Schering-Plough's 2008 SEC Form 10-K: Just Filed With SEC

I'll have several other observations, in the coming days and weeks, on the main body here, but two new legal/investigatory developments appear deep, deep deep in the Merck Schering-Plough Cholesterol Joint Venture's Supplemental Audited Financial Statement Footnotes (past page 128, at Footnote 9, on page 128).

First, the Congressional Committee investigation has generated three new letters since August 2008 -- focusing on the SEAS trial. Only one of these letters was publcily disclosed previously -- that being the February 19, 2009 letter, released by the staff of the Sub-committee itself.

More ominous, though, is the second new development -- as of September 2008, Merch/Schering-Plough was informed of a new facet of the civil DoJ investigation (per page 128 of the filing).

There is apparently a new (and separate, more formal) Department of Justice investigation underway -- specifically into whether the sales and promotion practices Schering-Plough employed to market Vytorin constituted civil violations of the federal False Claims Act (in causing sales to government payers or reimbursement authorities) -- the False Claims Act prohibits defrauding the government in the sale of products to it.

That is all new. The DoJ was known to be looking into the matter generally, presumably for civil false advertising, and perhaps, securities law violations. The Second Quarter 2008 Form 10-Q confirmed this -- referring ratherly blithely to a letter from DoJ (at the bottom of page 40: ". . . .requests for information from U.S. Attorneys seeking similar information and documents. . . .").

Tonight's language is far more formal, less breezy -- and implies an escalation in either (1) the seriousness of the DoJ's attention to the matter; or, (2) perhaps, in the seriousness with which Schering-Plough is approaching its disclosure obligations to the SEC, and responsiveness to the DoJ. Take a look:

. . . .As previously disclosed, since December 2007, Merck and Schering-Plough have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations (“O&I”), and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sale and promotion of VYTORIN, as well as sales of stock by corporate officers of Merck and Schering-Plough. In addition, since August 2008 the Partners have received three additional letters from O&I, including one dated February 19, 2009, seeking certain information and documents related to the SEAS clinical trial. . . .

. . . .Finally, in September 2008, Merck and Schering-Plough received a letter from the Civil Division of the U.S. Department of Justice (“DOJ”) informing them that the DOJ is investigating whether the companies’ conduct relating to the promotion of VYTORIN caused false claims to be submitted to federal health care programs. The Partners and the Partnership are cooperating with these investigations and responding to the inquiries. . . .

In addition, the Partners and the Partnership have become aware of or been served with approximately 145 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the Partnership’s sale and promotion of VYTORIN and ZETIA. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. These actions, which have been filed in or transferred to federal court, are coordinated in a multidistrict litigation in the U.S. District Court for the District Court of New Jersey before District Judge Dennis M. Cavanaugh. The parties are presently engaged in motions practice and briefing. . . .

Wow -- 'tis difficult to imagine why Schering's stock would rise on the NYSE, and on heavy volume, on a down US pharma-market-sector-day, immediately in advance of these disclosures.

Pharma CEOs Will No Longer Be Able to "Plant Peas, Expecting to Harvest Corn. . . ."

Most multinational pharma concerns in the United States lost between two and four percent of their market capitalizations today. Why? Because of something I -- along with thousands of other voices -- have been saying for at least a year, now. Reform of Health Care Delivery in the US will include significant new reimportation initiatives -- long sought by the FDA -- primarily to drive down the cost of name brand prescription drugs, to a level more consistent with what the rest of the world pays. [We could talk, at length, about the largely perverse incentives -- in our reimbursement and insurance policies -- that drive this current state of affairs, but that is for another day.]

Almost comically, last summer, Schering-Plough CEO Fred Hassan was pretty darn sure his little planted pea pods would shoot up -- into golden, swaying stalks of corn. Um. . . Nope.

Not gonna' happen. No way. Here (at left) is the very short (see the text I've highlighted in lime-green) portion of page 68 from President Obama's budget document, released today, that caused the pharma market-sector correction, this afternoon. As ever, click it to enlarge -- to reading size.

. . . .The Budget supports FDA's efforts to allow Americans to buy safe and effective drugs from other countries. . . .

Mike Mitka Analyzes Latest FDA Word -- on Vytorin -- in JAMA, Today

[But first, thanks go to Marilyn Mann for pointing this one out to me. Excellent find!]

JAMA is today carrying a rather exhaustive run-down on what the latest FDA announcement, released in January 2009 really means for Vytorin (post-ENHANCE). This is what much of the Schering defense lawyers' back and forth, and the plaintiffs' lawyers cogent replies, have been about, of late, in the ENHANCE-related would-be class actions -- but JAMA Senior Staff Writer Mitka clarifies, rather than obscures (as the Schering lawyers are often wont). Moreover, Mitka reminds us that FDA will very-likely have a similar announcement, but related to SEAS (the Vytorin study that arguably yielded a cancer-signal) -- as early as May 2009.

Do go read all of Mitka's carefully-constructed analysis-by-article ($$ subscription req'd), but I'll quote a very-illuminating snippet, here:

. . . .“Since LDL-C is a validated surrogate for cardiovascular disease, some would argue that an outcomes study is not necessary for a LDL-lowering drug [before or anytime after approval],” [FDA's] Colman said. “Others would argue that there may be some uncertainty about whether an LDL-lowering drug -- particularly if it is a first-in-class compound -- does what it is intended to do, so an outcomes trial should be done, at least following the drug’s approval.”

In the case of ezetimibe/simvastatin, starting an outcomes study as soon as possible after approval “would be ideal,” Colman added. But no such trial was initiated. . . .

Indeed, as the JAMA piece makes plain, IMPROVE-IT, the comprehensive Schering/Vytorin "outcomes" trial data will now likely not be available until late-2012. In the mean time, doctors -- and their patients -- will be left to wonder whether taking this very-pricey combination pill will yield any additional protection from cardiac events, as compared to simply taking a generic statin (and at 1/20th the price!), alone. The data on statins is clear -- it does help improve outcomes.

