Friday, October 31, 2008

Schering Pays Largest Pharma Pricing Fraud Settlement EVER in Mizzou!

. . .or, "Trick. . . or Treat. . . or Trick!"

One day after vowing to appeal, and fight on, in the appellate process -- Schering settled with the Missouri Attorney General -- for $31 million.

That is the largest pricing fraud settlement involving a pharmaceutical company, ever, in Missouri. Ouch.

My prediction?

This apparent lack of will-power "We'll fight it on appeal" (on Thursday) to "Let's settle!" (the very-next morning!) is going to cost the company, and dearly, in the 25 or so other states with cases still pending. Were I the AG in any of those states, I'd not take anything less than seven times actual alleged damages. Via AP-wires:

. . . .Missouri Attorney General Jay Nixon reached a $31 million settlement with a pharmaceutical company in a Medicaid fraud case on Friday.

New Jersey-based Schering-Plough Corp. agreed to the settlement of a 2005 lawsuit to resolve allegations that its former Warrick Pharmaceuticals Corp. division inflated its prices, said Nixon spokesman Scott Holste. Lawyers for the state argued the deception cost Missouri taxpayers millions of dollars.

The settlement is the largest amount Missouri has ever obtained in a case against a pharmaceutical company, Holste said. On Thursday, a St. Louis jury found the company liable for $7.3 million in compensatory damages. The jury had not yet decided on punitive damages when the settlement was reached. The $31 million settlement resolves Missouri's claims.

Schering-Plough spokesman Steve Galpin said, "The company had intended to appeal the jury's preliminary ruling but elected to settle in order to avoid additional litigation expenses and the uncertainty inherent in the legal process."

He said the company believed the initial jury findings were incorrect and that it had followed all necessary regulations and laws related to Missouri Medicaid reimbursement.

The lawsuit had alleged the company did not accurately report the prices of drugs sold to pharmacies participating in the Missouri Medicaid program.

Nixon's office said the prices reported to pharmaceutical trade publications often were higher than the prices actually paid by the provider for the drugs. It said the drugs were primarily generic brand inhalants used by patients with respiratory conditions.

Nixon said he was proud of the lawyers and staff in his office who had worked for three years on the case. "This is a tremendous day for Missouri taxpayers in the fight against fraud by pharmaceutical companies," he said in a statement. . . .

Schering Seen as an Attractive Bearish Play -- at the $14 Level?!

In "Drug Stocks: Short Stories", Joseph Hargett, in Forbes Magazine -- citing what he sees as Schering's near term range of $13 to $15 -- and seeing Schering nearing the top of the range again -- opines that SGP is thus "due for a drop to the $13 region, or below" -- his words, not mine:

. . . .Schering Plough (nyse: SGP) is another struggling pharmaceutical stock that could make for a nice bearish play. Since setting a near-term peak of 33.40 in mid-October 2007, SGP has plunged more than 57% while battling overhead resistance from its 10-week and 20-week moving averages. The shares are now trading in the teens and have bounced between support at the 13-level and resistance at the 15-level since mid-October 2008. The equity is currently trading near the upper rail of this trading range and could be poised for another drop to the 13-region or below. . . .
I agree -- except that I think the bottom is probably closer to $10 -- thus my graphic, above.

What's Wrong With Schering Plough's Executive Pay Processes: No Restraint in Evidence

We shall today try to tackle a truly-scary topic -- on Halloween, appropriately -- Fred Hassan's outrageously oversized pay -- relative to his recent performance, as CEO of Schering.

While I may have seemed rather flippant about the recent announcement that Schering's Nominating Committee Chair would survey shareholders in early-2009, about executive pay, I do applaud the move. It may be a very small step, but it is in the right direction. So, let me, more seriously now, sum up what I consider to be the most-vexing flaw in the Schering-Plough executive compensation scheme.

The central problem -- the one at the root of all other problems -- is a readily-apparent lack of measured restraint by the Compensation Committee of the board, its chair, Hans Becherer, and his exclusively-retained consultant, Ira T. Kay.

Schering's SEC filings and press releases (and repetitiously-so) make much of the fact that each executives' pay is tightly linked to company performance -- chiefly through the amount of compensation determined by the per share price performance of Schering-Plough common stock. In theory (assuming appropriately measured amounts of equity incentives), that might be an acceptable -- even laudable -- compensation process-approach.

In practice, however, Schering's Compensation Committee, and Chairman Hans Becherer (acting on the advice of Ira Kay), have each shown repeated willingness to "sweeten the pot" -- especially in times of declining Schering stock prices. That smacks of gamesmanship. And not by just a little. When the equity bet is made -- it should simply ride, up or down -- for the CEO, especially -- if it is to be a real motivator.

A recent May 1, 2008 example -- in which CEO Hassan was handed -- for essentailly no good reason -- an addditional (then nadir-price-touching) bolus of stock options -- was simply eye-popping. It came as the stock had declined some 30 percent to that point (now 57 percent -- as of October 28) in 2008. Here is his Form 4 form that grant:

[Several other top executive officers also received similarly priced grants that day.]

For Hassan, though, it was an incremental amount of close to $10 million -- on top of the over $30 million he made, for 2007, alone -- and over $7.7 million of that May 1, 2008 $10 million grant is not subject to performance earn-outs. He need do nothing more than keep his seat, to get that $7.7 million.

Let me do more than complain -- let me offer at least one constructive suggestion, here: At a very-bare minimum, this May 1, 2008 grant should have been priced at 20 or 30 percent above that day's stock price (putting it at $21 or $23 per share) -- a practice called "premium pricing" an option grant. Schering's plans permit it -- and responsible directors do it. And all of it (and all other equity incentives) should be subject to forefeiture if PMOs aren't met (over a period of, say, three years).

Quoting Paragraph 128 of the amended complaint in Cain v. Hassan, now:

. . . .On May 1, 2008, despite the aftermath of the gross mismanagement of the disclosure of ENHANCE study results, the Compensation Committee reviewed defendant Hassan’s, performance in “light of corporate goals and objectives” and decided, upon affirmance of the Board to give the CEO a discretionary 836,000 share [stock option] grant at an exercise price of just $18.85, under Schering’s 2006 Stock Incentive Plan. The 836,000 shares [stock option] grant is valued at approximately $9,130,000 of which about $7,700,800 is not subject to the CEO satisfying any performance criteria. . . .

Middle tier executives (non executive officers, all) had been awarded options at about $21 per share, a few months earlier -- thus granting Hassan a significantly greater potential for profit, both in terms of the size of the option (perhaps arguably appropriate, in theory -- he is the CEO, afterall), but also in terms of the 20 percent lower-price on the option. That, I submit, is not only excessive -- but has the potential to put the CEO's monetary incentives at least partially at odds with those of his mid-level executive team. For example, Hassan might make decisions to protect the portion of his gain (should the stock rise above $18.85, but stay below $21), rather than seeking to stretch for higher goals, and thus acheive higher stock prices -- for all Schering stockholders.

But I do not want to distract from my central point: this grant was simply too much. Too much, given that Mr. Hassan already has the potential to make some $75 million should the Schering common stock price rise above $25 per share -- and too much, given that Hassan is already holding some $32 million in cash-payments for 2006 and 2007 alone.

In fact, CEO Hassan will, in 2008, likely make triple what the other "most overpaid" pharma executive made (over at King Pharmaceuticals), in 2007.

So, my central, and very serious, concern about executive pay at Schering is that while the board talks about aligning it with equity performance -- the "walk" -- on that "talk" is actually to dole out more, during down-times.

This shortcoming is particularly egregious where -- as here -- the down-times were created by the mis-steps of this Schering management team.

I am coming to the conclusion that new leadership -- at the board level, as well as the CEO level -- is needed to root out this perniciously-repetitive practice.

And your survey responses, dear readers, may just give the nominating committee chair the "political cover" she needs to oust Hans Becherer, and Ira Kay.

