How are those 2008 Republican Donations Workin' Out for Ya', Mr. Hassan?

As this blog had noted as early as May 1, 2008, Schering-Plough generally, and Fred Hassan particularly, is giving far more (almost 11 to 1, as of March) to Republican candidates than Democratic ones, in the 2008 election cycle -- bucking an important trend reversal at other big pharma companies, at least for this cycle -- especially notable at companies like Johnson and Johnson (where giving has completely flip-flopped, this year -- now showing a 60 to 40 clip to Democrats, over Republicans, in 2008).

Schering and Hassan? They are (presently) giving about 60 to 40 -- to Republicans, over Democrats, per an Ed Silverman piece, of last week.

Thus I find it truly ironic, and delicious, to learn that Bloomberg is quoting Schering-Plough CEO Hassan this morning -- on the morning after 134 (that total including one Republican, Weller, who failed to cast any vote, as a "No") 195 Republicans in the House voted "No" to the Latest Bi-Partisan Compromise Amendment to the Original Paulson Bailout Plan -- woefully lamenting the "mess" his candidates have made of these attempts to right our domestic financial system, thus:

. . . ."It is a pity that this has developed into such a mess," said Fred Hassan, chief executive officer of drugmaker Schering- Plough in Kenilworth, New Jersey. "The probability of recession has gone up". . . .

Regardless of whether one believes this bailout fund was the "right approach" -- given Mr. Hassan's comments of this morning -- I must observe that it looks like his (and Schering's) money wasn't very well-spent, there, partner. . . .

After being sued by Schering, Orchid Pharma inks $100 million Merck Drug Development Deal

Longer-term readers will recall that Schering-Plough has sued Orchid, and several other would-be generic manufacturers (back in 2007), in what looks to be a largely vain attempt to delay the U.S. availability of generic versions of Schering's Clarinex Redi-Tabs (composed of the chemical compound descloratadine, at right). Clarinex was, until recently, a $700 million per year franchise for Schering. Orchid, an Indian company, is poised to lauch an "at risk" generic version very shortly -- perhaps by year-end 2008, or early in 2009 -- and thus has the most skin in that patent lawsuit game.

Now, thanks to the keen eyes of Ed Silverman (H/T) -- we learn that Schering's 50 - 50 partner in the cholesterol joint venture, Merck, has inked a deal with an Orchid subsidiary to spend $100 million in pursuit of new anti-infection compounds, among other classes of drugs. Quoth the article, out of India, that Ed links:

. . . .Orchid Chemcials and Pharmaceuticals today said that it has entered into an arrangement with US drug maker Merck & Co Inc for discovery and development of novel anti-infective drugs which holds a potential revenue stream of over $100 million.

While the deal has been signed by the two parties with an undisclosed upfront payment from Merck to Orchid the flow of money to Orchid would depend on milestones achieved over the next five years, said K Ragavendra Rao, managing director of Orchid Chemicals.

The arrangement is such that at the end of the drug discovery cycle, Orchid will hold the global patent for the molecules with an exclusive arrangement with Merck for licencing for commercialisation. Orchid expects to manufacture the drugs while Merck will market it across the world. The potential market for a the drugs yet to be discovered is estimated at $1 billion annually.

Orchid Chemicals’ fully owned drug discovery subsidiary Orchid Research Laboratories Ltd (OPLL) will be undertaking the research and development of new drug(s) in the anti-infective therapeutic area [and anti-inflamatory area]. Orchid Chemcials’ chief scientific officer, B Gopalan will be heading this initiative. Gopalan, who specializes in new drug discovery, joined Orchid Chemicals six months back after three decades of experience in various drug companies includes Boots and Glenmark. . . .

Does this presage an unwinding of the much-larger so-called Cholesterol Franchise Joint Venture Governance Agreements, to be announced on the third quarter conference calls of each company -- on October 21, and 22, 2008? I guess we shall have to wait -- and see.

"They say it's good to leave the fun part for last" -- Dr. Akira Endo, on his Lasker Award. . . .

On September 15, this blog noted that Dr. Akira Endo had won a Lasker Award for his discovery of the cholesterol-lowering properties of the family of drugs now called statins, thus creating a $30 billion world-wide market, and providing real cardiovascular outcomes improvements for literally millions of patients -- patients for whom diet and exercise simply haven't gotten the job done.

A couple of days ago, The Wall Street Journal posted a short video interview with Dr. Endo, on his pioneering work, and the joy of winning a Lasker for it -- do take a look.

How does he rank the step-order priority for a high-cholesterol treatment protocol?

. . . .In those cases wehere diet and exercise aren't enough, then a statin should be considered. . . .

Conspicously absent is any mention of Zetia or Vytorin -- even as a third line treatment -- on the rare occasion where statins aren't well-tolerated.

Interesting.

One Trend-Buster: A High-Flying Pharma Sector Stock -- Vertex -- on Hep C Candidate-Trials. . . .

. . .Meanwhile [as Merck prepares to let us all know how much the woes of Vytorin/Zetia will affect it (and Schering) in the future], Needham Securities just this morning upgraded Vertex to a "Buy" -- from "Hold" -- and Vertex is up another almost 5 percent today, trading at $34.50, as I write this. That bumps the post-public secondary offering gain (priced at $25.50) to almost 36 percent in eight days. Wow.



Sweet! -- add about 20 percent -- to the above chart, for Vertex. [The background -- on this action -- is here.]

On the Day AFTER Schering Reports Q3 Results, Merck Will Update 2008 to 2010 Guidance

This ought to make Schering's call interesting. Merck has elected to let Schering-Plough "go first" -- in announcing Third Quarter 2008 results. Then, the next morning, on October 22, 2008, Merck will announce its results and update the guidance it suspended, and withdrew after the SEAS trial top-line results were announced -- back on July 21, 2008.

Schering won't be able to hide behind Richard Clark's Italian-cut, pin-striped, double-breasted, big-shouldered suits much longer, now. From Merck's release:

. . . .During the [9:00 a.m. EDT, October 22, 2008] call, Richard T. Clark, chairman, president and chief executive officer, Peter N. Kellogg, executive vice president and chief financial officer, and Kenneth C. Frazier, executive vice president and president, Global Human Health, will provide an overview of Merck’s financial performance for the quarter plus 2008 and 2010 financial guidance. . . .

Interestingly, per the above, Merck will conduct its call during the NYSE trading day -- suggesting either that (1) Merck will want the markets to be able to react, in real time, to some fundamentally important news (more likely, in my estimation) -- or, (2) Merck does not expect the call to be Earth-shatteringly-material (less likely, IMO). Either way, Schering has scheduled its for before NYSE market open (per its usual practice), on October 21, 2008. It should all be rather droll -- so circle both mornings in red, on your calendars. I know I have.

And what of those Cholesterol Joint Venture Agreement Amendments Schering apparently never bothered to file with the SEC, as required by Instruction 2 to Item 601 on SEC Regulation S-K?

Wow. Pop-up some Jiffy-Pop popcorn!

MDL 1938: The RICO Violations -- Amended Consolidated Complaint Counts

Yesterday, we looked at the newly-detailed "mechanisms of delay and/or negation" of the ENHANCE study results, all as allegedly carried out by Schering's senior management. Today, we take a peek at the newly-detailed, and amended civil RICO (Racketeering) counts -- beginning with paragraph 257 on page 80, et seq. [Here's a link to the full PDF complaint file -- Warning: very large download!]:

. . . .257. The predicate acts committed by Defendants were and are similar, continuous, and related. From at least 2004 to the present, Defendants were aware that they had no scientific basis to claim that Zetia and Vytorin, compared to Zocor alone, reduced or slowed the growth of arterial plaque. However, notwithstanding this knowledge, Defendants heavily promoted, and continue to promote, Zetia and Vytorin’s purported distinct mechanism of action as an advantage in treating high cholesterol, claiming overall health benefits as a result, including cardiovascular benefits. Defendants’ marketing of Vytorin consistently focused on reducing the health risk associated with high cholesterol, including plaque formation leading to heart disease, heart attack, and stroke. Defendants’ advertisements explained the nature of cholesterol, the difference between good and bad cholesterol, the fact that excessive LDL cholesterol levels cause arterial plaque formation, and the adverse health risks associated with excessive plaque, including heart disease, heart attack and stroke. Defendants have consistently marketed Zetia to payers, consumers, and physicians as a drug that lowers LDL cholesterol in a “different” manner, stressing that lowering LDL is important because LDL causes plaque to build up in arteries. Defendants’ website for Zetia is titled “A different way to fight cholesterol” (emphasis in original). It states, “ZETIA works differently,” going on to contrast Zetia with statins. Neither the Zetia nor the Vytorin website explained that the “different” or distinct ways these drugs work produces no cardiovascular benefits for the patients taking them. Defendants uniformly omitted all mentions of the ENHANCE study, which would have negated Defendants’ claims about the purported benefits of Zetia and Vytorin. This consistent message of a “different” approach to lowering cholesterol and the uniform omission of all mentions of the ENHANCE study illustrate how Defendants’ predicate acts of mail and wire fraud were similar, continuous, and related.