In the "I Keep Forgetting to Mention This" Department: Vertex

In an almost unique move (in this market environment), Vertex sold $320 million of common equity into the public markets on February 19, 2009 (at very-near the prior-night's closing market price, to boot) -- and yet, the price of Vertex common has generally closed up, in the last seven days. That post-offering trading outcome was very common during the last-bubble -- but almost unheard of, since about October 2008. Especially to fund a not-yet-FDA-approved product.
Teleprevir really must be the one the market expects to win the next-gen Hep C horse-race:

. . . .The move will likely help bulk up the company's financial position as it continues developing its hepatitis C drug candidate telaprevir and prepares to commercialize the treatment. . . .

Telaprevir has been viewed as a potential leader in treating Hepatitis C, which is a viral liver disease that causes inflammation and has the potential to cause liver failure. . . .

Forbes' Matt Herper: What Chairman Waxman is after, in SEAS

Mr. Herper offers a very tightly-knit narrative, tonight, to explain what he feels Chairman Waxman was driving at, with his latest document-demand letter (of last Thursday). For Herper, it all boils down to a central question -- that is, "Why did it take six months for Schering to make first mention of the SEAS cancer signal?"

Mr. Herper's is excellent, so do go read it all, and to entice, here's a juicy snippet:

. . . .The three-person DSMB for Pedersen's [SEAS] study began worrying about the increased rate of cancer among Vytorin patients in June 2007. The panel met twice more that year. When the panel met in January 2008 and saw no signs that the risk had abated, the chair of Pedersen's DSMB contacted the chairs of the two other ongoing Vytorin studies. . . .

. . . .[W]hy, Congressional investigators want to know, did Vytorin's maker. . . Schering-Plough, tell the House Committee on Energy and Commerce that safety committees overseeing the analysis had started looking into a cancer signal a full six months earlier -- in January 2008?

Because that's what happened.

In January 2008, Merck and Schering were already being enveloped in a firestorm of controversy for delaying the results of a preliminary study where Vytorin had failed to best a cheap generic. The story of how the results from Pedersen's study, known as SEAS, were handled shows medical researchers basically doing things right, but it also reveals weaknesses in the way medical studies are monitored -- an issue that threatens to become more prevalent as industry and government do more to uncover drug side effects. . . .

Indeed. This one is going to keep on making headlines -- even if Schering-Plough performs absolutely admirably, from here on out.

Crain's NY Business: Report Rates Schering-Plough Accounting "Very Aggressive"

In a review of New York area companies conducted by Audit Integrity (which firm tracks companies on the basis of accounting and corporate governance practices), only one area pharma company received either an "aggressive" or "very aggressive" accounting rating -- Yep. You guessed it. None other than our buddies out in Kenilworth -- Schering-Plough.

Schering's accounting reaches the "very aggressive" mark (Audit Integrity's highest-risk rating) -- tying Citi, Morgan Stanley and Take Two Interactive, among a handful of others. That's some heady -- or perhaps, notorious -- company. Do go read the whole Crain's New York report, but here is a snippet:

. . . ."We certainly can't tell you that all 'very aggressive' companies are bad," Mr. Zwingli says. "But we can say that time and again, these companies have more negative blowups, be it poor stock performance, financial restatements, litigation or [Securities and Exchange Commission] actions". . . .

Pharma giant Schering-Plough, for instance, is rated "very aggressive." Among the problems Mr. Zwingli sees: congressional probes concerning the development and sale of drugs, amended filings with the SEC, and high levels of inventory and goodwill that open the door to asset write-downs. The CEO is also chairman, a governance no-no in some circles because it erases a last layer of management oversight.

Schering-Plough officials attribute the increases in inventory and goodwill to a biotech acquisition. The annual report was revised because of a "clerical error"—12 words were left out of a sentence. And the CEO-chairman, brought in five years ago to turn the drugmaker around, deserved the clout of a combined title.

Naturally, many companies often disagree with Audit Integrity's conclusions, but Mr. Zwingli points out that they are derived from digging through publicly available financial statements. "We're very much a Jack Friday sort of place," he says. "You know: 'Just the facts, ma'am.'. . ."

Indeed. Confidential Nota Bene: Way to go, Mr. In-Out-sider!

From The New York Times -- Odds and Ends in Health Care. . . .

From The New York Times, this morning:

Statin May Protect Patients With Low Cholesterol, Researchers Say

. . . .Research presented on Thursday at the American Stroke Association meeting in San Diego suggest that daily treatment with the statin Crestor benefits even people with low levels of cholesterol. Bloomberg News reports that AstraZeneca, the drug's manufacturer, plans to file a request with the Food and Drug Administration for expanded approval of the medicine. . . .

This development will likely place an additional roadblock before Schering-Plough's highly priced drug, Vytorin -- in its quest to return to any market share stabilization or growth, in the United States.

Pretty Much "Dead-On" -- Plaintiffs Slap Down Schering's FDA Defense Arguments

All but using the same words -- and certainly employing the same reasoning as I suggested back in January, twice -- the Plaintiffs in Polk, the Vytorin Sales and Marketing Class Action, (MDL 1938, Case 08-285) have laid waste to another over-reaching argument Schering's lawyers had put before Judge Cavanaugh. I'll let the letter speak for itself -- click it to enlarge:

BREAKING -- Full Text of Chairman Waxman's Letter to Schering re Vytorin Studies Early Unblinding

BREAKING -- More analysis shortly -- but this looks to suggest that the staff of the Congressional Committee suspects a continuing effort to shape or "pre-screen" the ongoing IMPROVE-IT trial (which was not expected to be available until mid-2012), related to the direct efficacy (on outcomes) of Vytorin. This is very significant -- that with all the other issues the nation is facing -- the Chairman of the House Energy and Commerce Committee is going to actively pursue Schering's Vytorin vindication studies. Ouch.

A later thought occurs to me: the Committee staff may also be keenly interested in whether the actual raw data does, in fact, in any way, mute the purported cancer signal first identified in SEAS. If the other data does not, this will likely result in a very public set of hearings -- with plenty of reprobation doled out.