And so, I'll close with a poll -- a new poll! -- do you think the Board will be willing to oust Hans Becherer, and/or Ira Kay (or Fred Hassan!), in 2009? Click at left!

Thursday, October 30, 2008

Jury in State of Missouri Drug-Pricing Fraud Case Finds Schering/Warrick Liable

CafePharma showed an anonymous post earlier today on this — but (thus far) I have been unable to confirm the amount of the jury verdict -- now Ed Silverman, at Pharmalot, and Schering, itself, have both confirmed the entry of a verdict against Schering -- but not the amount.

FYI, the linked CafePharma poster puts the verdict for fraud at $7 million — but the penalty phase is still being deliberated — and might thus be a much larger multiple of this $7 million number. We’ll see.

Perhaps not entirely-coincidentally, Schering has reportedly now blocked all work computer based internet access to CafePharma’s website, using the standard corporate WebSense filter. Classy. Looks like the same anonymous source as the verdit, too.

Finally -- as Ed cogently notes -- Schering's presser neglected to mention its loss in Texas, on these topics -- choosing to highlight only its victories. Again, classy. And, wild -- in its transparent, unvarnished desperation:

. . . .Schering-Plough failed to note in its statement that a $27 million fine was paid to Texas to settle charges that the drugmaker falsely reported wholesale drug prices to the state and federal Medicaid programs. . . .

Oddly, just now, at 5:25 pm EDT, NASDAQ afterhours trading posted a 29,929 share trade a full half-dollar below the last, at $ 13.46. Ouch. Is there more bad news to come, out of Missouri tonight?

Wednesday, October 29, 2008

Schering Shareholders to Receive a "Say on Pay" Survey -- Yay!

Well -- light 'em up, fellow shareholders! Your day has (almost) arrived!

My suggestion? You don't have to wait for the "Survey" to arrive -- Send your comments directly to Hans Becherer, now, in an envelope marked "Confidential: Executive Compensation Feedback" [Then, be sure to also answer the survey, when it arrives] -- Relevant contact details:

Mr. Hans Becherer
[ATTN: To be opened ONLY by Mr. Becherer]
Compensation Committee Chairman,
Schering-Plough Corp.
2000 Galloping Hill Road
Kenilworth, NJ 07033

And it is important that Mr. Becherer not be allowed to escape his over-arching fiduciary duty to you, as shareholders, by simply conducting a survey in the name of the Nominating Committee Chair -- and then later saying he "considered that input", before setting the compensation for Mr. Hassan (and his Top Six) for next year -- end of 2008, through end of 2009.

Need some ideas, on how best to phrase your concerns about the lack of relationship between pay and performance at Schering-Plough? It's easy!

Simply print-out, and mail any of these posts (here, here, here, here, here, here or here) in response to the 2008 Survey on Pay -- quoth CafePharma, now:

. . . .Schering-Plough Will Survey Shareholders about Pay

Submitted by: Carol Bowie, Governance Institute

". . . .Schering-Plough announced on Oct. 24, 2008 that it will conduct a shareholder survey on director and executive pay. The survey will be mailed to shareholders with the company’s 2009 proxy materials, and results will be discussed in the CD&A section of the proxy statement for the 2010 annual shareholder meeting.

Schering-Plough says the survey is intended to “inform future work of the Compensation Committee and the Board” by providing a window into shareholders’ views of the executive pay program.

“This survey is evidence of our commitment to seek and consider shareholder input, as we did in 2006 with the shareholder survey on majority voting for directors” said Pat Russo, Chair of the Nominating and Corporate Governance Committee of the Board, in the company’s press release. Indeed, the company conducted a shareholder survey on governance issues after its 2006 annual meeting, which led to inclusion of two management proposals to amend the bylaws on the ballot for the 2007 meeting: one was to eliminate certain supermajority vote requirements, and the other was to elect directors by majority vote rather than plurality. The first proposal passed, but the second did not, although the board subsequently amended the bylaws to include a director resignation policy, triggered if a nominee in an uncontested election fails to receive support from a majority of votes cast.

It appears that the 2006 survey was conducted by an independent consultant rather than being mailed to shareholders with the proxy statement. For the executive pay survey, Rich Koppes, former General Counsel of the California Public Employees’ Retirement System (CalPERS) and currently of counsel to Jones Day law firm and at Stanford Law School, will provide oversight of the process used to tabulate and report the results, according to the release. Koppes also will serve as the conduit for shareholders wishing to respond to the survey on a confidential basis.

Schering-Plough has participated in the Working Group exploring the issue of “say on pay” and presumably is hoping to head off annual votes, although the company did not indicate how often it intends to conduct its pay survey. A questionnaire should give the compensation committee more nuanced information than an up-or-down vote -- and would take proxy advisors out of the equation -- but with anger growing daily about extravagant pay practices in the troubled financial sector, Congress may still have advisory pay votes on its to-do list. . . ."

That much is an all but foregone conclusion, now.

These SEC-Required Disclosures Border on "Misleading".

This has bothered me for quite a while [This very same language appeared in the Schering Second Quarter 2008 SEC Form 10-Q, on page 27]. It is thus high-time to make my concerns plain.

This sentence appears on page 28 of the just-filed Third Quarter Schering-Plough SEC Form 10-Q, for the quarter ended September 30, 2008. That means this sentence portends the possibility of federal civil and criminal liability for intentional, and material ommissions, or inaccuracies, and misstatements -- under the applicable '34 Act SEC rules and releases:

. . . .Media reaction to the release of the results of the ENHANCE clinical trial in early 2008 led some commentators to call for the use of other products, rather than VYTORIN and ZETIA. Continued reductions in the sales and/or market share of Schering-Plough’s cholesterol franchise would have a significant impact on Schering-Plough’s consolidated results of operations and cash flows. . . .
I have supplied the emphasis in the first sentence.

How do CEO Hassan, CFO Bertolini, and General Counsel Sabatino know it was a "media reaction" that led "some commentators" to call for the use of other products (like statins, as a first-line therapy)?

Did these so-far anonymous "commentators" actually ever say they were calling for the use of other products -- due to the "media's reaction"? No. Attributing causal relationships in SEC filings is supposed to be based on empirical evidence. Let us examine the empirical evidence, then.

Oops. There appears to be. . . none. No evidence. Zip. Nada.

I submit that the "commentators" to whom Hassan, Bertolini and Sabatino here refer are, in fact, the members of the March 31, 2008, Society of American Cardiologists Conference Expert Panel Discussion -- including Dr. Harlan Krumholz, and Dr. Allen Taylor [Note: Edited/corrected 11.07.08 -- under the ever-helpful, and keen-eyes of PM]. I have now reviewed every public statement by these commentators, and not one of them ever cited "media reaction" as the cause of their opinion that Vytorin and Zetia ought to be the "last line" of cholesterol management therapy. Not one.

No, these comentators cite the results -- the outcome -- of the ENHANCE (and now SEAS) study as the reason for their opinions. As do most cardiologist, and family doctors.

Thus, these Schering officers, are in my opinion, very close to the line -- the line that demarks intentional mis-statements in SEC filings (or alternatively, the line that demarks material omissions, in SEC filings) -- as sanctionable statements.

It is simply no longer plausible to assert (effectively under oath, to the SEC!) -- after ten straight monthly-declines in actual 2008 IMS scrip trends (see data-graphic, above, right) -- that some ill-defined "media reaction" caused this continuous, and now-acclerating decline in the United States. I do hope the SEC's enforcement lawyers are still reading this blog.
The time has come to end these falsehoods.

Elsewhere in its Form 10-Q filing, Schering candidly admits that it is experiencing increased price competition, and increased pressure from Medicare, Medicaid and third party reimbursement plans -- to discount the prices charged on its drug products. Somehow missing is the concept -- the connecting concept -- that at least part of that pressure is due to the fact that ENHANCE and SEAS may suggest Vytorin and Zetia may be no more effective than placebos.

Allowing affirmatively misleading statements in SEC-filed documents is not the "usual course of business" at the SEC. I trust Schering will receive a comment letter from the SEC's Corp. Fin. staff about these less-than candid characterizations.

