Federal prosecutors are investigating whether Valeant Pharmaceuticals International Inc. defrauded insurers by shrouding its ties to a mail-order pharmacy that boosted sales of its drugs, people familiar with the matter said.
The lawyers, in the U.S. attorney’s office in Manhattan, are pursuing an unusual legal theory, previously unreported, that Valeant and a closely linked mail-order-pharmacy, Philidor Rx Services LLC, allegedly defrauded insurers by hiding their close relationship, the people familiar with the matter said.
In a statement emailed by a Valeant spokeswoman, the company said Wednesday: “Valeant has been cooperating and continues to cooperate with the ongoing Southern District of New York investigation.”
A spokeswoman for the U.S. attorney’s office declined to comment.
The probe is expected to be the most serious Valeant currently faces, and could lead to criminal charges against former Philidor executives and Valeant as a company, one of the people said. The investigation could conclude as soon as this year, the person said, adding that the timetable could also slip.
Prosecutors are investigating whether Philidor, now defunct, made false statements to insurers about its ties to Valeant, that person said. Philidor helped patients get insurance coverage for higher-priced Valeant drugs, for example for toenail fungus or acne treatment, instead of cheaper alternatives. At issue is whether insurers thought Philidor was neutral rather than in the service of Valeant, the person said.
Lawyers for Philidor in an April 2016 letter to a Senate committee said Philidor’s conduct was “agnostic” to its ties to Valeant and it dispensed drugs that “mirrored the independent judgment” of prescribing doctors.
The government lawyers are also examining some of Philidor’s business practices, including rebates and other compensation provided by the pharmacy to customers who used Valeant products, as well as Philidor’s efforts to seek reimbursement from insurers, the person said.
Philidor has previously said its employees “behaved ethically” when dispensing drugs to patients. Philidor representatives couldn’t be reached for comment.
Valeant, of Canada, has previously said in public filings that U.S. Attorney offices, including in Manhattan, have requested information from it on a wide range of subjects including “patient assistance programs…its former relationship with Philidor and other pharmacies” and “the Company’s pricing (including discounts and rebates), marketing and distribution of its products.”
Valeant for a long time successfully pursued a business model focused not on discovering drugs but on selling products it acquired from others, often at significant price increases. It started using Philidor a few years ago, but didn’t disclose the relationship to investors until October of last year, when accounting and other questions about it arose.
Valeant later said it was severing all business ties with Philidor and that it would restate earnings based on an accounting error related to the pharmacy.
Prosecutors, one person said, are investigating Andrew Davenport and Matthew Davenport in connection with Philidor. Corporate reports show Andrew Davenport was one of two founding Philidor principals. He was Philidor’s chief executive officer when the Philadelphia area-based company wound down its business earlier this year.
Documents filed with California’s Board of Pharmacy in December 2014 and June 2015 list Matthew S. Davenport as Philidor’s chief executive. Matthew Davenport is an executive with BQ6 Media Group, its website says. The company shares Philidor’s address. The Wall Street Journal has reported that former Philidor employees said BQ6 consulted for Valeant.
Neither Matthew Davenport nor Andrew Davenport could be reached for comment, and BQ6 didn’t respond to requests for comment.
The U.S. attorney’s office in Manhattan, headed by Preet Bharara, is investigating possible mail and wire fraud violations, one of people familiar with the matter said. The wide-ranging mail and wire-fraud statutes make it illegal to use interstate communications as part of a scheme to defraud another out of money.
Prosecutors are investigating not only the level of control Valeant exerted over Philidor’s business, but the extent of the ties, including Valeant’s role in Philidor’s growth, one of the people said.
Valeant told investors in October that ”the bulk of Philidor’s volume is related to Valeant products.” A lawyer for Philidor the following month referred to Valeant North America as its only client.
Industry experts say it is rare for a pharmacy to be controlled by a drugmaker and sell a large portfolio of its drugs. Adam Fein with Pembroke Consulting, whose focus is drug sales and economics, called the Philidor-Valeant relationship “highly unusual.”
Valeant has pointed to other drugmakers’ use of specialty pharmacies in defense of its Philidor relationship.
Valeant started doing business with Philidor in early 2013 when it struck a sales agreement with the startup, according to documents submitted to a U.S. Senate committee.
After starting as a pilot project to dispense only a few Valeant drugs, Philidor by 2015 was selling a portfolio of more than 50 Valeant drugs, according to the April 2016 lawyer’s letter to the Senate committee on aging. That year Valeant paid Philidor more than $80 million in fees, versus around $17 million the previous year, according to Senate committee documents.
Philidor’s drug distribution service was popular with doctors because it handled much of the paperwork involved with seeking reimbursements from insurers.
Valeant and Philidor discussed Valeant purchasing Philidor, according to the April lawyer letter and people familiar with the matter. In December 2014, Valeant agreed to pay Philidor $100 million plus milestone fees for an option to buy the company, with no further money down. The deal, which wasn’t initially disclosed to Wall Street, led Valeant to consolidate its financial results with Philidor.
By Jacquie McNish and Christopher M. Matthews
Aug. 10, 2016