So, as mentioned first by this Reuters story, here is (I think) the first full text version on the web, of today's continuing investigatory efforts by Chairman Henry Waxman, and Subcommittee Chair Bart Stupak -- a joint document-demand letter:

February 19, 2009

Mr. Fred Hassan
Chairman of the Board, Chief Executive Officer
Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033

Mr. Richard T. Clark
Chairman of the Board, President, Chief Executive Officer
Merck & Company, Inc.
One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889

Dear Mr. Hassan and Mr. Clark:

The Committee on Energy and Commerce and its Subcommittee on Oversight and Investigations are continuing an investigation into the safety and effectiveness of Vytorin, a prescription drug manufactured jointly by Schering-Plough and Merck.

On September 5, 2008, your counsel provided a briefing to Committee staff on a clinical trial called the Simvastatin and Ezetimibe in Aortic Stenosis (SEAS) trial.

Your counsel stated that in January 2008, the Data Safety Monitoring Board for this trial, which is responsible for ensuring the safety of patients participating in the trial, requested that the Data Safety Monitoring Boards for two other large, ongoing Vytorin trials "unblind," or release, their study data prior to the conclusion of the studies. According to your counsel, the Data Safety Monitoring Boards for both of those trials -- the Study of Heart and Renal Protection (SHARP) trial and the Examining Outcomes in Subjects with Acute Coronary Syndrome: Vytorin vs. Simvastatin (IMPROVE-IT) trial -- agreed to do so.

We are writing to request information about the decisions by the Data Safety Monitoring Boards to unblind the interim data from the SHARP and IMPROVE-IT trials. Accordingly, we request that Schering-Plough, Merck, and the joint venture of Schering-Plough and Merck produce the following documents and information by March 6, 2009:

1. The names, affiliations, and current contact information for all members of the Data Safety Monitoring Boards for the SEAS, SHARP, and IMPROVE-IT trials;

2. The names, affiliations, and current contact information for all members of the steering committees for the SEAS, SHARP, and IMPROVE-IT trials;

3. All documents relating to Institutional Review Board (lRB) approval and any subsequent IRB deliberations relating to the SEAS trial;

4. All minutes of Data Safety Monitoring Board meetings for the SEAS trial;

5. All communications relating to the SEAS trial between or among:

a. Any members of the SEAS trial's Data Safety Monitoring Board;

b. Any member of the SEAS trial's Data Safety Monitoring Board and any members of the SEAS, SHARP, or IMPROVE-IT steering committees;

c. Any member of the SEAS trial's Data Safety Monitoring Board and any investigators for the SEAS, SHARP, or IMPROVE-IT trials;

d. Any member of the SEAS trial's Data Safety Monitoring Board and any officers or employees of Merck, Schering-Plough, or the Merck/Schering-Plough joint venture;

6. All documents relating to the submission of the SEAS manuscript to the New England Joumal of Medicine; and

7. All minutes of Data Safety Monitoring Board meetings for the SHARP and IMPROVE-IT trials no later than two weeks after the completion of those trials.

We request that Schering-Plough, Merck, and the joint venture of Schering-Plough and Merck retain without alteration, until further notice, all minutes, records, communications, and other documents relating to the Data Safety Monitoring Boards for the SEAS, SHARP, and IMPROVE-IT trials.

An attachment to this letter provides additional information on how to respond to the Committee's request. If you have any questions regarding this request, please contact Paul Jung of the Committee staff at (202) 226-XXXX.

Note also that all of this doucmentary material is due back to Chairman Waxman by March 6, 2009 -- and that this will require ongoing submissions to Chairman Waxman's Committee staff, until the IMPROVE-IT trial is completed. While not conclusive, this strongly suggests that the Chairman's staff smells a rat (and remember that one of those lawyers is near the top of the list for next FDA chief). Again, ouch.

Rather Compelling New Counter-Argument -- in Schering ERISA Suit Filing

Last night, the Plaintiffs' lawyers in the ERISA would-be class action, Gradone v. Hassan, et al. (Case No. 08-1432), which centers on the much-delayed Vytorin/Zetia ENHANCE disclosures (and the intervening allegedly unlawful insider sales of stock by Carrie Cox, among others), each of which allegedly sounds as breaches of ERISA fiduciary duties, made a 51-page motion in opposition to Schering's earlier motion to dismiss various aspects of the case. Significantly, the Schering board of directors, CEO Fred Hassan and CFO Bob Bertolini, among others, are each to be held personally responsible for damages (to be paid from personal, not corporate, assets), if the ERISA class action succeeds. So the stakes are high, and climbing, for Schering's executive management team, here.

One of the Schering team's arguments for dismissal was essentially that, due to the "efficient capital market hypothesis", no matter when ENHANCE was ultimately disclosed, the ERISA plan participants would have suffered some form of an investment loss, and thus (puzzlingly, apparently) they should have no claim. Here is how the plaintiffs have responded:

. . . .Finally, Defendants argue that the efficient market hypothesis precludes Plaintiffs from proving damages in this case. Defendants suggest that the market would have reacted immediately to earlier disclosure of the negative results, and the price of Schering stock would have dropped before the Plans or the Plan participants could have sold their shares, thus suffering an unavoidable loss in any event. That over-simplified argument should be rejected.

First, Defendants’ argument that Plan participants would have suffered an unavoidable loss on all the shares already in the Plans whenever the disclosure was made ignores the rather obvious fact that shares were added to the Plans during the Class Period. While Defendants’ argument (if it were correct) might suggest that some losses were unavoidable, it utterly fails to address losses on shares of Schering stock that were added to the Plans between October 31, 2007, and January 14, 2008. As to those additional shares, Defendants’ argument is silent.

Second, Defendants’ argument ignores the fact that timely disclosure of the negative ENHANCE trial results would have caused a much less precipitous decline in the price of Schering stock. Had Defendants promptly disclosed the negative results ahead of the news leaks on January 14, 2008, rampant speculation about the delayed release of the results and the Congressional and Attorneys General investigations would have been avoided, and the Company would not have been caught in a swirl of controversy (including having to make a rapid response to the January 14, 2008, news leaks). The market would not have held against the Company the fact that the results were concealed, management’s integrity would not have been questioned in the manner it has, and the market would have reacted less negatively to the news. Thus, even if they continued to hold the same number of shares, the Plans would have lost less if Defendants had acted responsibly. . . .