At a minimum, if Schering contends there actually are widely-recognized medical "commentators" in the United States relying on "media reactions" to make specific patient treatment decisions -- Schering ought to name them. Clearly, the nation's "best and brightest" cardiologists (at ACC, for example) -- in the field of cardiology are not among them.

We shall see.

Why does Ed Silverman get all the GREAT Schering Swag?

I am truly hurt. Devastated, actually. How come I didn't get one?

Oh. Right. Fred doesn't know my name. But Ed does. [Hint. Hint.]

. . . .You can track the monthly drop in prescriptions for the controversial cholesterol pill. You can mark down when additional responses must be given to congressional committees that are conducting investigations into the handling of clinical trial data. And you can keep day-to-day tabs on Schering-Plough stock price to see how ceo Fred Hassan is making out with his $2 million investment. And docs can count the days until the drugmaker decides to revive its infamous wine-and-dine plan. Makes a perfect gift, yes?. . .

Wow -- seems that Ed guy has some serious drag in K-1.

Tuesday, October 28, 2008

A 37-Patients-Treated With Sugammadex "Seeding" Study: Will FDA Be Swayed?

Apparently scouring the bins for something -- anything(!) -- postitive to report -- our friends in Kenilworth offer up a pathetic, waifish "new hope" for getting FDA to approve sugammadex in the United States -- a truly-tiny study, that apparently broke no new ground, on any front -- save, perhaps, the PR front. And that may yet backfire.

Recall that in April, FDA declared this candidate non-approvable. Recall also that though approved in Europe, it will garner perhaps one penny of EPS, in the near term, for Schering -- anesthesia is simply viewed by surgeons, and thus used, differently (fewer cocktails -- combinations of drugs, as a routine anesthesia protocol, in surgery) in Europe (generally speaking, here), than it is in the United States (with "cocktails" galore).

So, I am surprised that CEO Hassan and crew would believe this would do anything other than (potentially) further alienate (recall finally that Mr. Hassan gave the FDA staff a Wall Street Journal front-page finger-wag/tongue-lashing, this past Summer!) the senior FDA staff. It seems rather prosaic, and transparent -- it seems an attempt to influence public opinion -- not advance science (the numbers are too small to be meaningful).

To my admittedly-biased eye, it seems that a study with only 37 patients in treatment is designed to advance a specific PR agenda -- "Gee, isn't that mean old FDA being unreasonable in declaring sugammadex non-approvable?" -- that's the messaging point just out of the spin-meisters in K-1:

. . . .In the study, sugammadex was well tolerated in the 37 patients who received the treatment, and its safety profile overall was comparable with that of neostigmine. Safety data from the study showed that the most frequently reported adverse events (AEs) for patients in both groups included procedural pain, nausea and incision-site complications. Serious adverse events (SAEs) were reported for two patients in the sugammadex group (postoperative infection and postoperative ileus) and three patients in the neostigmine group (nausea/pain/dyspnea, gastric perforation/procedural complication and postoperative ileus). No SAE was considered study drug-related. Only one patient (neostigmine group) discontinued from the study because of two SAEs (gastric perforation/procedural complication) and subsequently recovered. No cases of hypersensitivity were reported in the study.

Text of the full study titled, "Reversal of Profound Rocuronium-induced Blockade with Sugammadex: A Randomized Comparison with Neostigmine," can be found on the Anesthesiology website. . . .
Smells like desperation to me -- as many larger unhedged multi-nationals are already (only one month into the fourth quarter) warning about potential foreign exchange/currency trainwrecks, should the euro's plummet, and the dollar's sharp rise, continue into December. Schering will definitely feel this effect -- and pointing the lank finger of accusation at FDA would not be above this crowd -- even though the two have literally nothing to do with one another.

Monday, October 27, 2008

Salmon is on FIRE! -- More of the Asenapine Chronicles

And, per Salmon's closing lament, below, we may widen our topics a bit, here -- in the very near future. . . . So do stay tuned!

. . . .I checked some of AZ, Org, and SP press releases and there were 4 acute schizophrenia studies (2 reported as positive and 1 as failed (i.e. neither asenapine nor the active control olanzapine, (Zyprexa), worked), thus the other study was negative (i.e. the active control worked but asenapine didn't). In addition there were 2 positive bipolar studies, and based on the reported results they appear robust in bipolar at least.

So even if the efficacy of asenapine in schizophrenia was so-so or even insufficient for approval, the reported evidence for bipolar appears adequate for approval. So it's puzzling why at least one indication wasn't approved or at least approvable.

However remember that at about the same time FDA changed their policy so as to no longer have approvable letters, only approval and nonapproval. This would make the real reasons for nonapproval more opaque.

Plus the acute schizophrenia study reported in the press release this week appears to be the same study reported at the APA meeting May 8th. Yet both the May and recent SP press releases said the safety results would be released later, (hmmmm).

Besides lack of efficacy, or clinical safety issues, there could be manufacturing issues or animal toxicology issues that might hold up approval. But these more typically result in approvable letters and not simply nothing.

Prior to negotiations for PDUFA IV pharma was making a lot of noise to get approvals right at the end of the PDUFA review period and no more approvable letters.

Also during the negotiations for PDUFA IV PhRMA was pushing to get the FDA to shorten the review clock to 8 months. This wouldn't fly but in a draft of PDUFA IV the as outlined in the bills for Food Drug and Administration Act of 2007, they did get that labeling negotiations would begin 60 days before the PDUFA due date if it was to be approved or approvable. Yet in the final version of PDUFA IV as outlined in the FDAAA 2007 this isn't specified but instead it refers you to a MOU. (Nice way to hide what's really going on.)

FDA regs indicate that going beyond the PDUFA due date can only be done if there is an agreement with the sponsor. Plus extensions to the due date are not to be done for major amendments (such as more data), and manufacturing issues etc. are now supposed to be taken care of by early communications during the review cycle so FDA can give an answer one way or the other at 10 months.

It is now over 1 year since filing. SP had to have known at least 5 months ago (around May when they first reported on this new long term efficacy study) if they were going to get an approval or approvable, and they could infer a nonapproval even before they would hear officially. They then would have had to make an agreement with FDA to extend the review clock. Another interesting clue is Fred Hassan’s rant on the front page of the Wall Street Journal on June 30th, saying he doesn't know how to get something past the FDA. Which is shortly after when he should have known what the results of the review were.

So we should have then heard news about approval at around the time of the 2nd Qtr report or shortly thereafter. But instead we only heard more bad news about Vytorin, i.e. Cancer. If they thought it was never going to be an approval SP would have withdrawn the application quietly and we would never hear anything. However the fact that they're still reporting positive studies and that they're long term suggests that there's an agreement with FDA to extend the review for some reason, and that these new studies will provide some additional safety information. (Even though regulations don't allow this.) All this suggests to me that Fred himself is withholding material information that would have sent the stock price even lower than it did go, and it may even suggest FDA involvement.

However even if the new data is a 6 month study it doesn't mean that people are on the drug for 6 months. (In the labeling for positive studies for other antipsychotic drugs for the same indication the average length of time on the drug until relapse was ~ 50 days and even though this was statistically different from placebo it was only about a week longer, which is so small it may not be clinically significant.

As you can see based on the way the new FDAAA 2007 law is set up, companies will know the results of whether a drug is to be approved or not 2 months before the public. This gives a lot of room for insider trading or other manipulations, including collusion with FDA officials. I followed this law closely and if you know how the process works it's virtually everything that Pharma could possibly want but you really need to know the process to know how to have written this law, which would require a lot of input from Pharma (i.e. Pharma virtually writing the law.)

