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When Buying Pharmacies, Valeant Affiliates Haven’t Disclosed California License Denial

Officials at Philidor Rx Services, which was terminated today by two major pharmacy benefits managers, didn’t tell regulators in Texas or California about the license denial when seeking to buy stakes in other pharmacies.

Update, Oct. 30, 2015: Valeant Pharmaceuticals International announced early Friday that it would sever its ties to Philidor Rx Services, its main specialty pharmacy, and that Philidor would shut down its operations as soon as possible. "The newest allegations about activities at Philidor raise additional questions about the company's business practices," said J. Michael Pearson, Valeant's chairman and chief executive officer, in a statement. "We have lost confidence in Philidor's ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve."

Update, Oct. 29, 2015: A third pharmacy benefits manager, OptumRx, said late Thursday that it, “conducted an audit of Philidor in late 2014 and subsequently began terminating them from all networks in the interests of our customers.”

As they purchased stakes in pharmacies around the country, officials of the specialty pharmacy affiliated with Valeant Pharmaceuticals International did not disclose that their primary employer, Philidor Rx Services, was denied a license to operate in California, records show.

In the past year, Valeant has increasingly relied on Philidor to distribute its expensive dermatology drugs and creams to patients, charging them lower co-payments than they would pay at retail pharmacies while collecting as much insurance reimbursement as possible. The model appeared to be on the verge of collapse late today as a major pharmacy benefits managers, CVS/caremark, terminated Philidor from its network “for noncompliance with the terms of its provider agreement.” A second, Express Scripts, said it was in the process of terminating Philidor and was evaluating “the other four pharmacies Valeant has a similar relationship with.”

For Valeant’s Key Pharmacy, Business is a Chess Game

Chess seems to connect the growing bevy of pharmacy businesses affiliated with Valeant Pharmaceuticals International.

Valeant’s main pharmacy, Philidor Rx Services, and the other related businesses all use chess terms in their names. Here’s a guide to the companies and the chess terms for which they are named, some of which the Southern Investigative Reporting Foundation has previously reported:

Philidor is the name of both a master chess player, François-André Danican Philidor, as well as a couple of chess positions (including a checkmate) named for him. Last year, Valeant paid $100 million for an option to buy Philidor Rx Services, with future milestone payments of up to $133 million ($33 million has been paid). In a conference call this week, Valeant said about 6.8 percent of its third-quarter revenue comes from Philidor pharmacies. Valeant consolidates Philidor revenues on its balance sheet.

Isolani is an isolated (or unprotected) queen’s pawn. It is also a Delaware holding company controlled by Eric Rice, a senior director at Philidor that purchased a stake last fall in R&O Pharmacy, based in California. Isolani is suing R&O and Russell Reitz, its pharmacist in charge, contending that Reitz did not file the necessary paperwork with the state pharmacy board to complete the ownership transfer. Isolani also alleges that Reitz signed an agreement allowing Isolani to take over the management of the pharmacy but then “locked Isolani out” and is sitting on $15 million in payments for drugs. Reitz alleges that Isolani is Philidor’s attempt to get around the state pharmacy board’s denial of its application and that Philidor shipped drugs to patients using R&O’s billing information without its authorization.

Lucena is the name of a famous chess endgame move. It is also the name of a different Delaware holding company used to purchase a 10 percent stake in West Wilshire Pharmacy in Los Angeles. Its chief executive, Sherri Leon, identifies herself online as Philidor’s director of pharmacy operations.

Back Rank is the name of a checkmate move in which a rook or queen takes the king on the back row of the board. It is also the name of the Delaware holding company that took ownership in September of Orbit Pharmacy in Houston. Its managing member, James Fleming, is Philidor’s controller.

BQ6 is the chess notation used to describe the move that Bobby Fischer used to defeat two opponents. BQ6 Media Group is the name of a company that employs Philidor’s co-owner Matthew Davenport and other staff affiliated with Philidor. Philidor’s CEO Andrew Davenport has also had a BQ6 email address.

KGA is the notation used for the chess move King’s Gambit Accepted. KGA Fulfillment Services Inc. is a wholly owned Valeant subsidiary. The Southern Investigative Reporting Foundation reported that KGA was “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.”

Philidor’s problems originated last year in California, where the state’s pharmacy board accused it of making false statements about its owners and other financial matters. (Philidor is appealing its licensure denial and a hearing is scheduled for later this year.)

Subsequently, the company has purchased stakes in other pharmacies in California and elsewhere, using a string of holding companies named for chess terms.

Documents newly obtained by ProPublica under the Texas public records law show that Back Rank, a holding company run by a Philidor official, took over ownership of Houston-based Orbit Pharmacy this year. When asked by the Texas State Board of Pharmacy, however, if the pharmacy or any of its owners or partners had been the subject of a professional disciplinary action, or if any such actions were pending, the pharmacy and the official said no. Examples of disciplinary actions listed on the form include license denial. Back Rank lists an email address with the domain on paperwork submitted to the pharmacy board.

Similarly, when a different Philidor affiliate took a 10 percent stake in a California pharmacy in September 2014, Philidor’s director of pharmacy operations, Sherri Leon, checked “no” in response to a question about whether she had been associated with any person or corporation that had a professional license denied. Philidor’s license application had been denied the previous May, but a formal allegation was not made public until December of that year.

Gay Dodson, executive director of the Texas State Board of Pharmacy, said her agency would need to look into whether there was a connection between Philidor and Orbit Pharmacy, whose top official, James Fleming, is Philidor’s controller. Texas law allows people to set up corporations “as you wish,” she said, and if Philidor and Back Rank are fully separate entities, “I think we would have problems tying the two together and being able to take action with a different corporation, an entirely different corporation. We would have to really look at it.”

A Philidor spokesperson said in an email that the company disagrees with the characterization that it had been denied a license in California because the matter is under appeal.

Investors have pummeled Valeant’s stock in the past week and a half, in part based on the information trickling out about the drug maker’s convoluted relationship with Philidor.

More information about Philidor’s strategy of affiliating with or acquiring pieces of other pharmacies came to light Thursday in a story in the Wall Street Journal. The Journal reported that Philidor’s training manual instructed staff to try to submit prescription claims using various pharmacy billing identifiers — if one of them didn’t work, they were to try another. “We have a couple of different ‘back door’ approaches to receive payment from the insurance company,” a company manual said, according to the Journal.

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