Ding. Ring the Bell! That is nearly a perfect rejoinder -- pithy, and clear.

And thus, here is a particularly snarky footnote -- Footnote 8, on why the earlier Schering ERISA dismissal approach is so completely disingenuous: . . . .The House Committee on Energy and Commerce also demanded information relating to a million share stock sale by a Schering executive, Carrie Smith Cox, between the end date of the study and the release of the results. . . .

And. . . that's gonna' leave a mark.

Why? Because, apparently, Carrie Cox was able to avoid at least some (about $11 million worth) of her Schering-Plough stock losses. The plaintiffs would (did) say she clevely sold before anyone (else) knew.

Update on the Clarinex®/(Descloratadine) Patent Litigation (Case No. 07-2920, MDL No. 1851)

A Settlement Conference has been scheduled for March 17, 2009 at 2:30 pm, EST, in the federal district courthouse in Trenton, New Jersey in the Clarinex^®/(Descloratadine) Patent Litigation -- I expect that several of the already settling defendants will be dismissed outright, but that a decision to go to trial will be reached as to at least eight of them (background under that link). I'll provide a report on that day.

. . . .Minute Entry for proceedings held before Magistrate Judge Tonianne J. Bongiovanni:

Telephone Conference held on February 13, 2009 -- Settlement Conference set for March 18, 2009 02:30 PM in Trenton -- Courtroom 6E -- before Magistrate Judge Tonianne J. Bongiovanni. . . .

So -- will there be an at-risk generic launch in 2009? [The branded franchise drug is still worth over $750 million a year in sales to Schering.] My best-guess candidate to do so would be Orchid Pharmaceuticals, out of India. We'll have to wait and see.

Wellington's Updated Schering-Plough Holdings Reported to the SEC Tonight. . . .

Here it is -- on an amended SEC Form 13G:

. . . .February 17, 2009: 210,245,110 shares or 12.93%. . . .

February 14, 2008: 190,544,131 shares or 11.76%. . . .

February 14, 2006: 156,897,180 shares or 10.62%. . . .

Odd -- it looks like Wellington picked up about what CRMC reported shedding. Ironic.

Schering's Livial Ups Recurrence Risk for Breast Cancer: Lancet

Reuters has the wire-story, this afternoon:

. . . .The synthetic hormone Livial, designed as an alternative to hormone replacement therapy, makes it significantly more likely a woman's breast cancer will come back, Dutch researchers said on Tuesday.

Breast cancer was 40 percent more likely to come back in woman taking Schering Plough Corp's (SGP.N) Livial, a finding so pronounced the researchers said they stopped the trial six months early.

About 70 percent of the recurrent tumours killed the patients. . . .

This effect has been known for a while -- and will be likely only if MDs prescribe Livial "off-label" -- but apparently that had been more common than was originally thought.

Sad.

The History of CRMC's Recent Beneficial Ownership of Schering-Plough. . . .

CRMC, or Capital Research Management Co., acts as an investment adviser to many institutional and individual investors. Thus, under the applicable SEC Section 13 rules, CRMC must aggregate -- or add up -- all those separate account totals, to report all the registered equity shares of Schering-Plough over which it might be deemed to have the sole power (or shared power) to direct that the shares be disposed. Sold. And that it what has happened -- a significant aggregated sell-off -- from 102 million shares in 2006, to under 82 million shares in 2009.

Thus, we note the below SEC filings (see links):

February 17, 2009: 81,826,100 shares or 5.0%. . . .

February 14, 2008: 0 shares; 0.0% [apparently the holdings were split for that year among two CRMC-affiliated entities, thus falling below the 5 percent reporting threshold -- and that appears to be an errant reading of the 13G rules, given today's filing, above]. . . .

February 12, 2007: 99,918,560 shares or 6.7%. . . .

February 10, 2006: 102,640,720 shares or 6.9%. . .

Which reminds me: where are FMR's, and Wellington's SEC Form 13G filings? Will they show similar drops? Increases? We'll see.

Either way, I'll report it -- when each appears.

Schering's "CaféPharma Denigration Defense" Strategy Draws Renewed Scrutiny. . . .

FindingDulcinea (H/T Marilyn Mann) is running a thought-provoking article on the evidentiary potential of often-anonymous internet postings -- and the CaféPharma/Schering example is, once again, front and center. Regular readers know that we broke this story -- and it next was picked up by Ed Silverman, then over at Pharmalot (now at the InVivoBlog). Now many -- including Bloomberg Financial News Service -- are covering the developments -- as well they ought. Cool.

Do go read the whole thing, as it covers several other cases, but let's read along:

. . . .According to Bloomberg, the comments relate to the fact that the companies knew there were problems with the tests and did not make them public. The posts were “very detailed,” said Sean Coffey, a lawyer for the investors.

But the companies wrote in their request to U.S. District Judge Dennis Cavanaugh that “CaféPharma is, literally, the cyberspace equivalent of scrawls left on a men’s room wall.”

The case has added fuel to an already smoldering debate regarding the Internet’s role in the courtroom, as several recent lawsuits have centered on comments made online. . . .

The news wasn’t the only negative press the cholesterol drug has received. In August, the U.S. Food and Drug Administration announced that it would begin investigating a possible cancer link with the drug.

Clinical trial results released in July showed that, in a study of more than 1,800 people, 93 people who took Vytorin developed cancer, compared with 65 in a control group. Two other studies, however, indicated no link, and some researchers claimed the cancer finding was most likely an anomaly.

The cancer study came on the heels of another clinical trial that showed that Vytorin failed to improve a heart valve condition called aortic stenosis, which, if left untreated, can lead to serious heart problems. . . .

We will keep you informed. We promise.