That leads me to another interesting observation. The FDAAA 2007 is known as the Kennedy - Enzi bill. It just so happens that Ted Kennedy's son runs a consulting firm for Pharma called the Marwood Group. I've really got to wonder what sort of expertise Ted Kennedy Jr. has that he could be a consultant to Pharma (in addition to investors). ( Also Sen Kennedy has just been reported to be actively working on health care and expanded access and we know that this will help Pharma, especially those extremely profitable antipsychotics whose off label use and indications have been expanding and expanding. Just look at Seroquel XR (quetiapine) and all the new indications under study. Not to be partisan let's not forget Bush and his interest in expanded mental health screening programs for children.

Now the same day as Fred’s rant on the front page of the WSJ (June 30th), Janet Woodcock’s (the head of the center for drugs) Public Calendar shows she had a meeting with Ted Jr. of the Marwood group, ( Boy are there a lot of coincidences. As a speaker I have to wonder what clients would have been invited, and what would have she said that could be so interesting to Pharma and investors, and who would have paid for her travel expenses to NYC? Remember Congress has been looking into inappropriate meetings and communications between Sr. FDA officials and Pharma. Even if FDA paid is it really appropriate for the head of the FDA’s drug division to have a private meeting and discussion with investors and Pharma consultants that the rest of the investing public doesn’t have access to?

There's a lot more interesting stuff both on the limitations of efficacy as well as likely toxicities for asenapine and similar drugs that can be inferred by examining the literature and summary basis of approvals that aren't generally appreciated. This would be standard practice for any company to do. Plus Organon has been working on structures similar to asenapine since the 1960's. So they would know a great deal about toxicities. You've also got to ask yourself if they've been working on these structures since the 1960's why have so few come to market and why have they taken so long and why do they keep working on them.

It’s too bad you only post on SP, they’re not the only company whose drugs I follow.

-- Salmon

October 27, 2008 11:22 AM

We may have to do something about that. And soon.

Salmon's Continuing Asenapine Chronicles -- Next Installment -- Why DID Pfizer Bail Out?

The first installment of "The Asenapine Chronicles, by Salmon" may be found under the link in that title -- and Salmon is, as ever, spot-on, again. Consider the vast sums invested -- almost a quarter of a billion dollars -- that Pfizer apparently abandoned, and simply walked on (detailed below).

Now, a cynical critic of big pharma might also observe that a company with a certain amount of "pliability" on moral, ethical and legal dimensions might -- just might -- be, in part, banking on the fact that nary a single putative-long-term asenapine patient (being mentally-ill to begin with) will be a particularly capable or believable witness in any ensuing litigation about drug safety or efficacy -- if, in fact, it turns out to be unsafe, or unsound.

To such a company, what would matter most, would be how much Medicare/Medicaid (and the patch-work quilt of private health-plans) would be willing to reimburse for such a regimen -- even if it is ultimately found to be unsafe -- years after approval. But that, thus far, is merely a hypothetical scenario, as the candidate has not cleared FDA or EU authorities. Nor, I think, given Salmon's analysis -- is it ever likely to so clear.

. . . .Some other thoughts on Pfizer's actions.

Pfizer dropped out of codeveloping asenapaine in late November 2006. As I've mentioned before Organon's announcement of an accepted filing at Thanksgiving 2007 means that the NDA had to be submitted by early Oct 2007 at the latest or nearly 10 months after Pfizer dropped out of the deal. Since it takes about 9 months do analyses, write reports and to put together the documents for the submission. (even accounting for another couple of months so that both indications could be submitted simultaneously. This means that Pfizer dropped out after the Phase III studies were completed. Since there were 2 indications and both were submitted, and since the Phase II studies are presumably positive (otherwise the drug wouldn't have gone forward) asenapine likely showed efficacy in at least 1 phase III study for each indication which in combo with a positive phase II study is usually sufficient for approval, even if one phase III study was negative.

N.B. there have been published abstracts from meetings regarding study results.

Also Pfizer paid $100 million up front and presumably some other milestone payment (total, if filed, was supposed to be ~$300 million.) Let's assume a second $100 million milestone payment was made for a total of $200 million. In addition to this Pfizer likely conducted and paid for the US studies (assume 1 US study per indication per FDA's usual requirements) with 3 or possibly 4 arms: placebo, active control and 1 or 2 dosages. If there's 150 - 200 subjects per arm in a standard 6 week schizophrenia study and a standard 4 week bipolar study Plus a safety study at $7500/subject that's another $15 million at least. So Pfizer likely dumped at least $225 million into this drug and then walked away after all the work was done. Even if this drug doesn't work very well it still might mean several hundred million in sales per year anyway, which I don't think even Pfizer would walk away from as every penny adds to the bottom line.

To me the total evidence available in press releases points to Pfizer dropping the drug because of a safety signal.

-- Salmon

October 26, 2008 7:01 PM

Indeed -- we shall see.

Schering-Plough Spots a Small Ray of Sunlight, on Vicriviroc, a Phase III HIV Candidate. . . .

This is still no done deal, but Schering did get some encouraging news on its HIV candidate, vicriviroc:

". . . .These long-term results demonstrate that vicriviroc added to an optimized background therapy may provide durable viral suppression and sustained elevated CD4 counts in treatment-experienced HIV-infected patients," said Jihad Slim, M.D., division of infectious diseases, Saint Michael's Medical Center, Newark, N.J., and an investigator for the vicriviroc clinical program. "Importantly, vicriviroc was well tolerated, with some patients continuing on treatment for up to four years, and it was not associated with increased liver, CNS or cardiovascular adverse events or with an increased incidence of malignancy in this patient population. . . ."

As ever, with combination HIV therapy regimens, like these -- only time will tell.

Saturday, October 25, 2008

An Odd Development -- in the Schering Class Action ERISA Violations Cases

This will likely not change the process surrounding the ERISA putative classs actions pending against Schering-Plough related to ENHANCE non-disclosures -- resulting in alleged securities-law fraud, and alleged breaches of ERISA fiduciary duties -- in any other case, but I find it fascinating, nonetheless.

Apparently one of the original named plaintiffs (there are at least three named plaintiffs) had previously "served in a significant role in connection with conducting the Vytorin study" at Schering, and -- it is alleged, by Schering -- that participation in this suit would arguably violate his severance agreement.

My thoughts on this topic appear after the below excerpt -- from the motion preceding the proposed order:



MASTER FILE NO.: 08 Civ. 1432 (DMC)(MF)







1. Plaintiff John Oettinger (“Plaintiff”) hereby moves the Court for an Order approving his withdrawal as Plaintiff in the above-referenced action (“Action”). By Court Order dated June 27, 2008, Plaintiff was consolidated into the Action.

2. Plaintiff is a former employee of Schering-Plough Corporation (the “Company”) and a participant in the employee benefit plan on whose behalf the Action is brought. Specifically, Plaintiff served in a significant role in connection with conducting the Vytorin study, which is the subject of the Action.

3. After authorizing the filing of his complaint, Plaintiff had second thoughts about proceeding with his lawsuit because he believed he would be in violation of a severance agreement he entered into with the Company upon his departure.

4. Defendants do not oppose this motion. . . .

While some might view this development as favorable to Schering's chances -- as it appears that a true "insider" -- presumably, someone with first-hand knowledge of the ENHANCE delays -- is no longer involved in the suit, it is quite-likely going to turn out in exactly the opposite fashion. This will be a boon to the plaintiffs. How so?

First, Mr. Oettinger will likely still be called to answer questions under oath, in a series of sworn depostions, about what he knows. [And, rather sadly, it will allow the other plaintiffs' lawyers to treat him as a semi-hostile witness, should he balk at answering anything he had previously shared with them. More on that notion, in a futute, separate post.] And that may happen sooner than many think. See my earlier thoughts, on this topic.

Second, no legally-enforceable severance agreement may prevent this testimony. Such agreements may be construed to prevent bringing a separate suit, in one's own name, but Schering may not "purchase" the "unavailablity of key witnesses", in this manner.

