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The Pawn Isolated: Valeant, Philidor and the Annals of Fraud

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, the Southern Investigative Reporting Foundation uncovered how Valeant had sought to conceal its control of Philidor.

A Valeant conference call scheduled for Monday morning, Oct. 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 Southern Investigative Reporting Foundation reporting has revealed 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.  The foundation’s 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. This 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 had not 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, Philidor 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 unit was 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 percent 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 Jan. 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.

The Southern Investigative Reporting Foundation’s reporting suggests that there is little to separate Valeant and Philidor beyond corporate wordsmithing. Indeed, former Philidor employees said Valeant’s executives were such a constant presence at the Hatboro, Pennsylvania, headquarters facility, that it was commonly supposed they had a block of rooms permanently reserved at local hotels.

Consider Philidor’s launch in June 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 to $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 CEO’s brother — including the nondisclosure 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 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 of 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 the Southern Investigative Reporting Foundation 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 the Southern Investigative Reporting Foundation 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 does not appear to be an option for Valeant.

The Isolani v. 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.

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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 percent, 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 percent 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 percent 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.


An outside spokeswoman for Valeant, Renee Soto of Sard Verbinen, told the Southern Investigative Reporting Foundation last week the company would not comment.

A message left for Gary Tanner was not returned.

And attempts to contact Eric Rice and other Philidor employees named in the story by placing calls to the company’s management ended up with their being routed to Greg Blaszczynski, the chief financial officer of BQ6 Media. That’s the pharmaceutical marketing effort where both Davenport brothers have served as CEO.

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The King’s Gambit: Valeant’s Big Secret

If the name Valeant Pharmaceuticals International doesn’t ring a bell, its business practices should. The Quebec-based drug manufacturer’s policy of implementing regular price increases that often run north of 100 percent has generated plenty of anger, a congressional investigation, constant press coverage and a subpoena from the U.S. attorneys’ offices in both the Southern District of New York and the District of Massachusetts.

But as strange as it may seem, a slim legal filing in California federal court is poised to make Valeant’s world rockier still.

The story starts 50 miles northwest of Los Angeles in Camarillo, California, with R&O Pharmacy, a modestly sized operation co-owned by veteran compounding pharmacists Russell Reitz and Robert Osbakken.

According to a lawsuit filed by R&O, Russell Reitz received a letter from Robert Chai-Onn, Valeant’s general counsel and director of business development, requesting repayment of $69.8 million for “invoiced amounts.” This apparently struck Reitz as odd since R&O had done no business, at least in any direct fashion, with Valeant. Moreover, he had never received a single invoice from Valeant or its subsidiaries.

Reitz forwarded the letter to Gary Jay Kaufman, his lawyer in Los Angeles, who sent a letter to Chai-Onn on Sept. 8, noting that the lack of invoices from Valeant indicated to him that one of two things was happening: Valeant and R&O were being jointly defrauded by someone, or Valeant was defrauding R&O. He suggested they talk it over by phone.

Chai-Onn never responded, and on Oct. 6 Kaufman filed suit, seeking a determination from the court that R&O owes Valeant nothing.

There is, however, a hook, and as these things go, it’s a big one: The Southern Investigative Reporting Foundation has confirmed that Reitz was indeed doing business of some sort through a company called Philidor Rx Services and a man named Andrew Davenport.

Which makes Valeant’s demand letter very interesting.

To understand why, it’s important to understand what Philidor is. To the public, it describes itself as a “pharmacy administrator” and, according to a call service operator last Thursday, Valeant is its only client. Located in Hatboro, Pennsylvania, about 30 miles outside Philadelphia, Philidor noted in its corporate filings that both companies are independent of each other.

The phrase “pharmacy administrator” appears to be, in Philidor’s case, a term of art.

A better description is a “specialty pharmacy,” that fills, ships and obtains insurance approval for prescriptions of the more complex drugs Valeant makes. During its third-quarter conference call last year, the only instance when Philidor has been publicly mentioned by an analyst, Valeant chief executive Mike Pearson said that perhaps 40 percent of its business flows through specialty pharmacies. In July he reiterated the company’s guidance for up to $11.1 billion in 2015 revenue, suggesting that as much as $4.4 billion in product could move through this Philidor channel.

