Legal tangle in California may shed light on specialty pharmacies

By David Ingram
NEW YORK, Oct 25 (Reuters) - As Valeant Pharmaceuticals (N:VRX)
prepares to defend its drug sales practices to Wall Street on
Monday, new details are emerging about the tangled relationships
- and litigation - among Valeant's specialty pharmacy partners.
The court cases, which have drawn media attention in recent
days, are expected to be addressed during Monday morning's
investor call, a person familiar with the matter said. Valeant
lost more than 30 percent of its market value this past week as
the company disclosed details of its relationship to a
Pennsylvania-based pharmacy called Philidor Rx Services.
Specialty pharmacies are designed to handle medicines that
require complex storage or administration, often for serious
conditions such as cancer or rheumatoid arthritis. Valeant has
used Philidor to dispense a range of its medications, including
conventional treatments for acne and toenail fungus.
Influential short-seller Citron Research accused the
drugmaker of using Philidor to create "phantom sales" of its
products or push more product through distribution channels than
sales would warrant, an allegation that Valeant has denied
outright.
Although the two companies are separate legal entities,
Valeant said last week that it holds a right to purchase
Philidor, which in turn said that it holds the right to acquire
control of other affiliated pharmacies.
Philidor has not addressed questions of its sales practices.
It said last week that it works with a network of pharmacies and
provides them with call center functions, help with insurance
claims, technical support and "certain management services."
One of those affiliates is R&O Pharmacy based in California,
which has been in a heated dispute with Valeant, Philidor and a
related holding company for more than three months.
R&O sued Valeant in federal court in California on Oct. 6,
after receiving a demand letter from Valeant for more than $69
million, money that R&O said it didn't owe. R&O said in court
documents that it informed Valeant after receiving the payment
demand that either Valeant was conspiring to perpetrate a fraud
on R&O, or both companies were the victims of fraud by a third
party.
Even earlier, beginning in July, R&O owner Russell Reitz
demanded that Philidor end certain practices that Reitz said
were illegal, including use of R&O'S pharmacy identification
numbers to bill health insurers, according to court documents.
The correspondence went on through the summer, culminating
in a separate lawsuit in California state court brought against
R&O by a Delaware holding company named Isolani.
The lawsuit, filed on Sept. 8, stated that Isolani had
purchased a stake in R&O and an agreement to acquire full
ownership, and that R&O subsequently breached a management
services agreement entered into at the same time.
The suit alleged that R&O was unlawfully withholding more
than $15 million in payments it had received from health
insurers and others that belonged to Isolani. R&O alleges that
Isolani is a front for Philidor, the court documents show.
Lawyers for Isolani, a lawyer for R&O, multiple officials at
Philidor and spokespeople for Valeant did not respond to
repeated requests for comment.
The state lawsuit brought by Isolani and the federal lawsuit
brought by R&O are both at early stages, and there have been no
rulings in either case.
Investment banking advisory firm Evercore drew attention to
the state court case in a note to clients on Thursday. Evercore
said it was hard to have a definitive view on whether what
Philidor was doing was "kosher or not," and it asked whether
Valeant could be on the hook for any potential fine against
Philidor.
Philidor itself is not a party to either of the two
lawsuits. But R&O's attorney, Gary Kaufman, filed copies of
correspondence in the state court suit, in which his client
raised concerns about Philidor's actions and called for
terminating R&O's agreements with Isolani.
On Aug. 31, Kaufman sent a letter to a lawyer for Isolani
alleging that Isolani and Philidor were engaging in a "massive
fraud."
He said Philidor had targeted R&O for acquisition in 2014
because Philidor needed access to valuable multi-state pharmacy
licenses and payer contracts, and had subsequently used R&O's
provider numbers "to bill payers for prescriptions dispensed by
Philidor." Philidor last week said it has a contractual right
to acquire R&O "subject to regulatory approval."
Shares of Valeant rebounded somewhat on Friday after four
days of steep losses. Shares closed up 5.7 percent for the day
at $116.16 in trading in New York, still far short of the nearly
$170 per share at which it began the week.