Third, this very-likely means that Mr. Oettinger was let go in the latest round of layoffs, at Schering -- and, so this actually frees him up to answer deposition questions, without first consulting with any Schering attorney, for the defense. Now, under the customary terms of such a severance agreement, he can no longer "volunteer" information, and help, to the plaintiffs -- conversely, he cannot be prevented from telling the whole and unvarnished truth in depostions, or ultimately, in the witness box, on the stand, at trial -- should it not settle before then. It is highly-likely he has already provided the plaintiffs' counsel with much help -- prior to signing the agreement -- as would be well-within his legal rights.

Fourth, in the mean-time, Mr. Oettinger will have a (perhaps a highly-enhanced, non-standardized) bolus of Schering's money to "get by on" until this litigation progresses toward settlement, or trial. And that is a good thing, for him -- and his family.

Next, I am slightly-perplexed that apparently he brought the case while he was still a Schering employee -- more typically, this sort of suit would be filed by a retiree, or former employee. It isn't unprecedented, but it often does strain working relationships -- making the plaintiff a pariah in his own department.

Finally, were I a Lowenstein, Sandler (Schering defense) lawyer this morning, I might also be a little concerned that this filing suggests someone inside (or outside) Schering made some only-thinly-veiled threats against Mr. Oettinger -- the sort of threats that occasionally invalidate such a severance agreement's provisions. Understand that it is likely that Mr. Oettinger has laready received all his money under the agreement -- and such behavior would only detract from Schering's ability to stop Oettinger from disclosing secrets, or competing with it -- not a great scenario, that.

Kansas AG files suit for intentional drug price fraud -- joining 26 other states. . . .

Kansas becomes the latest of about 27 states to bring actions for fraud, and seek recovery of damages, from large pharma companies. Several of these suits, in other states, have already resulted in settlements in excess of $100 million -- with the payments coming from the pharma companies largely in proportion to the market share each held in any given FDA-approved drug, for which state reimbursement was sought. Schering has been a defendant in each of these -- and the drum-beat continues. It would be surprising, ultimately, only if less than all 50 states win damages from these companies. Here's a report from which I've clipped the snippet, below):

. . . .In the lawsuit, the State of Kansas says the pharmaceutical companies deliberately misreported drug price information in order to increase reimbursements made by the Kansas Medicaid program. Medicaid is the state-federal health care program for the poor. . . .

The Kansas Attorney General filed the complaint in Wyandotte County District Court. It accuses the defendants of violating the federal Medicaid statute, breach of contract, violating the Kansas Consumer Protection Act, fraud, and unjust enrichment. The suit asks the court to permanently prohibit the alleged illegal practices, and it seeks recovery of damages, penalties, and costs.

The Defendants in this lawsuit are: Takeda Pharmaceutical Company Limited, Abbott Labs, Wyeth, TAP Pharmaceutical Products, Inc., Schering Plough, Purdue Pharma LLP, Mylan Labs, Forest Labs, Boehringer, GlaxoSmithKline, Johnson & Johnson, Alza Corporation, Janssen Pharmaceutica Products, LP, McNeil-PPC, Inc., Ortho Biotech Products, LP, Ortho-McNeil Pharmaceutical, Inc., and DEY, Inc.. . . .

Obviously, the market participants with the largest sales in a particular category have the most to lose -- nationwide, during just the last three years, perhaps $300 million, in Schering's Cholesterol Franchise, alone. Ouch.

Merck Version of Vytorin/Zetia Securities Fraud Suits Now Consolidated. . . .

Not exactly Earth-shattering news, but Judge Cavanaugh has -- just this week -- consolidated the various Merck versions of the ENHANCE Vytorin/Zetia securities fraud putative class actions, under the 08-2177 action number, and caption-name (click it -- to enlarge to fully readable-size). Note also that CEO Dick Clark has been sued, for personal liability, in these suits. But do not weep prematurely for him (or Fred Hassan, Carrie Cox, Hans Becherer, et al. -- in the Schering-Plough versions of these suits). Why?

Assuming each acted with due care (or at least, without gross negligence, or intentional malfeasance), and in good faith (typically by relying on experts), each of their personal costs and expenses, including separate counsel, if need be, will be covered by applicable officer and director insurance policies, during the pendancy of the litigation.

If any of these folks are found to have acted in bad faith, or in a grossly-negligent fashion, the above D & O insurance becomes unavailable to cover any actual damages awarded (and they'll owe the companies for the lawyers' fees). In that case, they'll need to sell their second (or third, fourth or fifth!) homes -- to cover it.

Friday, October 24, 2008

Meanwhile, the euro is at its Weakest (v. the US Dollar) in at Least the Last Two Years. . . .

. . . .While this development makes travelling to Europe more appealing (forgetting the economic pinch, which causes people to be fearful of spending, generally) to tourists originating from inside the United States (i.e., cheaper goods) -- it also spells a potential Q4 disaster for largely unhedged multinational US companies like Schering-Plough.

CEO Hassan often crows that more than 70 percent of Schering's sales are made in other than US currencies -- the euro chief among these. "Russia, too!", as he often says. Well, when the dollar strengthens against the euro (and the Rouble), Mr. Hassan brings home fewer dollars of revenue, for the exact same volume of sales, in Europe, and Russia.

It is as though his drugs are being sold at an involuntary -- and accelerating -- discount, throughout the weakening-currency countries (essentially everywhere on Earth, except Japan), at the moment. The sharp decline in the euro (and the Russian Rouble) has been so abrupt, and alarming, that even the New York Times now is suggesting -- perhaps -- a currency "intervention" may be in order:

. . . .So great are the concerns among policy makers about the turmoil in currency markets that it has prompted talk of a coordinated intervention by the leading industrial countries in coming days, to quell the soaring dollar and put a floor under emerging-market currencies.

Such a move — in which the Federal Reserve and other central banks would sell dollars and yen and buy other currencies — has been used extremely sparingly by the United States in recent years.

“The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic,” said Kenneth S. Rogoff, an economist at Harvard. . . .

As is almost always the case, such an intervention will do almost nothing to improve Mr. Hassan's -- and Schering's -- fourth quarter malaise. [Recall that Russia is also a explosively-growing foreign currency exposure problem for Schering -- see graphic, above.]

This is why going largely unhedged, or naked, is a rather foolish long-term approach to financial risk management at any large US-based multi-national. Sure, in times of a weak dollar, companies like Schering enjoy a currency "tailwind" -- it is as though each sale in euros, Roubles and yen is made at a premium price point, and Schering need do nothing to "earn" it -- it was just "forked over" by the foreign-exchange gods, and goddesses (a tailwind that would be eliminated by effective hedging -- but so too would any later arriving "headwind" be eliminated).

But now -- in times of a strong, and strengthening, dollar -- the illusion of growing sales volumes reverses -- and Schering may actually book sales declines -- not just lower growth in sales -- in the fourth quarter of 2008. A triple whammy -- (1) Vytorin/Zetia swoons, (2) slower (to no) FDA approval of new drugs (think Sugammadex, here), and (3) evaporating currency advantages.

Live by the sword -- die by it too, Fred. Die by it, too.

Of Commenter Salmon's Keen Observations on the Schering Asenapine Trial. . . .

UPDATED 10.27.08 -- Do go read Part Three of the Continuing Asenapine Chronicles. Follow the link.

In comments, earlier, Salmon laid out some fascinating inferences from the Schering Asenapine press release of yesterday. They deserve a much-wider audience -- thanks, Salmon!

Do take a look:

. . . .Asenapine was filed over a year ago. It should have been approved already, yet nothing has been announced. When you have an add-on a study like this -- with no news on an approval and safety data to come out at a later time -- it points to major safety issues with a drug.

Since structurally similar compounds with major safety issues are marketed i.e., Zyprexa and even Clozapine with restricted access, this points to potentially huge safety issues. [Is this] another study carefully-designed with exclusion of certain subjects (e.g. bipolar) that may be intended to dilute out and obfuscate serious adverse effects[?]. . . .

[Later. . . . Do click on the image, at right, to view full size.] For what it's worth -- this study appears to be the same as the one the results were reported on, towards the end of last May or early June. If that's the case, then SP should have already had more than enough time to complete their analysis of safety data and to submit the results during the present review cycle. If there is a safety issue especially in bipolar this study would dilute the overall incidence rates.