I concur with Jim Edwards -- But I Arrive by Another Path

Yesterday, Jim Edwards, over at bnetPharma offered some detailed Schering-Plough expense-line variance analysis -- to suggest that, perhaps, Schering's $1.5 billion, three-year headcount reduction program, dubbed "the PTP" (or Productivity Transformation Program) by CEO Hassan in April 2008, was running out of steam.

While I agree that it is -- I honestly don't follow Mr. Edwards' currency explanation. More on that, below -- but first, our agreement -- captured in his absolutley-dead-on pull-quotes (do go read it all):

. . . .the overall trend is that the company’s productivity is plateauing, not getting better. Obviously, you do not want the results of your productivity program to peak when you’re only half way through. . . .

. . . .Perhaps it’s about time drug company CEOs stopped obsessing over sales rep salaries and started to pay a bit more attention to the cost of chemicals. There might be more money in it. . . .

Quite so.

Now, where we differ: Mr. Edwards suggests that a goodly chunk of the variance he highlights is due to a weaker dollar in 2008. Read this:

. . . .Translation: A lot of the gains you’re seeing in sales productivity are actually the positive effects of the dollar sinking against foreign currencies; when those foreign savings are changed into dollars, Schering gets more cuts. That ain’t productivity — that’s blind luck in the foreign exchange markets. . . .

I agree that it is blind luck -- I just think he's got the directional arrows reversed -- as to the currencies. The dollar was actually strengthening mightily in the fourth quarter of 2008, as compared to the Euro and Japanese Yen.

The stronger dollar is bad news for Schering, because Schering does almost no hedging of its currency exposures (and some 70 percent of all it sales are exposed to currency translation volatility/risk). In the past, it was a tailwind -- now a hurricane-force headwind -- at the sales line.

That is, the non-US-dollar-denominated sales (products sold for euros or Yen), must be brought back to the US in smaller numbers of dollars, as the dollar rises.

Conversely, the expenses (R&D, and SG&A) that Mr. Edwards analyzed are affected inversely -- if we are looking at non-US-dollar-denominated-expenses, they will take a smaller "bite" out of US-repatriated earnings levels.

So, I think the most salient question -- and the one Merrs. Bertolini and Hassan have thus far very-artfully skirted -- is "What are the proportions of US v. non-US expense cuts (primarily headcount reductions, and supply chain rationalization efforts), in the overall PTP program numbers?"

Notice that -- if we assume most PTP expense cuts will be made in the US (for example, US salesforce reductions; and US R&D program cuts) -- there will be little to no expense "pull-trough" to the net income line, from any rising dollar. But there will, on the other hand, be declining sales revenue, repatriated into US currency, from all the European and Japanese sales.

On the other hand, if most of the PTP expense cuts occur in Europe and Japan (in local science and sales forces -- i.e., not terribly-likely, in my estimation), then, but only then, will some of the negative effect of a stronger dollar be blunted -- at the net income line, for Schering.

What is now abundantly clear is that the PTP is far less about Organon facilities-rationalization -- and far more about fixing a cost structure, worldwide, that was premised on endless 20 percent growth of the vastly-profitable cholesterol management franchise. That came to an end on March 31, 2008. The PTP is really about trying to knock the expense base back down, in line with a far-less profitable Vytorin/Zetia franchise -- and soak off some of the vast amount Mr. Hassan "overpaid" for the Organon businesses. That is the reality of it.

And now, that effort is starting to run-aground, because there just isn't much room left to cut away, and still have a business model left (in Europe, especially, inside Organon). So, Jim Edwards and I agree -- we just get there by two differing paths through the foggy-moors of Schering's would-be financial disclosures (and non-disclosures).

Best Line in Any federal Schering-Plough Fraud Brief -- Ever.

In the "I Just Couldn't Resist" Department:

While outlining the path of inference that Senator Grassley first forged, back in February of 2008 (to deduce that Schering had acheived "functional unblinding" of the ENHANCE data), the plaintiffs, again in Manson (Case 08-397), offer perhaps the most succinct piece of skepticism I have yet read on the Schering ENHANCE disclosure delay (this is from another brief filed on last Friday -- full 50 page PDF file):

. . . .Schering’s ability to disclose the purportedly unanalyzable ENHANCE results so quickly after Congress exerted pressure supports a strong inference of scienter. Defendants make no attempt to reconcile how the supposedly intractable data problems that led Schering to withhold the results for over twenty months were magically overcome after just a few weeks of Congressional scrutiny. . . .

I may just go to Newark -- for these arguments.

Manson Rejoinder Filed: CaféPharma's "Scrawls on a Mens' Room Wall". . . .

Recall that Schering's lawyers -- in a December 2008 sworn-federal court filing -- denigrated some of the matter offered for a potential future admission into evidence, by the plaintiffs' lawyers in Manson v. Schering-Plough, et al. (Case No. 08-397), the ENHANCE Securities Fraud Putative Class Action. Oddly, Lowenstein Sandler did so, by suggesting that CaféPharma amounts to nothing more than a collection of profane scrawls on a virtual mens room wall.

Well, that didn't sit too well with the plaintiffs, and at the end of last week, they made a sworn-filing of their own. It seems that, once again, by making such an overly-inclusive generalization about the putative CaféPharma evidence, Schering's lawyers have "opened the door" to any early, and greatly expansive, counter-argument before Judge Cavanaugh -- about the "uncanny prescience" of these same CaféPharma postings. In laymens' terms, that would mean "pretty darn reliable".

Lowenstein's approach may prove to be yet a[nother] blunder, in my opinion. Once again, they've pressed marginal arguments well-beyond what the known factual material will possibly sustain, and may have to pay for it -- in credibility, before a very able federal trial judge. Let's read along -- some highlights now (but for the morbidly-curious, here is the entire 32 page PDF filing):

. . . .Among the facts alleged in the Complaint collectively giving rise to a strong inference of scienter are allegations that: (1) Schering failed to disclose the negative ENHANCE results until 2008, even though a January 2007 report by independent consultant Dr. Michiel L. Bots (the “Bots Report”) concluded that the ENHANCE data was “fine,” finding no reasons to justify delaying disclosure of the ENHANCE results based on purported data problems; (2) Schering CEO Hassan made statements in April 2007 suspiciously downplaying the importance of ENHANCE; (3) ENHANCE’s Principal Investigator Dr. John Kastelein expressed shock to Schering personnel in July 2007 (when the Company advised him it would not be releasing the ENHANCE results in November 2007, as it had previously planned), and advised Schering that there was no good reason to delay publishing the results; and (4) in November 2007, Schering suspiciously attempted to change ENHANCE’s primary endpoint to manipulate its results and publicly misrepresented that a panel of outside experts had recommended the proposed change when they did not.