258. The victims of Defendants’ predicate acts of mail and wire fraud number at least in the hundreds of thousands, and may number in the millions based on the number of Zetia and Vytorin prescriptions and their volume of sales. The cholesterol-reduction market is the single largest pharmaceutical category in the world. Unlike Zocor, which is now subject to competition from generic simvastatin, Zetia and Vytorin command name-brand prices. Generic versions of Zocor sell for 75 cents to $1 per day at most retail pharmacies, and as little as 10 cents per day at discount pharmacies. Prescriptions for Vytorin and Zetia, on the other hand, each cost roughly $3 per day. Notwithstanding their high costs relative to available generic statins, Zetia and Vytorin represent nearly 20 percent of the American market for cholesterol-lowering drugs. In 2007, 800,000 prescriptions for Zetia and Vytorin were written weekly in the United States. Given this high volume of prescriptions, the number of victims of Defendants’ predicate acts of fraud number in the tens to hundreds of thousands.

259. Defendants’ fraudulent scheme involved the repetition of similar misrepresentations, which were made to hundreds of thousands of consumers, physicians, and health insurers.

260. Defendants’ scheme was calculated to ensure that Plaintiffs and the Classes would pay for Zetia and Vytorin despite the ready availability of less expensive, safer and effective alternatives.

261. Each of Defendants’ fraudulent mailings and interstate wire transmissions constitutes “racketeering activity” within the meaning of 18 U.S.C. § 1961(1). Collectively, these violations are a “pattern of racketeering activity” within the meaning of 18 U.S.C. § 1961(5). . . .

It just keeps pouring in Kenilworth.

Massive 98-Page Consolidated Amended Complaint Filed Today in Polk v. Schering Plough, et al.

In much the same vein that the ENHANCE Securities Fraud Amended Complaint broke new legal ground, so too, does today's In Re Vytorin/Zetia Marketing, Sales Practices and Products Liability Litigation (MDL 1938) complaint. Significantly, it recites information clearly obtained from the very same "confidential witnesses" in the ENHANCE securities fraud suit -- but, again, refrains from specifically identifying them. I am certain these various camps are paying close attention to, and cribbing from, one anothers' filings -- and quite wisely so.

The other new wrinkle here, is the newly-added detail, and fine-patina, on the various mechanisms Schering's upper management used to (allegedly) supress the ENHANCE results for almost 24 months. And again, Mr. Hassan's, and Ms. Cox's names are prominently associated with these efforts -- efforts to negate, or delay, the ENHANCE results. All allegedly. Ahem.

I will have more on this tomorrow, but let's dive right in -- at pages 30 to 35, Paragraphs 72 through 97 (and 110) of the newly-filed complaint. I'll likely put up a link to the full PDF file, tomorrow.

. . . .Defendants Initiate a Scheme To Suppress the ENHANCE Study Results

72. In response to these results, Defendants immediately delayed public release of the information. In June 2006, a Schering-Plough executive told investors that the ENHANCE data would be ready by the end of 2006, meaning that the results of the study would not be announced, as originally planned, at the American College of Cardiology meeting that fall. At the time, this postponement received little notice in the medical community, since drug studies
frequently are not released on schedule.

73. However, Defendants did not withhold announcement of the ENHANCE results because of ordinary delays in producing a drug study. They delayed because upper management at Schering-Plough already knew that “they were not going to get any good news” from ENHANCE. A former Senior Medical Director in Schering-Plough’s Cardiovascular group, who worked with Schering-Plough’s “Brand Team” during the time that the ENHANCE data was being gathered and finalized, has advised that Schering-P lough performed quality control assessments of the ENHANCE data in late 2005 and 2006. Updates on the progress of the ENHANCE study were shared at the quarterly Brand Review Meetings led by Carrie Cox, Schering-Plough’s Executive Vice President and President of Global Pharmaceuticals.

74. Dr. Kastelein, ENHANCE’s primary investigator, was prepared to publish ENHANCE’s results in early 2007 and present them at the meeting of the American College of Cardiologists in the Spring. However, Defendants sought to further delay publishing the results, in order to find a way to either negate or mitigate the findings of the ENHANCE study.

75. As part of their scheme, in January 2007, Merck and Schering-Plough, through MSP, hired Dr. Michiel L. Bots, M.D., Ph.D., Associate Professor of Epidemiology at the Julius Center for Health Services and Primary Care of the University Medical Center of Utrecht in the Netherlands, as an “independent consultant.” Defendants asked Dr. Bots to advise them about, and to write a report detailing, purported problems with ENHANCE’s CA IMT measurements.

76. Dr. Bots provided Merck and Schering-Plough his report on or about January 26, 2007. The plan to use Dr. Bots to undermine the ENHANCE study results had backfired. He found no problems with ENHANCE data that justified any delay in releasing the study’s results.

77. According to the Bots Report, Merck and Schering-Plough set up three meetings in Amsterdam at the Core Echo Laboratory, where the image database was housed, to address the companies’ purported concerns – one meeting on January 16, 2007 and two on January 18, 2007. The Bots Report defined Dr. Bots’s objectives as:

(i) determining if the reading of the ultrasound images had been done according to the pre-established protocols for the study; and

(ii) determining how to address “outliers,” which were large differences in CA IMT
measurements between visits one week apart, which “were beyond what was to be expected from normal progression.”

78. Dr. Bots wrote in his report that at the January 16, 2007 meeting, “the core lab showed how the measurements were done.” Based upon this presentation and his discussions with the ENHANCE study team, Dr. Bots concluded that the CA IMT measurements “were indeed done in a manner that was described in the protocol.” Twice more, Dr. Bots’s report stated that the “CIMT measurements seem to be done according to the procedures outlined in the protocol.” On this issue, Dr. Bots concluded that the “CIMT measurements in ENHANCE have been done in a consistent manner, leading to reproducibility findings that compare well with that of published studies from other multi-centre randomized trials.”

79. On the purported “outliers” issue, Dr. Bots again found no problems with the ENHANCE data. Dr. Bots stated that the “core lab has re-evaluated all the images of the visits 3-4 [the first two measurement visits] that had a CIMT value that was 50% or more different” and re-evaluated similar images from visits 13-14 (the last two measurement visits). However, with respect to the “mean absolute CIMT difference and the standard deviations,” Dr. Bots concluded that “data are well in line with the studies that have been published in the literature. Based on those findings there seems to be little concern regarding the validity and precision of the data.”

80. Analyzing “how the reproducibility based on the original data changed when the ‘corrected’ outlier data were used,” Dr. Bots found that “[t]his improved . . . the standard deviation of the mean differences” but “the improvement was very modest.” Dr. Bots concluded that the “variability due to imaging and reading” was “excellent” and that the statistician’s concerns about results were “beyond biological variation.” In short, Dr. Bots found no reason to question the ENHANCE trial’s data.

81. The Bots Report addressed the issue of missing data: “Of the common carotid segment CIMT was missing for 4% of the participants, for the bifurcation segment 12% and for the internal segment 12%.” While “[m]issingness may affect the CIMT value,” Dr. Bots concluded that these figures were “in line with observational studies” and that “the current statistical models that were used in the analysis of CIMT trial data do appear to take care of that in an adequate manner.” Dr. Bots further rejected any concerns, saying:

Since the study was blinded, and the sonographer can not identify which participants were “progressors” and which participants are “regressers,” the effect of missing imaging information is likely to be a random phenomenon.

82. Dr. Bots concluded that all of the supposed issues with ENHANCE’s data that Defendants raised after the fact amounted to nothing.

83. The “Conclusions” section of Dr. Bots’s Report summarizes that “the evidence to me is sufficient to indicate that the data are fine.” In the Report’s “Summary” Dr. Bots likewise stated that “the evidence shown to me is sufficient to indicate that the CIMT data in ENHANCE are fine: i.e., no better, no worse than what has been reported in the literature.”

84. With Dr. Bots’s categorical confirmation of the validity and reliability of the ENHANCE data, Defendants then sought another way to negate the unfavorable study results and to further delay disclosure of the study results.

85. Defendants now suggested changing the way CA IMT was measured through selection of images, or changing the parameters used to define outliers. Dr. Bots refuted these suggestions also, saying they would change nothing:

[It is] [i]mportant . . . to realize that the above mentioned activities might reduce measurement variability to some extent. Since this is expected to involve only a small number of the measurements, the expected effects on variability are likely to be modest. Again, randomization protects against bias in the estimate of the difference between treatment arms.