I looked at SP's press release, and it was a 6 month placebo controlled study in 700 people at doses of 5 mg and 10 mg with only about 380 people on asenapine with some sort of run-in period -- that made no sense -- and may indicate they were screening out people (e.g., who switched meds from an active control during acute treatment), and either lost efficacy, or then had toxicities on asenapine.

If half the people on asenapine received 5 mg and half 10 mg then only about 165 people got the higher dose. Based on this, you can't even be guaranteed to see even a single case of a serious dose related toxicity [if that outcome were to occur] in 1% of people. Plus, this says nothing of cumulative toxicites, that show up after 6 months. Since there's no active comparator (the most obvious would be Zyprexa) you can't even tell if it's less safe than Zyprexa -- which is likely also intentional.

Overall, things look very fishy.

-- Salmon

Quite well-reasoned, and yes, indeed, they do. . . . Again, thanks for taking the time to share your expertise, and practiced perspective, here, Salmon!

Even later (in commentary, below), Salmon has this to offer:
There are other things that are suspicious about this program. For example this drug has been in development for decades. It simply doesn't take that long to do 4 - 6 week acute efficacy studies in an illness that's common and for which it's easy to show efficacy. (Preclinical prior to human studies only takes 2-3 years max.)This suggests that there were either safety or efficacy problems(or both) noted a long long time ago.

Pfizer also dropped codevelopment of the compound which was proposed to bring in over $2 billion/year.

The fact that we haven't heard anything in the last 2 - 3 months when we expect to hear at least something and we've got additional bad news with Vytorin during the same timeframe suggests that SP doesn't want to release any more bad news at the same time and drive the stock price even lower. (Looks like withholding of material facts to me.)

Plus maybe you can comment on this, but it this were such a great drug why wouldn't Azko Nobel simply take Organon public like they planned rather than sell it outright to SP. Looks like AN simply took the money and washed their hands of a dud with problems.

-- Salmon

October 24, 2008 4:27 PM

[My thoughts on Salmon's last paragraph, immediately above, are now in these comment-streams.]

Subsequently, an anonymous commenter just offered an echoing concern -- and an excellent observation:
I agree with Salmon. There is something 'amiss' here.

Why did Pfizer pass on this? You could say Azko didn't move on their own as they wanted to rid themselves of pharmaceuticals -- to concentrate more on chemicals. But Pfizer passing. . . . must be something wrong.

October 24, 2008 5:57 PM

Thursday, October 23, 2008

Well, on Schizophrenia, it works better than a placebo, at least. . . .

UPDATED 10.27.08 -- Do go read Parts Two and Three of the Continuing Asenapine Chronicles. Follow the link.

This is at least one small relief, to the folks in Kenilworth -- Schering's psychopharmacologic agent, asenapine, has met the primary endpoint in a long-term schizophrenia relapse prevention trial. Asenapine, which is administered as a fast-dissolving sublingual tablet, is a psychopharmacologic compound for which Schering is seeking European/EU (and US FDA) approval. It was only filed as an NDA with the FDA in June of 2008 Q4 2007 (and, as an obviously well-experienced, putatively anonymous commenter below notes, it may have a some basic science/side-effect concerns ahead of it) -- so this product is likely still at least three or more years away from the US market, at the moment.

In any event, quoth today's Schering press release:

. . . .Asenapine was statistically significantly more effective than placebo in preventing relapse, the primary endpoint of the trial. Asenapine was generally well tolerated during the trial. Full results of the trial, including efficacy, safety and tolerability data will be presented at a later date. These data are planned to be used to support a regulatory submission for the approval of asenapine in Europe. . . .

And still the stock swoon continues -- Schering is down below $12.20, in mid-afternoon trading, on the NYSE -- under heavy volume flow.

Okay -- What is the Post-Q3 Results "Hard Net Assets (per Share) Value" of Schering-Plough?

I won't lay out all the math in this post, as it involves a whole slew of assumptions about how much of each Schering product's revenue for all of 2008 comes from countries with newly shifting currency-headwinds -- as well as some estimates of what the effects of the "natural hedging" in those currencies would likely be. That is, I've estimated how much the currency headwind effect would be dampened by the fact that Schering actually holds assets -- property, plant and equipment -- in those countries. And, I've "baked in" the just-released Q3 results.

Next, I've "repatriated" a linear amount of full-year 2008 earnings to the United States -- and paid taxes on them -- again, taking into account the much-less favorable euro exchange rates, now prevailing in the For Ex markets.

In more placid times, one would next simply accrete that figure to the current price per share of Schering, and derive a 2008 year end per share value. Not so, in these extraordinary times. Forgetting Schering's own unique woes, we must now contend with market-wide, systemic uncertainties -- uncertainties not seen in at least 30 years (and perhaps, not seen in 80 years). . . .

No, in these uncertain capital markets, a prudent investor would look at what the net hard assets are worth per share (assuming alomost no "going concern" value), plus say 20 percent, then layer back in 2008 earnings, as calculated above.

When I do all of that, I come up with a new "hard-rock bottom" price per share for Schering common stock of just over $10 per share -- $10.13, to be precise.

I think I can very safely say that if Schering hits $10 per share, it is a buy. Above that price, I would not be comfortable declaring it a buy. In fact, I would not want to hold it above that price. Said another way, I still see about $2 of shorting opportunity here -- or another quick 20 percent to be made -- by the bold among us.

As I post this, Schering is trading down, in an up market (Merck is rising, as well!) -- the Real Time ECN pegs SGP at $12.55 per share. [At noon-time, SGP hit $12.09 -- after I posted this -- down over 16 percent in two days.] Ouch.

Your opacity is causing your pain at the moment, Mr. Hassan.

Wednesday, October 22, 2008

So -- What Will AstraZeneca present to AHA about JUPITER?

On this morning's Merck Q3 earnings conference call, the Barclays Capital analyst asked how the Vytorin/Zetia Joint Venture expected to shift its physician messaging points, once the expected Crestor-JUPITER presentation to the American Heart Association has been completed. The thought here is that Crestor now apparently shows a risk of morbidity benefit -- a benefit Vytorin/Zetia cannot claim.

The question thus becomes "How does one sell a drug that does no better than a placebo -- a placebo that costs five times a generic statin -- and now, as compared to Crestor, given AstraZeneca will apparently shortly be able to truthfully claim a reduced risk of death from cardiovascular events -- while taking Crestor?"

How? I dunno.

Now, just for background, here is the March 31, 2008 press release, from AstraZeneca, on the early halt of JUPITER:

Crestor Outcomes Study JUPITER Closes Early Due To Unequivocal Evidence Of Benefit

March 31, 2008

AstraZeneca today announced it has decided to stop the CRESTOR JUPITER clinical study early based on a recommendation from an Independent Data Monitoring Board and the JUPITER Steering Committee, which met on March 29, 2008. The study will be stopped early because there is unequivocal evidence of a reduction in cardiovascular morbidity and mortality amongst patients who received CRESTOR when compared to placebo.

JUPITER (Justification for the Use of statins in Primary prevention: an Intervention Trial Evaluating Rosuvastatin) was designed to determine if treating patients with no evidence of pre-existing cardiovascular disease and low to normal LDL-C but elevated C-reactive protein (CRP) with CRESTOR 20mg once daily would reduce major cardiovascular events. CRP is a recognized marker of inflammation and is associated with an increased risk of atherosclerotic cardiovascular events.

The JUPITER study team has initiated activities to close this large multi-centre study. Over 15,000 trial participants will be scheduled by their investigator for final assessments at over 1,200 sites in 26 countries. Data from these visits will be collected and reviewed to allow a full and complete analysis and final results of the study will be published once the analysis is complete.

JUPITER is one study from the global research initiative known as the GALAXY programme, which has now recruited more than 64,000 patients from 55 countries worldwide, to investigate the impact of CRESTOR on cardiovascular risk reduction and patient outcomes. . . .

