Thursday, February 14, 2013

This $688 Million Must Be Attributed To Fred Hassan's "Corporate Culture"

First -- Happy Valentines Day, one and all!

Next -- the good news: This resolves the single biggest litigation exposure New Merck faces, as a result of the bust-up of Schering-Plough, in late 2009. Perhaps immodestly, I must note that I predicted (repeatedly) that it would settle for over $500 million (as there was a veritable orgy of evidence of scienter -- allegedly, of course). It has.

Now, the sobering object lesson: Ex-CEO Hassan, Ex- No. 2 Carrrie S. Cox, Ex-CFO Bob Bertolini, Ex-GC Tom Sabatino and the rest of the top ten officers at legacy Schering-Plough walked off with more than the $498 million non-reserved charge taken today -- in golden parachute payments -- after they (allegedly) delayed a pivotal null-study result on the cholesterol management franchise for nearly two years. During that time, legacy Schering-Plough sold about $5 billion of that franchise's drugs to the public. As Dr. Harlan Krumholz of Yale said, when the study results were finally known in March of 2008 "this drug may just be a very expensive placebo. . ." So, during those two or so years -- patients did not get more effective drugs, due to the delay. In the end, the executive team busted-up Schering, sold it off, and pocketed their parachutes (with the help of an allegedly complicit Compensation Committee of the legacy Schering-Plough board).

The culture Mr. Hassan promoted as a supposed "turnaround artist" was largely antithetical to good science, and careful patient-focused care. It was all about slick marketing studies -- like ENHANCE (a study not completed until well after FDA approval of the drug being "studied"). No doubt, RMS Schering has some problems when Hassan, Cox, Bertolini and Sabatino and the rest joined in March of 2004 -- but the idea that they steered it directly into the iceberg, so that they could personally profit (and profit wildly) from its bust-up (all allegedly) should be compared with equal distain to the role of the banksters in the financial meltdown of 2008.

There can be no doubt that the Merck and Schering shareholders lost far more than the two-thirds of a billion -- for which New Merck is paying today. New Merck has a blotch on its once stellar reputation (most admired company for seven straight years, in the late 1980s), thanks in large part to the "buccaneer's" attitiude -- of the legacy Schering "turn-around" executive team. People aren't as likely to think that the best treatment will be promoted by Merck, post the ENHANCE debacle.

And that's very unfortunate. Thanks Fred, Carrie, Bob and Tom!

Here's a bit from Reuters:

. . . .Merck. . . said it has agreed to pay $688 million to settle two U.S. investor lawsuits over its disclosures concerning the Enhance drug study released in early 2008.

Two federal lawsuits led by several pension funds alleged that Merck and Schering-Plough Corp knew more than a year in advance that the trial known as ENHANCE was a failure, but withheld that information from investors. . . .

Merck said it has recorded a $493 million after-tax charge for the settlements. It said this reduced previously-reported fourth-quarter profit per share to 30 cents from 46 cents. . . .

It is baffling that each of those people still hold very responsible positions in corporate America -- and in most cases, at public health care companies. Baffling. [I should note the that legacy Merck team bears some responsibilty here, too -- as co-venturer on Vytorin. But only some. As anyone who has read the public emails (produced in the federal ENHANCE securities class action litigation) well-knows, the sharp end of the marketing speer was almost always being held by, and brandished about, by Schering-Plough people.]


Anonymous said...

I started my career at Merck and left a few years prior to the merger, when the Merck corporate mantra was solidly, "We will not merge!" I was shocked when the merger happened, and distrustful of its value, but what I've learned since has led me to view that as optimism. Setting aside the high-level con propagated by Hassan et al that this blog well describes, when I talk to people back at Merck, I see that the merger has been caustic to their ability to do their daily work and develop new meds. It was an act of desperation to "buy a pipeline", but such a poor decision.

Anonymous said...

While I support your efforts but, I think you're too easy on Merck. They own this 'big time' as due diligence was missing from the start for this reverse merger. Merck gave the $ to Fast Freddie and his team.

Condor said...

Actually, permit me to disagree, mildly.

Merck's hands were largely tied -- as an allegedly complicit legacy Schering-Plough Compensation Committee (chaired by Hans Becherer) both approved the parachute agreements, and even shovelled a mega-grant of options to the Top Ten, dead at the bottom of the ENHANCE debacle NYSE prices (circa $17.71, if memory serves).

That mega-grant was largely responsible for the Top Ten's windfall. It was granted in May of 2008.

Legacy Merck would have had to litigate against the legacy Schering-Plough team to knock out those contract rights. And that was never going to happen, in a deal where Hassan's team knew wheere all the bodies were buried -- and could greatly injure the value of the deal to Merck, should litigation erupt.

So, as I say -- Merck "paid the bridge trolls their bribes" -- and moved on. To be clear, here that is my opinion -- not a factual characterization; opinion. Thus protected -- as non-libelous.

But yes, it was a bad deal, no doubt -- from Merck's perspective.

Especially since 4 of Hassan's 5 "shining stars" turned out to be. . . um, brown dwarves.

Namaste -- do stop back!

Dan said...

Anonymous said...

Oh, you are arguing the 'specific' regarding ENHANCE. My position is Merck didn't do due diligence for the 'whole' of S+P. As you said, 4 out of the 5 being brown dwarves (piles, IMHO). But, I think the writing for those were on the wall. As much of your blog has said.

Condor said...

I do hear you, Anon., on due diligence.

I think at least a part of the problem for legacy Merck was that it could not afford to let legacy Schering-Plough go down alone.

It is, in my opinion, a near certainty that the Hassan-Cox-Bertolini-Sabatino S-P team would have tried to drag Merck into the abyss with it.

Even though more than 3/4ths of the settlement amount is being paid to S-P holders (impliedly due to the bad acts of the S-P executives), I think Merck feared letting this suit drag it in as a much deeper-pocketed "co-conspirator" -- all without being able to control S-P's often capricious actions.

So -- on balance -- I suspect Merck knew most of the pig it was buying, in S-P -- but just felt it had little choice. It felt it had to do so -- and pay the bridge trolls their 'chutes, in the process.

And I actually think Hassan, et al., were smart enough -- and immoral enough -- to have designed it all to come out just this way (consider that Hassan approved the agenda to get Becherer to grant mega-options and RSUs -- in May of 2008, just about eight weeks after he said it WASN'T the ENHANCE results that caused the stock to crash -- but a "media overreaction"). Amazing brass, that -- and a completely false characterization -- we now learn.

But that's just my opinion.

Thanks, do stop back!