Former Valeant executive, ex-Philidor CEO arrested, facing charges in U.S.

Former executives of Valeant Pharmaceuticals and a related mail-order pharmacy were charged Thursday with running a fraud-and-kickback scheme that bilked Valeant out of millions of dollars.

Their arrests are part of an ongoing investigation of the scheme, according to Preet Bharara, U.S. Attorney for the Southern District of New York, who announced the charges at a Manhattan news conference. Other arrests are possible, he said.

Bharara's office said it has charged Gary Tanner, a former Valeant executive, and Andrew Davenport, who had been the chief executive of Philidor, a mail-order pharmacy that is now defunct, with two counts of wire fraud, along with money laundering and conspiracy.

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The criminal complaint alleges that Tanner and Davenport conspired to enrich themselves with Valeant funds after the two helped Valeant set up Philidor in early 2013, primarily as a vehicle to market and distribute Valeant drugs.

According to the complaint, Tanner focused on building up Philidor's business, resisted his superiors' directives to line up other distributors for Valeant's products and ultimately received a $10 million US kickback from Davenport. Meanwhile, Tanner repeatedly told Valeant he was following its conflicts of interest rules.

The complaint alleges that in the fall of 2014, the two orchestrated Valeant's agreement to buy an option to purchase Philidor, which cost Valeant at least $133 million. More than $40 million of that went to shell companies controlled by Davenport, including one called "End Game LP," which kicked $10 million of that back to Tanner.

Davenport used that money to buy stocks, luxury goods and a $50,000 custom wine cellar, according to the complaint.

Both men were taken into custody Thursday morning at or near their homes and faced court appearances later in the day.

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Tanner, 39, of Gilbert, Ariz., had been Valeant's primary contact with Philidor and headed Valeant's "access solutions team," which worked to get patients' insurers to cover brand-name Valeant medicines instead of much-cheaper generic ones. Davenport, 48, of Haverford, Penn., a Philadelphia suburb, was Philidor's largest owner as well as its CEO.

Valeant has been under scrutiny for aggressively jacking up prices of old drugs with little or no competition and for questionable accounting practices, including prematurely reporting sales of its drugs made through Philidor.

Government probes, lawsuits

Valeant is the target of more than 10 different government probes, plus multiple shareholder lawsuits. Its stock price has plunged more than 90 per cent since the former Wall Street darling came under the microscope for its business and accounting practices.

At the news conference, Bharara cited emails investigators uncovered in which Davenport told Tanner, using the alias Brian Wilson, he could picture them "riding off into the sunset." Tanner responded, "Will have to keep playing the game," according to the complaint.

"As of today, the game is up and they will not be riding off into the sunset together," Bharara said.

Howard Shapiro, an attorney representing Tanner, said they will show that Tanner is innocent at trial.

"It was Gary Tanner's job at Valeant to grow and promote Philidor. He performed that job exceptionally well, greatly benefiting Valeant's shareholders, and regularly communicated to his superiors what he was doing," Shapiro said in a statement.

Davenport's attorney did not immediately respond to phone and email messages.

Closed down

Philidor was shut down early this year amid an investigation of irregularities in reporting of its financial dealings with Valeant, whose drug sales dropped significantly as a result.

In a statement, Valeant said the company, its current executives and its former CEO and chief financial officer "have not been charged at this time."

"Valeant continues to co-operate with all relevant authorities in this matter," the statement said, noting that Tanner left the company in September 2015 and Davenport was never an employee.

Valeant, which technically is based in Canada but operates from headquarters in Bridgewater, New Jersey, sells numerous generic medicines, along with brand-name ones for conditions in the fields of dermatology, gastrointestinal disorders, eye health and neurology.