It certainly seems as though the Schering-Merck Cholesterol Joint Venture (to sell Vytorin/Zetia) is running out of runway, here. . . .

Upshot of Merck's Revised 2008-2010 Guidance -- Schering Equity Income to Decrease Significantly More than Earlier Expected. . . .

I'll live-blog the Merck call, later here (as other duties beckon me this morning), but for now, know that 2008 Cholesterol Joint Venture Equity Income at Merck is projected to be more than $700 million less than last year -- off by about 30 percent year-over-year. Quoth MarketWatch:

. . . .Pharmaceutical giant Merck & Co. said Wednesday that it will cut 7,200 jobs by the end of 2011 to lower costs, with 40% of the reductions coming from the U.S. Merck also will cut its number of senior and mid-level executives by about 25%. As of Sept. 30, Merck had about 56,700 employees. The job cuts plan came as Merck said its third-quarter net income fell to $1.09 billion, or 51 cents a share, from $1.53 billion, or 70 cents, a year earlier. Sales declined to $5.94 billion from $6.07 billion. Excluding items, the company said it would have earned 80 cents a share. Merck also forecast full-year profit excluding non-recurring items of $3.28 to $3.32 a share. It was expected to earn 79 cents a share in the third quarter and $3.28 for the year. . . .

It has been a busy day on my other gigs, so instead of doing more local color on the Merck Q3 conference call, I'll let you all hear directly froma very able source -- Ed Silverman, late of, here:
Discussion about Merck layoffs

And, for his part, this morning, Merck CEO Dick Clark had this to say [Schering CEO Fred Hassan might do well to follow Mr. Clark's lead, here]:
. . . .We've always been straightforward and realistic when speaking to investors about Merck's business and intend to continue to communicate openly and candidly about where we stand and what we plan to do to accomplish moving forward. The experiences and events of 2008 have been instructive to me and the leadership team. We will be proactive in addressing all challenges facing our business. . . .

Although we've seen an additional 8% decline in new prescriptions since the initial release of the SEAS results, the rate of volume and share declines for the JV has slowed throughout the year.

However the overall cholesterol market growth has been slower than expected. And while we expected the JV brands will remain competitive in terms of managed care, provisioning in 2009, we anticipate a reduction in formulary coverage from 2008 levels. . . .


Tuesday, October 21, 2008

Q3 Earnings Release: One Time Items, Currency Tailwinds, and Write-offs -- Oh, My!

While Schering nominally beat the $0.31 EPS the Street had expected, it did so just as I expected, last week -- it gained from disposal of the respiratory joint venture, continued streamlining gains on PTP, and foreign currency tailwinds. These are non-repeating sources of growth -- not organic growth.

15 to 17 cents of EPS, or 12 to 13 percent, of all of Schering's global 9 months net income growth was driven by currency gains, according to the UBS analyst, Rupesh Patel. Those will very-likely be reversed, and turn into headwinds -- in the fourth quarter, based on global financial market conditions thus far in Q4.

▲ In short, earnings quality was poor, in the third quarter, and pock-marked by the Vytorin/Zetia swoon:

▲ More in a moment, but President Carrie Cox just said that

. . . .Cholesterol Franchise sales were down 29 percent for the nine months. . . but we expect that Vytorin/Zetia will retain Tier 2 status with Medicare/Medicaid. . . .

▲ I think she'll eat those last words on the year end 2008 conference call.

▲ In addition, keeping Tier 2 status for Vytorin/Zetia will be tough, given the recent reimbursement decisions in New York and Illinois.

▲ Moreover, sugammadex, or Bridion (by brand-name; earlier deemed non-approvable by the US FDA), is going to be less than a penny a share of EPS for the year 2008, yet CEO Hassan and Carrie Cox both made it a focal point of their remarks -- saying in Europe, the Bridion market will grow "slowly over time". . . . This is simply embarrassing.

Jamie Rubin, now at Goldman Sachs (no longer with Morgan Stanley) just asked why there was "no gross margin improvement" 2008 over 2007, if in fact, the Organon acquisition should now show at least some synergy benefits to gross margins. She just got a run-around answer.

▲ Tim Anderson, at Sanford Bernstein, just suggested that the AHA may have new data -- negative data -- out of ongoing SEAS analysis. He also got Carrie Cox to admit that Vytorin/Zetia is experiencing accelerating pressure from generic statins in the United States formularies, Medicare and Medicaid.

▲ I think Schering's stock will now fall -- by NYSE close, at least open -- the management team keeps dancing around the actual questions on currency, overall -- and as to whether the swoon in Vytorin/Zetia will result in an additional cutting of spending in the franchise operations. I expect that Merck will be more forthcoming on this -- tomorrow morning.

[UPDATED -- 10.22.08 -- Post the Merck Q3 Call, below]

On Wednesday morning, October 22, 2008, Merck CEO Dick Clark had this to say [Schering CEO Fred Hassan might do well to follow Mr. Clark's lead, here]:
. . . .We've always been straightforward and realistic when speaking to investors about Merck's business and intend to continue to communicate openly and candidly about where we stand and what we plan to do to accomplish moving forward. The experiences and events of 2008 have been instructive to me and the leadership team. We will be proactive in addressing all challenges facing our business. . . .

. . . .Although we've seen an additional 8% decline in new prescriptions since the initial release of the SEAS results, the rate of volume and share declines for the JV has slowed throughout the year.

. . . .[S]ome of those most recent decisions made in Medicare Part D have been not as positive for Vytorin and Zetia but its also important to keep in mind that they represent only 20% of the book of business. So today we reimburse without restriction or about 75%, next year we believe it will be about two thirds. . . .

However, the overall cholesterol market growth has been slower than expected. And while we expected the JV brands will remain competitive in terms of managed care provisioning in 2009, we anticipate a reduction in formulary coverage from 2008 levels. . . .


▲ And that last bit, bolded, immediately above, would mean Carrie Cox will likely eat her words about Tier 2 -- before year-end 2008.

The unvarnished truth now emerges -- over at Whitehouse Station -- just as Kenilworth's Cheshire Cat-like grins fade away. . . .


Monday, October 20, 2008

When is an "Initiates Coverage -- at Equal Weight" not-so-good news?

. . . .When the coverage actually reflects a "downgrade" -- from earlier opinions, by many of the same analysts -- that's when. First, a little refresher, here:

Recall that Barclays Capital purchased the US brokerage businesses of Lehman, in that collapse. Recall also that Lehman had most-recently upgraded Schering from "Equal Weight" to "Overweight" on July 15, 2008 (of course, thus just exactly reversing its downgrade, earlier in 2008). . . .

With me so far? Good.

Well, this morning Barclays Capital -- as sucessor to Lehman's analyst stable -- started coverage of Schering at "Equal Weight". So -- if we look through the little glass windows, we see that most of the same people who upgraded Schering in July, are now starting it (anew), under the Barclays Capital name, at a lower grade -- right back where it was when ENHANCE was first fully-disclosed by CEO Hassan:
. . . .10.20.08: Barclays Capital initiates coverage on Schering-Plough -- at Equal Weight. . . .


60 Page Amended Consolidated Complaint in Gradone ERISA Case against Schering Officers and Directors

Last week, the plaintiffs' lawyers filed an amended and now consolidated putative class action ERISA complaint against CEO Hassan, CFO Bertolini, the head of HR (Cheeley), the administrator of various plans (Sweeney), and the Board of Directors, as well as Schering-Plough itself -- expanding upon the theory that these people violated their fiduciary duties under ERISA -- when each allowed, or recommended as a "prudent retirement investment" (to the rank-and-file Schering employees, and retirees) sales of Schering stock to the ERISA plan participants at $25, $26, $27, $28, $29, $30, $31 and $32-plus prices per share -- throughout 2006, 2007 and into early 2008.

