Two Costco pharmacy directors have been charged with professional misconduct for an alleged kickback scheme in which drug companies paid to get their medications stocked at the retail chain.

The Ontario College of Pharmacists says Joseph Hanna and Lawrence Varga “contravened a provincial law” when “rebates” from as many as five drug companies were accepted by Costco. Those rebates are considered unlawful in Ontario.

“You engaged in conduct . . . (that) would reasonably be regarded by members of the profession as disgraceful, dishonourable or unprofessional,” the regulator said in its allegations against the pharmacists.

The college did not specify how much in improper payments Costco were alleged to have been taken from the five pharmaceutical companies, but in the complaint that led to the charges a sales rep from one of the drugmakers — Ranbaxy — accused the retail chain of squeezing out nearly $1.3 million in unlawful rebates from his company alone.

A disciplinary hearing has not yet been scheduled and none of the allegations has been proven.

“We are confident that the pharmacies, Mr. Varga and Mr. Hanna have acted appropriately and in accordance with current Ontario guidelines/regulations,” Costco spokesperson Ron Damiani said in a statement.

The college first received a complaint about Costco from Tony Gagliese, who was a sale rep for Ranbaxy, in August 2015.

At the heart of the complaint was a secretly recorded phone conversation of a Costco pharmacy director explaining how much the drug company would have to pay to “greatly reduce the likelihood of somebody eating your business.”

In Ontario, it’s illegal for pharmacies to receive any direct or indirect rebate from a drug company.

Outside the province, in places where rebates are not banned, generic drugmakers routinely pay pharmacies a percentage of the cost of their drugs to induce them to stock their products. These rebates are sometimes upward of 80 per cent.

For example, if the pharmacy buys a pill from a pharmaceutical company for $1, the drugmaker could rebate the pharmacy 80 cents. This would make the actual cost for the pharmacy 20 cents, one-fifth of what will ultimately be charged to a consumer or their insurance company.

For Costco in Canada, these rebate payments amount to millions of dollars a year.

Costco’s Damiani told the Star that the company and its directors will not answer any specific questions relating to the charges as the disciplinary matter is ongoing.

The company had previously told the regulatory college that the $1.266 million in payments from Ranbaxy were for “advertising fees” and were not connected to its decision to buy specific medications from the drug company.

Costco said it followed provincial law and any rebate payments were based solely on purchases for locations outside of Ontario.

“No improper rebate payments were received for Ontario sales and purchases,” the company’s lawyer said in October 2015 submissions to the College of Pharmacists.

In his complaint to the regulatory college, Gagliese alleged that Costco required Ranbaxy to pay “renamed” rebates on its Ontario sales through pricey “clinic support or marketing initiatives” in order to circumvent the law.

Costco said “the company that pays the most will win the most listings,” Gagliese’s complaint alleged.

The Star obtained a copy of the complaint file, including recordings of a phone conversation between Gagliese and Hanna, Costco’s director of Rx Buying in charge of choosing generic drug suppliers for the company’s pharmacies across Canada.

In the recording, pharmacist Hanna tells the drug company rep he would like “a minimum” of 60 per cent of Ranbaxy’s total sales to the Costco chain reimbursed to the company.

For an estimated $6 million in total sales in 2014, he explains, Costco would want $3.6 million.

“As a rough estimate, let’s say that $2.5 of that $6 million is in Ontario and $3.5 is in the rest of Canada,” he says.

“Obviously, I cannot take $3.6 million of support on $3.5 million of sales.”

In the recording, Hanna then describes different ways the payments could be split up: as much as $2.8 million in rebates from sales outside of Ontario and “$800,000 to $1.3 million in marketing initiatives.”

These initiatives, he explains, could be either through clinic support services at Costco pharmacies or an ad package in a magazine published by the retailer.

Ranbaxy ultimately sold more than $5.5 million of generic drugs to Costco in 2014. The pharmaceutical company paid the retailer nearly $1.8 million in rebates for sales outside of Ontario and another $1.266 million for advertising fees and clinic support.

Costco has previously told the regulatory college that these advertising fees and support payments were not connected to its decision to buy certain medications from the drug company.

The college’s charge sheet alleges the two Costco directors accepted improper payments from as many as four other drug companies: Teva, Pharmascience, Mylan and Actavis.

The companies either declined to answer or did not respond to questions from the Star about the alleged rebate payments.