Wednesday, April 30, 2008

Remember the January 23, 2008 FDA-Mandates (Ordering REVISIONS to the Zetia/Vytorin Advertising Materials)?

Or. . . . Your 90 days are. . . . over!

Well, in the last few days, the Schering/Merck website has begun to implement the FDA January 23, 2008 mandates (click on the small FDA letter image, below right, to read those mandates) -- The quote below is from the last line, on the first page, of the NEWLY-REVISED Vytorin web-advertising; the second paragraph (in blue, below) is from the Zetia page, on that same site [Emphasis below, is as it appears in the original]:

". . . .VYTORIN contains two cholesterol medicines, Zetia (ezetimibe) and Zocor (simvastatin), in a single tablet. VYTORIN has not been shown to reduce heart attacks or strokes more than Zocor alone. . . .

[Ed. Note -- And, from the new Zetia page:]

The most common cholesterol-lowering medicines, known as statins, work mainly with the liver. ZETIA works in the digestive tract, as do some other cholesterol-lowering medicines. Statins are a good option. As you can see in the animation above, ZETIA works differently. Now there are some other medicines, such as fibrates, bile acid sequestrants, and niacin, that work in the digestive tract to help lower cholesterol, but ZETIA is unique in the way it helps block the absorption of cholesterol that comes from food. Unlike some statins, ZETIA has not been shown to prevent heart disease or heart attacks. . . .

Wow. I'm going to pay up to four-times more, at least here, in the U.S. (where about 80 percent of the sales of Vytorin/Zetia were generated, last year), for Vytorin/Zetia, but Schering's website tells me that, unlike statins, it "has NOT been shown to prevent heart disease." Note particularly this sentence, as well:

"Statins are a good option." Wow.

Then, on the Vytorin page aimed at "people already taking Zocor", we read this, right near the top of the very first page:
"VYTORIN contains two cholesterol medicines, Zetia (ezetimibe) and Zocor (simvastatin), in a single tablet. VYTORIN has not been shown to reduce heart attacks or strokes more than Zocor alone. . . ."

[The same language (immediately above, with the same emphasis) appears on the page aimed at people taking Lipitor or Crestor -- and it even still refers to "Zocor" -- hmmm -- that seems like a typo, no?]

These revisions are almost word-for-word, what FDA earlier wrote it would expect Schering/Merck to say, in order to avoid "misleading" the public, post ENHANCE. And now -- the object-lesson, here? When the regulator holds your license-to-sell in its hands -- it has quite a bit of negotiating ju-ju, no?

I am, quite frankly, uncertain as to how a salesperson for the Joint Venture product(s) would go about handling any doctor who, during a sales-call, took even one moment to point these web-pages out, to that sales representative [shivers!]. Said another way, it would seem a very tall-order to "talk around" these recitations, in one's own marketing materials -- especially that the competitors' products (at a fraction of the price!) are a "good option."

And, of course, it remains a largely-open question as to whether, and for what purposes, these now very-public changes and revisions will be admissable as evidence in the various RICO/consumer fraud lawsuits now pending against Schering, and Merck, and the joint venture each helps operate.

Tuesday, April 29, 2008

NOT Claritin -- on Clarinex® Redi-Tabs Potential $800 Million Patent Vulnerability. . . .

[UPDATED: 04.2930.08 @ 4 PM: FiercePharma is now also following this story, of mine. Very cool; with one bit of white-out to FiercePharma's, here: the generic-makers could -- emphasis could -- be in the market in the second-half of this year, 2008, not next year, 2009, IF Latham & Watkins' position wins the day, for Orchid Pharma -- see below. . . .

4.29.08: That gracious fellow, Sir Pharmalot, has once again hat-tipped this blog, for the below story. . . . Cool!]

As we all likely know by now, that Claritin combo-pill won't ever see the after-glow of commercial sales in the US, on drugstore shelves, at least. And the reason the markets shrugged today, in response, is because it is likely that the loss of that potential incremental future revenue (from such an imaginary combo-drug) is probably just about offset by the avoidance of incremental running-costs of marketing that would-be combo pill, at Schering-Plough. . . .

I strongly suspect this will not be the case for Clarinex, an almost $800 million per year (in sales -- not profits) juggernaut for Schering, at least until now.

There is a deeper, apparently-entirely new story here -- one I entirely missed, at first. I literally blew past this court filing, last week, thinking there were already generic versions of desloratadine (sold by Schering, prescription only, as Clarinex®) inside the US market.

What I missed was just how very near to the market, the amassed-hoard of generic descloratadine purveyors/competition may sit, tonight -- and how much there is to gain -- and lose -- in this battle, now. Last year, according to the Form 10-K, sales of Clarinex increased about 11 percent to $799 million in 2007, over 2006. For the first quarter of 2008, sales of Clarinex grew another 4 percent (in the allergy off-season), adding another $213 million to Schering's top-line. That is not insignificant, given the expected Vytorin/Zetia fall-offs, for all of 2008.

While the chemical compound commonly known as desloratadine (imaged, at right, which is sold by Schering as Clarinex®) doesn't come off of a Schering patent until about 2020, an important new development has appeared, in court documents just filed April 16, 2008, in Schering's own suit to keep several would-be generic makers from selling desloratadine, as the chemical equivalent of Clarinex RediTabs.

In the In Re Descloratadine Patent Litigation (MDL No. 1851, Case No. 3:07-CV-3930 US Dist. Ct. NJ), Orchid Chemicals, an Indian company, and one of the would-be generic competitors, filed an Amended Answer to Schering's Original Complaint on April 16, 2008. Orchid's new answer sets out a very-interesting factual counterclaim to Schering's assertion that so-called FDA "Orange Book" status applies to Clarinex RediTabs. Now, generally speaking, if the branded manufacturer (here, Schering) files suit for patent-infringement within 45 days of learning of a generic's plans (here, Orchid, and others), on a patented-drug it has listed in FDA's so-called Orange Book, the court generally must automatically grant the branded drug (Clarinex) at least 30 months of continued exclusivity (or to at least March 2009, here), during the pendency of the dispute. That's the general rule (albeit an immensely over-simplified version of it). And, that, is just what Schering did. "So, what's the boggle, here, friend?" Well. . . .

What Orchid now says (actually, swears, by the way), is that the chemical compound out of which Clarinex RediTabs are made, was never covered by Schering's so-called '274 patent -- the one at issue here -- and the one Schering did file in FDA's Orange Book. The '274 patent, Orchid swears, covered compounds made of salts -- and the much-beloved, quick-dissolving Clarinex RediTab, is not made from any salt, at all, apparently (See above, right -- Yeah I took high school chemistry too. Pass-fail. J/K -- Heh!).

Quoting from the Orchid Answer, now:

. . . .18. Defendant Orchid filed an ANDA for desloratadine orally disintegrating tablets (No. 78-356), which referenced Plaintiff Schering’s CLARINEX® RediTabs NDA, and included a paragraph IV certification for the ’274 patent listed in the Orange Book. Orchid provided notice to Schering of the certification, Schering sued within the required 45-days, and now FDA presumptively is prevented from approving Orchid’s ANDA for 30-months, or until about March 2009, absent prior action by this Court.

19. Schering improperly caused the FDA to list the ’274 patent with regard to NDA No. 021-312 because the ’274 patent does not cover Clarinex® RediTabs. The ’274 patent discloses and claims desloratadine compositions containing a basic salt. However, as the FDA-approved label for Clarinex® RediTabs confirms, Schering’s orally disintegrating formulation does not contain a basic salt. June 26, 2002 Final Draft Labeling at 1.