The key question to be decided, as a factual matter, will be when did all or any of these officers and directors know that ENHANCE would bring "no good news". In that sense, the Gradone ERISA case does not depart from the theories advanced in the various other putative class action suits, so I'll not rehash it, paragraph by paragraph, here. For those keeping score at home, though, here is a link to the full 60-page PDF file, from the U.S. District Court in Newark.

Stay tuned here for Schering and Merck Q3 earnings news, as the same breaks.

Saturday, October 18, 2008

JP Morgan's "Franchise 16" -- One "Sweet 16 Dance" to which Schering was "Not Invited" -- While Merck was.

Overnight, JP Morgan-Chase's analysts put out a "go to" list of investments -- per Bloomberg -- a list of the "Sweet 16", or Franchise Stocks you should own, in this recessionary environment. Only a few are health-care names, at all. Among the health-care names on the list, though, there aren't any surprises. Baxter, Gilead Sciences and Merck made the cut. Low debt-loads, high profitability, high cash-generation, and return to shareholders, along with strong franchises -- were the primary metrics by which JP Morgan selected these names. The omissions however, were rather revealing -- no JNJ, no ABT, no PFE and yet. . . .

What tickled me most was that Merck was named as among these 16 best, yet Schering-Plough was not. Significantly, recall that JP Morgan did underwrite almost $800 million of Schering-Plough securities early last fall (August-September 2007), so it would seem to have a very-significant incentive to name Schering, and create some pull-through cushion for Tuseday's Q3 earnings release. In point of fact, Merck hasn't needed to raise equity capital in the markets in many years (it is not likely to need to, in the near term, either -- as it last issued some, indirectly, in the Rosetta transaction in 2001 -- excluding of course, the regular employee benefit plan stock issuances). [On the other hand, JP Morgan also structured, then abandoned, a bearish index-linked note offering, on Schering-Plough in June of 2008. So, go figure.]

The third quarter earnings release call is going to be very contentious. The analysts ought to grill CEO Hassan and CFO Bertolini about where Schering will find sustainable net income -- as opposed to simply where sales revenue is flowing. In any event, by Wednesday, when Merck resets its 2008 to 2010 guidance, we will all know just how deep the swoon in Vytorin/Zetia is likely to be, given that we'll hear from people inside the situation rooms. And in the process, Dick Clark's new glasnost initiative or "transparency" efforts at Merck will inevitably put some pock-marks on Schering's public relations spin-machines. Mark my words.

Here's a snippet from the Bloomberg item:

. . . .The requirements are low debt levels, return of cash to investors in the form of dividends or buybacks, and profitability. In addition, they're viewed by the bank's analysts as having the ability to prosper in a global slowdown. . . . The Franchise 16 list is distinct from JP Morgan's U.S. Analyst Focus List of researchers' favorite companies among the 1,200 they cover. The new list includes 16 companies because only that many met the criteria established for it. . . .

The companies are: 3M Co., Baxter International Inc., Colgate-Palmolive Co., CA Inc., Devon Energy Corp., General Mills Inc., Gilead Sciences Inc., Google Inc., Hewlett-Packard Co., McDonald's Corp., Merck & Co., Monsanto Co., Nucor Corp., Philip Morris International Inc., Union Pacific Corp., and Visa Inc. . . .

It is time to tell the whole truth, Mr. Hassan -- without any material ommission -- without spin. More and more, I am becoming convinced that your company's very survival is going to depend on it. I say so, because too much more of this nonsense, too-many more meaningless quarterly non-informational calls, and Schering will not even be a credible candidate for buy-out -- it will become only a candidate for a "bust-up" -- or a "for firewood" sale. And the animal health businesses -- with Kohan suddenly back in the driver's seat, there -- may be the first bundle of kindling. We'll see.

End of Vytorin/Zetia? Merck Decides to Switch Cholesterol Horses -- the Return of "Cordaptive"?

Again, in keeping with the meme of getting more news out (in this case, more bad news for Schering-Plough's joint venture with Merck) prior to Q3 earnings on Tuesday/Wednesday, we learned after market-close tonight (via an AP item) that Merck is going to revive, and expand, its efforts to seek FDA approval for its "next generation" cholesterol management drug candidate (Merck was seeking to call it "Cordaptive", but the FDA had earlier nixed that, as well) -- after most-recently receiving a non-approvable letter from the FDA -- the Friday after the Merck 2008 Q1 earnings release conference call. Here's a snippet from the Linda Johnson/AP item on it:

. . . .Merck & Co. is expanding an already-large study of an experimental cholesterol drug -- rejected this spring by U.S. regulators -- to get results sooner so it can move up its second bid for approval.

The drug, known as MK-0524A, combines the B vitamin niacin and a drug called laropiprant to limit the facial flushing caused by niacin. It was rejected in April by the Food and Drug Administration, which said it wanted results of a major international trial known by the acronym THRIVE before ruling again, Merck spokesman Ron Rogers said Friday.

The study, run by Oxford University in England, began in May 2006 and was to end in 2013. In a statement, the university's Clinical Trial Services Unit said it would expand the number of patients included from 20,000 to 25,000. . . .
There can be no doubt that this is a reflection on the Schering-Plough/Merck joint venture -- as Merck released this news through a spokesman -- without issuing a press-release to trumpet it.

Yep -- this development was apparently shared entirely orally with the AP writer.


Friday, October 17, 2008

Schering-Plough (Again!) Lost Share -- in an Expanding U.S. Cholesterol Market, Last Month. . . .

[UPDATED: now we learn that Merck's Cordaptive -- and the THRIVE study -- will rise from the dead -- the "dead" in this case being an FDA non-approvable letter right after Q1 earnings release. . . . Wow! It just gets worse and worse for Schering's joint venture.

10.20.08 AM: Each of Ed Silverman, at Pharmalot, Dr. Peter Rost and the Insider (Jack) at Pharmagossip have now linked this one of mine! Cool!]

September IMS data puts Schering below 11 percent in U.S. market-share -- at 10.9 percent, compared to 11.35 percent in August 2008 -- or a sequential month to month decline of around 500 basis-points [Click the images to enlarge]:

September 2008:

US Cholesterol
Management Market -- 19,923

Total Merck/Scher-
ing-Plough Franchise -- 2,171



This older graphic conveys a proportionate sense of how U.S. share is shrinking:

So, just as I predicted, the Schering Q3 Earnings Conference Call promises to be rather ugly on Tuesday morning, now. The strategy appears to be get some news out ahead of it, to ease the blow. . . . Yep:

In other news, CEO Hassan appears to have ousted the former head of Organon's Inervet/Animal Health businesses -- reinstating Raul Kohan's leadership of this franchise. . . .

Come Tuesday -- the Schering Story will be "Earnings Quality" -- or, the lack of it.

I'll live-blog the earnings call here, on Tuesday Monday morning -- before market-open, so do return then. . . but here are some (educated) guesses. . . .

A significant portion of the third quarter 2008 Schering-Plough earnings are likely to have been derived from sources that lack "quality" -- that is, they are likely to chiefly come from non-repeating sources -- special, one-time gains, on currencies, for example (the trend-line on which have reversed, and sharply, since the third quarter closed), and one-time pull-throughs from cutting heads -- some 4,000 in the third quarter alone.

I noted with interest how prominent consumer health and currencies were in JNJ's earnings just announced, and the relative decline in pharma profitability -- so, I'd look for much of the quarter's "earnings growth" to be due to currency exchange rates, not actual organic drug product sales growth (even internationally, where about 60 percent of all Schering's sales occur -- but far less profit) -- I'd also look for the Cholesterol Franchise to continue its year-long fainting-spell. . . . The current Q3 EPS consensus target?

. . . .Consensus Wall Street Analysts' estimeates are for EPS of $0.31 per fully-diluted share. . .
Will Schering beat it, or come in a penny under? I guess we'll have to wait and see.

See you, here, bright and early, on Tuesday -- now remember, too that Merck will report on Wednesday, before market open -- Yep -- I'll cover that, as well. So, expect a busy start for the week.