86. Dr. Bots did not serve Defendants’ purpose, because his Report found no material issues or problems in following the protocols for the ENHANCE trial, taking and recording the CA IMT measurements, dealing with outliers, or addressing missing data. Dr. Bots’s Report supported immediate release of the ENHANCE results, not the delay for which Defendants had hoped Dr. Bots would provide a scientifically plausible pretext.

87. Defendants were aware of the concern surrounding the delay in the release of the ENHANCE study and were already attempting to downplay the importance of the study. For example, at Schering-Plough’s earnings report conference call on April 19, 2007, Tim Anderson, a Prudential Equity analyst, asked Schering-Plough’s new CEO, Fred Hassan, if he was “worried about the outcome of the [ENHANCE] trial,” Mr. Hassan responded by saying, among other things, that “the data analysis is ongoing for the ENHANCE trial,” and that the study “is a surrogate market trial in a very special population with very special doses. There is a much larger trial called the IMPROVE-IT trial which is more of an outcomes trial . . . . [W]e are pretty confident about the overall pattern of data for VYTORIN.”

88. Mr. Hassan did not mention that ENHANCE had demonstrated that Zetia plus simvastatin was no better than simvastatin alone. Mr. Hassan’s qualification that ENHANCE studied only “a very special population with very special doses” and his quick, subject changing jump to discussing other studies and “the overall mix of the data” strongly imply his knowledge of ENHANCE’s bad results and Defendants’ continued scheme to obfuscate and conceal the negative results.

Defendants Further Delay The Release Of The ENHANCE Results

89. After the ENHANCE study was not presented at the American College of Cardiologists meeting in the fall of 2006, the ENHANCE study was rescheduled to be presented at the meeting of the American Heart Association in the fall of 2007. But Defendants also caused that presentation to be cancelled, apparently to Dr. Kastelein’s frustration. On July 6, 2007, in an e-mail5 to Dr. Enrico Veltri, Group Vice President of Global Clinical Development at SPRI, Dr. Kastelein wrote:

Is it correct that SP has decided not to present at AHA, but to await the two other, completely unvalidated endpoints, which analysis is going to take us straight into 2008??!?? If this is true, SP must have taken this decision without even the semblance of decency to consult me as PI of the study. I can tell you if this is the case, our collaboration is over . . . this starts smelling like extending the study for no other then (sic) political reasons and I cannot live with that.

90. Dr. Kastelein communicated with other senior SPRI researchers, asserting no good reason existed to delay disclosing ENHANCE’s results. On July 6, 2007, Dr. Kastelein sent the following email to Schering-Plough’s Dr. John Strony:

Dear John

[I]s it correct that SP has decided not to present at AHA [the American Heart Association conference from November 4-7, 2007], but to await the two other, completely unvalidated, endpoints, which analysis is going to take us straight into 2008 ??!!?? If this is true, SP must have taken this decision without even the semblance of decency to consult me as PI [principal investigator] of the study. I can tell you that if this is the case, our collaboration is over and I will take the appropriate steps to get in touch with the editors of major Journals as well as with the FDA. This starts smelling like extending the publication for no other then [sic] political reasons and I cannot live with that. This is the second day of a long overdue holiday after a terrible year, thank you very much for yet another terrible chapter of this trial.

91. Dr. Strony responded and explained away the delay as follows:

The timeline for the reading of the femorals alone has been a movingtarget [sic]. First it was 8 weeks, then 12, and then 16. This is under the assumption of having 4 readers. However, one of the four has failed qualification and now we are down to three. If all runs smoothly (whichhas [sic] never happened in ENHANCE) we are told it will take 17 weeks for the primary readings. Don’t forget the querying process and clean-up which is still not factored. . .

92. Dr. Kastelein replied to Dr. Strony on July 7, 2007, copying the message to Dr. Enrico Veltri, SPRI’s Group Vice President of Global Clinical Development, Cardiovascular & Metabolic Diseases:

I have been travelling half the globe in the last 6 months to a number of large and important meetings at the strong wish of Merck to chair them or to present ezetimibe data. At every single one of them I was cleared to say that ENHANCE would be presented by me at AHA. There is no reason whatsoever to include femorals; you will be seen as a company that tries to hide something and I will be perceived as being in bed with you

93. Dr. Veltri responded to the July 7, 2007 email. Dr. Veltri tendered still another excuse for delaying disclosure of ENHANCE’s results.

94. Still not satisfied, Dr. Kastelein sent the following e-mail on July 13, 2007:

Dear Rick,

I am glad you took the trouble of providing me with such a long answer. The raging part of my former emails comes from an enormous amount of frustration and a feeling that I have no control whatsoever on anything that relates to ENHANCE. As you know, in my normal state of mind, I am a controlled individual and I am not hard to work with. However, in all my previous experiences as a member of a Steering Committee or as a PI [primary investigator], I felt I was in control. With ENHANCE, that is totally the opposite.

The database is at SP, consultants like Gene Bond are in my opinion impossible to work with and never agree with me, Bo Yang has made several crucial mistakes on the way that cost us 9 months, Eric is a nightmare to work with in terms of organization and I can go on and on. The last example of this “never working with me” is the fact that you have decided to withdraw the abstract. This is not necessary. You could have sent in an empty abstract that as my friends at AHA tell me can be filled with data one week before AHA itself and if you were too late, you simply withdraw it. One phone call to me would have cleared all of this. This is exactly what I have done with Pfizer for the Torcetrapib latebreakers at ACC this year. The data were ready 3 days before ACC.

Also, I am constantly under pressure from Merck to plan all sorts of activities, before, at and after AHA. Because I !! will be the one who have [sic] to stand up and present and defend the data, and I would deeply appreciate being involved again and not just simply at the end of a long decision line.

95. On August 20, 2007, seven months after issuance of Dr. Bots’s Report, and after Dr. Kastelein’s requests to publish the data had been rejected, Dr. Kastelein met with Merck and Schering-Plough executives to discuss releasing the ENHANCE results. Merck and Schering-Plough demanded that the test data be reviewed yet again. Under pressure, Dr. Kastelein agreed to their request to convene an expert panel to further analyze the issues Defendants had invented regarding the data’s reliability.

96. The panel’s members included John Robert Crouse, M.D. of Wake Forest University; James Stein, M.D., of the University of Wisconsin; David Orloff, M.D., of Med Pace, Inc., Cincinnati; Greg Evans, M.S., of Wake Forest University; and Dr. Bots, author of the aforementioned Bots Report.

97. Having extracted Dr. Kastelein’s agreement to the formation of the expert panel, Merck and Schering-Plough continued to stall. They did not convene the independent expert panel until mid-November 2007. . . .

110. Merck’s and Schering-Plough’s effort to manipulate the panel by showing them only the worst slides, and by using highly pejorative descriptions of those slides, creates a substantial inference that Defendants knew the content and ramifications of the ENHANCE results, and the negative impact such facts would have on Defendants’ marketing strategy and market share, long before they disclosed them. . . .

By then, Congress was already investigating the almost two year delay.

More to come -- including the Full, Amended Consolidated Complaint (Large PDF File).

Great stuff on Merck and Schering at Ed Silverman's Pharmalot -- of "Transparency". . . .

He is right on time, here -- do go read it all:

. . . .Today, Merck has joined the party. The drugmaker issued a statement saying next month, grants to patient groups, professional medical societies and other organizations will be posted on its web site. Next year, payments to docs who serve as speakers will also be posted. Also next month, Merck will post study results on the ClinicalTrials.gov site.

These steps are occuring before the Physicians Payments Sunshine Act even becomes law (back story). Who’s next? How far will they go? And what about Schering-Plough? Will it win the Tin Ear award again next year?

I'd bet the Whole Ranch on it, here, Ed! Strongly bucking yet a[nother] clear trend in pharma, Schering's political donations in 2008 (image) remained heavily skewed to the Republican side of the ticket, in most races. Most of its fellow-pharma big-hitters have come much closer to parity, this year -- and several (including JNJ) have actually given more to Democrats than Republicans.

[I realize it's a tangent, above, but I've been meaning to post on it for about a week -- having noticed that Ed had also posted, this week, on the larger trend, earlier.] Here is Schering's earlier letter on the topic -- it is largely non-responsive, as you will see -- just for the record:

Vertex Common Stock: up 31 percent from Secondary Offering Price of $25.50, on September 18, 2008

Yesterday, VRTX rose about 16 percent on the day, now up another 6 percent this morning (Just for those keeping score at home, I had predicted a strong stock price effect for this data, about 20 days ago). I'd say that Teleprevir, the company's next generation Hep C candidate, has hit each of its pre-market trials out of the park. See this update, of yesterday, for more on the results -- the Vertex candidate outperformed the Schering candidate by a margin of more than two-to-one -- 81 percent response v. 35 percent response. So, an outfit called JMP Securities (no relation to JP Morgan Chase, nor Pinnacle) has upgraded its outlook on Vertex -- to "Outperform" -- just this morning.