20. Orchid is in a position to enter the market for generic desloratadine orally disintegrating tablets but for the presumptive 30-month stay associated with Schering’s filing of the instant lawsuit relating to Orchid ANDA No. 78-356. Thus, as Schering is aware, Orchid has fully and finally resolved a separate lawsuit with another pharmaceutical company involving another patent listed in the Orange Book for NDA No. 21-312 and another listed patent has expired. Orchid expects to obtain tentative approval to market its generic desloratadine orally disintegrating tablets in the near future. In short, the 30-month stay is the only remaining barrier to the availability of generic desloratadine orally disintegrating tablets to the public.

21. Concerned that pharmaceutical companies might improperly list patents in the Orange Book to thwart potential generic entry, Congress has specifically authorized courts to issue an order that the NDA holder “correct or delete the patent information submitted by the holder . . . on the ground that the patent does not claim either — (aa) the drug for which the application was approved; or (bb) the approved method of using the drug.” 21 U.S.C. § 355(j)(5)(C)(ii).

22. Orchid is entitled to an order that Schering be ordered to delete the ’274 patent from the Orange Book with respect to NDA No. 21-312 on the grounds that the ’274 patent neither claims the drug for which NDA No. 21-312 was approved nor an approved method of using the drug. . . .

Thus, if there is no Orange Book-listed protection for the '274 patent to reach the RediTab formulation of Clarinex®, then Orchid (and, presumably, all of its co-defendants) may begin marketing the generic "at risk", almost immediately. Orchid, for its part, indicated (see Answer excerpt, above) it is ready to begin, but for these court proceedings.

This court filing was made on April 16, 2008 -- a full seven days before the Schering-Plough Q1 Earnings Conference Call. Interesting.

We shall see whether this development appears in the Form 10-Q, due in very short order [but how much more quickly do you think Clarinex sales will slow, if, correlatively -- Claritin costs $25 a box, and the generics cost about $12.50 a box -- how much will a generic form of desloratadine sell for? Half-off? Wow.]

That 10 percent revenue growth, on over $800 million in Schering sales, from Clarinex, in 2008 looks to be in fairly serious peril, from where I sit. The central question, then, is whether Orchid (and the others) will be willing to go forward with "at risk" generic launches (and risk owing additional damages, if all the counter-claims are found without merit). If a good portion of $800 million is to be gained, though, I think it likely at least some of them will launch.

Now, it is possible that Orchid is mistaken, in these assertions in its filing, but Orchid is represented by Latham & Watkins LLP -- a very large, careful, well-respected firm (out of the Newark, New Jersey office of Latham, actually) -- and so, it is extremely unlikely that this is all some big mistake, on Orchid's part. No, it looks to me, to be yet a[nother] likely mis-cue, by Schering.

If Schering does not, in fact, have an FDA Orange Book-filed patent number that covers non-salt formulations of Clarinex, the generic tidal wave may be forming, and rising, even as I type this note. . . . and, if that's so, you ought to buckle-up for quite a ride in the back half of 2008.

Monday, April 28, 2008

Blogosphere-Weather-Adivsory -- A Forecast of Light-to-Intermittent Blogging, here. . . .

But fear not, gentle readers, I am working on a rather large narrative for you. . . .

Yep -- THIS IS IT.

It may take a day or two -- but I promise, it will not disappoint. [This is NOT it, BTW. Nor is this.]

Until then, though, you might consider reading the Schering-Plough company board over at

Back before too terribly long. Play nice -- and be safe, out there.

Saturday, April 26, 2008

More evidence of a shift in the winds at FDA, here. . . .

[UPDATED 04.2830.08 AM -- Another very-well researched, and well-written piece (from that shiny-new pen of PM, at Gooznews) on the changing tides at FDA. . . .

4.28.08: As will, no doubt, be the case, repeatedly, in the future, Pharmalot is on this, now -- and he's done a bang-up job of making it easy to read, and yet coveying all the essence of it. . . Kudos!

And, from the very same friend of this blog as below -- this would seem to confirm all of the below.]

This just in, from a friend of this blog (Thanks!) -- and, as additional evidence of an emerging trend toward more rigorous review-before-approval at FDA -- I've been alerted to the fact that FDA told Isis and Genzyme that they will need to conduct a study with clinical endpoints before FDA will even consider approval1. The drug is Mipomersen (formerly Isis 301012). This is plainly significant, because the companies clearly had been hoping to get approval based on LDL-lowering alone. I think this reflects new thinking at FDA on clinical v. surrogate endpoints -- and that, in turn, sounds a lot like FDA has learned some "hard lessons" from the ENHANCE study train-wreck.

From the Genzyme Form 8-K, of April 23, 2008:

. . . .Mipomersen for high-risk cardiovascular disease

Genzyme expects to finalize its license of mipomersen from Isis Pharmaceuticals in the second quarter and subsequently communicate a development plan for the product. Mipomersen is a lipid-lowering agent being developed primarily for patients at significant cardiovascular risk who are unable to achieve target cholesterol levels with statins alone or who are intolerant of statins. The product offers an innovative approach to addressing a serious unmet medical need, and Genzyme believes it could prove to be the most effective lipid-lowering agent for high risk cardiovascular disease patients for whom conventional therapies are not sufficient. The product may provide significant benefit over the standard of care and targets a well-defined and severely ill patient population. Mipomersen is currently being studied in a Phase 3 clinical trial involving patients with homozygous familial hypercholesterolemia. . . .


[Footnote 1: This FDA directive does not affect the accelerated approval track of the drug, for homozygous familial hypercholesterolemia patients.]

Probably this wasn't ever going to "move the needle" very much at Schering, but. . . .

. . . .this is plainly a disappointment for the Fred Hassan/Schering-Plough strategy of taking older, mature-market drugs, and re-igniting them by combining them with another active agent. [Think of Vytorin's marrying of Zocor with Zetia, here.] While the company said it was "evaluating its response" to the non-approvable letter from FDA, it probably means a[nother] write-off of at least $50 million in development costs, ad pitch consulting and strategy materials, etc. associated with the combo's one-and-one-half-year journey from FDA submission (August 2007), to last night.

I wonder whether the letter is also a harbinger of things to come at FDA: is this the beginning of a new -- more skeptical -- FDA review and approval process, when the clinical benefits of these combos appear marginal (as compared to taking the two drugs as two separate footballs), but the protections against patent-expiry, or generic incursions, seem to be one of the company's main motivating factors for submitting an ANDA?

I think it likely. Of course, Pharmalot's Ed Silverman has an even wider, and more cogent, meta-narrative he points us to, this morning -- and I think he is largely right. Brilliant, that one (though, Ed, isn't photocopying US currency, at least theoretically. . . . still a Class B felony? Heh!).

I do think, insofar as meta-narratives go, this is additional proof1 that the pendulum at FDA is swinging toward "slow to approve/quick to issue warning letters" -- [as to Schering, then, think about a slower path for its Sugammadex product, even though it holds an FDA "approvable" letter, at the moment -- it is not yet "FDA approved"] and thus, relatively-speaking, away from where it had been for a good portion of the two Bush/Cheney administrations.


[Footnote 1: I'll note in passing that FDA drug unit chief Woodcock, and Baxter CEO Bob Parkinson, will appear before a Congressional Committee, at a hearing provocatively-entitled "The Heparin Disaster: Chinese Counterfeits and American Failures", on this coming Tuesday, to explain how it was that, between FDA inspections of the wrong Chinese supply-plants, and Baxter's filling and packaging operations (in reliance on various global suppliers, of course) -- the batches of Heparin (both the Baxter-versions, and the competitors' versions) got contaminated, in the first place, shipped into hospitals, in the second place, and injected (or dripped) into the IV lines of patients, in the final analysis. Which is to say, I think it likely that the legislative/investigatory pressures from Sen. Grassley, and Reps. Dingell and Stupak, will not abate -- and FDA is adjusting its course, accordingly.]

Friday, April 25, 2008

Just a Couple More Insights into Schering's 2007 Proxy Statement


I had intended to spend some time, this evening, doing some calculating (inside the various buckets of compensation) to determine whether the 2007 Executive Compensation payments made by the Schering-Plough Compensation Committee seemed "out of proportion" to what would-have-been the increase (or decrease) in "Market Capitalization" -- the metric that Schering has wholly-removed from the factors influencing compensation, this year, as indicated below.

