The Southern Investigative Reporting Foundation’s story looking at Valeant Pharmaceuticals’ well-concealed relationship with Philidor Rx Services, struck a nerve.
Briefly, the story explored the ways in which Philidor, a specialty pharmacy whose sole customer is Valeant, used opacity and some misdirection to try and build a national pharmacy network. Additionally, SIRF uncovered how Valeant had sought to conceal its control of Philidor.
A Valeant conference call scheduled for Monday morning, October 26 is designed to explain these previously hidden relationships and, more importantly, calm the very frayed nerves of its battered shareholders.
But recently uncovered documents from a litigation between Philidor and R&O Pharmacy are probably going to have the opposite effect, in that they illuminate what can only be described as a bizarre effort to circumvent California regulations. Moreover, R&O’s allegations have been known to Valeant management for a month.
Additional SIRF reporting reveals that Valeant has been closely involved with Philidor at every stage of its life-cycle, controlling it in all but name, since day one.
This pain isn’t being borne for no reason, however. Our reporting indicates that Philidor is almost certainly one of the most important parts of Valeant’s business.
On July 21 Russell Reitz, a 64-year old pharmacist and the “R” in R & O Pharmacy, was working in his office when a visitor dropped in unannounced. It was Eric Rice, an executive with Isolani, the company that had struck, what he thought, was a deal to buy the small compounding pharmacy back in December.
Rice had flown in from Philadelphia with several of the ranking executives of Philidor Rx Services. Which Reitz found odd since when he questioned Rice about it, he insisted he worked for Isolani.
It was a tense but professional meeting and both sides left it unfulfilled.
Eric Rice was unable to come to an agreement over securing $3 million in payments he felt were due his enterprise. Reitz, for his part, had a startlingly basic question that Rice hadn’t satisfactorily answered, both in a series of emails, and in person.
Reitz wanted to clear up once and for all, why despite his insistence that he worked for Isolani, he was always professionally connected to someone from Philidor. What was the difference between the two companies, or were they one and the same?
Rice’s colleagues, Phildor’s CEO Andy Davenport, general counsel Gretchen Wisehart and controller Jamie Fleming, were to Reitz’s eyes, in the middle of everything Isolani did.
Rice, whose LinkedIn profile left little doubt about where he worked, still couldn’t answer to Reitz’s satisfaction why, if he had agreed to sell his company to Isolani LLC, was Philidor the entity he always had to deal with? And what was Philidor’s real agenda anyway?
Moreover, neither Rice nor his colleagues, whose emails to him were getting increasingly strident, had ever answered another question Reitz had posed: Where was Isolani’s pharmacy permit? That they obtain their own, and not rely on R&O’s was a core component of the sale agreement. (It does not appear they ever applied for one.)
To Reitz, the huge volume of Philidor’s prescription drug sales, using R&O’s National Council for Prescription Drug Programs number, was infuriating; that a good deal of the millions of dollars in volume were in states where R&O had no registration to operate in, with drugs he never had dispensed, and filled by a pharmacy he did not own, was nauseating. To pile insult upon injury, he had refused to sign the pharmacy’s audit only to learn it was signed by Eric Rice.
This dispute had transcended the “he said-she said” realm of most business disputes a few weeks prior and was something Reitz hadn’t supposed existed apart from movies featuring the mafia taking over a business. Apart from Ray Liotta and Joe Pesci’s absence from this drama, it was in every sense a bust out.
Not that there weren’t signs that R&O was more to Isolani than just a platform for compound pharmaceutical sales. Back in mid-December, shortly after the deal was inked, Reitz was surprised to see Jamie Fleming, Isolani’s controller, show up at his office with boxes of inventory. He had a man with him who introduced himself as Gary Tanner, and who was clearly in charge. It all seemed on the up and up, if a bit sudden.
After meeting Tanner, Reitz went back and looked him up. He couldn’t understand what Gary Tanner, a specialty pharmacy expert with Valeant’s Medicis Pharmaceuticals unitwas doing involved with R&O. In July, Tanner’s signing of an employment contract was something the company would later find it important enough to disclose to investors.
Reitz couldn’t have possibly known that a few months prior to approaching R&O, Philidor executive Sheri Leon had signed a California State Board of Pharmacy Change of Permit request for West Wilshire Pharmacy, despite providing inaccurate answers to standard questions. Under oath, she answered “no” to questions asking if she had ever worked for an entity that had been denied a California permit, and if any other entity owned more than 10% of her company.
That May, Philidor had been denied a nonresident pharmacy permit and like Isolani, it controlled Lucena Holding LLC, the entity used to buy West Wilshire Pharmacy.
On January 7 Eric Rice would sign a similar document seeking transfer of R&O’s license to Isolani.
Something Reitz might have looked into, was the origin of the word Isolani. It comes from the world of chess. To simplify a complex theory, it centers around isolating the pawn, the weakest and least consequential figure in the game.
Given Reitz’s refusal to pay, Isolani sued him in September to obtain a judicial order to preserve what it alleged was at least $15 million out of a total of $19.3 million worth of checks written to it. In response, his lawyer Gary Jay Kaufman filed a 68-page declaration. The next court date is set for the middle of December.
What Gary Tanner was doing at R&O was his job, which includes being the overseer, for want of a better term, of Philidor and its network of affiliated (or captive) pharmacies. Tanner’s exact title is unclear but an ex-Medicis executive said that he is Valeant chief executive Michael Pearson’s primary contact about Philidor’s operations.
