Thursday, April 30, 2009

Wall Street Journal Confirms Insider Trading Investigation by SEC -- related to Trading Prior to Merger Announcement

This is no surprise, given the short-dated, out of the money call option volumes on March 6, 2009 -- the Friday before the March 9, 2009 announcement of a proposed reverse merger -- but this makes it official. Per The Wall Street Journal:

. . . .The Securities and Exchange Commission is investigating trading of Schering-Plough Corp. shares ahead of its announced merger with Merck & Co., people familiar with the matter said. . . .

Interesting. Who might have "tipped"? Who might have traded? We'll know pretty soon. At this point, there is no reason to suspect that any Schering-Plough employee is a target.

Wednesday, April 29, 2009

Schering-Plough Has Mailed Its "Executive Compensation" Survey, Consistent With My Suggestions. . . .

I have received confirmation that at least some institutional holders have now received Schering-Plough's "Executive Compensation Survey" (that's the SEC-filed document). Note the last part of the answer to Question 3, below. As I suggested, right here, last Friday and Saturday, Schering-Plough will now report on the survey before the merger closes. Cool. Be sure to send in copies of all those CEO Hassan graphics I've made -- with your replies, folks (especially to Survey Item 5, at the bottom, below). To the Q&A, and Survey, then:

. . . .Questions & Answers on Compensation Survey

Q1. Why is this Compensation Survey Provided?

A1. The Schering-Plough Board from time to time has conducted shareholder surveys to obtain feedback on issues of interest. Surveys are just one of the many methods used to learn about shareholders’ perspectives in the active shareholder relations program led by Schering-Plough’s Governance and Investor Relations teams.

For example, an earlier survey on majority voting for Directors was used to help the Board in decision making on Schering-Plough’s majority vote by-law provision.

In October 2008, the Board announced this survey. Including the survey with the annual report and proxy materials allowed Schering-Plough to reach all holders, while avoiding the cost of a separate distribution.

Q2. Wouldn’t it be easier to conduct a Vote, instead of a survey?

A2. Yes. But our Board does not believe a vote provides enough information to be useful. Compensation is a broad topic, and there are many major aspects to consider when evaluating a compensation program, including the mix of cash and equity; the mix of fixed compensation and performance-based compensation; the performance metrics and goals; how to handle early termination for various reasons; benchmarking and peer groups.

If a shareholder votes to ratify executive pay, it does not mean he/she likes every aspect of the current compensation system. Likewise, if a shareholder votes not to ratify executive pay, the Company must then talk to the shareholder to learn what aspects of the compensation system led to the negative vote. So Schering-Plough believes the survey is a more efficient way to obtain useful shareholder input on compensation.

Also, a number of Schering-Plough’s large institutional holders told us they do not favor a “say-on-pay” vote. They use dialogue when they have a specific issue about compensation with a particular company. They told us that their resources would be taxed evaluating pay generally at many companies where they have no particular concern, rather than working in a concentrated fashion at only those companies where they have identified an issue. Because voting carries fiduciary duties that a survey does not, shareholders who have no concerns over compensation at our company will be more comfortable skipping the survey than they would be skipping a vote.

Q3. With the proposed combination of Schering-Plough with Merck, how will the survey be reported?

A3. At the time the survey was announced in October 2008, the Board had planned to discuss the survey results in the 2010 proxy statement. We are evaluating a process to complete and discuss the survey before the proposed transaction with Merck closes. The timing for closing depends on antitrust approvals and other contingencies. . . .

[From the Survey:]

. . . .5. Please write any other comment about executive or director pay that you may wish the Board to consider:

__________________________________________________ . . . .

Light 'em up, folks!

Dr. James Stein, Noted Cardiologist, "Bares His Soul" -- About the Influence of Pharma's Pay

This morning, The Milwaukee Journal Sentinel Online has a fabulous, on the record interview with James Stein, MD -- one of the outside experts who reviewed the ENHANCE study irregularities in late 2007, and then objected, in writing, to what he called Schering-Plough's "mischaracterizations" of the expert panel's advice, and proposed courses of action. You may read about all of that in this older backgrounder of mine -- see images (clickable), at right.

Today, Dr. Stein explains how the drug companies recruit, influence and subtly manipulate young doctors into feeling that they are "thought leaders" -- and, then, via increasing speakers' and consultancy fees, feed their egos -- and bend them toward subtly promoting the pharma companies offerings.

To be fair, the PhRMA Code, and the Adva-Med Code (effective July 1, 2009) now curtail a large chunk of the most-blatant forms of this sort of influence-peddling -- but compliance with these codes is presently voluntary (though widely adopted by US public pharma players). Here is the full-story -- and the snippet I had to smile about. The breath of reform, from the throats of those once enmeshed in the process. Do go read it all:

Physician found money, acclaim seductive, but ethical considerations troubled Stein's conscience

. . . .Stein got first-class airfare to Dallas. A limousine took him to a luxury hotel for the talk.

He walked off the stage, and a doctor from the conference handed him an envelope containing a $500 check.

"I got a pat on the back and he said, 'There's more where that came from, son.' I had no idea what that meant, but I went home and paid off part of my student loans," Stein said in a presentation at UW this month.

Stein was among dozens of UW doctors and an untold number of physicians nationwide who have pulled in large sums doing talks or working as consultants to drug and medical device companies. . . .

Stein told his cautionary story to medical students, doctors and others at a UW conference this month on conflicts of interest in medicine.

"It was a compelling personal story of someone who tried to have it both ways and realized he couldn't do it," said Norman Fost, a professor of pediatrics and director of the bioethics program at UW. . . .

Another firm, Schering-Plough, paid him about $12,000 for two days as a lecturer. . . .

This is a truly important, courageous and ground-breaking piece of journalism. Will other papers run it? We'll see. Kudos to Dr. Stein -- for standing up and speaking on the record.

Tuesday, April 28, 2009

Appendix K -- Arbitration Mechanics -- of Centocor Agreement to Stay Sealed Until 2017

Remember how I was asking after the terms of Appendix K, in the original Centocor Schering-Plough Remicade/Simponi Distribution Agreement? Sure you do.

Appendix K sets forth the procedural mechanics that govern any manditorily arbitrated dispute between the parties. It was redacted from the original filing, in February 2004. Just now, the SEC extended, by administrative order, the confidentiality of that Appendix (and several other portions of other sections, from the Centocor agreement), until December 20, 2017. Gee -- that's a long time.

So, we won't know exactly what happens in any potential arbitration, until either J&J tells us, or it is all over -- and a decision has been announced. I am not sure that the idea of "Schering's confidential commercial or financial information" should really trump a public company investor's right to receive all material information -- about an investment decision (here, whether to vote for, or against, the proposed Merck-reverse merger). It would seem a rather important consideration, in assessing the probabilities of whether J&J will ultimately prevail in reclaiming the perhaps $3 billion to $4 billion a year in Remicade/Simponi rights, outside the United States.

On the other hand, perhaps J&J will, sua sponte, decide to tip its hand, for some perceived business advantage (and explain how CEO Weldon sees the arbitration mechanics of Appendix K playing out) -- and with it, give the investors a sense of what any arbitration might hold. We'll see. From the SEC's Order, then:

. . . .Schering-Plough Corporation submitted an application under Rule 24b-2 requesting an extension of a previous grant of confidential treatment for information it excluded from the Exhibits to a Form 10-K filed on February 26, 2004.

Based on representations by Schering-Plough Corporation that this information qualifies as confidential commercial or financial information under the Freedom of Information Act, 5 U.S.C. 552(b)(4), the Division of Corporation Finance has determined not to publicly disclose it. Accordingly, excluded information from the following exhibit(s) will not be released to the public for the time period(s) specified. . . . through December 20, 2017. . . .

Generic Version of Zetia Likely to Clear FDA Soon. . . .

Mumbai-based Glenmark Pharmaceuticals Ltd. has received tentative approval for a generic 10 mg form of ezetimibe, the chemical name of Schering-Plough's branded Zetia. This, from today's HeartWire -- do go read it all:

. . . .In a press release issued Monday, Glenmark, which is based in Mumbai, India, said this is the first tentative approval granted by the FDA and that the company believes it has "first-to-file" status on ezetimibe, which would give it 180 days of market exclusivity. The tentative approval is for the 10-mg dose. . . .

