Ontario regulator is now probing Costco over alleged kickbacks from drug makers

An Ontario regulator is investigating allegations that two Costco pharmacy directors were involved in a purported scheme in which drug makers paid to have their medicines stocked by the retailer.

A spokesman for the Ministry of Health and Long-Term Care, which oversees the public health system in the province, confirmed that an investigation is under way concerning the alleged kickbacks. However, he declined to provide further details, such as whether any of the drug makers are also a subject of the probe.

The acknowledgement comes two weeks after the Ontario College of Pharmacists posted a notice on its website alleging the employees “contravened a provincial law” by accepting a “rebate” and causing Costco to accept “rebates” between April 2013 and December 2015. The medicines and amount of money involved were not specified, although Ranbaxy Pharmaceuticals reportedly paid $1.3 million.

The probe underscores the behind-the-scenes jockeying among generic drug makers. The companies that were named by the College of Pharmacists are among the biggest purveyors of copycat medicines — Mylan Pharmaceuticals; Teva Pharmaceutical; Actavis, which was recently sold by Allergan to Teva; and Ranbaxy, which is owned by Sun Pharma. Another named was Pharmascience.

Although generic drug makers regularly pay pharmacies a percentage of the cost of a drug for stocking the medicine elsewhere in Canada, such rebates are illegal in Ontario, according to the Ontario Drug Benefit Act. A Mylan spokeswoman declined comment, as did a spokeswoman for Teva. We asked the other drug makers for a response and will update you with any reply.

As we noted previously, the episode originated with a complaint filed last year by a former Ranbaxy sales rep, Tony Gagliese. He secretly recorded a phone conversation in which a Costco pharmacy director explained how much the drug maker would have to pay to remain competitive, according to The Toronto Star, which first reported about the complaint. Gagliese reportedly filed the complaint.

In his complaint, Gagliese alleged that a Costco pharmacy director indicated that “the company that pays the most will win the most listings and that Costco required Ranbaxy to pay ‘renamed’ rebates through ‘marketing initiatives,'” according to the Star, which had reviewed a copy of the complaint. Gagliese did not respond to our requests for comment.

At the time the paper first reported the existence of the complaint last March, a Costco attorney maintained that any payments were “advertising fees” and were not made “in connection with the purchase and sale of any specific drug product.”

“We are confident that Costco has complied with the legislation and the regulations and we intend to co-operate fully with the inspection,” Costco corporate counsel Stuart Shamis told Reuters.

Two weeks ago, a Costco spokesman wrote us that the retailer confirmed there was “no finding that Costco’s pharmacies or any of its employees have acted in contravention of Ontario’s regulatory regime.” However, he did not indicate which entity examined whether regulations had been followed. Meanwhile, the College of Pharmacists plans to hold a disciplinary hearing.