SOUTHERN lNYESTIGr\ TIVE
`REPOHTING FOUNDATION
`
`THE INVESTIGATOR
`
`A bout Us Contact Donors SIRF In The News SIRF Documents Dlog Donations
`
`UNCAlEGORIZEO
`
`The King's Gambit: Valeant's Big
`Secret
`
`By Roddy Boyd October 1g, 2015
`
`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% 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.
`
`ThP. story starts so milP.s northwe-_c:t ofT .os Ange]p_o;; in ('_amarillo, ('_a _ 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 got a letter from Robert Chai-Orm,
`Valeant's general counsel and director ofbusinessdevelopment, requesting repayment of
`$6<;).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 down in Los Angeles, who
`sent a letter to Chai-Onn on September 8 noting that the lack of invoices from Valeant
`indicated to him 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 October 6 , Kaufman filed suit, seeking a
`detennination 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.
`
`Vl'h:ich makes Valeant's demandletterveryinteresting.
`
`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 about 30 miles outside
`Philadelphia, its corporate filings indicate both companies are independent of the other.
`
`Pharmacy administrator appears to be, in Philidor's case, a term of art.
`
`A better description is a "specialty pharmacy," filling, shipping and getting insurance
`approval for prescriptions of the more complex drugs Valeant makes. In its third quarter
`conference call last year, the only instance where Philidor has been publicly mentioned
`by an analyst, Valeant chief executive Mike Pearson said that perhaps 40% of its business
`flows through specialty pharmacies. In July, he reiterated the company's guidance for up
`to $n.t billion in 2015 revenue, implying that as much as $4-4 billion in product could
`move through this channel.
`
`(Note that specialty pharmacies are exempt from reporting the drugs they sell to Th:IS
`Health, the tracking service used by companies and analysts to monitor drug sales and
`inventory channels.)
`
`Like many private companies, Philidor's financials are hard to come by but it is
`unmistakably an operation of some mass, with around 900 employees and its mVll. legal
`unit. A Pennsylvania State Senator posted an April 6 interview with company CEO Andy
`Davenport where he stated the company was on track to process between 12,000 and
`15,000 prescriptions daily by December. With prescription costs regularly running into
`the hundreds and even thousands of dollars, the company could potentially handle
`upwards of $1.5 billion in product this year.
`
`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- md 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 populalion of a drug's users frequently
`won't ohserve them. Still, the patient access program is central to the company's
`distribution program, and one of the issues the U.S. Attorney subpeonas specifically
`sought information on.
`
`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 quesliuns remain unanswereU; On the a!;Surnplionlhal tl1ere is $6g.8 million Uue
`someone, why wouldn't Philidor's hvo in-house attorneys have issued a demand letter to
`R&O? Similarly, whywouldn'tValeant's high-profile general counsel, when challenged,
`not provide support for his demand and avoid the risk and expense of litigation?
`Additionally, ifValeant 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. V\l'hat we discovered was indeed
`revealing, albeit probably not in the way it s owners intended.
`
`Pul bluiJLly, Philillur h as gone Lo ;sreal len;sll1s lu conceal il1:i owner:;hip. Slart witl1 a mar I
`named Matthew Davenport, the listed principal on most ofPhilidor '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 ovvns 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 ILC. The company's Linkedln profile lists 28
`employees but the majority are consultants or contract vvorkers, 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 :Ms. 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, Pa. and Francis Jennings of Naples, Fla.
`could not be reached, and Michael Ostrow of Bala Cynwyd, Pa. did not return a voice
`message left at his house. Paula Schuler of Old Greenwich, Ct., listed as an owner along
`with her husband Timothy, said she couldn't talk at that moment; she never returned hvo
`follow-np c:;~ lls_
`
`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 !'hilidor's ownership group, as well as Andrew's
`27% 0\Vll.ership stake.
`
`(A brief aside: Francais-Andre Philidor was an 18th century French Chess master, vffiting
`a book about it, The Analysis of Chess. BQ6 Media is named after the chess shorthand for
`Bobby Fisher's legendazy 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(cid:173)
`consummg.
`
`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 anyValeant 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 unknovm.)
`
`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 e:tists is much less clear. From the standpoint of rational self(cid:173)
`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 Cal ifornia 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-both of whom declined 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 \Vife, who said she was on the West Coast and was unsure
`where her husband was at that moment.
`
`~
`
`Meghan Gavigan ofSard Verbinnen & Co., an outside spokeswoman for Valeant
`Pharmaceuticals, was unable to secure a response from the company.
`
`Page 1 of 1
`
`ACRUX DDS PTY LTD. et al.
`
`EXHIBIT 1544
`
`IPR Petition for
`
`U.S. Patent No. 7,214,506
`
`