But instead -- and I can't explain why this did not hit me when I was originally writing this, this morning (not enough coffee? too much?) -- I simply want to point out that it is generally inappropriate to use market cap growth as a metric for determining compensation. Issuing shares (dilution) drives it up, but to be fair, so does stock price appreciation.

And yet, Schering has apparently done so, for at least two full yars, since Mr. Hassan took the helm. Why?

I believe it especially inappropriate because, at a company like Schering, that means stock price gets a "double-weighting" in figuring compensation levels. This is so because "Total Shareholder Return" is already factored in (see page 21 of the 2007 proxy). Note that "market capitalization" is simply share price, times the number of outstanding shares. Note also that total shareholder return is really stock price appreciation, plus dividend payments.

Thus, for most of the last three years, it seems, the Compensation Committee has been double-weighting the rise in Schering-Plough stock prices -- but now, as the stock price is declining, the Committee has entirely removed the double weighting effect. So, there is little need to do detailed analysis, here, it was, in part, overweighting compensation in good (rising) stock price years, and only now, will it "normalize" the weighting in a (presumably) falling stock price environment. Well, that IS interesting, no?

And if that weren't unusual enough, note that the 2005 Schering proxy, at page 42 -- while soliciting a shareholder vote to adopt this plan, the description of it does not even list "Market Capitalization" as one of the allowed metrics for measuring performance (and thus determining/awarding executive compensation)! Take a look:
. . .the Compensation Committee may select under the Plan include one or more of the following (in absolute values or relative to the performance of one or more comparable companies or an index of comparable companies):
• Net operating profit after taxes;
• Operating profit before taxes;
• Return on equity;
• Return on assets or net assets;
• Total shareholder return;
• Relative total shareholder return;
• Earnings before income taxes;
• Earnings per Share;
• Net income;
• Free cash flow;
• Free cash flow per Share;
• Revenue (or any component thereof);
• Revenue growth;
• Share performance;
• Relative Share performance;
• Economic value added; and/or
• Return on capital. . . .

That, my friends, is rather astonishing. I have to say that I have never seen that occur. The shareholders approved a plan, and it listed many variables, in sort of a la carte fashion, here -- for measuring performance. . . . and then, for at least two full years, the Compensation Committee determined performance, in part, on a factor that was NOT permitted -- and, in effect, double-weighted for that very factor.

It would be hard to overstate the ramifications, here: Should all that compensation from 2006, and 2007, and now part of 2008, be re-assessed, and re-calculated, to exclude any amounts awarded in reliance on the impermissible, or double-counted, factors? [I don't know -- but all those plaintiffs' lawyers will definitely have a view on this.]

And what are we to make of the fact that the proxy for this year (2007) simply fails to mention ANY of this -- the word "capitalization" does not appear once in the 2007 proxy -- run a "find text on this page" on it, for yourself. It doesn't. No, it just disappears this year, without any explanation of whether the prior double-counting was an unfortunate, but "inadvertent" error, or whether it was intentional.

I am going to need to sleep on this, and return to it -- it is, as ever, possible that I've made some sort of a mistake here -- and, I'd encourage all my Schering readers (another wave!) to point 'em out -- if they see 'em. . . . because, at least from where I sit right now, this looks pretty discouraging, in terms of assessing the competence, and carefulness, of the decision-making around top executive compensation at Schering-Plough, for at least the last two full years. Wow.


It seems that Schering's "designated" Compensation Consultant, Ira Kay, of Watson, Wyatt [pictured, below, left, and a recent, and repeating, visitor to this blog! Big Wave, here!], on behalf of his patron, Hans Becherer, the Chairman of the Compensation Committee of Schering-Plough's Board of Directors (pictured, at right), has recently decided to remove "Growth in Market Capitalization" as one of the general metrics upon which Executive Compensation levels were judged, in 2007.

It was one of the metrics in the 2006 proxy (page 25), rising from $25.5 billion in 2004, to $35.5 billion in 2006. For 2007, by my lights, the analogous number would have been only a little more than $39 billion -- nothing like the rise in prior years (over 18 percent per annum, v. under 10 percent per annum for 2007).

This drop in annual percentage increase is due to the fact that the Schering stock price had already begun to decline, in large part as a result of mid-December 2007 announcement of Congressional investigations of the ENHANCE matter. So, by December 31, 2007, Schering stock prices (and thus "Market Capitalization", as a straight multiple of that price), were in decline. To be clear, then, while the 2006 proxy disclosed a 38 percent growth from base (2004) levels, there would have been scant growth in this metric for all of 2007.

Could this be why it was spiked?

Could it be that -- as the Compensation Committee Report rather oddly admits, about March 31, 2008 -- that "none would have been payable", had the measurement of "Total Shareholder Return" been made as of March 31, 2008 (instead of the previously-structured December 31, 2008 date) -- that very little, or none, of that "bucket" of the incentive compensation package would be payable, had "Market Capitalization" trends been included in this year's Schering Executive Compensation model?

I don't know. But that is a question I intend to investigate today -- and provide answers for -- unless other duties interfere. Back later.

Thursday, April 24, 2008

Part Two of my Rant about "Hassan's buy shows confidence. . . ."

Today, Fred Hassan went through with his purchase of $2 million worth of Schering-Plough common stock -- first announced January 18, 2008, but executed at today's market prices (Now, was that an unregistered put-option, in favor of the shareholders, as of January 18, 2008? But I digress). . . .

[Here is Part One of my Rant, as a backgrounder.]

▲ One -- he essentially used the $2.087 million cash incentive that Hans Bechereer & the board paid him in 2007, for 2006-07 performance, to make this buy -- so, in a very real sense, this is actually from the shareholders' own money -- a bet placed with the house's funds.

▲ Two -- when he said he'd do this, on January 18, 2008, the stock closed on the NYSE at 21.28. He promised to spend $2 million. That would have netted him about 93,985 shares.

He waited -- to let the markets discover what he knew, re ENHANCE -- and waited, for Year end 2007 results -- and, then waited, for the ACC Panel debacle to fully-unfold. . . . and now, only now, after Q1 is out, does he "buy in" at $18.26, today.

So, now, he gets 109,530 shares for his $2 million. He gets 16 percent more shares, for his $2 million of "spent" 2006 SGP bonus money. He now owns about 720,000 shares outright.

So -- tell me again, now -- how was that a "show of confidence"?

[Query whether his open dispute, with Merck, about the veracity of the $700 million fall-off in the Vytorin Joint Venture's equity income for 2008, makes this "buy" in some way subject to the insider-trading rules. Is there "adequate public information" about the "known trends. . . and uncertainties" of Q2, and Q3, and Q4 "in the public market", simply because Richard T. Clark explained it, on Monday -- or is it considered "undisclosed", as to Schering's stock price, at least -- because Fred Hassan denied the existence of such a model, only yesterday. 'Tis perplexing, indeed. I am sure this -- as an anonymous hypothetical -- will be on an Advanced Securities Regulation final exam, at some law school, one day.]

Why isn't Jami Rubin -- at Morgan Stanley -- Excoriating Schering-Plough, today?

So, now I'll wade into truly shark-infested waters, here. . . . and ask a truly impertinent -- provocative -- question:

As I noted yesterday, and the call-transcript confirms, Jami Rubin of Morgan Stanley was essentially told by Fred Hassan that "no models" exist for what is happening with the Vytorin/Zetia Joint Venture.

However, Jami had also asked these questions on the Merck call (Merck transcripts, courtesy seeking alpha), only two days earlier, and heard a very different story -- the truth, apparently -- told to her.

So, why wouldn't she be writing -- and writing furiously -- about not being told the entire truth by Fred Hassan, yesterday? And, mind you now, this is no small matter: this is still over 55 percent of all of Schering-Plough's 2008 profitability, at stake here. Why wouldn't she?

