Before the group of East Coast investors arrived late last year, Camarillo pharmacist Russell Reitz had been promoting his modest prescription-filling business as "your local pharmacy."
That abruptly changed when he agreed to sell his pharmacy, in a quiet suburban office park, to the group for $350,000. As he continued as manager, Reitz began finding his store's name and his national pharmacy license number on an avalanche of prescriptions nationwide.
Then a torrent of insurers' money started flowing to his small shop, R&O Pharmacy — on pace to equal $230 million a year, according to invoices.
Reitz now finds himself at the center of the national scandal enveloping Valeant Pharmaceuticals International, the once highflying Wall Street darling that in recent weeks had its stock price almost cut in half. The Canadian company said Oct. 14 that federal investigators were probing its operations, including how it prices and distributes drugs.
In the last two months, Reitz has filed papers in two Los Angeles courthouses laying out details of what he and his lawyer call "a massive fraud."
"I saw personal risk to my future, so I had to take action," the 64-year-old pharmacist said in an interview last week at his office.
Reitz had agreed to sell his pharmacy to a company created by Philidor Rx Services, a mail-order pharmacy with close ties to Valeant.
Valeant became one of the hottest healthcare stocks in recent years by buying other firms' medicines and then swiftly hiking their prices by as much as 500%.
Specialty pharmacies such as Philidor are part of a little-known strategy by Valeant and other pharmaceutical companies to sell high-priced drugs that insurers otherwise wouldn't pay for.
Many of Valeant's expensive brand-name medicines — including Jublia for toenail fungus and Solodyn for acne — are similar to generic medicines available for far less. When patients fill those prescriptions at the pharmacy, insurers often require the druggist to switch to the generic — causing Valeant to lose the sale.
To get around that blockade, Valeant has been distributing coupons on the Internet and to doctor's offices across the country that allow patients to lower or even avoid a co-pay — if they ordered the drugs through Philidor.
Until Reitz's court filings, including a lawsuit he filed Oct. 6 in U.S. District Court in Los Angeles, few people knew about Valeant's close ties to Philidor, even though the mail-order pharmacy was increasingly crucial to its bottom line.
Last week, under pressure from angry investors, Valeant revealed more about Philidor, saying it had an expanding "network of pharmacies" across the nation.
Another pharmacy in the Philidor network is West Wilshire Pharmacy in Los Angeles. Wilshire did not return a call seeking comment.
The concern among investors is that the giant drugmaker's fast-rising sales growth is dependent on these mail-order pharmacies, which could be operating illegally.
"We did do a lot of business, but it wasn't being done right," Reitz said in the interview.
Wearing a burgundy T-shirt and jeans, Reitz seemed forlorn as he sat at a wooden desk, a crisp white pharmacy coat hanging from the back of his chair. He said he did not understand Philidor's intentions when he agreed to sell the company his business.
Valeant said that Reitz's lawsuit "is without merit."
"We operate our business based on the highest standards of ethics, and we are committed to transparency," J. Michael Pearson, its chief executive, said in a conference call with stock analysts last week.
In court papers, Reitz detailed how he had discovered that Philidor was using his national pharmacy identification number on prescriptions being filled at other pharmacies — and even on some that were filled and billed before he signed the agreement to sell R&O on Dec. 1.
He also found that, without his knowledge, a Philidor executive who had never visited the Camarillo pharmacy was answering questions about the pharmacy's billing practices during an audit by an insurer.
As Reitz pressed executives at Philidor's headquarters in Hatboro, Pa., for answers about the questionable practices, his emails became increasingly desperate.
"Time is of the essence," Reitz wrote to Andy Davenport, Philidor's chief executive, on July 20. "You must provide me with substantive responses immediately, as my license and professional reputation are at stake."
What Reitz hadn't known at the time he signed the sale agreement was that Philidor — and Valeant — were facing a hurdle in getting prescriptions filled in California, the largest market for medicines among the states.
State Atty. Gen. Kamala Harris' staff had denied Philidor's request for a California pharmacy license, charging that the company had falsified information in its application.
"Do you think I would sell to someone that was denied a permit?" Reitz said. "You've got to be kidding me."
Reitz said he believes that Philidor had targeted his pharmacy because it needed access to his licenses, which he has in California and 33 other states, as well as to the contracts he had negotiated with insurers.
On July 21, Davenport and three other Philidor executives arrived unannounced in Camarillo, talking to Reitz for just 15 minutes before rushing off. Reitz said the executives answered none of his key questions.
The next day Reitz's lawyer sent a letter to Philidor.
"Your continued silence indicates to us that Mr. Reitz' suspicions are well-founded," he wrote. "You appear to be engaging in a widespread fraud."
By then Reitz had stopped sending Philidor the millions of dollars in checks that he was receiving from insurers for prescription shipments. His lawyer explained that Reitz had to protect himself from "massive potential" liability.
On Sept. 4, the drug giant Valeant sent a letter to Reitz — demanding $69 million that it said the small-town pharmacist owed.
Until then, the pharmaceutical company had not corresponded with Reitz. Philidor executives had told him only that they "had a relationship" with Valeant to dispense its branded products, Reitz said.
A few days later, Reitz sued Valeant, asking the court to rule that he had no duty to the drug company and owed it no money.
Valeant's shares plunged 38% on Oct. 21 when Andrew Left, a short-seller at Citron Research in Beverly Hills, released a report accusing the drug company of using the pharmacies in an Enron-like scheme of inflating profits.
Early last week, Valeant executives insisted that Philidor operated as an independent company. But they also revealed that in December, Valeant had paid $100 million to Philidor for an option to buy it.
Valeant executives said that prescriptions filled by Philidor and its network of pharmacies amounted to 6% of the company's net revenue this year.
Yet on Thursday, Valeant's stock fell again when the nation's three largest drug-benefits managers — CVS Health Corp., Express Scripts Holding Co. and
On Friday, Pearson, Valeant's chief executive, tried to distance his company from Philidor. He announced that Valeant was severing all ties to the mail-order pharmacy. Philidor was shutting down operations, he said.
"We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor," Pearson said, "just as we have been."
Valeant's stock closed Friday at $93.81, down $17.69, or an additional 16%.
Reitz declined to say whether he had spoken to law enforcement or regulatory officials.
"A lot more is going to be coming out," he said.