. . . .On Wednesday, the company said 85 percent of patients taking telaprevir twice a day with the drugs Pegasys and Ribavirin had undetectable levels of hepatitis C after four weeks, while 68 percent of those taking the drug with Peg-Intron and Ribavirin had undetectable levels. Taking the drug three times daily, the percentages were 82 percent for the Pegasys combination and 71 percent for the Peg-Intron combination, respectively. The midstage study involves 161 people. . . .

These are smaller study populations -- but we're seeing very-strong efficacy -- no doubt. And so is Wall Street -- with 2 to 3 million still-largely latent Hep C infections, in the US alone.



Once again, Goldman Sachs (lead banker for the $25.50 common stock offering of last week) look to be "the smartest guys in the room". . . . the bank (and/or its clients) watched its holdings rise 31 percent in seven days. Warren Buffett was no fool to "stake" the Goldman firm a cool $5 billion this week, amid the market turmoil, either.

Interesting Testimony Before Congress -- on Determining Insurance Coverage

During the September 23, 2008 Senate Finance Committee Hearing (see webcast at that link) on US Health Care Reform -- Covering the Uninsured, the following prepared remarks, among others, were offered by a former chief actuary of Humana, John Bertko. I offer them for the public service/educational value they hold -- do take the time to read it all (PDF file) through -- you may find (as did I) that there are several entrenched practices working to decrease the ability of insurers to reform their own practices. They will plainly need legislative relief from some of these rate-setting mandates, in order to deliver more affordable care to more Americans:

. . . .The private health insurance market in the U.S. is frequently described as three separate segments: the Individual insurance market, the small group segment for employers with 2 to 50 employees, and the large group segment for employers with more than 50 employees. Each segment has different rating practices and regulation. To give an idea of the size of these
segments, there are:

• About 17 million covered individuals in the Individual Insurance market

• About 30 million in the Small Group market

• More than 120 million in the Large Group market.

Rating practices, or setting premium rates, differ for each of the segments and also differ by state. Premium rating is mostly regulated by state insurance law but also follows the requirements of several federal laws, including ERISA (for large employers mainly), COBRA (for extension of benefits coverage) and HIPAA (for certain provisions related to group insurance waiting periods and insurance continuation plans). I will provide a very brief summary of the rating methods used by private health insurers.

Individual Health Insurance Segment

For the Individual health insurance market, there are two distinct approaches to rating methods allowed by states. For five states, insurers in those states must offer policies to all applicants (guaranteed issue) and are limited to rates that are similar regardless of health status, called adjusted community rating. For these states, rates will generally vary by age and gender but not with health conditions.

In the other states, individual health insurance policies are underwritten, meaning that past health conditions of individuals are examined and rates are set according to the health risk of the applicant. Generally, there are three possible outcomes:

• An applicant answers a variety of health status questions and is underwritten as a “standard risk” and receives an offer of insurance at standard rates that are generally lower than those for an employee or dependent in the employer market. This occurs since the person is found to be healthy at time of policy issue, rather than being of “average health” typical of an employee or dependent of an employee.

• An applicant with some past or current health conditions might be offered a policy at higher rates than average (called a “rate up” offer) or with coverage of certain specified conditions excluded for a period of time (called a “pre-ex” offer).

• Some applicants with more serious health conditions will be denied coverage since the insurer would not be able to charge a sufficient premium in an underwritten market to pay for the average claims for these individuals.

In underwritten markets, about 70% of applicants will qualify for standard policies, about 15-20% will be offered policies at higher rates or with pre-existing conditions not covered and about 10-15% of applicants will not be offered any coverage. Additionally, agents or brokers may inform some individuals interested in obtaining coverage that they are likely to be denied coverage, so there is another group of people who do not apply for individual insurance coverage at all.

Individual health insurance rates in states allowing underwriting can vary with age and gender and with health status. On average, rates for the under-65 population may vary by an actuarial factor of 6:1 (or so) without regard to health status, meaning that rates for the oldest group (say, in the 60-64 year old bracket) will be six times the rate for the youngest adults (18-24 year old bracket). Some states place restrictions on the total variance of premium rates, including health status, but generally rates offered to those with health conditions will not exceed twice standard rates offered to the healthy individuals of the same age.

In 32 states, individuals who are denied coverage might be able to obtain coverage from High Risk Pools (HRPs), if they can afford the HRP premium and there is capacity in the HRP. About 200,000 Americans are covered by HRPs, with an average of about 6000 individuals in each state HRP. Premiums in the HRP are usually 200% to 250% of standard premiums paid by individual applicants and are heavily subsidized by insurance assessments or other funding sources in addition to the premiums charged. Access to a HRP is generally limited by the amount of subsidy available in a state and by the ability of a HRP applicant to afford the higher HRP premium.

Small Employer Segment

In the Small Group (SG) market, all states have followed HIPAA provisions and require Guaranteed Issue. This means that any small employer will be made an offer of insurance as long as certain requirements are met: typically, these include some minimum employer contribution requirement and participation or alternative coverage for all or nearly all employees.

Premium rates in the SG market are generally subject to rating band limitations, determined first based on “case characteristics,” consisting of age and gender of employees, location, number of employees and type of insurance product, which determine the “manual” or average rate for a premium. Then, in most states a factor for health status or industry is applied to calculate premium rates within certain rate bands. Model legislation from the National Association of Insurance Commissioners (NAIC) specifies that rates may deviate from the manual rate by no more than + or – 35%. However, there are variations in many states and the most common rate band is +/- 25%. A few states also specify Adjusted Community Rating in which no variation by health status or other factors is allowed.

Large Employer Segment

For large employers with more than 50 employees, premium rates are determined either from an individual firm’s claims experience or from a blended average of manual rates and claims experience. Firms with 500 or more employees are almost always experience-rated, meaning that their past year of claims experience is projected with health insurance trend to determine future premium rates. In addition, many of these firms are self-funded, meaning that the insurance risk for future claims is borne entirely by the employer, perhaps using re-insurance as protection against the possibility of catastrophic claims. For both these larger firms and for the smaller firms choosing to purchase insurance, there are generally no restrictions on premium rates that are charged. Regulation of the large employer market is split between limited state regulation and ERISA.

Some states regulate all health insurance rates to assure that they are necessary and adequate, but without formal limits on rates that can be charged. Larger self-insured employers generally use the ERISA exemption from state regulation to allow them to offer the same benefits for multistate locations.

Key Issues

There are at least two major issues in private health insurance market today: affordability and access. As you may know, the average health insurance premium this year is around $13,000 for a family covering two adults and children. Even with an average employer subsidy of 75%, this amounts to an employee payroll deduction for health insurance of over $3000 per year for the average employee. Out of pocket cost sharing generally amounts to about 20% of covered services in addition to payroll deductions for premiums. . . .

Indeed.

Judiciary Chairman John Conyers (D, MI) to Host Forum on Universal Healthcare

Congressman John Conyers, Jr., Chairman of the House Judiciary Committee, and Dean of the Congressional Black Caucus, will host be hosting a health care issue forum entitled, "Guaranteed Affordable Health Care For All In America: A National Symposium On Politics, Policy, & Possibilities For Change In America." during the upcoming Congressional Black Caucus Foundation’s Annual Legislative Conference, September 24-27, at the Walter E. Washington Convention Center, 801 Mount Vernon Place, NW, Washington, DC.

The health care forum will be held Thursday, September 25th, at 2pm, in room 209A. Panelists will include:

Dr. John Santa, director of the Consumer Reports Health Ratings Center at Consumer’s Union

Professor Leonard Rodberg of Queens College at the City University of New York and Research Director of Physicians for a National Healthcare Program’s New York Metro Chapter

Rep. Steve Cohen of Tennessee, Member of Congress

Mohammed Akhter, President of the National Medical Association;

Herbert Smitherman, co-author of Taking Care of the Uninsured: A Path to Reform

Marcia Dyson of Georgetown University

The event is free and open to the public.
Congressman Conyers made the Following statement regarding his upcoming issue forum:

. . . .I am very excited to be hosting my annual health care issue forum at the Congressional Black Caucus’ Legislative Weekend. This year, my forum will explore how our health care crisis affects economically disadvantaged minority communities. It is my belief that our current corporate non-system of health care is both unsustainable and inhumane. I look forward to hearing from this panel of health policy experts, politicians, and public intellectuals about potential solutions to our health care access and delivery shortcomings, which tragically fail America’s communities of color on a daily basis. . . .

Webcast Update on Vertex's Hep C Candidate This Morning

~~~~~~~~~~~~~~

UPDATED -- 09.24.08 @3 PM EDT

Vertex's Candidate, Teleaprevir, is
Twice as Effective as Schering's Candidate
for Next-Gen Hep C Treatment, All
in a Short-Duration Phase III Trial!

~~~~~~~~~~~~~~

Or, "Goodbye, Mr. Spalding!". . . .