Well, the SEC only requires, via Regulation AC, that all analyst- reports accurately reflect the genuinely-held personal views of the author. The SEC rules do not require that Morgan Stanley analysts certify actual "independence" of any sort.

And so, Morgan Stanley analysts are free, under the applicable rules, to take into account their own firm's interests1 in deciding what to write -- or not write -- about.

Interestingly, for his part, Merck & Co. CEO Richard T. Clark entered his own "confessional" about the relative-opacity, and self-interestedness [or, if you prefer, the conflicted interests] of the United States pharmaceutical sector (H/T Ed, at

"Hey! -- maybe Jami could profile Merck & Co.'s emerging views on this matter."

[Cue the crickets. . . . chirping. . . . chirping into a deafening silence.]


[Footnote 1: Morgan Stanley clients (purchasers of the Schering-Plough securities offered in August and September of 2007) had, at issuance, at least $626.68 million of exposure to Schering-Plough risks, courtesy of their Morgan-Stanley advised purchases, in August and September of 2007, alone. I'll not bother to calculate the amount of market-decline in those aggregated holdings, with any real precision -- suffice it to say that perhaps only 60 percent of the dollar-converted amounts of those net positions still exist, as of this writing.

In addition, Morgan Stanley affiliates earned a minimum of $14.53 million in commissions from Schering-Plough public stock and bond offerings, in the second half of 2007, alone.

I hope this gives the readership some stimulating food for thought.]

Not Without a Sense of Irony, it would seem. . . .

Filed under: PRICELESS.

BusinessWeek is running a great story, one that features Schering's Van Pool efforts:

. . . ."Every time gas prices rise, I get more and more employees who are taking our car pools or van pools or shuttle buses," says Schering-Plough's (NYSE:SGP - News) transportation chief, Sheila Gist. . . .

This new golden age has Gist in overdrive, scheduling new routes for what has become Schering's own in-house transit system. In the past year alone, Gist says, employee ridership is up by as much as 40%. Companies are big on breaking the car addiction because doing so increases productivity, amps morale, and delivers much lusted-after green cred. . . .

Last night, Schering disclosed that in 2006 and 2007 combined, it covered $333,700 of personal use of corporate jet-time for the executives, principally Mr. Hassan, and Ms. Cox. It also covered $23,305 for personal use of limo-drivers, and corporate-car expenses, for the top six executives:
. . . .Mr. Hassan has been directed by the Board to use the corporate-owned aircraft for all air travel including personal travel. This provides several business benefits to Schering-Plough. First, the policy is intended to ensure the personal safety of Hassan, who maintains a significant public role as the leader of Schering-Plough. Second, the policy is intended to ensure his availability and to maximize the time available for Schering-Plough business. Certain of the other named executives (and other key executives) use the corporate-owned aircraft for business travel, and on occasion for personal travel. Since Hassan joined Schering-Plough in April 2003, 94% of flying hours for senior management were for business use.

In addition, for the same reasons described above, Schering-Plough makes one car and driver available to Hassan. The driver assigned to Hassan is also a trained security professional. The other named executives occasionally use cars and drivers from a pool. All executives use the cars primarily for business purposes, and the cars and drivers (including the car and driver assigned to Hassan) are also used by other Schering-Plough personnel for business purposes. Since Hassan joined Schering-Plough in April 2003, 94% of car and driver usage for senior management has been for business use. . . .

It sure feels good to ride the corporate van, eh?

Wednesday, April 23, 2008

We have a Winner! -- CEO Hassan made $30.32 million for 2007!

BREAKING: How full is the [2007 Edition] Schering CEO honey-pot?

[Click it to enlarge -- as if you'd need to! Heh!]

Schering just filed its proxy statement with the SEC tonight, and the pollsters who bet [about] "the same as 2006" are the WINNERS! [See poll results -- at lower left.]

More from the proxy, shortly, but above is a summary graphic. His compensation is actually up about 2.3 percent, all in -- note that Mr. Hassan has a little more "guaranteed" to him (that cannot be forfeited) -- about $1.8 million more than last year, at this time. [N.B.: Here is my analysis of the 2006 CEO pay disclosures.]


Now, consider this [emphasis supplied] from tonight's Schering narrative:

. . . .A Special Note About 2008

In the pharmaceutical industry today, media firestorms about complex drug safety and efficacy concerns are frequent and intense. Often, these events impact stock price. Sometimes these events also impact prescriber and patient preferences, which can impact future sales. These impacts frequently occur whether or not there is medical and scientific support for the concerns publicized in the media.

Schering-Plough’s Board, including the Compensation Committee, believes having a CEO with deep industry experience, together with an experienced team of senior executives, can position Schering-Plough, as well as is possible, in today’s environment. Schering-Plough tries to manage such situations in a manner to best protect long-term shareholder value, and at the same time assist the prescribing physicians who are the only ones qualified to advise their patients about individualized health care needs.

Schering-Plough is currently facing such a challenge, which began in early 2008 relating to a Merck/Schering-Plough cholesterol joint venture clinical trial, called ENHANCE. That clinical trial included the drug VYTORIN and was initiated (and designed earlier) by the Merck/Schering-Plough cholesterol joint venture in 2002, before Hassan and the new management team joined Schering-Plough. Details of the matter are discussed in Schering-Plough’s 2007 10-K which was filed with the SEC on February 29, 2008. This challenge has pressured the stock price, which has dropped since year end.

The pay-for-performance elements of Schering-Plough’s executive compensation program have been designed to closely link the interests of senior management with that of the shareholders and the creation of shareholder value. Even in the current situation, where the Board believes management has handled the challenge well, because the stock price has declined, the named executives have lost significant net worth, and potential future compensation for each of them is at risk.

The named executives, along with the other top 40 Schering-Plough executives, are subject to rigorous stock ownership requirements (eight times salary for the CEO and four times salary for the Executive Vice Presidents and Senior Vice Presidents). See the chart on page 29 for details. Equity compensation also represents a significant portion of each named executive’s total compensation. As a result of their equity holdings, the named executives have each lost value along with shareholders.

Hassan also holds additional shares he purchased with $4.6 million of his personal funds in 2003. In 2008, Hassan committed to making an open market purchase of $2 million of Schering-Plough common shares with personal funds upon receiving legal clearance to do so (anticipated following announcement of first quarter earnings for 2008).

As mentioned earlier, the named executives have a significant amount of future pay at risk, which may be impacted by the challenges described above. For example:
▲ The outstanding five-year transformational incentive (with a performance period ending in 2008) uses total shareholder return (both actual and relative to the Peer Group) as a performance metric. Stock price declines often adversely impact total shareholder return. As a result, named executives Hassan, Bertolini, Cox, Sabatino and Saunders may lose future compensation with respect to the transformational incentive if the stock price does not increase prior to the completion of the performance period. For example, had the performance period ended March 31, 2008 (rather than December 31, 2008 as provided in the plan), the payout would have been zero for each of them based on performance metrics of actual and relative total shareholder return.

▲ The outstanding three-year performance-based share awards (with a performance period ending December 31, 2009) use total shareholder return (both actual and relative to the Peer Group) as a performance-based metric for one-half of the award opportunity (sales and earnings growth metrics apply to the other half of the award opportunity). Stock price declines often adversely impact total shareholder return. As a result, all of the named executives may lose future compensation with respect to the three-year performance-based share awards if the stock price does not increase.

The Compensation Committee, the Board and the management of Schering-Plough (including Hassan and the other named executives) take pride in the performance-based compensation system, and they remain committed to maintaining the integrity of the system in good times and bad. Accordingly, should the current (or future) challenges result in lagging performance in 2008, as measured by the applicable sales, earnings and actual and relative total shareholder return metrics, then compensation to executives in 2008 will be significantly reduced from the compensation reported in this proxy statement, which relates to performance periods where performance — measured by those same metrics of sales, earnings and actual and relative total shareholder return — was strong. . . .

