Former Valeant, Philidor Executives Convicted of Fraud

MANHATTAN (CN) - A federal jury returned guilty verdicts Tuesday morning in the fraud trial of former executives from Valeant Pharmaceuticals and the mail-order pharmacy it helped create.

Valeant executive Garry Tanner and Philidor Rx Services CEO Andrew Davenport were convicted on all four counts brought against them in a 2016 complaint. Just two weeks earlier, Laval, Canada-based Valeant said it will be called Bausch Health Companies Inc. starting in July.

"As a unanimous jury has found, Gary Tanner sold his loyalty to Andrew Davenport in exchange for $9.7 million," U.S. Attorney Geoffrey S. Berman said in a statement this afternoon. "Tanner was entrusted by his employer to manage Valeant’s relationship with Davenport’s company. Davenport exploited that trust by promising a massive kickback in exchange for betrayal."

Prosecutors noted that Tanner’s work in the alternative-fulfillment program at Valeant involved incentivizing doctors and patients to prescribe or use Valeant-branded medications. Among other things, Tanner helped obtain insurance coverage for those drugs to make them preferable to generic substitutes.

Thanks to Valeant’s financing, personnel and supervision, Philidor’s doors opened in January 2013. Before the specialty pharmacy shuttered in late 2015, a casualty of ramped-up pressure on Valeant, at least 90 percent of the drugs Philidor dispensed were from Valeant.

Prosecutors called Tanner the Valeant executive primarily responsible for the Philidor relationship. As U.S. Attorney Berman put it in a statement this afternoon: "Tanner became the fox guarding the henhouse."

Valeant and its shareholders faced significant risks because of the efforts Tanner took to prop up Philidor and Davenport, according to the complaint. It notes among other things that Philidor received $2 million in Valeant financing, as well as a Valeant-paid sales force.

Rather than having Valeant explore other commercially available alternatives, according to the complaint, Tanner increased Valeant’s dependence on the pharmacy, all the while assuring his employer that he had no financial interest in Philidor.

In reality, however, prosecutors say Tanner and Davenport were working to make sure that Tanner would receive hefty kickbacks in an arrangement they pushed for Valeant to buy an option to acquire Philidor.

Set to cost Valeant shareholders almost $300 million, the purchase included $100 million in up-front payments, a $33 million time-based milestone payment, and potential future multimillion-dollar sales-based milestone payments.

While Tanner and Davenport set up shell companies and shell company bank accounts to launder and distribute the kickbacks, the complaint says Tanner was advising Valeant on the option agreement and using a secret Philidor email account to keep Davenport up to speed.

Valeant sent $100 million to the bank accounts of Davenport and other beneficial owners of Philidor when the Option Agreement was signed in December 2010.

The $33 million time-based milestone payment followed soon thereafter. Prosecutors said entities that Davenport controlled acquired more than $40 million of those sums.

Tannner received $9.7 million in kickbacks, using said funds to purchase a new home, make investments, settle debts and cover other personal expenses.

Davenport meanwhile bought tens of millions of dollars in securities, as well as luxury goods and items, including the installation of a $50,000 custom wine cellar.

Prosecutors said Tanner continued to use his position at Valeant over the following years to advance Philidor and Davenport’s interests.

In addition to expanding the number of Valeant products sold through Philidor, Tanner interfered in Valeant’s efforts to collect cash from Philidor to which it was entitled.

All the while, according to the complaint, Tanner continued to communicate with Davenoprt on the secret Philidor email account, which was in the name Brian Wilson.

Davenport wrote in one email to Tanner’s Wilsoni account that he pictured their “butch and sundance ride into the sunset (or off the cliff as in the flick).”

Investor websites and news organizations exposed Valeant’s connection to Philidor in October 2015, causing several insurers and other payors to terminate their contracts with Philidor.

While Valeant’s stock price plummeted, the payor risk that senior executives at Valeant had sought to avoid by diversifying away from Philidor was realized. Valeant CEO Michael Pearson was ousted by 2016. Along with Mylan and the pharmaceutical companies run by Martin Shkreli, Valeant was one of the companies investigated by Congress for hiking drug prices.

Tanner, 40, and Davenport, 50, were arrested in their home towns of Gilbert, Arizona, and Haverford, Pennsylvania, respectively.

They were charged with one count of conspiracy to commit honest services wire fraud; one count of honest services wire fraud; one count of conspiring to violate the Travel Act; and one count of conspiring to commit money laundering. The charges together carry a maximum sentence of 65 years in prison.

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