Vertex has press released very important new top-line results (Abstract) this morning, at the UBS web-conference (webcast link, below -- you'll need to provide an email address, but it is otherwise free of charge). Vertex common stock rose 17 percent this afternoon, on huge volumes. And this, after issuing lots of dilutive common shares last week. Wow.

It would seem that teleprevir is proving efficacious in Hep C patients whose disease has previously failed other treatments, per the interim data. This is a significant advantage over the Schering candidate, boceprivir, a drug that cannot point to any data that is nearly as encouraging as this -- twice daily dosing showed no detectible virus in 82 percent of patients! This compares to 35 percent rates for Schering's boceprivir. Two more dot points:

41 percent chance of cure in a six-month regimen; 50 percent chance of cure in a 12 month regimen, in prior treatment failure patients.

That is amazing. Truly.

~~~~~~~~~~~~~~
END, UPDATE
~~~~~~~~~~~~~~

Vertex has completed the main tranche of its previously-SEC-registered common stock offering, and today announced that the underwriters had exercised a so-called "Green Shoe" (or more technically, "over-allotment") option -- purchasing additional shares, due to excess demand for the securities.

On Wednesday, Vertex will update the world on itself at the UBS Global Life Sciences Conference on Wednesday -- a link to that webcast, is here.

From today's press release:

. . . .the underwriter has exercised in full its option to purchase 1,125,000 shares of common stock at a public offering price of $25.50 per share. The exercise of the option brings the total shares of common stock to be sold by Vertex in the offering to 8,625,000 shares. Vertex expects to receive gross proceeds from the offering, before commissions and expenses, of approximately $220 million.

Goldman, Sachs & Co. is acting as the sole book-runner for the offering. . . .

We should learn much more about the length of the lead of Vertex's Hep C candidate, Teleprevir, over Schering's rival Hep C candidate, on the above-webcast. Do tune in.

Schering in-house lawyer apparently wrote a "nasty-gram" -- before checking the ACTUAL facts -- in Cain v. Hassan, et al.

The plaintiffs in Cain v. Hassan, et al. (though Schering calls this case Cain v. Becherer, et al. -- Heh!) have answered Schering's motion to dismiss. And it is a doozey.

As is often the case with larger filings, the juiciest part appears at the end -- on pages 28 and 29 -- when it is revealed that in August, a Schering in-house lawyer (see letter at right -- click image to enlarge) tried thwart a statutory shareholder right-to-inspect official books and records of the company (a company this shareholder owns, at least in part, BTW!) -- saying that compliance by Schering, with the portion of the statute governing corporate records access, would allow an "end run" around "the court's discovery order". The problem is that the federal district court in Newark entered no such order. Oops! Do take a look:

. . . .Schering’s Efforts To Thwart Plaintiffs’ New Jersey Statutory And Common Law Rights To Inspect Schering’s Books And Records Further Evidences Defendants’ Bad Faith

On July 22, 2008, Plaintiffs invoked their right under N.J. S. A. 14A: 5-28(4) and common law to inspect the books and records of Schering. This “inspection statute” is common in most states and is an expansion of the common law right of shareholders to protect themselves by keeping abreast of how their agents were conducting corporate affairs. See, e.g., Drake v. Newton Amusement Corp., 123 N.J.L. 560, 562-63, 9 A.2d 636 (N.J. 1939) (“This common law right has not been abridged by statute.”). Use of inspection statutes is recommended in many shareholder derivative cases as a means to investigate management wrongdoing. See, e.g., Melzer v. CNET Networks, Inc., 934 A.2d 912 (Del. Ch. 2007); Wood v. Baum, 953 A.2d 136 (Del. Supr. 2008); Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 1057 n.52 (Del.Ch.2003), aff’d 845 A.2d 1040 (Del. 2004). Despite Plaintiffs having satisfied every requirement of the statute, Schering nonetheless refused to permit Plaintiffs to inspect the records. Incredibly, Schering informed Plaintiffs that to comply with the books and records request would constitute “an end-run around this Court’s discovery order.” (See Scolnick Decl., Ex. D).

Obviously, this Court issued no such order, and it is apparent Defendants have directed Schering to thwart Plaintiffs’ statutory and common law rights to inspect corporate records. As a result, Plaintiffs have been forced to initiate an Order to Show Cause in Union County Superior Court (Docket No. UNN-C-134-08) seeking to compel Schering to comply with the statute and produce the requested records (Board and Committee minutes). The return date is October 2, 2008. (See Scolnick Decl., Ex. E). Plaintiffs expect to learn facts from the inspection that will allow them, in an amended complaint, to particularize in even greater detail precisely what the Board and its various committees actually knew about the suppression of the ENHANCE trial results and the false advertisements and when they knew it, rather than having to guess at whether the directors’ refusal to take corrective action was due to actual knowledge, or a reckless failure of oversight. In either event, the facts alleged in the Amended Complaint compel the conclusion that at the least eight, and more likely eleven, Board members failed to satisfy the requisite disinterest due to a substantial likelihood of liability. Nevertheless, based upon the information which Plaintiffs expect to learn through limited discovery in this case and inspection of the corporate records they may well wish to amend the complaint. Accordingly, Defendants’ request that this complaint be dismissed with prejudice to amend is wholly inappropriate. . . .

[Footnote: The law is clear that leave to amend should be “freely given when justice so requires.” Fed. R. Civ. P. 15(a). The Third Circuit has consistently held that “leave to amend should be granted freely, and court[s] should use ‘strong liberality’ in considering whether to grant leave to amend.” Dole v. Arco Chemical Co., 921 F.2d 484, 486-87 (3d Cir.1990) (citations omitted). “The United States Supreme Court stated that amendments to pleadings should be granted under Rule 15(a) except in certain limited circumstances- ‘such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.’” Ikelionwu v. Nash, No. 06-625, 2008 WL 762864, at *3 (D.N.J. Mar. 19, 2008) (quoting Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)).]

Well -- it seems, once again (as Zen philosophy would have it), Schering's in-house lawyers are pushing so hard for a certain result, they are likely to acheive the precise opposite of that result.

More on this, if time permits.

For the year, Schering's Vytorin/Zetia is off about 30 percent. . . .

Although top-line ENHANCE disappointments were already known by mid-January 2008 (post January 14), the below graph offers a perspective on just how poorly things are going for the Joint Venture's Cholesterol Franchise, this year -- the overall U.S. cholesterol management market is off about 5 percent, from January to August -- while Schering's share is down a whopping 30 percent. [Click image to enlarge.]



And this 30 percent fall-off is occuring in a drug-line that generates about 50 percent of all of Schering-Plough's profitability. Ouch.

Vytorin and Zetia US Market Share Fell to 11.35 Percent in August 2008: IMS Data

. . .Schering filed with the SEC a Form 8-K announcing August IMS data just a few minutes ago.

I have a graphic finished, now -- much more, including graphics, shortly, but -- note that US market-share is down again, from 11.7 percent in July of 2008. Click it to enlarge:



That is about a 6 point share decline, month to month. And so, exactly as I predicted, Schering continues to lose share, in a shrinking cholesterol management market in the United States, post the July 21, 2008 top-line SEAS trial results announcement.

IMS Monthly Prescription Data:

July 2008 Cholesterol Management Market: 20,292

August 2008 Cholesterol Management Market: 19,666

~~~~~~~~~

July 2008 Merck/Schering-Plough Franchise: 2,376

August 2008 Merck/Schering-Plough Franchise: 2,233

~~~~~~~~~

July 2008 Vytorin: 1,339

August 2008 Vytorin: 1,249

~~~~~~~~~

July 2008 Zetia: 1,038

August 2008 Zetia: 984

~~~~~~~~~

[All data in thousands.]

In another FAQ in the Form 8-K, we learn that Schering has dosed its first Phase III patient in its Hep C boceprivir candidate trials -- a full three months after Vertex had dosed its first Phase III teleprevir patient.

First Negative Quarter -- in at Least a Decade -- for US Scrips, per WSJ. . . .

Citing the U.S. economic downturn, this morning's Wall Street Journal is running a longish article on the first negative growth in quarter-over-quarter (an absolute decline, not just a decrease in the prior quarter's rate of growth) system-wide US prescription drug spending -- and, especially hard-hit it seems -- are preventative medicines (think Vytorin/Zetia here).

So, I think it safe to assume that the IMS Vytorin/Zetia monthly data for August 2008 (due out at any moment from Kenilworth) will show another overall cholesterol management drug market contraction, vis-a-vis July 2008. The most-salient question to be answered by that data will be -- how much share will Schering have lost, in that contracting market. Let's listen in to the WSJ -- but do go read it all, here:

. . . .Americans are already cutting back on health care, a sector once thought to be invulnerable to recession. Spending on everything from doctors' appointments to preventive tests to prescription drugs is under pressure.

