Monday, May 12, 2008

Those Ignorant of History's Lessons -- Are Doomed to Repeat Them

Once again, some less-than-enlightened back and forth at has convinced me that several of the less-experienced people working in sales at Schering-Plough do not appreciate the gravity of the pending investigations by the United States Attorneys, and the New York, Connecticut and Oregon States Attorneys General. This post is designed to (should they be able to read it) help them out.

Let's take a look at page 72 of this year's glossy annual report to Schering shareholders, shall we? Note the highlighted portions -- as ever, click image to enlarge:

Note that Schering is already subject to a "Corporate Integrity Agreement" (a "CIA") that runs until 2011. In some ways, this CIA is in the nature of a deferred prosecution agreement. That is, in the event that the United States Attorney in Pensylvania (as a result of long-prior questionable Schering acts, here) determines that Schering's present "corporate integrity" is lacking in some material respect, the agreement could be deemed rescinded, and the Pensylvania U.S. Attorney's office could re-institute the possibility of charging Schering, in a civil, or criminal proceeding, based on the old investigations.

What might trigger such an event? Well, having your CEO make statements on a quarterly earnings conference call that are contradicted by an SEC-Form 8-K, filed one day prior, probably doesn't help matters, in this regard. Having your stock price fall from around $27.50 -- when you sold investors $3.8 billion of your securities -- to a low of $13.80 in a few months, after the world learned of the full-fallout (at ACC on March 30, 2008), from the long-delayed-results of the ENHANCE study, likely doesn't help matters, very-much either.

So -- the object lesson here, is that these sorts of things become cumulative, at some point, in the minds of prosecutors -- and matters that were previously civil (and thus "fines-and-penalties"-driven) may become criminal (think jail for individuals, and so-called "debarment" -- being prevented from bidding on, or winning, any government contract -- for the entire company, for a period of years, here).

In the nature of additional, sorta' cumulative, stuff here, note that it was only just last summer, in August of 2007, Schering was released (after several solid years) from its FDA Consent Decree -- which decree tightly monitored its efforts to renew compliance with "good manufacturing processes" -- after significant prior lapses in manufacturing quality control has required it to enter the consent decree with FDA. I suspect that FDA may be taking a "second-look" at that consent decree. Why?

Well, as Sen. Grassley, and Reps. Dingell and Stupak have made clear -- it appears that there were various protocol irregularities, in the way the raw ENHANCE data was stored, toward the end of 2006 and early 2007 -- split-up, and littered about -- willy-nilly, it seems, on a host of laptops, and desktop computers, at the M-SP joint venture offices (see Rep. Dingell's letters -- and document-dump for more, on all of that).

We all recognize that it is still too-early to tell where all of this will ultimately end-up, but Schering is no longer a company that may rely on a stellar, long-standing, prior track record of good citizenship, and high-compliance rates, in front of the FDA, or the DoJ, or the NY AG, for that matter. It is still operating under settlement agreements, and one of which has been "extended" out to 2011, recently.

So, at a minimum, that is a "bargaining chip" Schering no longer holds -- it cannot sensibly expect to sign yet-a[nother] deferred prosecution agreement with the DoJ -- or, if Schering does make such an offer, the US Attorneys in New Jersey, and Washington, DC (after talking to their co-horts in Pennsylvania), might well ask "What good is another one of these, from you guys?"

"No -- we'll need something more, this time. . . ."

That is reasonably-likely to be the way it all goes down, this time. Now, what will the "something more" be? Who knows? But it is not likely to be a[nother] slap on the wrist, this time.

You read it here, first.

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