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Costco drug rebate probe in Ontario goes to discipline panel

Nov 22 Two executives of Costco Wholesale Corp may have sought kickbacks from drug makers in violation of Ontario law, an industry regulator in the Canadian province has found as it advances a probe into the retailer's pharmacy business.

The Ontario College of Pharmacists launched an investigation into the executives for alleged misconduct after a former sales consultant for Ranbaxy Pharmaceuticals filed a complaint saying the Costco executives sought illegal rebates of up to $1.3 million on drugs supplied to the retailer.

Costco has denied the allegations, saying the company and the two executives have complied with all laws. Stuart Shamis, an attorney for the retailer, said there had been no finding of wrongdoing. He declined to comment on specific allegations.

The regulator's investigation into the two men found sufficient evidence to refer the matter to its discipline committee, according to a notice on its website last week. That step is taken when a probe finds a person may have "been dishonest, breached trust" or violated professional principles, its website says. If wrongdoing is found, penalties range from a public reprimand to revocation of an individual's certificate to practice in the industry for a minimum of a year.

The probe into the Costco executives marks the first time an allegation involving rebates has been escalated to the discipline committee since Ontario law was changed in April 2013 to ban all rebates, paid directly or indirectly, to pharmacy operators, a spokesman for the regulator said. Rebates are legal elsewhere in Canada.

The complaint, first reported by the Toronto Star newspaper in March, has put a spotlight on Costco's pharmacy business in Canada, where it has 94 locations, ranking as its second largest market after the United States.

In addition to Ranbaxy, which was acquired by India's Sun Pharmaceutical Industries Ltd last year, the regulator listed in its allegations units of Teva Pharmaceutical Industries Ltd, Mylan NV and Pharmascience Inc as other drug makers that may have paid rebates to Costco between April 2013 and Dec. 31, 2015.

A Mylan spokeswoman said the company was not a subject of the probe and had cooperated with requests for information. The other drugmakers did not respond to requests for comment.

The complaint was submitted by former Ranbaxy representative Tony Gagliese in August, 2015. As evidence, Gagliese submitted a secretly recorded phone conversation in which Joseph Hanna, a director of pharmacy buying at Costco, can be heard telling Gagliese that Ranbaxy would need to provide up to $1.3 million to the retailer to maintain its business in Ontario.

While Hanna said the money would be marked for "marketing initiatives" he appeared to calculate the $1.3 million in the context of Ranbaxy giving at least 60 percent of sales across Canada, including Ontario, back to Costco. Reuters reviewed the recording but could not independently verify its contents.

Gagliese declined to comment.

Hanna and the other Costco executive named in the investigation, Lawrence Varga, did not respond to requests for comment. Shamis, the attorney, said Costco was confident the two men had acted appropriately and in accordance with regulations.

In a written rebuttal to the complaint last year, Costco said that any rebate payments were for areas outside of Ontario. (reporting by Nathan Layne in New York, Solarina Ho in Toronto and Zeba Siddiqui in Mumbai; Edited by Noeleen Walder and David Gregorio)

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