In addition to these and other facts collectively demonstrating a strong inference of scienter, the Complaint alleges that: (1) anonymous individuals posted detailed and what now are known to be remarkably accurate entries about the ENHANCE results on CaféPharma, a pharmaceutical industry website, beginning in March 2007, which strongly suggests that ENHANCE results were known within Schering long before they were made public; and (2) six former Schering employees confidentially provided additional corroborating facts, that: (a) by the Summer of 2006 (the start of the Class Period), it was clear to Schering insiders based on a quality control assessment of ENHANCE that it was unlikely that Schering would obtain any positive results from ENHANCE; (b) the delayed release of ENHANCE results was not justified by any data quality issues; and (c) Schering employees and senior managers were familiar with and regularly visited the CaféPharma site.

The Exchange Act Defendants, who have moved separately to dismiss the Complaint, move under Federal Rule of Civil Procedure 12(f) to strike the CaféPharma posts and confidential witness statements from the Complaint, contending that they are “scandalous, immaterial, and impertinent.” But whatever “scandal” has been introduced in this case comes from Defendants’ filing, which soils the record with offensive and repulsive materials that have nothing to do with the CaféPharma posts cited in the Complaint (the “Cited Posts”) let alone with this securities case. The Exchange Act Defendants’ motion is utterly without basis. None of the material that Defendants inflict on the Court with their filing was cited in the Complaint.

Unlike the posts cited by Defendants, the eight CaféPharma posts quoted in the Complaint, which appeared between March and November of 2007, have ample indicia of reliability. The Cited Posts – none of which is remotely scandalous – evince a level of access consistent with knowledgeable persons because, among other things, they include specific details that were not public at the time, but which were subsequently confirmed when the ENHANCE results were finally made public in 2008. The now confirmed and detailed nature of these posts includes, for example, reported “higher liver problems” and “arguing back and forth” between Schering and the Principal Investigator for ENHANCE “about how/when to release the info” – which, as public investors later learned in 2008, was actually occurring at the time of the posts. Indeed, one telling indication of the materiality and pertinence of the Cited Posts is that Congress considered them highly relevant to its investigation of Schering and noted the “obvious[]” significance of the CaféPharma posts to “the question of whether anyone within Merck or Schering-Plough knew the results of the ENHANCE trial prior to the official release of data.” Letter to Fred Hassan and Richard Clark from U.S. Representatives Dingell and Stupak (Feb. 11, 2008). . . . Nor is there any requirement that the person or persons responsible for the CaféPharma posts be identified and testify at trial for the Court to consider them at the pleading stage.

Defendants are also off-base regarding the facts provided by former Schering employees who agreed to discuss on a confidential basis what they had witnessed inside the Company. The vast majority of courts have allowed securities plaintiffs to rely on confidential witness statements at the pleading stage to support a strong inference of scienter. The Cited Posts and confidential witness statements should not be stricken because they properly support a strong inference at the pleading stage, collectively with all of the other facts alleged, that Defendants were aware of the ENHANCE results more than a year before the results were publicly released. Accordingly, Defendants’ motion to strike should be denied. . . .

The plaintiffs have requested oral argument in open court on these issues in March; perhaps I'll pop into Newark, and live-blog the to and 'fro. Perhaps. It will certainly be entertaining.

ENHANCE RICO Class Action Gathers Steam. . . .

Schering's lawyers (at Dechert LLP) had earlier filed motions to dismiss the portions of the Vytorin/Zetia Marketing, Sales Practices and Products Liability Litigation, formally captured under Polk v. Schering-Plough, et al. (Case No. 08-285), by suggesting that, among other matters, the FDA's jurisdiction forecloses RICO actions -- that only the FDA may bring such claims. Poppy-cock. So now, with much precedent in tow, the plaintiffs' lawyers have formally pled so. Let's read along, shall we?

. . . .[Schering-Plough's] argument about the FDA’s primacy in regulation of drug advertising (Br. at 23-26) rests entirely on their baseless assertion that the Complaint merely disguises violations of the Food Drug & Cosmetic Act of 1938, 52 Stat. 1040, 1042, 21 U.S.C. § 301 et seq. (“FDCA”), as civil RICO claims. Not only are Defendants wrong, but no court has ever invoked FDA “primacy” as a basis to dismiss a RICO claim based on predicate acts of mail and wire fraud involving suppression of material information and misrepresentations.

Here, the Complaint describes a scheme to suppress information, including the ENHANCE study results, bearing on the purported efficacy of Vytorin and Zetia. It does not allege FDCA violations as predicate acts or claims addressing the FDA’s regulation of prescription drugs. Rather, the RICO claim involves predicate acts of mail and wire fraud in furtherance of Defendants’ scheme to suppress material information. Defendants do not challenge the sufficiency of the pleading of those predicate acts. At this stage, those allegations must be accepted as true. . . .

Defendants ignore the numerous precedents upholding RICO claims alleging that pharmaceutical companies engaged in a pattern of racketeering activity involving fraudulent marketing of drugs through acts of mail and wire fraud. For example, in In re Synthroid Mktg. Litig., 188 F.R.D. 287, 289-90 (N.D. Ill. 1999), and 188 F.R.D. 295, 299-300 (N.D. Ill. 1999), the court certified a RICO class action where consumers alleged that they had paid increased prices for Synthroid because defendants, through predicate acts of mail and wire fraud, had suppressed a relevant medical study and falsely represented that other drugs were not Synthroid’s bioequivalent. Similarly, in In re Zyprexa Prods. Liab. Litig., 493 F. Supp. 2d 571, 574 (E.D.N.Y. 2007), the court upheld RICO claims alleging that defendants had misrepresented the safety and efficacy of the anti-psychotic drug Zyprexa via mail and wire fraud. And in In re Lupron Mktg. & Sales Practices Litig., 295 F. Supp. 2d 148, 167-68 & n.18 (D. Mass. 2003), the court held that the defendants’ fraudulent promotion of the cancer drug at issue was actionable under the mail and wire fraud statutes. . . .