It just keeps on rainin' -- over in Kenilworth.

UPDATED @ 2:24 pm: A commenter, below, points out that Schering-Plough has sued Glenmark for patent infringement, on the chemical ezetimibe.

I will go verify this, but I believe Glenmark Pharma will still be free to conduct an "at risk" launch, even if the suit isn't resolved, by the time FDA clears Glenmark's ANDA. There is only a relatively short window within which the federal district courts may order a generic competitor that it is not "allowed to take the risk" of launching a competing version -- and thus, arguably be liable for damages to the patent holder (here Schering-Plough). I believe that period is not far from expiry.

I will report back on what I find, right here -- from an amended (March 10, 2008) Answer filed by Glenmark, in the Ezetimibe Patent Litigation (Case No. 07-1334, U.S. Dist. Ct. NJ):
. . . .18. Glenmark Ltd. admits that if ANDA No. 78-560 is approved by the FDA, that Glenmark USA may market and distribute an ezetimibe product in the United States. . . .

135. On information and belief and as discussed in detail earlier in this Answer, the failure of either Magatti, Schering, and / or other Schering individuals subject to Rule 56, to disclose to the PTO during prosecution of the ’751 application that the metabolites of the SCH48461 compound were inherently produced when SCH48461 was administered to mammals (including humans), as described in the ‘048 PCT, was an intentional and knowing act. . . .

238. On October 25, 2006, Abbreviated New Drug Application (“ANDA”) 78-560 was filed with the U.S. Food and Drug Administration (“FDA”) pursuant to 21 U.S.C. § 355(j). ANDA 78-560 seeks FDA approval to market 10 milligram ezetimibe tablets (“the Glenmark Ezetimibe Product”).

239. One or more claims of the ‘721 patent are invalid for double patenting and / or failure to meet one or more of the requirements of patentability set forth in the Patent Statute, inter alia, 35 U.S.C. §§ 101, 102, 103, 112, 116, and 256. . . .

242. The ‘721 patent, and all patents in the ‘721 family of patents, are unenforceable for inequitable conduct before the PTO by Schering, other Schering individuals subject to Rule 56, and Schering’s counsel, and / or failure on the part of Schering, other Schering individuals subject to Rule 56, and Schering’s counsel, to comply with the PTO Duty of Disclosure under Rule 56. . . .

In short, Glenmark is disputing the validity of the Schering-Plough patents -- and intends to market ezetimibe 10 mg "at risk" -- if and when it receives FDA approval to do so.

Stay tuned.

Monday, April 27, 2009

How is it that 25 Percent of the Five Year Incentive Was Paid Out -- for 0.72 Percent of Actual TSR?

UPDATED: Lest one think this discusssion involves only a relatively-small amount of money -- at $22.17 per share, tonight's NYSE close, Hassan, Bertolini, Cox, Saunders [Editor's errata] and Sabatino received about an additional of $8.7 million, in the aggregate -- with about $4.4 million of that amount going solely to CEO Hassan.

On April 24, 2008, Schering-Plough common stock closed at $17.86 on the NYSE. On that day, the board told the world, and the SEC, in last year's annual proxy (on page 22 near the bottom), that:

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

Now, on March 31, 2008, Schering-Plough stock closed at $14.20 on the NYSE. On April 24, 2008, it stood at $17.86. At year-end, December 31, 2008 -- Schering-Plough common stock closed at $17.03 per share (actually below the price on the day the board mailed last year's proxy).

Since when does agreeing to bust-up, and sell-off a company (on the cheap) qualify as "performance" under the Five Year Transformational Incentive program?

Since Ira Kay and Hans Becherer sit in review, I gather. Here is this year's disclosure -- and note well -- the quartile-chart at right is nowhere to be found last year's proxy. Did the Compensation Committee "move the goal posts closer"? Who knows? It is clear that this disclosure wasn't shown in graphical form, last year. [See actual graphic, from Schering's present proxy -- at right.]

Text (about at the middle of Page 29):
. . . .Actual TSR: Target -- 15%

Actual -- 0.72%

Relative -- (Negative 1.08%). . . .

. . . .As shown above, Schering-Plough failed to reach its targeted level of actual TSR but did achieve its targeted level of relative TSR. As a result, only 25% of each named executive’s target award was earned as shown below. . . .

Okay, in the blue text (last year's disclosure, above) did anyone notice a defined term called "Relative TSR"?

Nope -- me either. "Actual TSR" or actual total shareholder return -- for the five years was 0.72 percent. Yes. That is less than one percent. In fact, it is less than three-quarters of one percent. Overall, the Peer Group lost about one percent, in the same period -- but how does this remotely justify a 25 percent payout?

And yet, the Compensation Committee, chaired by Mr. Becherer, awared 25 percent of the five-year incentive to CEO Hassan, and the Top Five (excluding Dr. Koestler -- he apparently wasn't eligible, back then), for less than three-quarters of one percent of total actual shareholder return, during the five years.

For CEO Fred Hassan, alone, that equaled 198,488 units, or $4.4 million at tonight's $22.17 Schering-Plough NYSE Closing price, per share.

Again, an additional $4.4 million, for less than three-quarters of one percent total shareholder return.

That is appalling.

By the way, does anyone else wonder why, exactly, Mr. Hassan was telling Wall Street that the cholestrol franchise's US sales were "generally stabilizing" toward the end of 2008 (near five year measurement time) -- when we only now learn that the US Vytorin/Zetia month-by-month sales continued to fall an additional 15 percent, in sequential quarters (Q4 2008 to Q1 2009)? I am put in mind of at least $4.4 million reasons.

CEO Hassan and Co. Graded: a "D" by the Corporate Library in 2008; Now To Be Given $78.6 million From the Board

Schering-Plough filed its "regular" annual proxy statement with the SEC tonight, and while the board nominally reduced the compensation of CEO Hassan and the Top Five (due to a failure to meet the goals outlined by the terms of the "Five-Year Transformational Incentive" program -- but more on that in another post!), the real story is that this proxy speaks only as of December 31, 2008 (when Schering's stock price was only $17.03) -- at a time prior to the February 27, 2009 special grants of deferred stock units, and prior to the March 9, 2009 announcement of proposed merger with Merck & Co.

As a public service, I've added up the last two years non-forefeitable cash compensation the board gave to Mr. Hassan (2006 and 2007), then added the same figures for 2008 -- which, by my reckoning, equal another $5.73 million. . . . then added in all the change of control payments he is due, both equity, and non, that are triggered by the Merck announcement. For the graphic below, I've used today's closing NYSE Schering-Plough common stock price -- $22.17. See it below -- click it to enlarge:

Now, to make this easy for you to keep an updated tab upon, know that for every $1 that Schering-Plough's stock rises over $22.17, you'll need to add about another $6 million to the $78.6 million portion of these totals ($6,004,324, to be more precise). So, for example -- at the NYSE close on March 26, 2009, Schering-Plough common stock was $24.42 -- thus, had the merger been completed that night, it would have yeilded a change of control payment to Mr. Hassan of over $92.1 million, PLUS the $31.8 million in his last two years -- equals a grand total haul of over $123.9 million.

Importantly, these figures do not include any "gross-up" for "excessive compensation" taxes that will be paid by Schering-Plough, on behalf of Mr. Hassan, and the rest of the EMT. But Schering is going to pay them -- it has already agreed to do so.

Now, let's read about how the Corporate Library grades Schering-Plough's board and governance processes -- on responsibility, shall we? Yes let's (from page 58 of the proxy):

. . . .The Corporate Library, an independent investment research firm, rated [Schering-Plough] our company Very High Concern in executive pay. . . .

Grade: “D” Overall.

High Governance Risk Assessment. . . .

Fred Hassan was awarded 944,000 options. The large option number raised concerns over the link between executive pay and company performance. Small increases in share price (completely unrelated to management performance) can result in large financial awards.

Hans Becherer and Robert van Oordt were long-tenured and retirement age — independence and succession planning concerns.

