The Tiny Pharmacy at the Center of Valeant's Money Mysteryby and
After agreeing to sell his pharmacy, owner's questions mounted
E-mails raised concerns over audits, court filings show
Several months before investors directed a barrage of scrutiny at Valeant Pharmaceuticals International Inc., one Southern California pharmacist began pulling on a thread.
Valeant disclosed last week that it had ties to a network of pharmacies filling prescriptions for its drugs across the U.S., setting off a $10 billion drop in its market value as investors struggled to reassess the company’s sales picture. Asked why it hadn’t talked sooner about the related web of pharmacies, Valeant said that it hadn’t been bound to do so.
But the company has had little option but to explain itself in the past week thanks to a growing chorus of questions -- among the first of which came from R&O Pharmacy, a smoked-glass storefront amid rows of low-slung office buildings in Camarillo, California.
Less than a year ago, 64-year-old pharmacist Russell Reitz agreed to sell his business there to a Delaware-registered company for $350,000. R&O soon became the victim of widespread fraud, Reitz’s lawyer alleged in documents filed in a billing suit against him in state court in California.
Even before the sale agreement was executed, other pharmacies began using an R&O identification number to bill for prescriptions that R&O hadn’t filled, sometimes for drugs the store didn’t stock, according to the court documents. Reitz asked why R&O’s suitor had signed an insurance-company audit for the pharmacy that Reitz still controlled. The next day, he received surprise visitors from a firm called Philidor RX Services, whose links to the buyer Reitz struggled to understand.
Increasingly alarmed as millions of dollars in payments flowed in, Reitz started stashing away the checks. Then he got sued.
Reitz’s effort to learn who was selling drugs in his name -- peeling back, along the way, layers of corporate structures -- emerges in e-mails, letters and other documents filed in state court in Los Angeles, as well as in a lawsuit R&O filed against Valeant in federal court there early this month.
R&O’s suit asked why Valeant was asking it for money. Answers soon began to emerge. On Oct. 19, Valeant confirmed its link to a Pennsylvania mail-order pharmacy called Philidor. Valeant paid $100 million late last year for an option to buy Philidor for nothing over the next 10 years, Valeant said on an Oct. 26 conference call. Philidor has an option to buy a Delaware entity called Isolani LLC, which, in turn, has an agreement to buy R&O Pharmacy, Valeant said on the call.
Valeant’s revelation -- that some of its drugs were reaching American patients in part via a little-understood but related network of pharmacies -- cast doubt on the sustainability of its sales growth. A short-seller, Andrew Left, asked whether the previously nonpublic arrangement represented an Enron-style accounting fraud.
Laval, Quebec-based Valeant has vigorously denied Left’s allegation, calling them unsupported and an incorrect interpretation of facts. It said several other drugmakers use specialty pharmacies like Philidor to sell their products.
Valeant also said, on the Oct. 26 call, that sales hadn’t been artificially inflated because it consolidates Philidor’s results on its own books and doesn’t record those sales until prescriptions are shipped to patients.
It said it didn’t have to declare its interest in Philidor because the specialty pharmacy network has accounted for about 6 percent of Valeant revenue so far this year. That is below the 10 percent sales threshold that would make the arrangement material under Generally Accepted Accounting Principles, the company said in its presentation.
Valeant declined to provide additional comment. It has called R&O’s payment-dispute lawsuit “without merit” and said it will file a counterclaim.
Philidor referred requests for comment to public-relations firm Hill & Knowlton, which declined to comment, citing pending lawsuits. Lawyers for Isolani didn’t respond to requests for comment.
Isolani alleged in its California suit that Reitz and his pharmacy were withholding drug reimbursements that weren’t theirs, and that Reitz had breached his contractual obligations while Isolani had upheld theirs. Philidor, which is mentioned in e-mails and documents filed as part of that suit, isn’t a party.
Reitz’s lawyer, Gary Jay Kaufman, declined to comment via e-mail.
Earlier this week, Reitz, dressed in a black T-shirt, jeans and casual loafers, greeted a reporter outside his pharmacy. The office had a small waiting area, with two vintage beakers and copies of Gastroenterology and Endoscopy News on a coffee table. A hutch held vases, Charles Dickens novels and a book titled “Imported Skin Diseases.”
Reitz worked for Baxter Laboratories and started a medical business he sold to a private-equity firm in 2011, he said in an interview. Then he started R&O, which he said received a license in California in 2013. He now holds pharmacy licenses in 34 states, including New York, New Jersey and Florida, covering what he estimates to be about 85 percent of the U.S. population, he said. He declined to discuss issues in the lawsuits, saying his perspective is reflected in documents filed with the courts.
Valeant is at the forefront of a debate over price increases for older drugs in the U.S. It said earlier this month that it had received subpoenas from U.S. Attorney’s offices in Massachusetts and Manhattan seeking information on its pricing decisions, patient assistance programs and drug distribution. The company said it believes it operated its business in a fully compliant manner.
The court documents provide one view of the network Valeant built to sell some of those drugs. At its center was specialty pharmacy Philidor, formed in 2013. Specialty pharmacies have historically handled drugs that are rare, expensive or need special handling. As Valeant has explained it, Philidor expedites the path of Valeant drugs to patients, often wrangling later with insurers over payment details.
