Well, That Was Fast! -- Amended Consolidated Complaint to Enjoin Merck Merger Filed

Only yesterday, federal District Court Judge Cavanaugh ruled that the suits challenging the merger ought to stay in New Jersey's federal courthouse, and all the identical state court actions should be dismissed, and consolidated into one federal putative class action. The ink on Judge Cavanaugh's order had scarcely dried, when all the plaintiffs' lawyers convened -- to re-file a single, amended, consolidated 40 page complaint in the litigation.

This litigation, In Re Schering-Plough/Merck Merger Litigation (Case No. 09-1009, U.S. Dist. Ct., N.J., amended complaint filed June 3, 2009), names the Schering-Plough directors and several officers personally, alleges breaches of various fiduciary duties, and seeks to delay the merger long enough for a full-on "market-check"/auction to take place. The entire 40 page PDf file of that amended complaint is right here -- but here is a juicy new bit:

. . . .53. If there were any doubt that the Proposed Transaction shortchanges Schering-Plough shareholders, that doubt was quelled mere days after the March 9, 2009 announcement.

Specifically, on March 12, 2009, Schering-Plough issued a press release revealing positive results of a Company-funded Phase II study of its thrombin receptor antagonist drug, SCH 530348, a drug designed to combat stroke in patients at risk of cardiovascular events:

Results of a Schering-Plough Corporation (NYSE: SGP) Phase II trial of SCH 530348, a novel oral thrombin receptor antagonist (TRA), were published today in The Lancet and demonstrated that the investigational antiplatelet compound met its primary endpoints of safety and tolerability. TRA showed no increase in major and minor Thrombolysis in Myocardial Infarction (TIMI)-scale bleeding when given with current standard antiplatelet therapy (aspirin and clopidogrel) for patients undergoing percutaneous coronary intervention (PCI), commonly known as balloon angioplasty with stenting.

“The results of this study are encouraging as they support the viability of TRA as a potential new antiplatelet therapy option,” said Richard Becker, MD, director of the Duke Cardiovascular Thrombosis Center and lead author of the study. “TRA appears to work in a novel way that is complementary to current antiplatelet therapies,” he further commented.

54. Schering’s press release revealed that, not only had SCH 530348 met its primary goals in the study, but Schering’s drug reached its secondary goals as well:

Another important result from the Thrombin Receptor Antagonist Percutaneous Coronary Intervention (TRA-PCI) trial was the rate of thrombin-receptor agonist peptide (TRAP)-induced platelet aggregation inhibition, a secondary endpoint. Thrombin is the most potent platelet activator, which leads to platelet aggregation and the development of blood clots. In the study, TRA showed a much higher TRAP-induced platelet aggregation inhibition compared to standard of care alone in both loading and maintenance doses.

55. Upon the announcement, the market instantly realized the potential value of the drug and its corresponding benefit to Merck, the company that, just days prior, had agreed to purchase Schering. Indeed, the following day, on March 13, 2009, Merck shares rose more than 12.6%, adding $6.4 billion in market capitalization to Merck stock. The Associated Press reported that “Shares of Merck and Co. surged Friday after Schering-Plough Corp., which it plans to acquire, reported positive trial results for an anti-clotting drug.”

56. Industry analysts were similarly thrilled. The morning following the announcement, Tim Anderson, Bernstein Research analyst, predicted that SCH 530348 could grow to become a several billion dollar per year drug, and upgraded Merck shares to “Outperform” from “Market Perform,” noting that the Schering-Plough buyout strengthens Merck’s position in the coming years. Anderson also raised his price target for Merck to $30 per share, a 37% premium over Merck’s closing share price on the previous day. Additionally, ValuEngine, a stock valuation and forecasting service, upgraded Merck to a “5” rating, ValueEngine’s highest rating.

57. Interestingly, Merck’s stock surged immediately prior to Schering’s positive news release, gaining more than 9.5%, a $4.4 billion increase in shareholder value, on March 12, 2009, the day of the announcement. Wall Street insiders were undoubtedly privy to this soon-to-bereleased information and caused this spontaneous spike in Merck’s share price. As Dow Jones reported, on the day of and the day following the announcement, Merck “posted the biggest two-day percentage gain in their [sic] history” and “added more than $10.8 billion to Merck & Co.’s market capitalization.”

58. Had the Company released the positive results of the SCH 530348 Phase II trial at any time prior to the Proposed Transaction’s announcement, the more than $10 billion in shareholder value would have inured directly to Schering shareholders through a rise in Schering share price. Instead, by allowing the announcement of the Proposed Transaction prior to Schering’s release of the positive trial results, it was Merck shareholders that received the benefit through an increase in Merck share price. These events establish that the purported 34% premium to be received by Company shareholders is illusory, since if the value of the drug been taken into account in the March 6 offer, it would not have represented a premium at all, but a discount of 2.7%. . . .

I'm not sure I'd buy all of that, as it arguably suggests that the directors and officers could lawfully "manipulate" the disclosure timeline on TRA, if it would only benefit the Schering-Plough shareholders. I don't think that correctly states the law applicable to these sorts of transactions. But I do think this "wrongful transfer of value" argument is an interesting one.