By Nate Raymond
NEW YORK (Reuters) - U.S. prosecutors on Thursday filed charges against a former Valeant Pharmaceuticals (NYSE:VRX) International Inc (TO:VRX) executive and a former CEO of mail order pharmacy Philidor Rx Services, alleging they engaged in a multimillion-dollar fraud and kickback scheme.
Federal prosecutors in Manhattan accused Gary Tanner, a former senior Valeant director, of secretly agreeing with former Philidor CEO Andrew Davenport to pay $100 million for the right to buy the specialty pharmacy, which is now defunct.
That deal resulted in Davenport earning $40 million, $10 million of which he secretly kicked back to Tanner, who used his position to expand the number of Valeant products sold through Philidor, prosecutors said.
They said the investigation of Laval, Quebec-based Valeant and Philidor is continuing.
The Federal Bureau of Investigation arrested Tanner, 39, and Davenport, 48, on Thursday morning at their residences in Arizona and Pennsylvania, respectively, authorities said. Their lawyers did not respond to requests for comment.
Valeant said in a statement that Tanner no longer works for the company and that the charges included allegations that the defendants defrauded the drugmaker. It said it is cooperating with authorities.
The development is the latest to hit Valeant, whose stock has plunged more than 90 percent since August 2015 amid intense criticism of its drug pricing and business practices and various investigations.
Valeant, whose biggest investor is Bill Ackman's Pershing Square (NYSE:SQ) Capital Management, has disclosed it received subpoenas seeking information related to its ties to Philidor and its accounting treatment for sales by specialty pharmacies.
INVESTIGATION CONTINUES
At a news conference, Manhattan U.S. Attorney Preet Bharara said investigators continuing looking for potential corruption and fraud at Valeant that may have harmed shareholders and the marketplace.
Tanner and Davenport were expected to appear in court on Thursday. They face four counts, including conspiracy to commit wire fraud and conspiracy to commit money laundering.
Valeant shares fell 5 percent early Thursday after news of the arrests broke. The price recovered following Bharara’s news conference, trading up 0.79 percent, or 19 cents, at $24.22 in New York.
Founded in 2013, Philidor was a specialty mail-order pharmacy formed with Valeant's assistance, prosecutors said. At least 90 percent of the drugs it dispensed were Valeant-branded products, they said.
Valeant's ties to Philidor emerged in October 2015 following a report issued by short-selling firm Citron Research focused partly on Philidor.
Up until that month, neither the nature of Valeant's relationship to Philidor nor its increasing dependence on the pharmacy to achieve its sales and profitability goals, had been disclosed to the public, the complaint said.
Following subsequent revelations, several insurers terminated contracts with Philidor and Valeant cut ties with the pharmacy. Philidor terminated its operations in January.
In March, Valeant announced that CEO Michael Pearson (LON:PSON) would leave, as the company said a board investigation of its dealings with Philidor found accounting problems dating to December 2014.
Valeant at that time said the committee found that "improper conduct" by former Chief Financial Officer Howard Schiller and the company's corporate controller contributed to the pharmaceutical company's need to restate results.
Schiller, who stepped down in 2015 and left Valeant's board this year, has denied wrongdoing. Lawyers for Pearson and Schiller did not respond to requests for comment on Thursday.
The case is U.S. v. Tanner, U.S. District Court, Southern District of New York, No. 16-mj-7388.