Two Costco pharmacy directors admitted to accepting illegal payments from a drug company to get its medications stocked at the retail chain.

Joseph Hanna and Lawrence Varga solicited more than $1.2 million from the generic drug maker Ranbaxy for advertising services — money that could reasonably be seen as an unlawful rebate, according to an agreed statement of facts presented at an Ontario College of Pharmacists disciplinary hearing Monday.

The two pharmacists were fined $20,000 each and required to pass the professional regulatory body’s jurisprudence exam within the next 12 months.

“The panel finds both members conduct to be unprofessional,” said Sylvia Moustacalis, chair of the five-person disciplinary panel.

Costco said the advertising fee program was designed to reduce dispensing fees for customers, and that neither Hanna nor Lawrence personally pocketed any of the money.

As part of the settlement, charges that the pharmacists allegedly accepted illegal payments from four other generic drug companies were withdrawn.

The backbone of the case was a secretly recorded 2014 phone conversation in which Hanna explains to a Ranbaxy drug sales representative how much the company would have to pay to “greatly reduce the likelihood of somebody eating your business.”

That rep, Tony Gagliese, complained to the pharmacists’ regulatory college, alleging Costco was requiring Ranbaxy to pay “renamed” rebates on its Ontario sales through pricey “clinic support or marketing initiatives,” in order to circumvent the law.

It’s illegal in Ontario for drug companies to give direct or indirect incentives to induce a pharmacy to stock their products. These kickbacks are known as rebates, which the province has said artificially inflate the price of drugs.

The lawyer representing Costco’s Hanna and Varga said the men believed at the time the advertising services they charged Ranbaxy did not run afoul of the rebate regulations. Ranbaxy’s logo was included in clinic handouts and ads were put into the Wellness Connection, a magazine published by the retailer.

“In retrospect, the fees in relation to this particular transaction could be considered a rebate,” said the lawyer, Randy Sutton. “It is reasonable to accept that this was an error on their part and not deserving a significant sanction beyond what is sought today.”

Sutton said Costco stopped charging for advertising services when the complaint was filed in 2015, and immediately sought clarity from the province on whether these payments violated its rebate regulations.

The Ontario government still has not commented on the propriety of the payments, the disciplinary panel heard.

The province is conducting its own investigation into the payments.

Matthew Gourlay, the lawyer representing the college, told the disciplinary panel that this case hovered in a “legal grey area,” as it was the first time the professional regulator has had a case concerning “payments that weren’t rebates on their face.”

Gourlay said the penalty against the two pharmacists sends a warning to the profession against trying to exploit loopholes in the anti-rebate regulations.

“The finding of professional misconduct — and the consequences that will go with it — will go along way to demonstrating to the public and to the profession that these laws need to be respected in their spirit and their letter,” he said.

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Hanna and Varga are allowing the college to monitor payments made by generic drug manufacturers to Costco pharmacy for the next year. The men were also ordered to pay the costs of the disciplinary proceedings.

Gagliese, the sales rep who originally filed the complaint, said he was happy Costco’s pharmacy directors admitted their misconduct but said the punishment did not go far enough.

“I don’t see how a $20,000 fine after demanding $1.2 million in illegal rebates is a deterrent to others from engaging in the similar behaviour,” he said.

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