Our directors (who as a group held 4 seats on our 3 key board committees) served on boards rated “D” by the Corporate Library: Fred Hassan; Eugene McGrath; Patricia Russo; Arthur Weinbach. . . .

Three directors (who held 5 seats on our three key board committees) were designated as Accelerated Vesting directors by The Corporate Library for speeding up stock option vesting to avoid recognizing the related cost:

Hans Becherer, who even chaired our Compensation Committee; Kathryn Turner; Arthur Weinbach. . . .

It is unfathomable (at least to me) that Mr. Hassan would not be so embarrassed by these excesses, as to agree to return a good portion of the money -- indeed, he sold thousands of investors Schering-Plough common shares at $27.50, in September 2007 (to finance the Organon acquisition) -- a price the shareholders won't likely see, even in the post-merger trading on the NYSE.

Saturday, April 25, 2009

Anemia Appeared in Fewer Than One Percent of Vertex's Teleprevir Patients

Copenhagen EASL 2009 Update -- Half of the Boceprevir (Schering-Plough) patients developed anemia. Only two of 339 Teleprevir patients developed anemia, while seeing a 51 percent cure rate in "non-responder" patients (patients who failed prior Hep C treatments). Double. Match. Point. Quoth The Guardian

. . . .Red blood cell boosting anemia drugs were used in only two of 339 telaprevir patients, a far lower percentage than seen with an experimental Schering-Plough Corp drug, boceprevir. . . .


"Made in Purgatory", Or "The Most Desperate Love Triangle"? Which Is It?

This is small -- but worthy of its own post, I believe. Two national columnists, this week, ran these headlines, about the proposed Sch-Merck transaction (the second refers also to the J&J Remicade/Simponi potential for reversion of non-US distribution rights) -- do click the embedded links, in each, to read the whole articles. They are very worthy reads:

. . . ."Schering and Merck: A Match Made in Purgatory"

-- Brian Orelli, The Motley Fool. . . .

. . . ."Who is the Most Desperate in This Bizarre Love Triangle?"

-- Jim Edwards, BNET Pharma. . . .

What, Exactly, Did Schering-Plough Promise the SEC -- About a "Say on Pay" Survey?

UPDATED -- 04.27.09 PM:

$78.6 million; more if the stock rises
above $22.17 during the merger process.


On January 27, 2009, Schering-Plough's Senior Securities Counsel told the SEC, in a so called "no action" letter request, that the company wished to exlude a non-binding "say on pay" proposed shareholder resolution -- from the mailings that would comprise the company's 2009 proxy solicitation materials. The Senior Counsel argued, in part, that Schering-Plough had essentially already adopted the proponent's suggestion -- having announced on October 5, 2008, that the company would engage a Stanford Law School professor, and former CalPERS General Counsel, to oversee a formal "say on pay" survey -- to be mailed with the ordinary 2009 proxy-statement.

On March 27, 2009, the SEC Staff's Special Counsel wrote that excluding the proposal would not result in any recommendation of an enforcement action -- on entirely unrelated grounds, however (accepting a company representation that Mr. Loeb, the proponent, had not provided legally-sufficient evidence that he owned Schering-Plough shares, and that he owned them for more than a year). Of course, this March 27, 2009 SEC letter was sent after the March 9, 2009 proposed merger announcement. Interesting.

Thus far, Schering-Plough is apparently not seeking any formal concurrence from the SEC that it might combine its regular annual elections proxy (otherwise due to be mailed early next week), with the proposed merger-related proxy materials (due to be mailed at the end of May 2009). Me? I thought the regular annual materials would be out last night; now I would be surprised if the regular proxy isn't mailed by Wednesday, of the coming week.

Frankly, I wonder how Richard Koppes feels about being associated with all of this back and forth. [Here's an April 5, 2009 Wall Street Journal take on it]. That is, does he think a "say on pay" survey is really irrelevant, simply because there may be a merger, about 10 to 15 months from now? [I wonder why the results couldn't be made available, on an expedited basis, to be INCLUDED in the proposed merger proxy materials -- in about one and a half-months. The data would surely help the newly-constituted SCH-Merck board avoid some of the pitfalls that have arguably led to this merger -- a merger one national columnist called "A Match Made in Purgatory", last week. Another called this, coupled with the Remicade/Simponi to-and-fro (thus including J&J) "A Desperate Love Triangle".]

So, will Schering mail a "say on pay" survey next week, as it had originally promised? Or, will it rely on the fact that the proposed-merger would make this a short-term effort -- "only one year" of applicability? We'll know soon.

Here is the full PDF of the SEC's correspondence file on the matter, but the below is from page 32 of that 58 page file:
January 27, 2009. . . .

. . . .The survey will be mailed with the 2009 proxy materials and the results of the survey will be included in the 2010 proxy statement.

In addition, as specified in the Company's announcement (Exhibit 5 [Page 58 of PDF]), the Company would also provide an avenue for shareholders to provide individual input with an independent third party (Richard Koppes, currently at Stanford Law School and formerly General Counsel of the California Public Employees Retirement System (CalPERS)), on specific concerns of individual investors. This was confirmed to Mr. Loeb, the Proponent, and Mr. Lapham by letter from the Company's Corporate Secretary, dated January 5, 2009 (Exhibit 3), which stated, in part, that the purpose of the survey is:
To obtain more granular feedback than a vote would provide. For example, we have heard from colleagues in the United Kingdom that a vote ratifying pay does not mean all shareholders are happy with all features of the executive compensation program and a vote failing to ratify pay does not mean all shareholders are unahppy with the same component (for example, one shareholder might disagree with the perfonnance compensation metrics while another might believe the mix of equity and cash is not optimal).

The Company will monitor the level of interest across all shareholders to determine whether to repeat the survey in future years as a good resource. . . .

We shall see.

Friday, April 24, 2009

Friday Litigation Update: Five SIX Institutional Investor Class Actions Challenge Merger. . . .

Last week, I reported that there were at least five separate institutional investors, each bringing its own class action suit, to challenge the terms of the reverse merger. I was wrong.

There are at least six. I did not have easy access to all of the various New Jersey state court filings, at that time. Now I do. And so, I learned that on March 24, 2009, the Firefighters and Police Pension-Funds (ACT 345), for the City of Dearborn Heights, Michigan, had filed suit in the Chancery Division of the Superior Court for Union County, New Jersey (Class Action Docket No. UNN - C - 48-09). Additional class plaintiffs include the retirement and pension funds for the City of Livonia Employees, the Westland Police and Firefighters and the County of Macomb Employees (all also located in Michigan). Here is what these Michigan government pension funds allege, related to the Johnson & Johnson Remicade/Simponi rights [click it to enlarge]:

For now, I will keep my tally of all suits challenging the merger at at least 17 -- as this one was "hidden" among those I already counted, separately.

As ever, more to come.

Will We Learn Tonight How Much CEO Hassan Took -- in 2008?

UPDATED -- 04.27.09 PM:

$78.6 million; more if the stock rises
above $22.17 during the merger process.


Schering-Plough holds its Annual Meeting later than most calendar-year-end-based public pharmaceutical companies. That, in turn, allows it to file its proxy statment later than most -- typically at the end of the third week of April, for a third week of May meeting date.

Why does Schering wait?

One possibility is that it keeps Fred Hassan's pay out of those Fortune and Forbes "100 Highest Paid CEOs" tables -- because his data is "not yet available". Another theory holds that, in this way, the Compensation Committee may now grant him, and the EMT, even more additional compensation -- typically in the first few days of May, which means that compensation is not in the tables disclosing pay in this year's proxy -- and is "very old news" -- by the time it is added into the compensation tables for the following year. [If the reverse merger goes through, there will be no "next year's proxy" -- for Schering-Plough, stand-alone. And there will be no proxy-disclosure of Hassan's compensation for 2009 then, as he has promised to be gone, by then.]

So, will the Compensation Committee really "load the EMT's boat" in May, this year -- given that it is unlikely to appear in at least Hassan's Executive Compensation Table, next year -- as he is very-likely to be gone by then? I challenge all readers to watch for it. I'll report it here, in any event.