(Note that specialty pharmacies are exempt from reporting the drugs they sell to IMS Health, the tracking service used by companies and analysts to monitor drug sales and inventory channels.)

As is the case with many private companies, the financials of Philidor are hard to come by, but it is unmistakably an operation of some mass, with about 900 employees and its own legal unit. A Pennsylvania state senator posted an April 6 interview with company CEO Andy Davenport in which he stated the company was on track to process 12,000 to 15,000 prescriptions daily by December. With prescription costs regularly running into the hundreds and even thousands of dollars, the company could potentially handle upward of $1.5 billion in product this year.

Here’s a key cog in Valeant’s “patient access” program: Patients referred to Philidor often receive coupons for reduced or waived co-pay requirements (given to the prescriber by Valeant’s sales representatives). And, in turn, Philidor would appear to attempt to recoup the cost of the drug from private insurers or Medicare. Theoretically, this makes price increases less risky for Valeant, given that a sizable population of a drug’s users frequently don’t have the capability to observe them. Still, the patient access program is central to the company’s distribution program, and one of the issues the U.S. attorneys’ subpoenas specifically sought information about.

Philidor’s business practices have generated mixed reviews (at best) on consumer message boards — including numerous instances of alleged unwanted refills and an allegation of the improper removal of HSA funds. Another message board account alleges that to get reimbursement approvals, prescriptions already denied at larger insurers were “pushed through” their sister pharmacies. (To be sure, comments on these sites can be gamed, both by consumers and the company, and the Southern Investigative Reporting Foundation was unable to verify these accounts.)

Several questions remain unanswered: On the assumption that there is $69.8 million due someone, why wouldn’t Philidor’s two in-house attorneys have issued a demand letter to R&O? Similarly, why wouldn’t Valeant’s high-profile general counsel, when challenged, not provide support for his demand and avoid the risk and expense of litigation? Additionally, if Valeant does have some sort of claim to that nearly $70 million, what then is their real relationship to Philidor?


The Southern Investigative Reporting Foundation was able to uncover Valeant’s financial connection to Philidor — one that it hasn’t disclosed to investors — as laid out below.

The first task was to establish who owns Philidor. What we discovered was indeed revealing, albeit probably not in the way its owners intended.

Put bluntly, Philidor has gone to great lengths to conceal its ownership. Start with a man named Matthew Davenport, the listed principal on most of Philidor’s state registrations; additionally, several states list David Wing, John Carne and Gregory Blaszczynski as officers, and a few more have an End Game Partnership LLP listed as an assistant treasurer.

Given Andy Davenport’s video above, his role as Philidor’s chief executive is clear. Plugging the address of End Game Partnership LLP (which in turn is owned by End Game LLC, a Las Vegas-based entity) from its filings into a search engine turns up a match to a house Andy Davenport owns in Horsham.

A Southern Investigative Reporting Foundation phone call to Philidor’s administration revealed that there is no Matthew Davenport, David Wing, (Edward) John Carne or Gregory Blaszczynski working at Philidor. On the other hand, all four work at BQ6 Media, a pharmaceutical marketing company located about 2.5 miles from the company. At one point, prior to Philidor, Andy Davenport was its CEO. Both BQ6 and Philidor share the same domain registrar, Perfect Privacy LLC. The company’s LinkedIn profile lists 28 employees but the majority are consultants or contract workers, with several listing time spent at Philidor.

The Philidor state registration in North Carolina was particularly helpful in that it listed a broader array of owners than other states.