Gee -- that makes me feel better.

Or. not. so. much.

As luck(!) would have it -- lucky for the Schering executives, that is -- the Compensation Committee of the Board measures "Total Shareholder Return" only on one day, each year -- December 31, 2007, in this case. So, all the Schering executives need do, is manage to the window-dressed year end, right?

Does this make the stock price decline any less real in the board's collective mind, for the rest of the Schering shareholders? Odd.

LATER UPDATE: I forgot to mention, in addition, that for every $1 Mr. Hassan can keep Schering common stock from falling, he "saves himself" $4,070,799.30, beginning May 1, 2008 -- and once May 1, 2009 passes, he'll save himself $4,422,799.30, for each $1. This will be true, even if the Board never awards him another single share, or option. Said another way, for every $1 decline in Schering stock, Mr. Hassan loses over $4 million of value -- a very powerful incentive to try to stabilize the recent Schering stock price slide. From a closing price of $27.24 per share, on January 10, 2008 -- to $ 16.55, the close on April 14, 2008, then, Mr. Hassan has seen his equity value drop by over $43.5 million (albeit a not yet realized, or paper, loss -- as he hasn't sold anything to "fix" these declines).

This is why it is so terribly important to find scrupulous CEOs -- and/or retain very tough Compensation Committees -- at the Board of Directors level. Otherwise, the whole exercise simply becomes one long gravy-train for extreme upper management.

That admission -- the "backhanded gravy-train" admission -- at Dot Point 1, above, quoted from the Compensation Report (at page 22) of the just-filed 2007 Schering proxy -- says a lot more about the Schering-Plough Board, and its supposedly-independent, pro-active Compensation Committee, than it does about the Schering executives, actually (after-all, why would they ever push away from the table --"No, really, Uncle Hans -- I'm stuffed! I can't eat even one more gravy-laden biscuit!"). And that is unfortunate for all affected communities -- Schering employees, stockholders, customers, suppliers, the pill-poppin' public, and the doctors prescribing 'em. . . .

One constructive suggestion for "Uncle Hans" Becherer -- the Chair of the Compensation Committee at Schering: Why not measure "Total Shareholder Return" eight times a year? Once at each quarter end, and once at each quarter's mid-point? Then average 'em all out. Why wouldn't that be "more aligned with shareholder interests" than managing to a window-dressed December 31?

But maybe I'm just surprised that the Board has paid this much, for presiding over a flawed study, one that flat-lined the flagship franchise. . . . I dunno.

[UPDATED: It seems that Schering's "designated" Compensation Consultant, Ira Kay, of Watson, Wyatt [and a recent, and repeating, visitor to this blog! Big Wave, here!], on behalf of his patron, Hans Becherer, the Chairman of the Compensation Committee of Schering-Plough's Board of Directors, has decided to remove "Growth in Market Capitalization" as one of the general metrics upon which Executive Compensation levels were judged, in 2007. It was one of the metrics in the 2006 proxy (page 25), rising from $25.5 billion in 2004, to $35.5 billion in 2006. For 2007, by my lights, the analogous number would have been only a little more than $39 billion -- nothing like the rise in prior years. This is due to the fact that the Schering stock price had already begun to decline, due in large part to investigations, by Congress, of the ENHANCE matter, by December 31, 2007. So -- while 2006 showed 38 percent growth from base (2004) levels, there would have been scant growth in this metric for all of 2007. Could this be why it was spiked?]

CEO Fred Hassan's Call Transcript Now Online. See the Dodge.

Here it is, courtesy of seekingalpha:

. . . .Jamie Rubin - Morgan Stanley:

Wait, wait. And what about my other question... my first question, on Merck's more specific VYTORIN, ZETIA guidance?

Fred Hassan - Chairman and Chief Executive Officer:


Robert J. Bertolini - Executive Vice President and Chief Financial Officer:

We will [not?] provide numeric guidance Jamie.

Fred Hassan - Chairman and Chief Executive Officer:

Yes, Jamie, I think you did hear the market share delta between March and December and then you also heard that there's another drop that's occurred after the ACC. I think what I said is that there is no model that we can relate to that would... that can give us any prediction. The previous models have been related to side effect issues and we have a very strange situation here where there's a U.S. media driven situation which is quite different from outside the U.S. There are no months to be looking at here. But the reality is that science is strong and we're going to work hard to recapture a lot of the market share that we've lost. It's hard to predict when that recapture will start to occur. Because at this time there is still a lot of confusion out there only in the U.S. market. . . .

[Emphasis supplied.]

This will not go down well, at the SEC, when compared to his Form 8-K, filed only yesterday.

It is always the little stuff. . . .

A Vytorin/Zetia Must-Read over at Pharmalot. . . .

Or, "Wish I didn’t have a Zetia contract. . . ."

I'll just let Ed Silverman do the explaining, here.

It is also true that Carrie Smith-Cox confirmed the essential accuracy of all of the-above-linked trend, on the call, this morning.

Go. Read. Now.

Vytorin Marketing, Sales Practices and Products Liability Cases to have Separate MDL designation/collection point by May 8, 2008

The various categories of suits are starting to sort themselves out (a la first day, for first-years, at Hogwarts Academy). . . . Yesterday, Judge Cavanaugh apparently held a conference on selection of an Interim Lead Counsel for the above-class of cases, and accepted a form of order (but has not, yet, entered it). The Order (purportedly agreed to by the Defendants -- Schering and Merck) sets May 8 6, 2008 as the date by which -- in all probability -- this particular class of the now 115-some cases will be coordinated under one MDL number, and represented by one lead counsel (likely with an underlying governing structure of lawyers, and law firms, beneath that lead firm).

For those of you keeping score at home, you may watch Polk v. Schering-Plough Corp., et al. (Case No. 2:08-cv-00285-DMC-MF US Dist. Ct., NJ 2008), and Case No. 2:08-cv-01506 (same court-room), for the updates, here.

I won't image a copy of the MDL order, until at all, as Judge Cavanaugh has signed and entered it, as of April 29, 2008 -- under MDL Case No. 2:08-cv-00285 -- so, things are starting to roll on this front now. Note that the Securities Fraud cases have an MDL and a Lead Plaintiff, and Lead Counsel, already -- as of April 17, 2008. That leaves the ERISA cases, and the RICO cases -- still to be sorted. So, now "Slytherin? or. . . Gryffindor? Hufflepuff. . . or, Ravenclaw?" We shall see.


Does Fred Hassan even read his own company's SEC filings?

[UPDATED:4.24.08: Mr. David P. Hamilton, at has hat-tipped my story, and done a much better job of explaining it -- as did, earlier. . . . cool!

Call transcript from seeking alpha is up. Also, it seems Mike Huckman reads this blog. See his middle 'graphs -- Eerie.]

This simply deserves its own post, from the very end of this morning's Q1 Earnings Conference Call:

The Morgan Stanley analyst, [I missed her name] Ms. Jami Rubin, just flat-out got stiff-armed, by CEO Fred Hassan, at the very end of the call -- she asked Schering to help "quantify the Vytorin/Zetia equity income declines," now expected for 2008 -- and specifically mentioned Merck's owning up to a $700 million loss of income, here.

Well, Fred essentially hung up on her.

He said "we really have no model for this scenario". That is simply false -- from Schering's own '34 Act filing (read: "carries liability for material misstatements/fraud") with the SEC, of yesterday, Schering effectively swore otherwise. Wow.

Yep, just yesterday, Schering filed a Form 8-K with the SEC indicating that its joint venture entity, an entity "under common control" (in SEC parlance, that is, shared 50/50 with Merck) had made a "range of estimates" for the equity income fall-off, in 2008. Applicable SEC literature requires disclosure of that range.