If CEO Hassan's team holds true to form, the proxy will file tonight, after-hours, at the SEC. In it, we will see just how much more Hans Becherer, and the Board, paid CEO Hassan -- and the top five of the EMT -- for 2008 "performance". [Note also that the Board granted most of the members of the EMT additional phantom deferred stock units on February 27, 2009 -- while the team was negotiating to bust-up, and sell-off the company -- to Merck. Was that a conflicted-interest-to-their-fiduciary duties? I dunno.]

A "say on pay" survey was promised -- but withdrawn, by CEO Hassan (he felt the merger made it less meaningful -- right!). Yesterday, an advisory "say on pay" proposal passed at Pfizer, but failed (albeit narrowly) at Johnson & Johnson. I now peg CEO Hassan's pay-day for the merger at close to $78 million. Do you want a say on that? Sure you do.

I'll post an update here, when we know what Hassan made in 2008-2009.

Thursday, April 23, 2009

"Wolf" Brings Eyewitness Report on Boceprevir -- From Copenhagen

In the comment-box, tonight -- Wolf, a long-time friend to this blog -- has provided some expert on-site reporting, from Copenhagen -- and the 2009 EASL, thus:

. . . .Schering-Plough presented their SPRINT-1 data in Copenhagen today. This is their naive trial (not non-responders). A couple of initial observations although I am still digesting the data:

1. Discontinuation rates in the boceprevir arms ranged from 26%-50% vs the 10-15% we usually see with current standard of care ie.PEG+ribavirin. This observation was left unexplained however premature discontinuation in HCV trials is usually associated with some tolerance or compliance issue.

2. My greater concern is their numbers, as presented, do not add up. SP claimed a 75% SVR in their best treatment arm which included 103 patients ie. 77 patients had SVR. However they also report 27 patients discontinued. We are already at 104 patients not including the patients that did not respond (at least 8 patients, probably more from another slide, ie. n=112). What does this mean? In my mind it suggests that the 75% SVR being reported is not based upon an ITT (intent to treat analysis). Under ITT, patients that d/c should be counted as non-responders as they did not complete the protocol. It appears that SP may be counting some discontinuations as responders. The FDA typically will look at a strict ITT analysis when interpreting the data.

3. Their 38% response rate in Genotype 1 patients with PEG INTRON + Rebetol control arm is poor. If I were Roche, I would be capitalizing on this lacklustre reponse to gain greater market share for Pegasys + Copegus.

4. It is my opinion that TID (three times a day) dosing will be very challenging. The boceprevir pharmacokinetic profile suggests that the drug must be taken every 8hrs whereas the ribavirin component is taken every 12 hours. Standard rule: You do not mix bid and TID dosing. For example, if a patient takes their first dose of boceprevir and ribavirin at 8:00 AM (4 pills BP, 3pills riba), they must take their second dose of BP at 4:00 PM (4 pills), their second dose of riba at 8:00 PM (3 pills) and their 3rd dose of BP at 12:00 AM (4 pills). Repeat every day for the next 48 weeks! Add in once weekly interferon injections and you can imagine how difficult this will be from a patient pill burden and compliance point of view. Using HIV as a comparator, we suspect that upwards of 90% compliance will be required to avoid the emergence of drug resistance.

Significant advantage will go to the company that developes a BID (twice daily dosing). This would allow synchronization with the ribavirin dose and reduce the times in which drug is taken from 4 to 2 per day. Vertex has recognized this issue and have been doing these studies.

Advantage Vertex.

-- Wolf

Thanks, Wolf! -- this greatly enriches the dialogue, and my site (my squib on it, from stateside, today). Any chance you'll still be there for Vertex's "Late Breaker" session on Saturday? I'd love to have your take on that!

Revisiting Section 8.2(c) -- in the Centocor Agreement -- Remicade/Simponi Rights. . . .

UPDATED 04.28.09 @ 5 PM EDT

Remember how I was asking after the terms of Appendix K, in the below agreement? Sure you do.

Appendix K sets forth the procedural mechanics that govern any manditorily arbitrated dispute between the parties. It was redacted from the original filing, in February 2004. Just now, the SEC extended, by administrative order, the confidentiality of that Appendix (and portions of some other sections, in the Centocor agreement), until December 20, 2017. Gee -- that's a long time.

So, we won't know exactly what happens in any potential arbitration, until either J&J tells us, or it is all over -- and a decision has been announced. I am not sure that the idea of "Schering's confidential competitive or financial information" should really trump a public company investor's right to receive all material information -- about an investment decision (here, whether to vote for, or against, the proposed Merck-reverse merger). It would seem a rather important consideration, in assessing the probabilities of whether J&J will ultimately prevail in reclaiming the perhaps $3 billion to $4 billion a year in Remicade/Simponi rights, outside the United States.

On the other hand, perhaps J&J will, sua sponte, decide to tip its hand, for some perceived business advantage (and explain how CEO Weldon sees the arbitration mechanics of Appendix K playing out) -- and with it, give the investors a sense of what any arbitration might hold. We'll see.


Johnson & Johnson CEO William Weldon plainly wanted to "hold forth, in great detail" (at 1 hour, 40 minutes into the webcast) on the Remicade/Simponi matter, at today's J&J Annual Shareholders' Meeting, but has been told -- very firmly -- by his lawyers, to clam up.

His off-the-cuff, certainly unscripted use of the word "issue" (as opposed to "deal", or "transaction") -- to refer to the matter upon which he was taking a scripted "no comment" -- would plainly suggest this is not going to be an outright offer for Schering-Plough. No, I think it is a dispute about whether a "change of control" [note the small "c"s there -- not CAP "C"s!] has triggered reversion of the rights.

In that regard, note that the original Centocor agreement, at Section 8.2(c), defines a "CAP C" Change of Control -- but then doesn't employ it, in spelling out all the termination provisions.

This makes a fight pretty likely -- as it would arguably allow in extrinsic evidence of what a "small c" change of control might mean -- to experienced practicioners, in this securities law/distribution agreement context.

And, that would be very bad news for the Merck and Schering-Plough lawyers. The arguable gaffe in Section 8.2(c), then:
. . . .from such notification, to notify in writing the party subject to the change of Control of the termination of the Agreement taking effect immediately. . . .

Half of Boceprevir Patients in Phase II Trial Developed Anemia

While showing good efficacy in treatment naive patients, the SPRINT study -- presented today, at EASL 2009 in Copenhagen -- which is a trial of Schering's Boceprevir candidate also presented anemia in half of all patients, per a Reuters report:

. . . .But half the patients taking the boceprevir experimental medicine developed anemia -- a potential commercial disadvantage to a similar pill called telaprevir that Vertex Pharmaecutical Inc (VRTX.O) is developing. . . .

In my estimation, this makes Vertex's Teleprevir the clear winner -- in this horse race. Teleprevir is curing half of all previously-failed-therapy Hep C patients -- and Schering's doesn't show any real promise, there.

Latest Merck SEC-Filed Merger-Related Disclosures. . . .

Last night, Merck filed with the SEC a transcript of remarks made by CEO Dick Clark and Merger/Integration Team Leader Adam Schecter, to a gathering of Merck employees on April 21, 2009. I will confess that, once all the jargon always scattered about in such a speech is stripped away, there are some encouraging signs here -- for transforming Schering-Plough's rampant "culture of complicity". [It was the culture that allegedly sanctioned the delay in making full ENHANCE disclosures, afterall.]

Since CEO Hassan assumed the helm in 2003, it has seemed that disagreeing, even mildly, with any idea proposed by one's superiors was strictly verboten -- the notion has been that, at Hassan's Schering-Plough, no one is to challenge anything anyone above their pay grade has to say. I think Hassan's team refers to it as being a "psychological/behavioral fit" -- for the [now-ending?] Hassan/Schering culture.

If Merck CEO Clark is to be taken at his word, then a shift to "courage and candor" -- in challenging one anothers' ideas, at the post-merger Merck/Schering-Plough -- may well lead to a vast improvement in decision-making at the new company:

Adam Schecter:

. . . .And we also looked at the surveys that they had at Schering-Plough and got the most recent data we can get from there to understand how they’re doing towards their aspiration. And they still have many things that they’re trying to work on in order to do better. . . .