David Cowen is a former hedge fund manager and Elizabeth Kardos is general counsel for restructuring consultants Zolfo Cooper who are married and own Four Beads LLC; they did not return a message left at their house or reply to an email sent to Kardos. Nick Spuhler is a BQ6 alum who could not be reached, David Ostrow is a physical therapist and golf swing coach who did not return multiple calls to his house and residence, Jeffrey Gottesman is an insurance agent who has a sideline as a competitive poker player; reached on his mobile phone, he declined comment. The address listed for Gina Miller tracked to a code inspection business with no apparent connection to Philidor. Alternatively, a Gina Milner works at BQ6, but it couldn’t be determined if she is involved. Fabien Forrester-Charles of Hatboro, Philadelphia, and Francis Jennings of Naples, Florida, could not be reached, and Michael Ostrow of Bala Cynwyd, Philadelphia, did not return a voice message left at his house. Paula Schuler of Old Greenwich, Connecticut, listed as an owner along with her husband Timothy, said she couldn’t talk at that moment; she never returned two follow-up calls.

It is not readily apparent if there are any specific relationships among group members, beyond the general ties to Matthew and Andy Davenport (according to an online database they appear to be brothers), BQ6 and Philadelphia. One that does jump out is David Cowen and Andy Davenport’s tenure together at hedge fund Quasar Financial between 2004 and 2008; Davenport also donated to the Museum of American Finance, where Cowen is the president.

Not every state looked kindly upon the way Philidor went about securing out-of-state pharmacy operation privileges. California took exception to Matthew Davenport’s attempt to register as Philidor’s principal and rejected the company’s application for a Non-Residency Pharmacy Permit in May 2014. The state’s Department of Consumer Affairs Board of Pharmacy cited a series of disclosure-related problems, specifically his swearing to what was termed “false statement of facts” on the application, several of which involved the failure to disclose Philidor’s ownership group, as well as Andrew’s 27 percent ownership stake.

(A brief aside: Francois-Andre Philidor was an 18th-century French chess master, who wrote a book about it, “The Analysis of Chess.” BQ6 Media is named after the chess shorthand for Bobby Fisher’s legendary move against Russian chess master Boris Spassky in 1972. Another popular chess move is the King’s Gambit Accepted, or as it’s often referred to in chess notation, KGA.)

Establishing the economic connection between Valeant and Philidor was less time-consuming.

As it happens, Valeant has a wholly owned unit named KGA Fulfillment Services Inc., that was formed in Delaware in November 2014. Its only mention in any Valeant filings is that sole line in last year’s annual report. An exhaustive search didn’t turn up any references to it in trade publications, nor state and federal databases. (What the initials stand for, apart from the similarity to the chess strategy, is unknown.)

The Southern Investigative Reporting Foundation found KGA Fulfillment Services listed  as the “secured party” on UCC-1 liens placed this January and February against the members of Philidor’s ownership group. These liens are the public notice that a lending entity may have an interest in the debtor’s personal property. In this case, Valeant/KGA lent money to Philidor’s ownership group, and per the rules is announcing that their equity stakes in Philidor are potentially collateral.

The UCC-1 financing statements for the group are David Cowen and Elizabeth Kardos, Timothy and Paula Schuler, Nick Spuhler, Andrew Davenport Trust, David Ostrow, David Wing, John Carne, Matthew Davenport, Fabien Forrester-Charles, End Game Partnership LLP, End Game LP and Michael Ostrow.

That an important financial relationship exists between Philidor and Valeant’s KGA unit is inarguable; why it exists is much less clear. From the standpoint of rational self-interest, the owner of a rapidly growing business would almost never want to borrow against their equity stake, let alone from the newly launched subsidiary of the enterprise’s sole customer.


Over several days, since coming across the California lawsuit, the Southern Investigative Reporting Foundation made repeated phone calls to every person or company discussed above. With the exception of Jeffrey Gottesman from the Philidor ownership group and R&O Pharmacy’s lawyer, Gary Jay Kaufman — who both declined to comment — every other person did not return our calls.

Robert Chai-Onn did not reply to a call to his office; a call to a mobile phone registered to his name was answered by his wife, who said she was on the West Coast and was unsure where her husband was at that moment.

Meghan Gavigan of Sard Verbinnen & Co., an outside spokeswoman for Valeant Pharmaceuticals, was unable to secure a response from the company.