This source said that Tanner has often worked in conjunction with a lawyer, Michael Dean Griffen, and another (now apparently former) Medicis employee, Bill Pickron, to source these types of pharmacy transactions for Medicis and Valeant.
SIRF’s reporting suggests that there is little to separate Valeant and Philidor beyond corporate word-smithing. Indeed, former Philidor employees said Valeant’s executives were such a constant presence at the Hatboro, Pa. headquarters facility, that it was commonly supposed they had a block of rooms permanently reserved at local hotels.
Consider Philidor’s launch in June of 2013. It’s a safe bet that Valeant heavily underwrote or otherwise subsidized the company given the long lead times of insurance reimbursement, coupled with the stress on working capital of starting a business with rapid expansion plans.
According to former employees, Philidor places heavy productivity demands on its call-center and data-entry personnel, but pays them decently: SIRF found most employees earned between $20-$25 per hour, but in return a near 60-hour week was mandatory.
This is where the stress on working capital management factors in, since overtime would add at least $400 extra per employee paycheck. On top of that, from a late 2013 headcount of 250, Philidor added an average of 100 employees per quarter, as well as a 28,000 square foot lease, utilities, health care, insurance and the frequent “extras,” like free lunches and coffee, to incentivize employees to stay at their workstations.
Eventually, of course, the reimbursements for the thousands of prescriptions roll in, but until then those bills have to be paid. Nothing about the economic profiles of Philidor’s management group suggests they have the ability to personally absorb the millions of dollars it cost each month to get the company off the ground.
For example, Philidor chief executive Andy Davenport, while the owner of a five bedroom, 3,500 square-foot house in nearby Horsham, has had a series of municipal liens placed against him for unpaid county and state property taxes.
At bottom, pharmacies like R&O were a way for Philidor to surmount the very big hurdle resulting from the California Board of Pharmacy rejection, in May 2014.
(It is quite a read, referring to several “false statements of fact” by Matthew Davenport–the CEOs brother–including the non-disclosure of Philidor’s true owners and their real equity stakes.)
The headache existed because, as ex-Philidor employee Taylor Geohagan put it when interviewed last week, “Billing from a [pharmacy’s] license in one state, but shipping from a California location, is against the rules.”
He would add, “Pretty much everything we did in the [Philidor] Ajudication department was use the [National Provider Identifier] codes from the pharmacies we bought out to get something [approved] in a pinch.” He described his Philidor experience in a website posting at PissedConsumer.com that said that paper copies of the NPI numbers of “sister pharmacies” were rarely handed out, and if they were, they were soon taken away and shredded.
Geohagan said that when he left the company in late summer, the practice of using multiple NPI numbers had stopped. (At least part of his animus toward the company, he wrote, resulted from resigning with two weeks notice and being fired the next day.)
The Philidor billing department manual actually has a page that discusses using the NPIs of these so-called captive pharmacies called “Our Back Door Approaches,” according to another former employee. For example, when attempting to secure approval for a prescription with an insurance company Philidor did not have a relationship with, employees were instructed to use West Wilshire’s NPI.
Two ex-Philidor employees from the adjudication and billing departments told SIRF that the volume of prescriptions flowing into the company was massive, with billing unit workers expected to process at least 100 prescriptions daily. The former adjudication unit employee showed SIRF internal documents from November trumpeting the fact that 22,299 prescriptions were filled in the prior week. Additional documents showed other weeks that came in above 23,000.
A strategic distancing from the controversial unit doesn’t appear to be an option for Valeant.
The Isolani vs Reitz litigation reveals that Philidor’s use of these captive pharmacies is a vital revenue stream for Valeant. Some digging around in its corporate filings shows that R&O, at least before Russell Reitz began to object in July, was poised to a material contributor to organic growth.
A brief aside: organic growth, or the increase in sales apart from Valeant’s acquisitions of other companies, is vital to the debate over its future. Short-sellers and other critics, for example, have argued that the company’s drug brands are, in the main, declining; without the torrid pace of acquisitions, shrinking revenues and profits are a foregone conclusion.
Thus the importance of looking at what Philidor’s newly exposed captive pharmaceutical network reveals. Here’s what it shows: In the second quarter, Valeant’s 8-K reported “organic” sales growth of 19%, with revenue growing $691 million, to $2.73 billion from $2.04 billion.
Of this $691 million, however, at least $392 million was attributable to acquisitions, with the $299 million balance organic revenue.
The Kaufman declaration’s release of the Philidor/Valeant invoices to R&O imply a prospective quarterly sales run-rate of about $55 million (an average $4.6 million weekly shipment multiplied by 12 weeks.) This would have accounted for 18.5% of Valeant’s total organic growth in the second quarter. From there, it’s a sure bet that given the prominence of West Wilshire to Philidor’s billing unit, its sales volume would easily surpass R&O.
Notionally, organic growth equal to 40% or more of that $299 million could have come from two pharmacies that even the most gimlet-eyed Valeant sleuth didn’t suspect existed.
It also becomes much easier to understand why Valeant’s management didn’t immediately sever the relationship with Philidor.
Renee Soto, a Valeant outside spokeswoman with Sard Verbinen, told SIRF last week the company would not comment.
A message left for Gary Tanner was not returned, and an attempt to contact Eric Rice and other Philidor employees named in the story by calling the company’s administration went into the voicemail of Greg Blaszczynski, the chief financial officer of BQ6 Media, the pharmaceutical marketing effort where both Davenport brothers have served as CEO.