. . .we want to improve upon and use the integration to help us with is courage and candor, making sure that people are challenged status quo, that they feel comfortable, truly comfortable speaking up, debating what’s important, that people feel they have the opportunity to say what’s on their mind and challenge ideas, that we take appropriate risks, that we accept failure at times.

. . . .I think if you look at some of the discussions that we’ve already had between Merck and Schering-Plough and Merck and Schering-Plough together, you’re starting to see people really challenge one another in spirited way, in a good way, respectful but being very upfront and honest about what people are feeling and what they’re thinking. And we’re going to continue to make sure that we have that type of process moving forward so that we really build in to the integration, courage and candor. . . .

This could be a very good thing.

Wednesday, April 22, 2009

LIVE-BLOG: Johnson and Johnson's Annual Meeting Tomorrow at 10 am

▲ 11:40 AM -- CEO William Weldon would love to answer a shareholder's question, on Remicade/Simponi rights (at 1 hour, 40 minutes into the webcast), but he fears his "lawyers will shoot" him -- so, instead, he says: "we are very much engaged -- we are not sitting back and doing nothing -- we will notify you when we have resolved this issue. . . ." Well, that sounds decidedly unlike he's contemplating any outright bid (of any kind) for SGP (note the word "issue" in his remark -- not a word like "deal", or similar). Nope, that sounds more like he's ultimately going to be "seeking arbitration" -- for a return of at least part of the Remicade/Simponi rights.

▲ Earlier: William Weldon just announced an increase in the dividend to $0.49 a quarter.

▲ TIAA-CREF (holder of over $1 billion of JNJ stock) just moved for an advisory "Say on Pay" proposal (much like the SEC proposes) -- CEO Weldon said that the Board of Directors opposes this resolution. [It did not pass.]


Tomorrow morning, starting at 10:00 am EDT, I'll live-blog any portion of the J&J annual shareholders' meeting that mentions the Schering-Plough Remicade/Simponi reversion of rights dispute. Merck took a "no comment, at this time" on the topic yesterday morning (and Schering-Plough wasn't even asked about it). If you'd like to listen along, tune in here, to register tomorrow around 9:55 am.
. . . .Upcoming Events

April 23, 2009
10:00 AM ET:

Johnson & Johnson Annual Meeting of Shareholders. . . .

Tuesday, April 21, 2009

Forbes Picks Up the Theme -- Matt Herper: Vytorin "Stabilized"?

Just now, Matt Herper, writing at Forbes picked up on my meme, in this morning's live-blog session, about whether CEO Hassan's February 2009 "generally stabilizing" comments were truthful when made, thus (do go read it all):

. . . .Plummeting U.S. Zetia sales were partly counteracted by global growth. But Vytorin sales fell 37% in the U.S. and 7% outside the U.S.; executives at Merck and Schering had previously said international growth would help stabilize the franchise. . . .
[Ed. Note: Emphasis supplied.]

Um, cue the plaintiffs' securities lawyers. I'll report when (not if) the first federal suit files.

Monday, April 20, 2009

Schering Reports First Quarter 2009 Results: Live Blog Here, in the Morning!

U P D A T E D: 04.21.09
Earnings Released @ 6:27 AM EDT

The Q1 Earnings Call is
LIVE NOW -- click in -- no
passwords needed!

LATER: Here's a Link
to the MERCK call.

FINAL LIVE ENTRY: Schering-Plough opened off about 5 percent on the NYSE; Merck opened down almost $2, or off 7.5 percent. Tough, tough times.

▲ LATER: Schering-Plough common stock is off about 3 percent in light trading on the NASDAQ pre-market. . . .

▲ LATER: Merck takes an icy "no comment" on the J&J Remicade matter -- now Merck is off a buck in NASDAQ pre-market (about 100,000 shares traded). . . .

LATER STILL: Merck CEO Clark just confirmed that later this year, IMPROVE-IT data will be reviewed (but not "unblinded") to decide whether the sample size will need to be increased -- read: a multi-year delay, for new enrollments, and then subsequently, any results. [Which, of course, would be the sort of analysis Senator Grassley's staff conducted on the ENHANCE data, last Spring, on the fly, to determine that no favorable outcome was possible, simply by analyzing the "blinded" data. This is known as "functional unblinding".]

▲ Global sales of Vytorin/Zetia Q1 2009 down over 15 percent, overall -- in sequential quarterly comparisons (Q4 2008 v. Q1 2009). That is NOTHING like "generally stabilizing" sales.

▲ Q1 2009 US cholesterol franchise (see page 5 of that link): $596 million, v. $695 million in Q4 2008. That's a US sales down-bubble, in sequential quarters, of 14.2 percent. That also is NOTHING like "generally stabilizing" sales.

▲ "Net sales of the cholesterol franchise, which include sales of the cholesterol joint venture plus sales recorded by Schering-Plough in non-joint venture territories such as Japan and Latin America, declined 21 percent in the first quarter of 2009 [Ed. Note: as compared to Q1 2008] to $973 million, reflecting a 17 percent operational decrease and a 4 percent unfavorable impact from foreign exchange. Sales declined 30 percent in the U.S. In international markets, sales declined 2 percent, reflecting operational growth of 11 percent and a 13 percent unfavorable impact from foreign exchange. . . ." That, also, is NOTHING like "generally stabilizing" sales.

Let those three dot points sink in a moment: On January 20, and February 3, 2009, CEO Hassan told the world that the cholesterol franchise sales decline had "generally stabilized" -- and he would no longer report monthly IMS data -- as a way of informing the equity markets, in a more timely fashion, of what Schering's prospects might hold. On March 9, 2009 he announced the proposed reverse merger, which was pegged off of Merck and Schering stock prices.

▲ What would those figures have been, on March 9, 2009, had the equity markets seen February 2009 Monthly IMS Data? What would have been the price, had the equity markets known of this continuing monthly deterioration in the the sales revenue, and thus fortunes, of Vytorin/Zetia? A deterioration that Mr. Hassan had said, a month earlier, was ending. Remember, Mr. Hassan did not stop receiving the IMS monthly updates -- he just stopped disclosing them. I think the class-action securities lawyers/plaintiffs will smell new blood, in these waters, this morning.

▲ Currency created a 10 percent drag on Q1 2009 sales revenue, overall. That is in line with the headwinds Abbott reported last week.

▲ GAAP Q1 2009 EPS of $0.46 -- misses by one penny. Yawn.

▲ Also as required by GAAP, the increase in common stock prices -- from the announcement of the proposed reverse merger on March 9, 2009 -- has caused the mandatory convertible preferred (convert date: August 2010), (SGP-PB) to be considered dilutive for the purpose of calculating EPS -- so, instead of about 1.635 billion common share equivalents (@ Q4 2008), Schering now has to spread its earnings over 1.739 billion common share equivalents, or more than an additional 100 million common shares. This is bad news, albeit GAAP-rule-driven-news, as well.

▲ Meanwhile, over at Whitehouse Station, WSJ MarketWatch reports thus, this morning: ". . . .Merck & Co. cut its 2009 revenue view and delayed the filing of a migraine drug as it reported a 56% decline in first-quarter profit. Its first-quarter net dropped to $1.46 billion, or 67 cents a share, and sales fell 8% to $5.39 billion. Currency swings and the loss of exclusivity of Fosamax hurt sales, and the year-ago profit featured a $1.4 billion gain on a distribution from AstraZeneca. Excluding one-time items, Merck said it would have earned 74 cents a share against 89 cents a share. Analysts polled by FactSet had forecast earnings of 78 cents a share. It still sees adjusted earnings between $3.15 and $3.30 for the year, but cut its revenue view by $500 million to $23.2 billion. Merck said it is delaying the filing of the U.S. application for telcagepant, used to treat acute migraines, and said it doesn't expect a filing this year. . . ." Ouch.

▲ Merck shares are now off -- over 3 percent -- in NASDAQ pre-market trading (albeit on light volume, so far).

▲ Schering-Plough is off, albeit only marginally, in NASDAQ premarket trading -- and again, on light volumes.

Now, Blogging the Call

▲ CEO Hassan admits that there is "continuing pressure" in the United States on Vytorin/Zetia. That is an astonishing understatement.

