Further Allegations Of Misconduct Plague Valeant’s Pharmacies In California

by Charles Ornstein ProPublica, Oct. 23, 2015, 2:19 p.m.

A pharmacy controlled by Valeant Pharmaceuticals International attempted to circumvent California law and distribute drugs in the state without a license, documents filed as part of a Los Angeles lawsuit allege.

Questions about Valeant have caused the company’s once high-flying stock to plummet in the past week. Investors have raised concerns about Valeant’s accounting and business practices, particularly its relationship with so-called specialty pharmacies that generally charge patients lower co-payments than retail pharmacies.

The questions have been particularly acute in California because Philidor Rx Services, the main specialty pharmacy associated with Valeant, was denied a permit to operate there in 2014. Valeant is Philidor’s sole customer and the drug company has an option to purchase the small privately held pharmacy business. Valeant consolidates Philidor’s sales and profits into its own financial statements.

Yesterday, ProPublica reported how a Philidor executive and others affiliated with the pharmacy purchased a 10 percent stake in a licensed pharmacy in Los Angeles a few months after Philidor itself was denied a license.

Documents in a lawsuit filed in September in Los Angeles Superior Court allege that Philidor officials also purchased a stake in a second Southern California pharmacy, R&O Pharmacy, to get around the state pharmacy board’s denial and then shipped drugs to patients using R&O’s billing information without its authorization. If true, these actions could be grounds for regulatory or legal sanctions.

Isolani, a holding company controlled by a senior director at Philidor, sued R&O and Russell Reitz, its pharmacist in charge, contending that Isolani paid Reitz $350,000 for a 10 percent stake in his pharmacy and the right to purchase the rest, and that Reitz did not file the necessary paperwork with the state pharmacy board to complete the transfer. Isolani also alleges that Reitz signed an agreement allowing Isolani to take over the management of the pharmacy but then “locked Isolani out” and is sitting on $15 million in payments for drugs. Attorneys for Isolani filed hundreds of pages of itemized invoices in court that it said were reimbursements owed to Isolani.

Reitz’s responses to Isolani’s claims have provided critical new material to those concerned with Valeant and its relationship with Philidor.

Reitz and his lawyers contend that Isolani and Philidor are essentially one and the same and involved his pharmacy in their effort to circumvent the laws of California. He contends that Philidor used R&O’s billing identification number to charge insurers for drugs that R&O did not dispense.

Reitz and his lawyer say they demanded that Philidor and Isolani stop using R&O’s billing ID code to bill insurance companies and process reimbursements. Included in Reitz’s legal filings is an email from Andrew Davenport, Philidor’s CEO, saying that Philidor would stop doing this.

“While we remain comfortable with the practice, we halted activity pending coming to some alignment with you,” Davenport wrote in July. “You had asked in your email that we cease the contentious activity, and I just wanted to let you know that we had already done so.”

Reitz’s lawyer alleges that the billings under R&O’s ID continued.

“It is now crystal clear that Isolani/Philidor fraudulently induced Mr. Reitz to sign the agreements in order to allow Isolani/Philidor to engage in a massive fraud,” Reitz’s lawyer Gary Jay Kaufman wrote in an August 31 letter to Isolani’s lawyer, included in the court records.

“It is now readily apparent that Isolani is simply a shell created by Philidor to perpetrate a massive fraud against not only Mr. Reitz and R&O but also the California State Board of Pharmacy, various payer networks and as yet unknown entities and individuals.”

Kaufman went on: “Philidor targeted Mr. Reitz and R&O back in the fall of 2014 because it needed access to R&O’s valuable multi-state pharmacy licenses and payer contracts.”

Valeant and Philidor have not yet responded to emailed questions from ProPublica. Isolani could not be reached and its lawyer did not respond to an email. A hearing is scheduled in December.

Reitz and his lawyers acknowledge that R&O has received reimbursements and contend that the money is being held in a “safe place” until a court can determine the legality of the transactions.

Separately, R&O filed suit against Valeant earlier this month in federal court in California, contending it had received an invoice for $69 million in drug purchases from Valeant without any backup documentation to justify the bill.

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.

Documents requested by ProPublica under the California Public Records Act do not list Philidor or Isolani as having ownership stakes in R&O, as the law would appear to require.

“California law requires that changes of ownership of 10 percent or more be reported to the board,” said Virginia Herold, executive officer of the pharmacy board. “That 10 percent ownership change [involving R&O] is not reflecting in our records.”

In the court documents, Isolani and R&O blame each other for failure to communicate with the board.

According to documents filed in the Isolani lawsuit, the holding company signed its purchase agreement with R&O in November 2014.

Umer Raffat, a managing director at Evercore ISI, a boutique investment bank, was the first to draw public attention to the material in the Isolani lawsuit yesterday. In a presentation to clients, he said that it leaves many questions, including whether Valeant is covering any legal liability Philidor may have against fines and lawsuits. He also called for Valeant to disassociate itself from Philidor.

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. The specialty pharmacy or the drug company eats the difference in order to garner the loyalty of patients and doctors.

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.”

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