The number of prescriptions filled in the U.S. fell 0.5% in the first quarter and a steeper 1.97% in the second, compared with the same periods in 2007 -- the first negative quarters in at least a decade, according to data from market researcher IMS Health. Despite an aging and growing U.S. population, the number of physician office visits also has been declining since the end of 2006. Between July 2007 and 2008, the most recent month for which data are available, visits fell 1.2%, according to IMS.

As consumers cut back, spending on everything from doctors' appointments to preventive tests to prescription drugs is under pressure. In a survey by the National Association of Insurance Commissioners last month, 22% of 686 consumers said that economy-related woes were causing them to go to the doctor less often. About 11% said they've scaled back on prescription drugs to save money. . . .

Should it persist, this will be an ominous trend-line for the longer term health of Americans, and consequently, the longer term cost of providing acute care to these Americans. They are either forced to skip required medication, or follow-up doctors' visits -- due to cost -- and that will inexorably lead to more acute problems (read: higher overall expenses).

Senators Grassley and Baucus Seek Reform of the Medicare Appeals System. . . .

Senators Chuck Grassley and Max Baucus have asked the federal government to report on the performance of the appeals system currently in place for Medicare beneficiaries and to consider changes to the system that would better serve Medicare beneficiaries. Their request is based on concerns about the consistency with which appeal options are presented to beneficiaries, the ease with which Medicare beneficiaries can reach appeal offices, and the amount of time in which appeals are decided.

The senators were the principal Senate sponsors of the 2003 Medicare prescription drug legislation that reformed an outdated Medicare appeals system. The legislation required the Secretary of Health and Human Services to set up a new system. In 2005, Grassley and Baucus requested an independent review, which found shortcomings in the transfer from the old to the new program and that the new program failed to meet the legislative goals and requirements.

Grassley and Baucus said they want to make sure that "beneficiaries and providers have an appeals system that is equitable and just". . . . Here's the full-text of their letter:

September 15, 2008

The Honorable Michael O. Leavitt, Secretary
U.S. Department of Health and Human Services
200 Independence Avenue, SW
Washington, DC 20201

Dear Secretary Leavitt:

The United States Senate Committee on Finance (Committee) has jurisdiction over, among other things, the Medicare and Medicaid programs, which are administered by the Department of Health and Human Services (HHS). As Chairman and Ranking Member of the Committee, we have a responsibility to protect the rights of the over 80 million Americans who receive health care under the Medicare and Medicaid programs. This includes oversight of the manner in which the appeal rights of Medicare beneficiaries and providers are administered.

As a result of Section 931 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), HHS created the Office of Medicare Hearings and Appeals (OMHA). OMHA was tasked with conducting Medicare administrative appeals previously handled by the Social Security Administration. In creating OMHA, HHS used its discretion to explore the use of video teleconferencing (VTC) and established only four OMHA offices nationwide, as it planned to make better use of technology in its appeals process.

As principal authors of the MMA, we believe that technology plays an important role in making the Medicare appeals process more efficient for the American taxpayer and more accessible to beneficiaries and providers. At the same time, we have a special responsibility to ensure that beneficiaries and providers have an appeals system that is equitable and just. To this end, in December 2005, we requested that the HHS Office of Inspector General (OIG) assess the use of telephone, VTC, and in-person hearings in the Medicare administrative hearing process.

We also requested that it examine the extent to which OMHA was meeting its statutory requirement of deciding certain cases within 90 days. HHS OIG released its report in July 2008, which raised several concerns we would like to share with you.

The HHS OIG report found that, of twelve Administrative Law Judge (ALJ) teams interviewed, five directed appellants to a VTC hearing as the default option, five offered VTC and telephone options at the same time, and the remaining teams discussed the options more generally. Thirty-five percent of the appellants interviewed reported that OMHA staff promoted telephone hearings over other formats, and sometimes did not present VTC as an option at all.

Three appellants reported that they were never presented options; they were simply mailed letters stating the hearing would be conducted over the telephone. In interviews, OMHA staff explained that there is no standardized script or employee manual that offers guidance on how to present the hearing options to an appellant, or ways to document how the hearing format is decided.

OMHA is under a statutory mandate to decide certain appeals within 90 days. The HHS OIG report found that in its first 13 months of operation, OMHA received 6,085 cases subject to this mandate. Of these, only 3,278 had a decision date recorded in the appeals system. Of those in the system, 501, or 15 percent, were not decided within 90 days. On the basis of these concerns, we request responses to the following questions:

(1) Are there any employee manuals, scripts, or other documents to assist employees in their communication with appellants? If so, please provide copies to our staff. If not, are any such documents in development? If not, why not?

(2) Does OMHA staff have any way of recording what options were presented to appellants, or how the appellant chose their hearing format? If not, is any such process in development? If not, why not?

(3) HHS OIG found that only 3,278 of the 6,085 cases subject to the 90-day mandate had a decision date recorded in the system. Why were the 2,807 remaining cases without recorded decision dates?

(4) Can you identify, by hearing format, the number and percentage of appeals that were decided favorably and unfavorably to the appellant?

(5) Of the cases OMHA reviewed in the first quarter of calendar year 2008, what percentage of those subject to the 90-day statutory mandate was decided within the required timeframe?

(6) The HHS OIG report found that most delays occur in the pre-scheduling period after OMHA receives the hearing request. To what do you attribute this delay early in the appeals process? What changes has OMHA implemented, or what changes does it plan to implement, to cure this delay and better comply with its statutory obligations?

Finally, as Chairman and Ranking Member of the Committee on Finance, we have previously requested monthly updates on OMHA’s performance. It has been nearly a year since our staff received an update. We are sure this is an unintentional omission by HHS officials, and look forward to the next update being provided before the end of September, and on a monthly basis thereafter. We have also asked HHS OIG to conduct a follow-up investigation, and expect OMHA’s continued cooperation with HHS OIG’s inquiries.

We would appreciate a response to this letter by no later than October 6, 2008. Thank you in advance for cooperation in this matter.

Sincerely,

Max Baucus (D, MT),
United States Senator,
and Chairman, Senate
Committee on Finance

And By:

Charles S. Grassley (R, IA)
United States Senator
and Ranking Member,
Committee on Finance

September 23, 2008: Final Senate Health Care Reform Hearing Before November Elections. . . .

The final one of these three hearings will be held on September 23, 2008. As earlier noted on this blog, this hearing will focus on exploring ways to improve access to coverage through pooling arrangements, or through the creation of a health insurance exchange or “connector” -– connecting individuals, small businesses and those eligible for premium subsidies to available health insurance plans.

[LIVE REALMEDIA VIDEO LINK, here, on Hearing-day morning.]

UNITED STATES SENATE
COMMITTEE HEARING NOTICE

Covering the Uninsured:
Making Health Insurance Markets Work

Tuesday, September 23, 2008
10:00 a.m. EDT
215 Dirksen Senate Office Building

Member Statements:

Max Baucus, MT

Charles Grassley, IA

Witness Statements:

John Bertko, FSA, MAAA, Adjunct Staff, The RAND Corporation, Former Chief Actuary, Humana Inc, Flagstaff, AZ

Andrew Dreyfuss, Executive Vice President, Health Care Services, Blue Cross Blue Shield of Massachusetts, Boston, MA

Pam MacEwan, Executive Vice President, Public Affairs and Governance, Group Health Cooperative, Seattle, WA

Kim Holland, Oklahoma Insurance Commissioner, Oklahoma City, OK

Aren't August 2008 IMS Vytorin/Zetia Scrips Due Out. . . Now?

. . .And, wouldn't it be perfect form, for the Kenilworth crowd, to bury them in the avalanche of uncertain financial news on Wall Street, today? Look for them after markets close, right here.

Just my (experience-based) hunch.

UPDATED: 09.20.08 @ 8 AM EDT

Check the comments to this post -- a thoughtful poster points out that Schering actually dumped a deceptively-huge raise for Dr. Koestler (head science guy) into a Friday night Form 8-K.

My reaction? -- we'll see the August IMS Vytorin/Zetia data Form 8-K on Monday or Tuesday, then -- but consider the other cha-cha underway, here:

What strikes me about this Friday night Form 8-K is not just that the board is paying Dr. Koestler more, but how the board chose to disclose (or partially-disclose) it:

The Form 8-K recites that Koestler "only" recieved a 5 percent base salary "bump". That may be (facially) factually accurate, but then it means he received an undisclosed earlier raise.

How so?

Well, the most recent Schering proxy (at page 34) indicates that his base -- for all of 2007 -- was $726,250 (before bonus, stock awards, SARs, options and long-term payouts) -- NOT the $823,000 recited in the Form 8-K.

The 8-K pegs his new base salary at $864,000 -- thus, actually, he garnered an increase of exactly 16 percent -- over his 2007 base salary.