▲ Raul Kohan is reviewing the Animal Health businesses. [Is he setting these up for divestiture? Or, will it be Merck's animal health businesses -- that are off-loaded? We'll see.]

▲ CEO Hassan: No news from FDA on asenapine -- "continuing to work" with FDA.

▲ Canadian Health's recent approval of Simponi glowingly-mentioned by Hassan, and by Carrie Cox, as well.

▲ Carrie Cox just spent over a minute on the international positives for Vytorin/Zetia -- and then offered only about 10 seconds on scrips-decline (30 percent!) in the US -- clearly, the $900 million quarterly elephant in the room.

▲ Tim Anderson, Sanford Bernstein, asks about Simponi: Tom Koestler said that the European registration is 12 to 18 months away from approval -- Carrie Cox said that they are still working through the Canadian reimbursement process -- sales will be later in the year.

▲ Rupesh Patel, UBS, is asking for a "line by line" analysis of currencies headwind -- now Bob Bertolini is basically saying it affected everything, adversely.

▲ New analyst at Morgan Stanley: asks about EPO in clinical trials, vis-a-vis Boceprevir. . . .

▲ Goldman Sachs [Name?] asks about European pressure on Remicade reimbursement -- is there the same pressure we're seeing in the US? Carrie Cox said in Eurpoe, it is viewed more as an "in-hospital" drug -- which militates against some of the cost pressures, on reimbursement in the EU.

▲ "No predictions" on timing for any potential resolution of the Congressional investigations of the ENHANCE and related matters, from Tom Koestler.

▲ Seamus Fernadez, Leerik Swann -- questions on timing of any merger vote, given Merck's tough quarter: CEO Fred Hassan no update on any potential merger vote date -- Annual Stockholders' Meeting in May 2009 is next. Tom Sabatino: merger proxies will likely be filed with the SEC toward the end of May 2009.

▲ For its part, Merck's press release this morning offered: "Merck said it has made the appropriate filings with regard to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. . . ."

▲ How is "prior authorization" playing out on Vytorin/Zetia in the US? Carrie Cox offered a commercial, on lowering LDL. Then she admits to substantial generic inroads.

▲ Dick Clark, over at Merck, is now confirming, on his call, that Merck's Form S-4 will file with the SEC toward the end of May 2009 -- saying the "financials" [did he mean "financings"?] are complete, and bank syndication is in place, in principle -- in short, things are "on track".


Tomorrow morning at 7:30 am EDT, before the NYSE opens, I'll be live-blogging the Schering-Plough first quarter 2009 earnings conference call -- we may well learn more about where the Remicade/Simponi rights stand, vis-a-vis Johnson & Johnson.

Later, FoxBusiness intones that ". . . .Schering-Plough is expected to report first-quarter earnings of 47 cents a share, according to analysts surveyed by FactSet Research. . . ."

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

It will likely go "Live" -- at Schering-Plough's Kenilworth HQ -- around 7:25 a.m., EDT.

What to watch for: On February 3, 2009, CEO Fred Hassan told Wall Street, on the 2008 Year-End Results call (reiterating an "Investor FAQ" dated January 20, 2009) that Vytorin/Zetia sales had "generally stabilized" -- and thus he would no longer provide monthly IMS prescription data updates for the cholesterol franchise.

If the franchise's sales are down more than 10 percent, tomorrow, in sequential quarters, Wall Street ought to cry foul -- loud and long.

Where It Stood -- At Year End

On February 2, 2009, the press release pegged Schering's worldwide share of the Vytorin/Zetia revenue in Q4 2008 at $531 million, while it totaled $1.1 billion, worldwide, which included Merck's half of the sales.

The IMS scrips for Q4 2008, listed in the "Investor FAQs" were as follows:

US Cholesterol Market: 61,149,000

Merck/Schering-Plough Franchise: 6,317,000 scrips; Schering's US share: $695 million

Vytorin: 3,466,000 scrips; Schering's US share: $357 million

Zetia: 2,850,000 scrips; Schering's US share: $338 million

[The US$ of Q4 2008 revenue figures immediately above are from page 5 of these Schering product sales sheets.]

How will Q1 2009 stack up? We'll know in about 12 hours.

An Interesting Coincidence: Of $10.50 per Share -- in Cash Payments. . . .

Last night, a commenter asked about the stability of the Schering-Plough pension plans. Other than following Cain v. Hassan, et al., I haven't really written much about them, yet. As is often the case, one finds interesting coincidences, on the way to looking for something else, entirely.

What I found, upon a cursory glance, is that the pension plans are immensely underfunded -- their expected liabilities exceeded their projected assets by about $1.2 billion, at year end 2008. And I think that gap has likely widened, with the global downturn, and increased lay-offs/early retirements. However -- a potential silver lining, here -- I did notice that, if the reverse merger is completed, Schering/Merck would have some instant liquidity.

More specifically, in the event that the Sch-Merck transaction is consummated, next year, at least some of the underfunded plans will get liquidity, to the extent that these plans hold Schering-Plough stock, at closing. That is, any of the plans then holding old Schering-Plough common will receive $10.50 in cash for each share -- thus increasing the liquidity of those plans' assets. As luck would have it, at least at year-end 2007, the single largest asset-class held by the Schering-Plough pension plans is -- you guessed it! -- Schering-Plough common stock.

The Details, Then (Where the Devil Resides)

As I said at the top, though, as of year-end 2008, the pension plans were underfunded by $1.2 billion -- per the financial footnotes, Note 9, in Form 10-K:

. . . .At December 31, 2008 . . . the accumulated benefit obligations (ABO) for the retirement plans were $3.7 billion. . . . The aggregated accumulated benefit obligations and fair values of plan assets for retirement plans with accumulated benefit obligations in excess of plan assets were $3.4 billion and $2.2 billion, respectively, at December 31, 2008. . . .

That leaves about $1.2 billion unfunded, and it will likely be worse this year, due to the overall equity market downturns.

Then I began to look deeper: the 2008 year end asset-by-asset holdings of the pension funds won't be filed with the SEC until late-June 2009 -- so I used 2007 figures (from the June 2008 Schering Form 11-K filing, at Page 13):

The following investments represented 5 percent or more of the Plan’s net assets available for benefits. . . .

Schering-Plough Stock Fund, 882,935 . . . units, and $422,749,000, respectively. . . in 2007. . . .

This means that the plans held, at year-end 2007, about 16,153,955 shares of Schering-Plough -- then, the single largest holding of these plans.

If there are still that many, or more, shares held by the plans today, $169,616,528 in cash will be paid to the plans in the merger, sometime in 2010.

And that will generate decent liquidity, for the $1.2 billion of underfunding, should there be a spike in early pay-outs/borrowings against pensions (say via early retirements/layoffs).

However, at year-end 2007, the common stock was trading at about $26.90 per share -- so the losses the plans show on these shares, at year-end 2008, when the stock was trading at about $16.90 -- are also about $10 per share.

Now that's a pretty interesting coincidence, no?

The Sch-Merck transaction will return almost all the losses since 2007 year-end to the plans -- in cash -- plus $0.50 per share in attorneys' fees (or about $8 million).

Thus, as I have argued before, this reverse merger deal looks a little like a non-litigated, extra-judicial, preemptive settlement of ENHANCE securities law liabilities.

Sunday, April 19, 2009

At Least Five Separate Institutional Investors Have Filed Suits. . . .

. . . .to enjoin, delay or modify the proposed reverse merger between Schering-Plough and Merck. The goal of each of these suits is to seek, and obtain, an increased return to the common shareholders of Schering-Plough -- if the company is to be busted-up, and sold-off. There are at least 17 suits in total, and at least four of those are now pending in the federal District Courthouse in Newark, New Jersey -- pending before Judge Cavanaugh, the same very able jurist handling all of the more than 150 pieces of ENHANCE-related litigation [click to enlarge]:

. . . .the [merger negotiation and review] process was grossly inadequate, amounting to a clear breach of the Schering-Plough officers' and directors' fiduciary duties. . . .

The Q1 Earnings Call should thus be rather entertaining.

