Former Valeant and Philidor executives arrested by DoJ

November 18, 2016

Upcoming trial could explore the intricacies of ‘alternative fulfillment’ via specialty pharmacies

There was widespread criticism of the former commercial practices of Valeant Pharma last year, when its unusual relationship with a specialty pharmacy, Philidor became public, which occurred in a context of enormous price hikes for a variety of Valeant products. Valeant’s formerly high-flying stock crashed, its CEO was hauled before a Congressional committee (and retired not long after) Philidor was eventually shuttered, and the entire pharma industry took a black eye over such Philidor practices as switching lower-cost drugs for higher-priced Valeant products. However, there was little that could be pointed to directly as an illegal act worthy of criminal prosecution. A variety of investigations of Valeant were started, and now one has resulted in a criminal indictment: an alleged fraud and money-laundering scheme between Gary Tanner, a Valeant senior director, and Andrew Davenport, Philidor CEO, with the latter paying the former as much as $10 million in kickbacks for the prescribing arrangement and for advocating for Valeant’s investing in Philidor.

The indictment takes some pains to point out that Tanner did these alleged actions without the knowledge of senior Valeant management; the company fired Tanner in August 2015 (who then began working directly at Philidor), before the arrangements between the company and Philidor became public. The indictment also alleges that Tanner was paid “millions of dollars in salary, bonuses, stock options, and restricted stock grants to represent its interests” prior to his termination. As the program was in full gear in 2015, 90% of the rapidly growing specialty pharmacy’s business was with Valeant alone.

As it stands, this story is one of fairly mundane allegations of kickbacks and conflicts of interest, but there is a bigger implication in the “alternative fulfillment” process (as it was called at Valeant) for pharma marketers and for specialty pharmacies. The dramatic growth of specialty pharmacy in recent years has created essentially a new distribution channel, and it is common, through so-called “limited distribution” arrangements, for a manufacturer to work with one or a few specialty pharmacies as the main source of a drug for patients. And while there are important and valuable elements of patient support provided by the specialty pharmacies, the limited distribution arrangements have—and will—call attention to the incentives for the two parties to do business together. More broadly, pharma pricing continues to be in the gunsights of legislators and others. An AP report, coincidentally issued the day before the DoJ indictment, noted that even with all the criticism Valeant had received starting last year (as well as other prominent instances like Turing Pharma and Mylan), the elevated pricing of some of their products has essentially been unchanged, although a variety of discounting programs have been set in place. More Congressional attention is likely.