"No model", indeed. Fred -- what are you thinking? Did you even look at that Form 8-K, yesterday, before your lawyers filed it?

Or, maybe he just needs to "try the decaffeinated brands. . . . they are very tasty!". . . .[and maybe I do, too(!)].

Tuesday, April 22, 2008

Live-blogging the Schering-Plough Q1 Earnings Release


▲ Schering CEO Fred Hassan just reiterated the line that "unwarranted confusion" is what is challenging the Vytorin/Zetia Joint Venture's results. This flies in the face of his deciding to take an incremental $1 billion charge to resolve the issues -- going out to 2012. How is it possible that he needs four years of charges and restructuring to address an "unwarranted confusion"?

This simply doesn't meet the "straight-face" test.

▲ The claim was just made, on the call, that "a dozen" studies indicate lowering LDL is better for patients. That is true -- but there is no evidence that the WAY Vytorin/Zetia lowers LDL improves any cardiac outcome. Those studies involve liver mechanisms, not gut-mechanisms. We won't know until 2012 (IMPROVE-IT) whether the gut-mechanism improves outcomes.

▲ Without currency "tailwinds", Schering Q1 sales would only be up 5 percent, even after excluding all the Organon items -- a morass of back-and-forth, put-and-take, accounting.

▲ Over 80 percent of Vytorin/Zetia sales occur inside the US for the cholesterol franchise, so the growth of non-US is far less important than CFO Bob Bertonlini just implied.

▲ CFO Bob Bertolini flat-out admitted that the Q1 trends just discussed -- will not persist through the rest of 2008. "Likely to be lower. . . ."

Again, how can it be that "unwarranted confusion" cannot be cleared up? This is simply hard-to-swallow.

▲ The claim is being made that Vytorin/Zetia "efficacy" is identical to lower LDL-levels. There is simply no proof that this is "efficacy" as to outcomes.

To claim the gut-mechanism is identical to LDL "efficacy" is at best ambiguous -- and is, perhaps, misleading.

▲ EVP Carrie Smith-Cox said that most patients who switch are going to the generic Zocor. . . . [that is at about one-tenth the cost of Schering's drugs.]

▲ EVP Carrie Smith-Cox claimed that Pro Cordaptive (Merck's niacin product) is a "niche" only product -- not likely to impact the franchise. We'll see about that -- it will likely be FDA-approved next-week.

▲ EVP Carrie Smith-Cox said the resumption of "direct to consumer" (DTC) advertising for the franchise will resume when the company, and FDA, agree on it. Remember that FDA wants promotional materials changed over by April 24, 2008 -- tomorrow. It must all mean that Schering is still in negotiations with FDA about those advertising-literature, and Television-spot changes.

▲ The Morgan Stanley analyst just flat-out got stiff-armed, by CEO Fred Hassan, at the very end of the call -- she asked Schering to help "quantify the Vytorin/Zetia equity income declines," now expected for 2008 -- and specifically mentioned Merck's owning up to a $700 million loss of income, here.

Well, Fred essentially hung up on her.

He said "we really have no model for this scenario". That is simply false -- from Schering's own '34 Act filing (read: "carries liability for material misstatements/fraud") with the SEC, of yesterday, Schering said otherwise.

Yep, just yesterday, Schering filed a Form 8-K with the SEC indicating that its joint venture entity (shared 50/50 with Merck) had made a "range of estimates" for the equity income fall-off, in 2008. Applicable SEC literature requires disclosure of that range.

"No model", indeed. Fred -- what are you thinking? Did you even look at that Form 8-K, yesterday, before your lawyers filed it?

[End of Call @ 9:05 a.m., EDT.]

[Call transcript from seekingalpha is now up.]


Tomorrow morning, before NYSE open, I'll be live-blogging the Schering-Plough first quarter earnings conference call -- we should learn more about Vytorin and Zetia 'script-trends -- and the status of any write-downs to be taken inside the Schering/Merck Joint Venture, as well at Schering-Plough, proper. We will hope for an update on the status of the pending Congressional, and governmental, investigations and all the 115 pieces of litigation.

This link should anchor directly to a log-in for a Windows Media feed of the call on Wednesday.

It will likely go "live" -- at Schering -- around 7:50 a.m., EDT.


First, for the past few months, I've been guessing that Schering-Plough's share-equivalents for 2008, fully-diluted, would rise to about 1.62 billion shares. My estimate was too low -- Schering shows fully diluted Q1 share equivalents at 1.637 billion shares, making all my 2008 EPS guesses (of declines, here) slightly too conservative -- too small. Wow.

Schering will henceforth have quite a few more shares that it needs to "cover" with earnings. This is due to the decline in common stock prices, rendering the 6% Convertible Preferred. . . . dilutive, in share counts, henceforth.

Now, an a GAAP-basis, Schering missed -- $0.15 v. $0.37 expected, at the EPS line, according to FirstCall.

At the revenue line, FirstCall reported an expected range of revenue of between $4.16 and $4.80 billion -- Schering's actual Q1 was $4.7 billion, slightly above the median estimate. Net income is the story, though.

Net income available to common, at Schering, for the first quarter was $243 million (GAAP), and $543 million (Non-GAAP). HOLD ON A SECOND!! -- that means that Joint Venture Equity Income was about 95 percent of all Schering-Plough's Non-GAAP net income in the first quater.

NINETY-FIVE PERCENT!?! YIKES! [I'll go verify that those are apples to apples numbers, now -- Wow!]

Almost as importantly, Equity Income from the Vytorin/Zetia Joint Venture, on a sequential quarterly-basis, is down 9.5 percent.

That is bad. The First Quarter was over (by all but one day), by the time the ACC met, so Q2 simply must be significantly worse -- and yet, the Q1 Equity Income share for Schering was only $517 million. The Fourth Quarter 2007 Equity Income was $566 million. And there are now declines, overall, admitted to by Schering now, not just in the US market.

Remember, Merck has already admitted that its share of this equity income fall-off will be off at least $700 million for the full year.

By my rough estimates, if Schering's equity income line is off more like $900 million for the year 2008, it will cost them $0.55 per share of 2008 EPS. That may be offset, in part, by about $400 million of savings, or $0.25, on a per chare basis, from the 2008 Productivity Transformation Program, to be acheived in 2008 (total $1.5 billion through 2012) -- but that still leaves SGP with about a $0.30 per share "hole" in 2008 EPS.

Next point -- Schering is making the "As Adjusted" figures for the quarter, due almost exclusively to the purchase accounting adjustment/write-off of $688 million in total -- of which $551 million is a write -down of inventory(!) -- from the Organon acquisiton of last fall, pre-tax. Schering then shows an increase of $600 million on an after-tax basis, for having written this off. The plain implication here is that much is being buried in the Organon numbers, both historical, and pro-forma.

More soon.

Forbes is on to my story, of this morning, now. . . .

I posted on it this morning; this afternoon, Forbes is on it:

It seems Merck may have some ulterior motives, here -- Merck gets all of the profits from Cordaptive (due to be approved by FDA as early as next week), which will likely cannibalize some (more) of the Vytorin/Zetia market-share. . . .

In short, "Why share with Schering-Plough (on Vytorin/Zetia), when we have a new drug -- Cordaptive -- one that goes 100 percent to our own bottom line?"

That seems to be what Merck was wondering, softly, yesterday, and now aloud, to Forbes (off the record, of course).

The SEC -- On Disclosure of Known Trends and Uncertainties; Ranges of Material Loss Contingencies. . . .

[UPDATE:Well -- this site just had a very-interesting returning visitor "hit". See the visit image, below. These visits last up to two-hours (a few weeks ago), and over three-minutes, once again, this morning. . . . Cool!]

New Monthly IMS data out of Schering this morning -- but first (and I'll have more on this here, in a few minutes), this new text disclosure will likely not serve Schering very well, with the staff of Corporation Finance, at the SEC:

". . . .Q: What is Schering-Plough’s comment on Merck’s guidance regarding the cholesterol franchise?