Saturday, April 18, 2009

More, on JNJ's Role, From Lothian (Edinburgh, Scotland) Pension Fund v. Hassan, et al.

While this putative federal class action -- the latest challenge to the reverse merger treads much of the same ground of the other 16 suits now pending in state and federal courts, it is particularly noteworthy. How so? It is the first suit I've seen that credibly advances the theory that the Centocor/J&J Remicade/Simponi rights ambiguity is evidence of a flawed -- or at least hasty -- merger negotiation process. That is, it evinces a breach of fiduciary duties -- as alleged by a sophisticated institutional investor -- one that owns more than $10 million of Schering-Plough stock. [Here is a partial roster of all the similarly-pending suits.] And, here is more from this suit, on that score [click to enlarge]:

Is it really so hard to believe that, on a $4 billion franchise, if a deal could have been arranged between J&J/Centocor and Schering/Merck -- prior to the announcement date (March 9, 2009) -- it would have been? I don't think so. This is likely why Dominic Caruso, J&J CFO took a very-icy "no comment", earlier this week.

That is -- I think every party to the deals (old, and new) expects a fight -- or at least, a very hard-fought negotiation, which will likely result in some transfer of value to J&J. We'll see -- Schering-Plough reports next week. So does Merck. Stay tuned.

Friday, April 17, 2009

Minor Friday Litigation Update: Cain v. Hassan, et al.

In the federal class action suit alleging that Compensation Committee Chairman Hans Becherer (and others) breached fiduciary duties prohibiting (among other things) "excessive pay" (resulting in an alleged waste of corporate assets) -- by, among other things, awarding CEO Hassan over $9 million worth of additional stock options, priced at $18.85, in early May 2008 -- all while CEO Hassan was very-publicly telling Wall Street, and the investing world generally, that his company's stock was unfairly "undervalued", the Plaintiffs lawyers here have begun to receive the early discovery documents I earlier mentioned, under the Polk matter.

In the state-court companion case to the federal Cain v. Hassan, et al., case (Case No. 08-1022), the time for Schering's appeal of a judge's ruling allowing the books and records of Schering-Plough to be inspected (back in December of 2008), has expired. Thus -- the relevant portion of that state-court order below [click to enlarge]. Sweet! Discovery is apparently well-underway in the state court version of Cain v. Hassan:

. . . .appeals [of this order] hav[e] run. . .

New Institutional Investor Files federal Putative Class Action Challenging Merger

This morning, another new suit was filed -- (Case No. 09-1800, US Dist. Ct., NJ, complaint filed April 17, 2009) with many new breach of fiduciary duties counts and allegations. This time, the lead-plaintiff is the non-US institutional owner of over $10 million worth of Schering-Plough stock (a Scottish pension fund), and this time, the complaint recites that the proposed reverse merger is flawed, because, in addition to other valuation-related problems, it has threatened the viability of Schering's Remicade/Simponi rights -- "greater than $2 billion" of annual revenue -- thus reducing the value of the transaction. [Click below, to enlarge the image.]

More coming shortly, as I digest the full 24-page putative class action complaint. This makes at least 17 pending lawsuits -- each challenging the proposed reverse merger, and/or the process by which CEO Hassan & team reached this presently-proposed deal. Updated: At least five institutional investors have filed such suits [again, click to enlarge]:

Thursday, April 16, 2009

PharmaLive agrees with Dr. Thomas Koestler -- But That's Not Good News

PharmaLive, in its "Only on PharmaLive" section, dissects the SCH-Merck reverse merger, franchise-by-franchise -- so do go read it all -- but here is a quote which would suggest we should believe Thomas Koestler, head of R&D at Schering-Plough Research Institute, when he tells us, in videotaped comments this week, that "one of the greatest challenges" will be to generate genuine "excitement" about this merger:

. . . .Outlook: Even if Schering-Plough’s late-stage pipeline fulfils its commercial potential, it is unlikely that it will be able to cover the gap left by the soon to be defunct hypertension franchise and the diminishing sales of Zetia and Vytorin. Hence, Merck’s original strong position in the cardiovascular arena will be diluted after the deal. In addition, the resulting company is expected to change its focus in the cardiovascular arena from primary care indications to indications mainly covered by specialists. . . .

Add to this, that spending in the US on DTC is down, industry wide, year-over-year, as are sales -- worldwide, especially at multi-nationals -- due to the dollar's rise, and the economic slowdown, worldwide. At least 70 percent of Schering-Plough's sales are exposed to the stronger dollar here in 2009. This bit both Abbott (yesterday), and Baxter (today). Ouch.

Tuesday, April 14, 2009

More, Tonight -- On Who Best Should Represent All Shareholders Challenging Merger

This is the latest (filed tonight) in the series of papers sorting out who should serve as lead plaintiff in the federal suits challenging the reverse merger. Click that immediately-preceding link for background, but the so-called Institutional Investors Group argues that the size of its stockholdings, when compared to the individual plaintiffs, makes it better able to serve, tonight -- and I think I concur:

. . . .the Congressional intent of the PSLRA should not be completely lost. “[I]nstitutional investors [] with large amounts at stake will represent the interests of the plaintiff class more effectively than class members with small amounts at stake.” In re Cendant Corp., 264 F.3d 201, 264 (3d Cir. 2001), citing H.R. Conf. Rep. 104-327, at 34 (1995). Moreover, Delaware courts, which lead the nation in merger-related shareholder class actions, recognize that the relative stockholdings of litigants should be weighed by courts facing competing motions for lead plaintiff and lead counsel. See Hirt v. U.S. Timberlands Service Company, LLC, Civ. No. 19575, 2002 Del. Ch. LEXIS 89, *4 (Del. Ch. 2002) (courts should weigh the following 6 factors: (1) “quality of the pleading[s],” (2) “the relative economic stakes of the competing litigants,” (3) “vigorous[]” prosecution, (4) “absence of [] conflicts”, (5) “enthusiasm and vigor,” and (6) “competence of counsel”). . . .

Of course, as ever, more to come.

The Greatest Challenge of the Sch-Merck Reverse Merger?

Truer words were perhaps never spoken by Tom Koestler, in this evening's "Update on the Merger" SEC filing:

. . . .Tom Koestler EVP & President, Schering Plough Research Institute: So I think one of the greatest challenges we have is to instill some excitement, some true excitement, about the value of what we're creating here for many generations to come. . . .

Is it fair to label an entirely-truthful statement ironic -- even when the speaker isn't aware of his irony, in context? I think so.

Unintended irony. Yep -- that's workin' for me.

Monday, April 13, 2009

LIVE-Blogging: Johnson and Johnson Q1 Earnings Conference Call, Tomorrow


[Podcast available of Full Q1 Conference Call, here.]

▲ From the midpoint (@ 41:20) of the call -- Bruce Nudell, Senior Analyst, UBS:
". . . .and with regard to the 'Elephant in the Room' -- the Schering-Plough Remicade/Simponi rights, Ex-U.S. -- can you give us some insight about that, and do you expect a satisfactory resolution of that matter, at this point?"

Dominic J. Caruso, J&J CFO: "Bruce, we're not going to comment on that matter. Thanks so much -- next question. . . ."

▲ Well, that was less than enlightening, as to the state of the play on Remicade/Simponi rights, at least. Nothing mentioned in the press materials, or supplemental sales charts, either.


I actually think this late-afternoon's "green-light", in Canada, for Simponi -- for rheumatoid arthritis, among other conditions -- will increase the likelihood of a challenge from Johnson & Johnson/Centocor. We'll see. And we may learn more, from CEO Weldon, or CFO Caruso, tomorrow morning. Do tune in.

I suppose "partial" live-blogging will turn out to be a more accurate headline. That is, I will bring real-time news of any remarks Mr. Weldon's team makes -- about the Remicade/Simponi reversion-of-rights -- right here. So, do tune in first thing tomorrow morning. Here's a wire-story's presaging snippet on the topic:
. . . .Meanwhile, industry watchers are waiting to see what J&J will do about Merck & Co.'s $41.1 billion buyout of Schering-Plough Corp. That's because Schering and J&J share rights to revenues from immune disorder drug Remicade and their contract has change-of-control provisions that could come into play. J&J has been keeping mum about its plans so far. . . .