So, for me, it is not just that the Chairman of the Compensation Committee of the Board (Hans Becherer -- pictured at right) dumped it into a Friday night disclosure (on Schering "layoff press release day", no less!), it is also that Schering's board, via Hans Becherer -- a named defendant in Cain v. Hassan (which alleges he breached his fiduciary duties in approving excessive compensation for Mr. Hassan in May of 2008, and others, among many other matters) -- apparently played "hide and seek" with where the 2008 currency converter pegs "30 pieces of silver", these days.

When at least 1,000 salespeople lose their jobs, and the rest are lucky ot be able to stay -- with no increase, mind you -- Koestler walks off with nearly a million a year -- up one-sixth from last year -- and that is BEFORE stock, and options and bonus.

Sheesh.

Off-Topic: Wall Street -- Analytics of Considering the Proposed RTC-like Suggestions

Okay, a lil' refresher, here -- for this is off-topic, afterall: if you saw this, and this later one, of mine, over the weekend past -- please do consider this comment/addendum (given subsesquently unfolding events) and scratch your head for any consistent message -- from last night's news that an RTC-like solution may well win the day, here:

. . . .“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,” said Henry M. Paulson Jr., the Treasury secretary. “And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.

One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars’ worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so. . . .

Object Lesson: No one is driving this bus. [Or said another way -- perhaps, more darkly -- pure Presidential Election Year politics just may be.]

Act accordingly.

Why did Fred Hassan DOWNPLAY the potential of ENHANCE -- on April 19, 2007?

Again -- almost a full year before the complete disclosure of ENHANCE (at ACC, on March 31 to April 1, 2008) -- way back on April 19, 2007, according to the complaint, here is what CEO Hassan had to say in response to a question, on the dearth of ENHANCE updates -- from analyst Tim Anderson (then at Prudential) -- quoting from the bottom of page 45, now:

. . . .122. Defendant Hassan began deliberately downplaying the importance of ENHANCE and discrediting its results as early as April 2007, if not earlier, including, for instance, on the Company’s April 19, 2007 first quarter 2007 earnings conference call. Tim Anderson, an analyst at Prudential Equity, asked Hassan, “Your first big kind of quasi-outcomes trial is coming up on VYTORIN, which is ENHANCE, and I have not heard you talk much about that despite that trial and all those results almost being in hand. It seems like they could be fairly important to [the] VYTORIN franchise. I’m wondering if you are at all worried about the outcome of this trial in terms of what it shows?” Hassan replied:

First, I think we’ve already discussed on previous occasions that the data analysis is ongoing for the ENHANCE trial. That as you know is a surrogate market trial in a very special population with very special doses. There is a much larger trial called the IMPROVE-IT trial which is more of an outcomes trial. So one has to look at the overall mix of the data. The overall regression curve in terms of LDL, lower LDL, is better, is being proven in numerous studies, so we are pretty confident about the overall pattern of data for VYTORIN.

In this statement, Hassan made a vague reference to the fact that the ENHANCE study involved “a very special population.”. . .

Why did he do that, on the very same day -- in the very same public conference-call in which he also announced the spectacular 48 percent quarterly sales growth garnered by Vytorin/Zetia?

The answer to that question will likely be very illuminating -- in Mr. Hassan's deposition (read: under oath). Buckle-up.

What did Carrie Cox say, on the day BEFORE she began selling?

I am having a nice back-and-forth with the ever-sharp Salmon, in the comments, here -- about what might have caused the run-up in Schering stock prices from January 1, 2007 to May 1, 2007. . . . do read that, but here is what the Complaint alleges was said by Carrie Cox one day before she began the series of $29 million (gross -- about $11 million, net) liquidations of her options positions -- about Vyotrin's benefits (see pages 28 to 29 of the full complaint -- in 237 page PDF format):

. . . .During Schering’s First Quarter 2007 Earnings Call on April 19, 2007, Hassan stated: “We continue to grow VYTORIN and ZETIA despite the new wave of generics that has recently entered the market. As we have said before, physicians and their patients are following the evolving medical science; evolving medical science that is indicating that lower LDL cholesterol is better. And now we will be extending the core of our cholesterol business into Japan.”

During the call, Defendant Cox added: “At last month's American College of Cardiology meeting, lowering LDL was again validated as the primary target of lipid therapy and with lower clearly better, we believe this plays right into the strength of our cholesterol franchise. Only VYTORIN provides more than a 50% LDL reduction at the usual starting dose and across the dosing range. More than Lipitor and more than Crestor.”. . .

According to Schering's press release, in that First Quarter 2007, Vytorin/Zetia sales grew at an explosive 48 percent (over the comparable First Quarter of 2006); and Equity Income (or profit) from those sales was up a full 21 percent. Wow. That's some mo-jo, right there.

So -- what did she really know? And when did she -- and CEO Fred Hassan -- know it?

That is a very significant part of what this litigation is all about.

ENHANCE: What Did Carrie Cox Know -- And When Did She Know It?

We'll post a little more tonight, from the Amended Consolidated ENHANCE Securities Fraud Complaint -- at pages 83 to 84 -- note that "CW" refers to "confidential witnesses" -- and the number following the "CW" refers to individual confidential witnesses. CW 1, for example, avers s/he knows Carrie Cox knew there would be "no good news from ENHANCE." That was in the summer of 2006. Let's look in, now:

. . . .211. Based on interviews with former Schering employees conducted by counsel for Lead Plaintiffs, Exchange Act Defendants Hassan and Cox were closely involved with ENHANCE and regularly briefed on its details. As discussed above, CW 1 interacted with Schering’s Brand Team on a daily basis regarding ZETIA and VYTORIN, and updates regarding ENHANCE were shared in quarterly Brand Review Meetings that CW 1 attended, which were conducted by Defendant Cox. According to CW 1, there was a quality control assessment of ENHANCE data done in late 2005 to early 2006, and by the Summer of 2006, CW 1’s team “knew that they were not going to get any good news from” ENHANCE.

212. CW 1’s statements are corroborated by CW 3. According to CW 3, throughout the Class Period, Cox attended a monthly meeting with the cholesterol franchise Brand Team and the individuals in charge of ENHANCE, Drs. Veltri and Strony. CW 3 was personally involved in the preparation of certain materials for these meetings. According to CW 3, the Company’s other senior executives, including Hassan, also attended certain of these meetings. According to CW 3, ENHANCE, its progress, and results, were regularly discussed by Drs. Veltri and Strony with Cox and the other senior executives in attendance. At the meetings, discussions and detailed PowerPoint presentations updated the participants on developments with VYTORIN and ZETIA, involving not only the marketing and commercial aspects of the drugs, but also the status of ongoing research. As CW 3 has stated: “Nobody keeps this kind of stuff from management when it is going to have a huge impact on the product.” When CW 3 asked Drs. Veltri and Strony how ENHANCE was going, “years ago,” “they always seemed a bit worried.” They told CW 3 that “they did not like the kind of results they were seeing and that they had to take another look at something.”

213. According to CW 3, Schering’s marketing department for the drugs, headed by Ray Russo, “wanted to control the science; it was very much marketing driven and not science driven,” and Schering is “not concerned with the data as much as they are selling the drug”. . . .
[Emphasis supplied.]

Again -- we do know Carrie Cox exercised and sold on the twentieth day of April, 2007 and first day of May 2007 -- netting something like $11 million, on a series of transactions which grossed around $29 million.

Fascinating -- and all filed with the SEC on Forms 4 -- right here, and immediately above. . . .

I'm listening to Tommy Thompson, Former HHS Chief -- on Health Care Reform. . . .

He truly is a dynamo -- he reminds us that 23 cents of every federal bugdet dollar is spent through his former agency -- HHS. . . .

FDA regulates 25% of the US GDP. . . .

He opines that Medicare will collapse within four years, if the coming Adminstration does nothing about this crisis.

I'll likely have more from this event, tonight.

Massive 237-Page Amended Consolidated ENHANCE Securities Fraud Complaint Filed Against Schering-Plough, and its Officers, among others. . . .

On Friday, I wrote that this putative securities fraud class action ["The Iceman (Very Soon) Cometh. . ."] complaint amendment might file early -- ahead of the actual September 22, 2008 deadline -- and it has. Almost a full-week early!

My goodness -- it is truly one whale of a filing: 237 pages, plus about 13 pages of exhibits. Tonight, I'll concentrate on only one section: pages 103 through 120 -- the Senator Grassley "functional unblinding" allegations.

I think this section of the securities fraud case may well make legal history -- here, establishing a new method of proving securities fraud scienter -- at least in situations where scientific results are material -- and where (as here) it is claimed that the scientific trial results have been double-blinded insofar as the company's officers are concerned. Proving scienter is key -- it establishes that the officers, Mr. Hassan, and Mrs. Cox, among others, acted with knowlege that what they were doing was wrong. Here, it is suggested by the sheer force of mathematics, that they must have known.