A: Schering-Plough does not provide numeric guidance and does not comment on the guidance of other companies.

The Merck/Schering-Plough cholesterol joint venture developed potential scenarios about the 2008 equity income. Merck chose an estimate that is within the ranges established in those scenarios. . . .
[Emphasis supplied.]

"Hold on a sec., there, pard'. . . ." Didn't Schering announce a $1.5 billion charge, a good chunk of which will likely be booked into its First Quarter 2008 results? Now, doesn't that press release indicate that the charge is, in part due to ". . .to the confusion in the U.S. market around cholesterol management that impacts the products of the Merck/Schering-Plough joint venture, Zetia and Vytorin. . ."?

Well, as a matter of fact, yes sir -- it does. So, Schering, according to well-settled SEC law, needs to provide the range of the fall-off in the Cholesterol Franchise Joint Venture. It is clearly the reason for at least $1 billion of that charge. More on that below. [By the way, when was the last time you saw a Fortune 200 company take a $1 billion bath, and credit the write-down to "confusion"? wouldn't it be cheaper, and easier, if it were simply confusion, to get out there, with factual, forceful, proactive advertising -- and promptly "clear up" the confusion, rather than cut-out 10 percent of your workforce, and spend $1B, grande? So -- is it really "confusion", guys -- or something else? Ah, but I digress.]

The notion that Schering is not going to provide that range -- the fall-off that drove the $1 billion of incremental cuts/charges -- unless it does so on tomorrow's call -- is plainly frowned upon by SEC rules and releases. There can be no dispute that almost no number is more material to the future earnings of Schering, than the range of loss in profits now expected from the Cholesterol Joint Venture.

I'll have a cite to the SEC literature on this in a moment below, but once a range has been established (jointly by agents of Schering and agents of Merck & Co., not some third party/interloper, here!), as to a material loss contingency, the range must be disclosed (unless the loss contingency is deemed "remote" by the auditors, and that is not the case here -- what audit firm is going to take the risk that something Merck said was real, is "remote" as to Schering, a much, much smaller company?!) -- even if the actual amount, with precision, cannot be determined, by tomorrow's call.

The range must be disclosed. This franchise is over 55 percent of Schering's (previously-) expected 2008 profitability.

This is not some goofy "the-Sky-is-falling" pronouncement from a crazy blogger, here (Heh!) -- this is Schering's 50-50 Joint Venture partner, a huge public company whose lawyers decided this was material, estimable and probable -- as to their joint $5 billion business relationship. To persist in denying this, seems not only unwise from a legal point of view, it seems unsound from a public investor relations point of view.

So -- I'd expect Schering to disclose the range tomorrow -- and it will certainly be as high as $900 million (as I predicted yesterday), but may be even higher. . . . $1 or even $1.2 billion.

Other than the above, the SEC Form 8-K filed by Schering just now essentially confirmed what MRK said yesterday, about IMS trends, so I'll not repeat it here.

On to the SEC's rules and releases then -- and Reg. S-K, Item 303(a):
". . . .(3) Results of operations.

(i) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and, in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues or expenses that, in the registrant's judgment, should be described in order to understand the registrant's results of operations.

. . . .(ii) Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

(iii) To the extent that the financial statements disclose material increases in net sales or revenues, provide a narrative discussion of the extent to which such increases are attributable to increases in prices or to increases in the volume or amount of goods or services being sold or to the introduction of new products or services. . . ."


The SEC's financial statement rules, collected under Reg. S-X (which incorporate FASB releases), provide thus -- via SFAS No. 5:
". . . .Disclosure of the nature of an accrual made pursuant to the provisions of paragraph 8, and in some circumstances the amount accrued, may be necessary for the financial statements not to be misleading. . . . [Editorial Note: Remember here that Schering has indicated it will take a $1.5 billion charge, or accrual, in large part to address the fall-off in the Joint Venture's business.]

If no accrual is made for a loss contingency because one or both of the conditions in paragraph 8 are not met, or if an exposure to loss exists in excess of the amount accrued pursuant to the provisions of paragraph 8, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss or range of loss or state that such an estimate cannot be made. Disclosure is not required of a loss contingency involving an unasserted claim or assessment when there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment unless it is considered probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable. . . .

. . . .After the date of an enterprise's financial statements but before those financial statements are issued, information may become available indicating that an asset was impaired or a liability was incurred after the date of the financial statements or that there is at least a reasonable possibility that an asset was impaired or a liability was incurred after that date. . . . [T]he information may relate to a loss contingency that did not exist at the date of the financial statements, e.g., threat of expropriation of assets after the date of the financial statements or the filing for bankruptcy by an enterprise whose debt was guaranteed after the date of the financial statements. In none of the cases cited in this paragraph was an asset impaired or a liability incurred at the date of the financial statements, and the condition for accrual in paragraph 8(a) is, therefore, not met. Disclosure of those kinds of losses or loss contingencies may be necessary, however, to keep the financial statements from being misleading.
If disclosure is deemed necessary, the financial statements shall indicate the nature of the loss or loss contingency and give an estimate of the amount or range of loss or possible loss or state that such an estimate cannot be made. . . .

Occasionally, in the case of a loss arising after the date of the financial statements where the amount of asset impairment or liability incurrence can be reasonably estimated, disclosure may best be made by supplementing the historical financial statements with pro forma financial data giving effect to the loss as if it had occurred at the date of the financial statements. . . .

. . . .The SEC expands the disclosures about the nature of operations whenever a concentration exists that places the well-being of the entity at risk. The SEC believes that readers need to know about operational concentrations which, if the relationship with the concentration is severed or significantly reduced, could cause significant harm to the entity.

Concentrations come in many forms -- so many, in fact, that the SEC felt compelled to list the particular concentrations that concern it the most. Specifically, the following four concentrations require disclosure if they meet the disclosure criteria:
Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor or contributor;

Concentrations in revenue from particular products, services or fund-raising events. . . .

. . . .When an entity has a concentration that belongs on the above list, the concentration must be disclosed when all three of the following criteria are met:
▲ The concentration exists at the date of the balance sheet;

▲ The concentration makes the enterprise vulnerable to the risk of near-term severe impact; and

▲ It is at least reasonably possible the events that could cause the severe impact will occur in the near term.

The SEC defines a "severe impact" as a ". . .significant financially disruptive effect on the normal functioning of the entity." The term implies a higher threshold than a "material impact." A material impact implies information that would alter decisions about an entity and may, in turn, alter the valuation of an entity's capital stock or outstanding debt. A severe impact implies a more serious effect, one that would seriously upset the central manufacturing or marketing operations of the entity. To judge whether a severe impact is possible, the focus is on the core operating processes of the company. The question is how seriously the operating environment would be affected if the relationship with the concentration were disrupted. . . .

[Editorial Comment, here: This page had some fascinating traffic, today, no?]

. . . .The disclosure of the concentration should contain sufficient information to inform the reader of the nature of the risk caused by the concentration. Normally, this would consist of a narrative statement. The SEC only encourages the use of quantitative measures for the degree of the concentration. In addition, the SEC realizes that information about concentrations may already be presented in efforts to comply with other pronouncements such as SFAS No. 14, Financial Reporting for Segments of a Business Enterprise. . . .

The SEC mandates particular requirements for certain types of concentrations. When an entity has a concentration of customers or contributors or has a concentration of operations located outside the entity's home country, the SEC removes some judgement: The entity should always consider it reasonably possible that the relationship or operations will be disrupted in the near term. . . .

At the risk of repeating here, then, it seems obvious beyond peradventure, that if Merck & Co., at twice Schering's size, believed this estimated $700 million profit decline is probable (not just "possible"), material, and estimable, then Schering simply must disclose its own view of the range, tomorrow. Up or down -- whether it agrees, disagrees, or has some other path, here. It seems difficult to find any other lawful reading of the SEC's 30-plus years of guidance, here.