We'll see tomorrow whether we learn anything more -- about J&J's plans.

Saturday, April 11, 2009

Some NYSE Listed Company Manual Section 309.00 (and 307.00) Pointers. . . .

As I just hinted a moment ago, below, it strikes me that the adequacy of the reverse merger process might also be questioned on a separate ground -- that being, whether CEO Hassan, and perhaps more importantly, the Board of Directors Compensation Committee, complied with NYSE Listed Company Manual policies -- in granting the Schering-Plough February 27, 2009 phantom deferred stock units.

Schering Plough is listed on the NYSE; thus it must comply with that exchange's so-called "corporate governance" policies -- not just the New Jersey state corporate law ones which apply, as well. Section 309.00 of the NYSE Manual, has this to say about the timing of grants of equity to officers:

. . . .Where a development of major importance [here, the Merck reverse-merger -- Ed.] is expected to reach the appropriate time for announcement within the next few months, transactions by directors and officers should be avoided. [These two events were only 11 days apart. -- Ed.]

. . . .Corporate officials should wait until after the release of earnings, dividends, or other important developments have appeared in the press before making a purchase or sale. This permits the news to be widely disseminated and negates the inference that officials had an inside advantage. Similarly, transactions just prior to important press releases should be avoided.

In granting stock options to directors and key officers, the same philosophy that relates to purchases and sales may well apply. . . .

. . . .the timing of a purchase is not usually critical as the price is set at the time the option is granted. The reasoning relating to stock options might also apply to employee stock purchase plans in which directors and officers may be entitled to participate. . . .

[Also consider this, from NYSE Manual Section 307.00:]

. . . .While no particular method of resolution is suggested, the Audit committee or a comparable body could be considered as the forum for review and oversight of potential conflicts of interest situations [Did the Audit Committe approve these February 27, 2009 deferred stock units? -- Ed.]. . . .

The Exchange expects the listed corporation and corporations applying to list to discharge their responsibility to monitor and review such situations in an appropriate fashion. . . .


Note well that, by all rights, the Merck reverse merger discussions had to be in "full-on high-dungeon" in late February 2009, and note that the Compensation Committee of the Schering-Plough board (chaired by one Hans Becherer -- who is already defending some excessive compenstion claims, personally, in Cain v. Hassan, et al.) granted Mr. Hassan an additional $4.3 million in stock units on February 27, 2009 -- while those discussions were progressing a-pace (else, how could a March 9, 2009 announcement have been logistically-possible?). CEO Hassan's Executive Management Team apparently all received the benefit of this arguable "related-party" transaction -- a gift of deferred stock-units, with no vesting schedule at all(!) -- while a complete take-over (by Merck) was being deeply-vetted, by these very same officers, in Kenilworth, and Whitehouse Station.

True enough, these NYSE matters may not create truly-private rights of action, in favor of the stockholders -- but they ought to be considered, when Judge Cavanaugh evaluates whether the Schering-Plough board (and Executive Officers team) adequately-discharged their fiduciary duties, in negotiating the Sch-Merck transaction.

That is, the Landesbank/LPERF federal putative class action cases may well not turn solely on the resolution of matters of internal New Jersey state corporate law. Here endeth the lesson.

Friday, April 10, 2009

Landesbank Investment Berlin GmbH, and Louisiana Police Employees Retirement Fund Face Potential Intervenor

[UPDATED, throughout: 04.11.09 @ 10:50 am -- for analysis of Colorado River abstention factors. -- Ed.]

Manson, the plaintiff in the Schering-Plough ENHANCE Securities Litigation, had (on March 10, 2009) filed what looked to be the first New Jersey state court action challenging the Merck reverse merger transaction. I had earlier noted that 15 such suits are now pending -- and at least three of those, in federal court.

Tonight, Manson's lawyers filed a 52-page motion to intervene in each of the three federal suits, with the objective of having them declared "parallel" to the state actions, then asking Judge Cavanaugh, under the doctrine of federal abstention, to decline to hear, or otherwise stay, the federal suits -- so that the central class-action challenging the SCH-MERCK reverse merger might proceed exclusively in the state courts of New Jersey. These state court actions are referred to as Plotkin, below, in the Manson filing (click it, to enlarge):

The argument runs that Manson and the Plotkin parties have moved forward with more urgency (and first-obtained the state courts' jurisdiction), as compared to the Landesbank/LPERF federal plaintiffs. It is also claimed that the New Jersey state courts are more deeply-versed in the nuances of New Jersey state law which will determine the rights of the Schering shareholders, here. It is argued that the only reason the federal court in New Jersey is involved (other than that the Landesbank/LPERF plaintiffs chose the federal forum, which ought to count for something -- shouldn't they be allowed to decide where they bring suit?), is that the parties reside in several differing states, thus creating so-called "diversity" jurisdiction. I am not so sure. Why?

Interestingly, earlier this week, the two large institutional investors in the federal suits filed papers detailing just how significant their collective interests are -- as the process of sorting out lead plaintiff began, in federal court. How significant? Well, collectively, the institutions own about $4.3 million worth of Schering-Plough stock (and I strongly suspect Manson, and the Plotkin parties, own far less than $4.3 million of Schering stock). The "deep-pockets" theory holds that the institutions will be both highly-motivated, and able to fully-finance the challenge's considerable ongoing expenses:

. . . .The Institutional Investor Group, sophisticated institutional investors with the resources to oversee the [federal class] actions, is the most adequate plaintiff to lead this litigation. . . . for instance. . . . 187,900 shares [are] owned by the Institutional Investor Group. . . .

How will these two competing motions -- the Plotkin/Manson one to intervene, and ask federal Judge Cavanaugh to abstain -- and, the other, to have Landesbank and LPERF named lead federal plaintiffs -- turn out? Who knows?

Judge Cavanaugh will be asked to apply the so-called Colorado River formulation of abstention -- in deciding whether the federal proceedings should be stayed. Under Colorado River, the first question is whether the state-, and federal- proceedings are "parallel" actions. These 15 actions all seem pretty close to identical, so let us assume that this threshold inquiry is answered in the affirmative by Judge Cavanaugh.

Next, he must, under the Supreme Court's teachings in Colorado River, decide how five separare factors come out -- in favor of federal abstention, or against it. These factors are: (1) the federal policy against piecemeal litigation; (2) the absence of federal court proceedings beyond the filing of a complaint;(3) the presence of extensive rights governed by state law in the actions; (4) the relative convenience of the state and federal forums; and (5) whether the state courts will adequately protect the federal plaintiffs' interests.

I think all but factors (2) and (3) are toss-ups. That is, I think factors (1), (4) and (5) suggest that that either the state or federal courts would be equally able to handle these matters -- once consolidated.

Factor (2) would usually control here, for often not very much happens shortly after the filing of a federal complaint. That is not the case in these federal suits, though. There has been significant activity, to establish the order, and priority, of federal lead-counsels, and to consolidate the three federal actions, already. So, factor (2) might lean slightly toward continuing the federal "diversity" jurisdiction, here.

Factor (3) probably leans the other way -- toward the state court's exclusive jurisdiction, once the suits are consolidated, under a lead counsel -- that is, most of the claims in these suits will turn on how New Jersey state corporate law views the actions of CEO Hassan, and his deal team, in negotiating the reverse merger.

So, it looks pretty close to a "push" -- to me, at this point.

A-Not-So-Confidential-Hint: Had any of the federal plaintiffs alleged violations of the NYSE Listing Standards, in the NYSE Listed Company Manual [new post!], and thus given their suits a more "national" (i.e., also federal) rub-of-flavors -- the balance might tip their way -- in favor of continuing federal jurisdiction. Who knows?

In any event, it is encouraging to see this level of vigor in the pursuit of a more-adequately shopped transaction -- afterall, if Schering is to be broken-up, and sold-off -- it should be to the highest bidder, not the easiest one. Moreover, arguably, it should not be the one that maximizes the cash-out for CEO Hassan (perhaps $78 million!) and his Top Six -- at least not at the expense of a higher-priced (but less-Executives'-cash-laden) offer.