The cases that Defendants cite (Br. at 24-25) do not suggest that Congress intended to preclude RICO claims alleging predicate acts of mail and wire fraud as a means to suppress information or convey false messages about prescription drugs. The alleged predicate acts in those cases were direct violations of the FDCA or other statutes vesting regulatory authority in a federal agency.

The Third Circuit has recognized that concealment of material facts by means of the mails or wires constitutes mail and wire fraud. United States v. Olatunji, 872 F.2d 1161, 1167 (3d Cir. 1989); accord United States v. Bryant, 556 F. Supp. 2d 378, 431 (D.N.J. 2008). That the FDCA creates no private right of action (Br. at 24) is irrelevant. Defendants cite no case in which similar allegations have been dismissed because of the FDCA. . . .

RICO, by its very design, reaches many of the same areas as do other statutes. Indeed, overlap is inherent in its scheme. See 18 U.S.C. § 1961; cf. Grove Fresh Distrib., Inc. v. Flavor Fresh Foods, Inc., 720 F. Supp. 714, 715-16 (N.D. Ill. 1989) (Lanham Act claim not an attempt to circumvent FDCA, where both FDCA and Lanham Act prohibited alleged misconduct).

Even assuming arguendo that there were an irreconcilable conflict between the FDCA and RICO, that would not suggest a repeal by implication because it is the more recent statute that normally controls. See Watt v. Alaska, 451 U.S. 259, 266 (1981). RICO was adopted more than thirty-two years after the FDCA. . . .

And so it would seem that the RICO counts in this putative class action complaint will move forward, inexorably toward a trial on the merits.

And that, coupled to the whiff of evidence that, while at the helm over at Pharmacia, about eight years ago, a prior Hassan- and Cox-led allegedly fraudulent truncated publication, and misleading partial disclosure of the Celebrex CLASS study results caused a securities fraud -- it will all begin to look very much like RICO repeated "pattern" activity -- trebling the potential damages, and very-likely ending two careers. We'll see.

"Deja Vu, All Over Again"? -- From the LAST Pharma Hassan and Cox Ran Together. . . .

The companies' names have changed, but the two key players (and their modus operandi, at least allegedly) are a spot-on match. Alaska Electrical Pension Fund, et al. v. Hassan, Cox, Pharmacia, et al., (3d Circ. Appeal 07-4500).

The year was 2000; the company was Pharmacia, ultimately acquired by Pfizer (at a perhaps inflated price); the franchise drug was called Celebrex; and the study was called "CLASS".

Both Fred Hassan, as CEO, and Carrie Cox, as President, were sued -- and personally named as securities fraudsters -- for allegedly truncating, and then downplaying, less-than-fully positive drug study results. The original 10-b5 securities fraud suit has just been reinstated by the Third Circuit, ruling that a so-called "storm warnings" approach, for determining when the statute of limitations began to run on the plaintiffs' claims -- was incorrectly applied (too-strictly) by the courts below. Let's read along with the Third Circuit (full opinion PDF) -- as this may well be where ENHANCE, and Vytorin/Zetia, as well as Hassan and Cox, at Schering are headed:

. . . .In this securities fraud class action, plaintiffs allege that defendants violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 by making, with scienter, materially false statements about a clinical study of Celebrex, a popular anti-inflammatory medication. In particular, defendants are alleged to have misled investors by distorting the study’s results with the intent to show that Celebrex had a better safety profile than similar medications. . . .

Substantially more expensive than many other nonsteroidal anti-inflammatory drugs (“NSAIDs”), Celebrex’s promise was rooted in the hope that it would cause fewer gastrointestinal (“GI”) side-effects than the less costly NSAIDs.1 To help the hope become a reality, defendants commissioned a long-term clinical study of Celebrex’s effect on the GI system, the Celecoxib Long-term Arthritis Safety Study (“CLASS study”). This litigation focuses on the aftermath of that study.

According to the complaint, the results of the CLASS study were a disappointment to defendants: Celebrex did not show the desired reduction in GI side-effects as compared to the other drugs studied. Fearing a decrease in sales and stock price, defendants allegedly undertook to distort the results of the study so that it would appear that Celebrex possessed a better GI safety profile than, in fact, it did. Towards this end, in April 2000, defendants released only the results from the first six months of the CLASS study; those results, divorced from the entire set of data, were capable of positive construction.

Defendants released the truncated results of the CLASS study with great fanfare, declaring that the study “shows that Celebrex has a truly exceptional safety profile,” and that “the longterm outcome data paints a clear and compelling picture of Celebrex’s safety versus NSAIDs.” (Joint App. (“JA”) 59, 64.)

Some documents issued by defendants noted that the CLASS study lasted a full thirteen months, but the reason for excising the last seven months from the analysis was not revealed. . . .

Scientists affiliated with defendants then drafted an article based on the truncated results and submitted it for publication to the Journal of the American Medical Association (“JAMA”). As would become known only later, however, neither defendants nor the article’s authors informed JAMA that the data in the article was incomplete. . . .

Months later, on August 5, 2001, the Washington Post reported that defendants had withheld the full CLASS study data from JAMA. In the article, JAMA’s editor described herself as “disheartened” and stated that “a level of trust . . . was, perhaps, broken.” (Id. at 203.) Additionally, a scientist who wrote an editorial published in conjunction with the JAMA article stated that he was “flabbergasted” when he saw the complete data; another scientist “said he complained to JAMA after noticing differences between the published [JAMA] report and the data presented to the FDA.” (Id. at 203-04.)