They must have known, in fact, in much the same way the brute-force of statistical mathematics established that many officers at quite a few public companies were backdating stock option grant dates, a few years back. It could not have occured by chance, it was argued. A very-similar corollary of that brute-force statistical argument is in play, below.

Before we start reading from the complaint -- I'll indulge in some immodesty (I can't resist it: Told ya' so!) -- I must mention that I predicted that this day would come, back when Senator Grassley wrote his second letter, in early-April of 2008. Now it has -- Okay. Let's dive in, at page 103:

. . . .The Facts Also Support a Strong Inference that Early Analysis of the ENHANCE Data Showed the Study Was Unlikely to Detect a Statistically-Significant Benefit for Ezetimibe, Giving the Exchange Act Defendants a Strong Motive to Delay Release of the ENHANCE Results

258. To reduce the possibility of the results being biased, clinical trials are often “double-blinded,” meaning that neither the patient nor the doctor (nor, with most trials, the pharmaceutical company sponsor) knows whether the patient is in the experimental group (i.e., the group taking the drug under study) or the control group (i.e., the group taking placebo or another drug with known effects in the study population). Despite the obvious (and intended) limitations of blinding a clinical trial, if certain data about the population in the trial are made available, it is possible to discern useful information about the trial’s results, even while the treatment assignments remain blinded. Recognizing this, on February 11, 2008, in the Second Senate Letter, Senator Grassley wrote to Hassan that ENHANCE statisticians would not have needed to unblind the ENHANCE data to know that the study was not likely to show a statistically-significant difference between treatment arms:

It has come to my attention that Schering Plough and Merck would not need to unblind the data to understand that Vytorin performed no better than generic simvastatin. . . . These studies try to detect a statistically significant difference between treatment groups on the primary endpoint. Once the results are recorded, the study is then unblinded to determine which drug is the better performer. However, if the drugs performed the same, meaning there is no statistically significant difference in the treatments, then this information is apparent before the study has been unblinded.

259. Dr. Allen Taylor of Walter Reed reached the same conclusion. Dr. Taylor told Heartwire that, “Somebody had looked at the end-point examination, the IMT results, and, irrespective of group assignment, could know that a groupwise comparison of CIMT changes showed no statistically significant difference. . . . In my view, once that is known, the trial is functionally unblinded.”

260. As discussed above, Schering personnel began “quality control” analyses of IMT measurements as early as 2005, the last patient visit in ENHANCE was in April 2006, Schering knew by the Summer of 2006 that it was not going to get any good news from ENHANCE, and critically, the ENHANCE results, when finally released in 2008, did confirm, as Senator Grassley put it, that “the drugs performed the same, meaning there is no statistically significant difference in the treatments.” Because VYTORIN’s failure in ENHANCE was “apparent before the study ha[d] been unblinded,” the strongest, most compelling inference to be drawn is not that delay was simply the unintended byproduct of otherwise innocent conduct, but rather that the Exchange Act Defendants intended to and did delay the release of the ENHANCE results.

261. Indeed, well-accepted statistical methods available to Schering, Merck and M/SP provided them with the ability to determine whether ENHANCE would be likely to show a statistically-significant change in one group’s CA IMT versus the other using blinded data even before the trial ended. Schering provided an example of this methodology, commonly referred to as an “internal pilot study,” on March 28, 2008 (two days before the release of the final ENHANCE results), when it disclosed that it was adding approximately 5,500 patients to IMPROVE-IT, the Company’s ongoing outcomes trial designed to test whether VYTORIN can reduce heart attacks more than treatment with simvastatin monotherapy. As Dow Jones reported on March 28, 2008, researchers were expanding the trial’s enrollment to as many as 18,000 patients from the previous target of 12,500 because:

The researchers said they determined that more patients were needed in order to detect whether or not Vytorin could provide a statistically significant reduction in risk of heart problems compared with one of its component drugs, simvastatin. . . . The doctors said the increase in the Improve-It study was based on “ongoing evaluation of blinded, aggregate cardiovascular event rates in the trial. . . .” Blinded typically means not knowing which patient is getting which therapy. All trial participants and leaders remain blinded to which treatment the patients are receiving, the doctors said. (Emphasis added.)

Schering’s ability to analyze blinded, aggregate data in IMPROVE-IT to draw a conclusion regarding the trial’s capacity to show a statistically significant benefit of VYTORIN over simvastatin supports a strong inference that Schering researchers could, and in fact did determine, based on blinded data, that ENHANCE would not be likely to demonstrate a statistically significant difference between treatment arms, even before the conclusion of the trial.

262. When comparing two groups of unblinded observations with roughly bell-shaped distributions, a statistical test known as Student’s t-test can be applied to determine whether the observed difference between the groups will be statistically significant. The key number is the difference between the mean outcome in each treatment group divided by the standard deviation of the observations. If that ratio (difference of means divided by standard deviation) is large, then the difference between the two treatment groups will be statistically significant. That is, the standard deviation is the “natural scale” of the data, and, for differences to be significant, they must be measured relative to that scale. How large this ratio must be to attain statistical significance depends upon the sample size.

263. For example, in the final ENHANCE carotid IMT data, first disclosed by the Company on March 30, 2008, the change outcomes were 0.0058 mm. in 320 patients receiving only simvastatin and 0.0111 mm. in 322 patients receiving simvastatin plus ezetimibe. The standard deviation of the change was about 0.068 mm. so that the key ratio was (0.0111-0.0058)/0.068 = 0.078, and favoring simvastatin alone. To attain significance, this ratio needed to be about 0.155, about twice its actual value.

264. With an internal pilot study, standard deviation can be monitored while a trial is underway, without unblinding, assuming the two true standard deviations (parameter values) are the same. This method uses pooled data without knowledge of which treatment was received by a particular patient. Even with this limitation, analysis can extract important information about the likelihood a trial will come to a clear conclusion.

265. Because the treatment arms remain blinded, the mean and standard deviation within each group cannot be determined. However, using results seen in prior clinical trials or other data, it is possible to establish benchmarks against which the standard deviation of pooled results from an incomplete clinical trial can be compared. An observed standard deviation that is markedly larger than the prior estimate is a signal that the trial is unlikely to yield statistically significant results to support the efficacy hypothesis being tested. In ENHANCE this approach could have been used repeatedly.

* * *

266. As alleged herein, the Exchange Act Defendants acted with scienter in that, among other things: (i) they had access to internal data concerning ENHANCE; (ii) they knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false, incomplete or misleading; (iii) they knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and (iv) they knowingly or recklessly participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws.

267. As officers and controlling persons of a publicly-held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, and is traded on the NYSE, and governed by the provisions of the federal securities laws, the individual Exchange Act Defendants each had a duty to disseminate promptly, accurate and truthful information with respect to the Company’s drug products and drug testing, its business, financial condition and performance, growth, operations, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company’s securities would be based upon truthful and accurate information. The individual Exchange Act Defendants’ material misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

268. The individual Exchange Act Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of or recklessly disregarded their materially false and misleading nature. Because of their senior executive and managerial positions with Schering, each of the individual Exchange Act Defendants had access to the adverse undisclosed information about Schering’s business prospects and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Schering and its business issued or adopted by the Company materially false and misleading.

269. The individual Exchange Act Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each of the individual Exchange Act Defendants was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the individual Exchange Act Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.

270. Each of the individual Exchange Act Defendants, by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, and financial condition, as alleged herein. Said Defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws. . . .

[From earlier in the Complaint -- Ed:]

. . . .74. As discussed below, each of the Exchange Act Defendants –- i.e., Defendants Schering, M/SP, Hassan, Cox, Bertolini and Koehler –- is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Schering securities by disseminating materially false and misleading statements and/or concealing material adverse facts regarding the failure of the ENHANCE trial. The scheme: (i) deceived the investing public regarding Schering’s business, operations, management and the intrinsic value of Schering securities; (ii) enabled Defendants to artificially inflate the price of Schering securities; (iii) enabled Schering insider Cox to sell over $28 million of her own Schering shares and allowed the Company itself to register and sell over $4.08 billion in newly issued securities during the Class Period while in possession of material adverse non-public information about the Company; and (iv) caused Lead Plaintiffs and other members of the Class to purchase Schering securities at artificially-inflated prices. . . .

I predict this will all get increasingly combative, now -- there is no tried and true answer for the "functional unblinding" theory/allegations -- Schering will be feeling its way through, from here on. And if Mr. Hassan's recent history (related to making judgment calls of this magnitude) is any guide, Schering is in for a very bumpy ride. As is Mrs. Cox -- she is copiously lashed for the size, and timing of her sales, pre-ENHANCE results disclosure (in much greater detail than the thumbnail outline, immediately above). But more (much) on that, at some point tomorrow. I am off-the-grid for a good chunk of the day, tomorrow -- but will check in, on Schering news, SGP stock prices, etc. by iPhone 'net connect.

G'night.