The fraud trial of a former executive at Valeant Pharmaceuticals International Inc. is set to begin this week in Manhattan federal court, the first criminal prosecution to emerge from multiple investigations into the embattled pharmaceutical giant over its sales practices.
In this case, prosecutors say Valeant was the victim. Using a statute often applied to public corruption cases, the U.S. attorney’s office in Manhattan has accused the former Valeant executive, Gary Tanner, and a co-defendant, Andrew Davenport, of defrauding Valeant through an alleged multimillion-dollar kickback scheme involving Philidor Rx Services, a specialty mail-order pharmacy.
The defense has said in court filings and appearances that the men were working in Valeant’s interest, developing Philidor as a partner and bringing in “incredible profits” for both companies.
Valeant says it is cooperating with the investigation. “Today, Valeant is focused on improving people’s lives with our health-care products,” a company spokeswoman said.
A spokesman for the Manhattan U.S. attorney’s office declined to comment.
With current and former Valeant employees expected to testify as government witnesses and bids by the defense to put Philidor employees on the stand, the trial could put Valeant in an uncomfortable spotlight, raising questions about the Canadian company as it tries to recover from years of tough scrutiny over its business practices.
For years, Valeant was considered a pioneer in the drug industry, with a business model focused not on discovering new drugs, but on acquiring and selling drugs, often with significant price increases.
Philidor was formed in 2013, and helped Valeant sell some of its higher-priced products by helping patients obtain insurance reimbursement and other financial assistance for prescriptions. While Philidor was in operation, at least 90% of the drugs Philidor dispensed were from Valeant, prosecutors alleged. Philidor, which was based in Pennsylvania, closed in 2016.
The relationship with Philidor wasn’t discussed with Valeant investors until 2015, when questions emerged in the media about the companies’ ties. At the same time, Valeant faced law-enforcement scrutiny and intensifying criticism over drug-price increases.
Mr. Tanner and Mr. Davenport, who had been Philidor’s chief executive, were arrested in November 2016 and charged with conspiring to persuade Valeant to funnel business to Philidor. Prosecutors alleged Mr. Davenport paid Mr. Tanner about $10 million in kickbacks, while Mr. Tanner allegedly used his position at Valeant to facilitate deals that helped Mr. Davenport reap more than $40 million.
In one instance cited in the initial criminal complaint, when Valeant began pushing Philidor for $50 million in overdue payments, Mr. Tanner urged his employer to give Philidor more time. After securing the delay, Mr. Davenport sent Mr. Tanner an email likening themselves to Butch Cassidy and the Sundance Kid, riding “into the sunset…as our wiggle room/ability to operate independently gets whittled down.”
Both men face four counts: honest services wire fraud, honest services wire fraud conspiracy, Travel Act conspiracy, and money-laundering conspiracy.
Prosecutors have alleged in filings and oral arguments the men used shell companies and an alias to conceal the alleged scheme and Mr. Tanner’s financial interest in Philidor, thus depriving Valeant of Mr. Tanner’s “honest services.” Lawyers for Mr. Tanner have argued the government misapplied the honest-services fraud statute in this case.
The statute has been used in federal public-corruption cases, but prosecutors have also applied it in cases where individuals are accused of violating a fiduciary responsibility to a company.
Valeant remains under investigation by federal prosecutors in Manhattan and Massachusetts, the North Carolina Department of Justice, the Securities and Exchange Commission, the California Department of Insurance and Canada’s principal securities regulator, among others, according to recent Valeant SEC filings.
The company has said it is cooperating with those investigations.
Valeant also faces multiple lawsuits, which are on hold pending the trial. The spokeswoman didn’t respond to questions about the litigation.
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