After the Washington Post article raised the red flag of impropriety, other sources began to question defendants’ good faith. For example, an article from The Sunday Times noted that the scandal involving the CLASS study had inspired medical journals to “stop drug firms from ‘cheating’ on medical studies.” (Id. at 1360.) On June 1, 2002, an article in the British Medical Journal called the “explanations for [the] serious irregularities [in the JAMA article]. . . . inadequate.” (Id. at 757.) The article also stated that “[p]ublishing and distributing overoptimistic short term data using post hoc changes to the protocol, while omitting disappointing long term data of two trials. . . . is misleading.” (Id.)

Following the publication of this article, the price of Pharmacia’s stock dropped 7% in three days. . . .

What goes around -- apparently really goes around -- and comes back 'round, when one doesn't deal with it, promptly. Might the above be evidence of "pattern" behavior? Same two players -- seven years later -- were I an ENHANCE plaintiffs' steering committee lawyer, I'd at least make the allegation.

Schering Announces Its 2008 Year-End Now Tomorrow -- I'll LIVE-Blog it.

Some UPDATED 02.03.09 facts, and questions:

Merck Conference Call now underway:

▲ Cowen & Co. Question: On Q3 call, you said you expected that about two-thirds of US formularies will not require advance approvals for any Vytorin/Zetia scrips? -- Answer: Yes; we still believe that is true, but it is down from 80 percent. Do you still expect Vytorin/Zetia growth in the US in 2009? Answer: We have seen a change in the use of the products, but we are hopeful that growth will return in the US, one day -- but maybe not 2009.

▲ Merck is guiding 2009 revenue to the lower-end of its earlier-projected ranges. This revenue-line weakness is clearly evident in Schering's results, and prospects, as well.



Schering Conference Call now underway:

▲ Carrie Cox said that Bridion/Sugammadex is launched in ten countries in Europe -- large government payers, hospital formularies -- just now starting to take hold. My sense: It will be slow going.

▲ Koestler: Asenapine rceived an FDA Class 2 Complete Response letter "clock start". . . .

▲ Jamie Rubin (JP Morgan) asked about Boceprevir timing: mid-2011 remains the Schering-announced "aspirational FDA filing date" -- well behind Vertexe's Teleprevir (See link).

▲ Seamus Fernandez (yes, the same Leerink Swann analyst!) asked about Proventil HSA pricing, then how will gross margin be affected by currencies -- what happens to inventory -- as the Q2 flows through. No expectation of ongoing conversion past first quarter (said Carrie Cox). CFO Bertolini pretty much dodged the question on gross marging/currencies.

▲ David Reisinger (B of A) asked about currency headwinds at the gross profit line: $240 million currency headwind, at the sales line, of which 30 percent fell to the bottom line. May vary quater to quarter.

▲ In response to a question, CEO Hassan said that Schering expects to build a psychiatrists' sales force for Asenapine (pricey!).

▲ Tim Anderson (Sanford Bernstein) asked about of Golimumab, first half of 2009? Koestler answered by year end. Vyotrin & Zetia, Carrie Cox said long-term, they are hopeful.

▲ Rupesh Patel (UBS) asked about PTP timing, SG&A and R&D (net of currency headwind): Bertonini said PTP is on-track, but not ahead of schedule on PTP; currencies affected R&D line by $70 to $80 million in the quarter, and affected SG&A by about $50 million.

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▲ Sales of OTC consumer products fell 14 percent to $219 million, mainly due to inventory-stocking patterns that hurt over-the-counter sales of its Claritin allergy drug, said CFO Bertolini.

▲ Global Cholesterol Franchise revenues were off 24 percent, worldwide, in the fourth quarter of 2008.

▲ In the US, Vytorin/Zetia sales were off by 35 percent in the fourth quarter of 2008.

▲ CFO Bertolini expects continuing "currency headwind" through 2009 -- it reduced 2008 sales by 6 percent.

▲ The worldwide sales-revenue line miss was a very significant miss: $4.3 billion ACTUAL, as opposed to the EXPECTED $4.5 billion. The actual $4.3 billion included $1.3 billion in sales of products from the OBS acquisition and an unfavorable impact from foreign exchange of 6 percent. . . .

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

What to expect? Per this wire-story:

". . . .BY THE NUMBERS: Analysts polled by Thomson Financial expect, on average, earnings per share of 30 cents and revenue of $4.52 billion. In the year-earlier period the company lost $2.08 per share, on a charge for the $14.4 billion Organon purchase. Revenue was $3.72 billion.

In the PRIOR quarter, earnings per share fell to 24 cents per share, from 34 cents a share in the 2007 period. . . .

. . . .But the cholesterol joint venture represents half of Schering-Plough's profits, and sales of those drugs, Zetia and Vytorin, have been hammered for a year by reports questioning their efficacy and safety.

Ryan expects sales of both to be down a third or more in the fourth quarter, although earlier this month, the Food and Drug Administration said patients should not stop taking them or other other cholesterol-lowering drugs. Still, Ryan writes that the company "is no longer a growth story, but a cost-cutting one."

Credit Suisse analyst Catherine Arnold expects the company to end 2008 with a low tax rate, only in the mid- to high teens. . . ."

Will SGP meet the lowered bar? Or will it miss it?

What do you think?

I'll also likely live-blog at least some of the Merck Earnings Call, same time tomorrow -- 8 am EST.

Are Mrs. Daschle's Lobbying Efforts -- From 18 Ten Years Ago -- Relevant, Any Longer?

I think it fair to take a close look at Tom Daschle's recent contacts, amended tax returns, and -- of course -- paid gigs. I also think "the best antiseptic is sunshine" -- so, while I am thankful we know about Linda Daschle's almost 10 20 years-past lobying, I don't think it will much influence the incoming HHS Secretary. This snippet is per the Houston Chronicle -- do go read it all:

. . . .Daschle’s wife did some work for the health care industry as well. In 1999 and 2000, Linda Daschle was among a group of lobbyists at Baker Donelson Bearman & Caldwell who represented the drug maker Schering-Plough, which paid the law firm $470,000 over the two years, according to federal lobbying reports. . . .

What so you think? Let me know.