Now, consider this, from the SEC's MD&A literature:
". . . .In assessing whether disclosure of a trend, event, etc. is required, management must consider both whether it is reasonably likely to occur and whether a material effect is reasonably likely to occur. As the Commission noted when it adopted the requirement, the "reasonably likely to occur" test is to be used rather than the Basic v. Levinson probability and magnitude test for materiality of contingent events. See Securities Act Release No. 6835 (May 18, 1989) [54 FR 22427] at fns. 27-28 and accompanying text. . . ."
That pretty much seals it.

And, while not directly applicable to these facts, this is illuminating, from the Form 8-K Release, as Schering chose to make this disclosure by way of a Form 8-K, so updates are now required:
". . . .If at the time of filing the company is unable to make a good faith estimate of the amount. . . . it need not disclose an estimate at that time, but must nevertheless file the Form 8-K report describing the company's commitment to a course of action under which it will incur a material charge. Within four business days after the company formulates an estimate, the company must amend its earlier Form 8-K filing to include the estimate. . . ."

As ever, more to come.

Monday, April 21, 2008

Another Interesting Cafepharma Question, here. . . .

A reader at Cafepharma asked another question -- my answer is apparently caught in the moderation que, at the moment, over there, so here it is:

Anonymous wrote:

when will the criminal case start on insider trading -

a) Never
b) 3077
c) Already settled

your answer ??

My answer:
"I doubt it is settled already -- that would require a public SEC filing, a report -- and we haven't seen any.

As to the individual officers/directors, I think proving a criminal (as opposed to civil) insider trading case -- at least, on the facts as we now know/understand them -- would be a tall order. I think to prove that crime, one would need to show far more than just "access" to the ENHANCE data, by those who traded prior to disclosure -- while in a purely civil case, this "access", plus the top-of-market prices, might be enough to convince a court to impose a civil penalty -- or at least, to extract a civil charge settlement in deferred prosecution/negotiations with the SEC, directly, in the weeks leading up to a trial, at some 2009 date.

It is quite difficult to say, as it is all very early in the process of finding out what evidence exists, beyond what is already known by the public.

I think it would be similarly difficult (based on the public documents, thus far) to prove that the "enterprise" conspired to conduct the August 2007 $3.8 billion offerings with specific intent to defraud. That does not mean it did not happen. It just means it would be very difficult to prove. Your mileage may vary. . . .

We may learn much more in the coming months that will render this polly-anna-ish and out-of-date, but right now, I really can't see the SEC filing [sincere thanks go to Anon. No. 2, in the comments hereto, for the suggested edit!] referring a criminal case, to the DoJ, on these facts. Not on what we know thus far.

Highlights from Merck Q1 Call this Morning. . . .

[This is an update to an earlier, longer post.

It seems Fred Hassan doesn't believe this estimated range/model exists.]

From Merck's First Quarter 2008 Earnings Release:

". . . .The $700 million decrease in equity income guidance [for the full year 2008] is solely attributable to the lower anticipated contribution from the Merck/Schering-Plough joint venture. . . ."."

Editorial -- Wow! So, take at least $700 million out of Schering's 2008 expected profitability!

Schering's share of the Joint Venture downturn may be greater than a 50/50 split, though, as Schering picks up more of the expenses from the venture, and -- if certain levels of profitability are acheived, then Merck & Co. reimburses those expenses, fully. I'll go see if this sized-down-turn will mean Yep -- This means less reimbursement of expenses for Schering, and thus an increase Schering's effective "share" of the downturn may turn out to be to more like $900 million in 2008.

Remember, the new 2008 Schering cost-cutting program will likely bring only $400 million "back into" Schering's 2008 EPS (only 40 percent of the incremental $1 billion will be completed/realized in 2008).

So -- I still see, at a mininum, a $500 million reduction to Schering's profitability.

[Editorial Comment, here: This page had some fascinating traffic, on tuesday, April 22, 2008, no?]

We'll know much more on Wednesday, but on 1.62 billion share-equivalents outstanding, that will drop 2008 EPS, on a net-net basis, by at least $0.30 per share -- which means the new low 2008 EPS estimate ought to be closer to $1.10, for all of 2008. At 14 times $1.10 2008 EPS, Schering is worth $15.40. And, a multiple of 14 is very generous, in a market where Merck can only muster 1 percent sales growth. At a 13 multiple, Schering is worth $14.30 per share, today.


More from the press release:
. . . . .Combined worldwide sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), as reported by the Merck/Schering-Plough joint venture, were $1.2 billion for the first quarter of 2008, representing a 6 percent increase compared with the first quarter of 2007. Worldwide sales of ZETIA, marketed as EZETROL outside the United States, were $582 million in the first quarter of 2008, an increase of 7 percent compared with the previous year's first quarter. First-quarter 2008 worldwide sales of VYTORIN, marketed outside the United States as INEGY, were $651 million, an increase of 4 percent compared with the first quarter of 2007. The Company records the results from its interest in the Merck/Schering-Plough joint venture, which totaled $393 million in the first quarter of 2008 compared with $347 million in the same quarter a year earlier, in equity income from affiliates. . . ."

Remember three important facts not stated above: (1) ACC didn't happen until the last day of Q1 -- so this is all pre-ACC -- modest growth from Q1 2007 to Q1 2008 -- but, overall, compared to Q4 2007 -- the LAST quarter, sequentially, J/V sales are off 30 percent -- $1.5 billion v. $1.2 billion. (2) And even that "modest growth" is quite a far fall from the "up 30 percent" expected at the end of 2007. And, (3) the Street expected sales of $6.1 billion from Merck for Q1 -- Merck missed on the sales line this morning. It was only able to muster a 1 percent sales gain (even with the benefit of foreign currency "tailwinds"!), overall -- or $5.82 billion, up 1 percent from $5.77 billion in the first three months of 2007.

Now to the truly ugly:
ENHANCE Study Litigation Update

". . . .As previously disclosed, since December 2007, the Company and its joint-venture partner, Schering-Plough, have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations, and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sales and promotion of VYTORIN, as well as sales of stock by corporate officers. On Jan. 25, 2008, the companies and the Merck/Schering-Plough Partnership (MSP Partnership) each received two subpoenas from the New York State Attorney General's Office seeking similar information and documents. Merck and Schering-Plough have also each received a letter from the Office of the Connecticut Attorney General dated Feb. 1, 2008 requesting documents related to the marketing and sales of VYTORIN and ZETIA and the timing of disclosures of the results of ENHANCE. Merck and Schering-Plough also recently received subpoenas dated April 4, 2008 from the Office of the New Jersey Attorney General seeking documents related to the ENHANCE trial and the sales and marketing of VYTORIN. The Company is cooperating with these investigations and is working with Schering-Plough to respond to the inquiries. In addition, since mid-January 2008, the Company has become aware of or been served with approximately 115 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the MSP Partnership's sales and promotion of VYTORIN and ZETIA. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. Also, on April 3, 2008, a Merck shareholder filed a putative class action lawsuit alleging that Merck and its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities laws. . . ."

115 Suits. Wow.

Now we wait for the call, and the analysts' questioning of Clark. My sense of all of the conversations is that Merck is very lucky to be twice as large as Schering, at the revenue line, and to have the AstraZeneca partnership distribution to effectively fill the now-admitted "~ $700 million hole" that the ENHANCE results have recently-revealed, at Merck's J/V equity income line.

Schering, plainly, will have no such luck -- it has no other relationship on any remotely comparable scale, to back-fill with. As I type this, more than 55 percent of Schering's 2008 profitability hinges on the Joint Venture with Merck. So, the question becomes, is that newly-announced $1.5 billion cost cutting going to be enough to fill Schering's "~ $900 million hole" in 2008 profits? I -- for one -- strongly doubt it.

Next up, Schering's Q1 call, on Wednesday.