Documents Raise New Questions About Valeant’s Pharmacy Relationships in California

by Charles Ornstein ProPublica, Oct. 22, 2015, 5:02 p.m.

Over the last week, Valeant Pharmaceuticals International, a large drug maker, has seen its stock price plunge amid allegations of questionable dealings with pharmacies.

Now ProPublica has obtained documents showing how people affiliated with Valeant’s main pharmacy used a backdoor approach to gain an ownership stake in California after the pharmacy, Philidor Rx Services, was denied a permit to operate in the state.

Philidor’s license application was denied in May 2014 after the California Board of Pharmacy accused the company and its representatives of making “false statements of fact.” Specifically, the board said Philidor lied when listing the pharmacy’s owners, its accountant and its authorized signatories for financial transactions.

Several months later, a holding company whose chief executive identifies herself online as Philidor’s director of pharmacy operations purchased a 10 percent stake in West Wilshire Pharmacy in Los Angeles.

Since last Friday, Valeant’s stock has plummeted almost 40 percent as investors have raised as-yet-unanswered questions about its accounting and business practices, particularly its relationship with so-called specialty pharmacies that generally charge patients lower co-payments than retail pharmacies.

Disclosure of the West Wilshire transaction seems likely to intensify those questions. It’s unclear how it enables Philidor or Valeant to distribute drugs any more easily than a contractual relationship with a California pharmacy would. Calls to Philidor, Valeant and West Wilshire were not returned.

Virginia Herold, the executive officer of California’s Board of Pharmacy, said it’s vital that pharmacies and their owners provide truthful information to the board.

“The board spends a lot of time investigating applications to ensure the individuals are who they say they are,” Herold said, though she declined to discuss Philidor specifically because the pharmacy has appealed its license denial. “It is a concern to us when someone misrepresents that.”

Valeant rose to prominence through acquisitions of drugs and companies, including Bausch & Lomb and skin-care company Medicis. It specializes in taking over companies with portfolios of small, sleepy drugs, slashing research and development spending, and raising drug prices aggressively. A bevy of high-profile hedge funds, most prominently Bill Ackman’s Pershing Square Capital Management, have taken big stakes in Valeant.

Increasingly, Valeant and other drug companies are encouraging patients to use specialty pharmacies. They are essentially mail-order pharmacies that help patients and doctors navigate insurance company requirements.

Specialty pharmacies are seen as a reliable distribution channel for expensive drugs, offering patients convenience and lower costs while maximizing insurance reimbursements from those companies that cover the drug. Patients typically pay the same co-payments whether or not their insurers cover the drug.

But investors are concerned that Quebec-based Valeant has not disclosed the full extent of its relationship with Philidor and its network of other pharmacies. They also are concerned about the convoluted ownership structure of the network, which has only grown more confusing with Valeant’s recent disclosures.

Camarillo, Calif.-based R&O Pharmacy filed a lawsuit in federal court against Valeant earlier this month, contending Valeant demanded it pay $69 million for drugs even though “it seems that Valeant has no evidence whatsoever to back up its claims.”

R&O’s complaint postulated two theories to explain Valeant’s actions: “1. Valeant and R&O are victims of a massive fraud perpetuated by third parties; or 2. Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.”

The lawsuit was first reported on Monday by a group called the Southern Investigative Reporting Foundation.

During a conference call with analysts on Monday, Valeant said that R&O is one of the specialty pharmacies in its network. Valeant said it shipped approximately $69 million worth of drugs to R&O, which was worth about $25 million to Valeant’s bottom line.

“R&O is improperly holding amounts it received from payers,” Valeant said in a slide presentation.

Valeant also disclosed for the first time Monday that it had a “contractual relationship with Philidor and late last year we purchased an option to acquire Philidor.” Philidor is based in Hatboro, Penn., outside Philadelphia.

Then, on Wednesday, Philidor issued its own statement shedding a little more light on its network. Philidor said it is licensed in 46 states and the District of Columbia. “Philidor has contractual relationships with the affiliated pharmacies, such as R&O Pharmacy, under which we provide those services. Philidor does not currently have a direct equity ownership in R&O Pharmacy or the affiliated pharmacies, but does have a contractual right to acquire the pharmacies now or in the future subject to regulatory approval.”

Neither Valeant nor Philidor made reference to West Wilshire Pharmacy.

ProPublica pieced together some details about what’s gone on in California using documents requested under the state’s Public Records Act and other documents on the state pharmacy board’s website.

Philidor applied for a California license in August 2013, listing Matthew S. Davenport as its chief executive. The board denied the application on May 16, 2014, citing “false statements of fact” and failure to comply with pharmacy laws, among other things.

In a Philidor filing with the federal government in July 2013, it lists Andrew Davenport as its CEO. Andrew Davenport, who is reported to be Matthew Davenport’s brother, also was featured as the pharmacy’s chief executive in an interview posted recently on the Facebook page of a Pennsylvania state senator.

Matthew Davenport is listed as the chief innovation officer of BQ6 Media Group, which bills itself as a “privately held marketing firm specializing in pharmaceutical communications.”

Until last year, West Wilshire was owned entirely by Shahrokh Makhani, a licensed pharmacist. He sold a 10 percent stake in August to a company called Lucena Holdings LLC., which was formed in Delaware but has an address in Ambler, Penn.

Lucena lists Sherri Leon as its chief executive officer. Leon’s LinkedIn page lists her as director of pharmacy operations for Philidor since August 2013.

Also listed as an ownerof Lucena is Gregory W. Blaszczynski. He was Philidor’s bookkeeper, accountant and a signatory on its financial transactions, according to the pharmacy board’s denial of Philidor’s license. Blaszczynski is also listed as chief financial officer of BQ6 Media Group, where Matthew Davenport works.

There are other indications that Philidor and West Wilshire are closely tied. West Wilshire’s online privacy policy mentions Philidor directly. In addition, both companies direct questions to the same toll-free number. West Wilshire’s website is also hosted on an online network that belongs to Philidor.

On Thursday afternoon, Valeant announced that it would hold a conference call Monday to “lay out the facts including allegations made against our company regarding our relationship with Philidor and R&O.”

It said many of the reports to date “contain numerous errors, unsupported speculation and incorrect interpretations of facts and circumstances to the detriment of the shareholders of the company.”

ProPublica reporter Jesse Eisinger contributed to this report.

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