In 2015, the industry observed the emergence of “captive pharmacies,” or pharmacies that enter arrangements to be owned or operated by pharmaceutical manufacturers. Captive pharmacies typically promote the manufacturer’s products instead of other lower-cost, equally effective medications. The intent is to circumvent formulary management programs designed to protect the patient and the plan sponsor from unnecessarily filling high-cost medications. The most high-profile captive pharmacy arrangements were between Valeant Pharmaceuticals International and Philidor Rx Services, and Horizon Pharma PLC and Linden Care Pharmacy.

Express Scripts Holding Co, the largest U.S. pharmacy benefit manager, is “reviewing and evaluating all similar captive pharmacy arrangements that we know of and will work to identify others,” said Brian Henry, a spokesman for Express Scripts. He defined a captive pharmacy as one that derives the vast majority of prescription volume from one manufacturer or one product. CVS Health, the second-largest pharmacy benefit manager, also said it is continuing to investigate other pharmacies to uncover inappropriate billing and dispensing activities.

The New York Times reports that Valeant has encouraged doctors to submit prescriptions for its products to Philidor Rx Services, rather than send patients to the corner drugstore. That makes it more difficult for pharmacists and insurers to substitute a less expensive alternative. Co-payments are often subsidized, making it easier for the patients to agree to get the higher-priced Valeant drug. And Philidor handles the task of fighting for reimbursement from insurers, taking that off doctors’ hands. What has raised even more suspicion is that Valeant did not disclose its relationship with Philidor until recently, when word started to get around, even though it had paid $100 million for an option to acquire the pharmacy, for no additional payment. Valeant said the transaction was too small to be material.

Phildor Rx Services was denied a license to dispense drugs in California because, the state said, it had not been truthful identifying its owners and financial officers. When Philidor failed to get the license in California, entities affiliated with it bought stakes in at least two California pharmacies. One of those, R&O Pharmacy, has presented evidence in litigation that the entity that bought the stake tried to hide that it was a front for Philidor. It also claims that Philidor used R&O’s pharmacy identification numbers to help fill its own prescriptions.

R&O Pharmacy is a small storefront community pharmacy amid rows of low-slung office buildings in Camarillo, California. According to Bloomberg News, 64-year-old pharmacist Russell Reitz agreed to sell his business there to a Delaware-registered company for $350,000. Even before the sale agreement was executed, other pharmacies began using an R&O identification number to bill for prescriptions that R&O hadn’t filled, sometimes for drugs the store didn’t stock, according to the court documents. Reitz asked why R&O’s suitor had signed an insurance-company audit for the pharmacy that Reitz still controlled. The next day, he received surprise visitors from a firm called Philidor RX Services, whose links to the buyer Reitz struggled to understand. Increasingly alarmed as millions of dollars in payments flowed in, Reitz started stashing away the checks. Then he got sued. It wasn’t pocket change. Valeant’s general counsel, in a September 4 letter to Reitz, said R&O owed Valeant in connection with gross invoices of $69.9 million. He threatened to take “any and all actions” to ensure payment.

As a result of publicity following the R&O lawsuit Valeant finally revealed that it had a secret network of pharmacies pushing its products around the country. In March, 2016 Valeant announced the litigation between the parties has been resolved by a “confidential settlement agreement that resolves all claims between them.” Reuters reported that Philidor Rx Services also has had questionable transactions with West Wilshire Pharmacy in Los Angeles.

One of the products dispensed by Philidor is Solodyn, a Valeant acne drug that costs more than $1,000 a month and is a formulation of an old generic antibiotic, minocycline. Another product is Jublia, an ointment for toenail fungus that costs more than $500 a bottle and is one of Valeant’s fastest-growing treatments. Philidor handled 44 percent of Valeant’s Jublia business in the third quarter.