Mail-order pharmacies generally need permission from states where they want to ship drugs. Philidor is licensed in 46 states, Valeant says. California -- with more prescriptions dispensed annually than any other state, according to IMS Health Holdings-- pushed back.
The state’s Board of Pharmacy rejected Philidor’s application for a nonresident pharmacy permit in May 2014. The board, on its website, said Philidor had made misleading statements about its ownership, failing to include information on four out of five partners.
Fewer than 1 percent of such applications are denied, said the board’s executive officer, Virginia Herold. She declined in an interview to discuss Philidor’s rejection, saying California law requires full disclosure and adding generally: “If they don’t wish to disclose themselves, it begs the question of why are they hiding something?”
Philidor will appeal its rejection to an administrative judge later this year, according to the board. Valeant has said its board will create a special committee to review the company’s dealings with Philidor, including why the California application was rejected.
Reitz put R&O up for sale in late 2014 and got five offers, including one from Philidor, he said in his interview. He first saw the name Isolani, he said, in a purchasing agreement shortly thereafter.
Isolani had been founded in October 2014 by one person -- Eric Rice -- to buy R&O, according to the documents filed in the state court case. The address that Rice listed on the sale agreement matches the Horsham, Pennsylvania, address in Philidor’s 2013 business registration documents. A Hill & Knowlton representative, who confirmed that Rice is a Philidor employee, declined to make him available for an interview.
Reitz signed a deal to sell 10 percent of his business to Isolani, with an agreement to sell the rest when the buyer got the necessary permit from the pharmacy board. Isolani got the right to take on all profits and losses in the meantime, according to a management agreement entered into the state court.
By the summer of 2015, Reitz was raising flags about how one of R&O’s identity numbers -- from the National Council for Prescription Drug Programs, a nonprofit standards organization -- was being used. He discovered some prescriptions using the number were apparently being filled not by R&O, but by Philidor, according to an e-mail he sent Rice on July 14 that was filed in court.
“I am not aware of any type of authority that would permit these types of practices,” Reitz wrote to Rice. He also said he had been asked “several times” to sign off on audits by insurance companies related to the transactions, and said he was not aware of any authority that would permit this.
‘Far From Allayed’
Five days later, Reitz received an e-mail from Philidor’s chief executive, Andy Davenport. Philidor, he wrote, had “ceased all central processing” involving R&O’s National Provider Identifier, a federal ID. While Philidor was “comfortable with the practice, we halted activity pending coming to some alignment with you,” Davenport wrote.
A Philidor spokesman at Hill & Knowlton declined to make Davenport available for comment. No one answered the door at Pennsylvania homes where Davenport is registered as owner.
“My concerns are far from allayed,” Reitz responded on July 20, asking why he was being asked to send Philidor checks made out to R&O, and whether Philidor had a financial interest in Isolani. Reitz also learned that Rice had signed off on an audit from an insurance company -- one that Reitz, as so-called pharmacist in charge, had refused to sign because of lack of information, he wrote.
“Eric Rice is not the PIC (I am) and has never even stepped through R&O’s doors,” Reitz wrote.
Rice arrived in California the next day.
Isolani’s principal flew “unannounced from Pennsylvania” with Philidor CEO Davenport and two other Philidor officials, according to a letter that Reitz’s lawyer, Kaufman, wrote to Rice on July 22. The visitors refused to address Reitz’s inquiries, wrote Kaufman, who added that they “appear to be engaging in a widespread fraud” against Reitz, the pharmacy and California, among others.
Philidor employees continued to use Reitz’s ID numbers to bill for prescriptions dispensed through Philidor, Kaufman alleged in a letter the next month. To protect himself, Reitz would retain “any and all funds” in the pharmacy’s possession, Kaufman wrote.
It wasn’t pocket change. Valeant’s general counsel, in a September 4 letter to Reitz, said R&O owed Valeant in connection with gross invoices of $69.9 million. He threatened to take “any and all actions” to ensure payment.
Valeant didn’t sue. It was Isolani that filed a complaint against Reitz and the pharmacy, early the next week, alleging he was confiscating checks. Reitz had also failed to complete a form that Isolani needed for California to approve the sale, Isolani alleged. Reitz said, in the interview, that he is still the pharmacy’s full owner; Valeant said this week that Isolani owns a 10% stake in R&O.
Isolani said Reitz and the pharmacy owed it at least $15 million in insurance-company reimbursements, according to the state court complaint.
That suit didn’t refer to Valeant. But this month, R&O brought the company into the picture as the only defendant in its federal court lawsuit. R&O said it hadn’t received a single invoice or demand for payment from Valeant until September. It asked for a declaration that it owed Valeant no money while it sought to “get to the bottom” of the company’s role.
“R&O believes that one of two things must be true: Valeant and R&O are victims of a massive fraud perpetrated by third parties,” according to the Oct. 6 complaint in federal court, or else “Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others.”
Valeant, in its conference call, said it had sent R&O about 75 shipments from January to August, and that until July, the pharmacy had sent payments to Valeant. Philidor didn’t dispense products to patients in California, but only to patients in states in which it has a license, Valeant said.
The lawsuit’s strong wording attracted the attention of the Southern Investigative Reporting Foundation, which linked Valeant to R&O on Oct. 19. Two days later, activist investor Left released his report that questioned Valeant’s ties to Philidor, helping to send Valeant’s shares down as much as 39% during the day.
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(An earlier version of this article corrected the date that Valeant disclosed its link to Philidor.)