investigation into the Canadian drugmaker.

“The investigation is ongoing, we still continue to look at a lot of things in relation to Valeant,” he said.

Shares in Valeant have lost more than 90 per cent of their value since the middle of last year.

The charges against Mr Davenport and Mr Tanner are the first to be brought in the year-long investigation. Prosecutors are also investigating Michael Pearson and Howard Schiller, Valeant’s former chief executive and chief financial officer, respectively, according to people briefed on the case.

Several investors have filed lawsuits against Valeant alleging that the arrangement with Philidor defrauded them.

Valeant said: “Gary Tanner ceased to be a Valeant employee on September 13 2015, and Andrew Davenport has never been an employee of the company. 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.”

It added: “The company, former CEO, former CFO, and current executives have not been charged at this time.”

Mr Tanner and Mr Davenport could not be reached for comment.

Mr Pearson built Valeant from a tiny drugmaker into a company with a market capitalisation approaching $100bn through a strategy of debt-fuelled deals, frequent lay-offs of scientists and huge price rises.

His approach won plaudits and big investments from well-known stock pickers, including Bill Ackman, the hedge fund tycoon who has lost billions of dollars on his shareholding in the drugmaker.

Mr Pearson’s creation started to crumble last year after it was revealed that Valeant had used the secretive network of pharmacies to boost sales of many of its best-selling products.

Sales of some of Valeant’s top products, such as Jublia, a $1,000 toenail fungus cream, have plummeted since Philidor was shut down in October last year.

In the third quarter of 2015, when Philidor was still in operation, the ointment generated $106m of sales, compared with $44m in the most recent quarter.

One person familiar with Valeant’s business model said Philidor had been sending refills of Jublia to patients who did not need the cream and then billing their health insurer.

The person said revenues from those prescriptions would never return.

Via FT