Some “Inside (MDL 1938 Litigation) Baseball” Here — Dechert, Consolidated Complaints, and the Federal Discovery Rules. . . .

Last night, Dechert filed an unusual “letter brief” in MDL 1938 — seeking to dismiss many of the claims made in Polk, et al., v. Schering-Plough, et al. On September 25, 2008, the plaintiffs’ lawyers had submitted a massive consolidated amended class action complaint, in MDL 1938, chiefly for the purpose of satisfying the very-tight federal standards governing allowable pre-trial discovery. The plaintiffs had asked that the newest filing be considered chiefly for the purpose of satisfying the “pleading with particularity” requirements of the federal MDL rules, in Footnote 1 to the September 25, 2008 filing.

Now, step back a moment — and to oversimplfy, rather greatly — think of the present litigation stage/procedural wrangling, as you would one of those Southeast Asian-style shadow-puppet shows.

Got it? Okay — what is happening in Polk right now is very much like one of those shadow shows — we, the assembled audience (and the Judge), are nominally asked (by Dechert, on behalf of Schering and Merck) to accept the tautology that it would be judicially inefficient to give these particular plaintiffs “multiple bites at the same apple“. Sounds sensible — insofar as our shadow-puppet play goes, right? Right.

To catch a glimpse of the actual puppeteers, though — behind those gauze-screens, we’ll need a little wider-frame of reference. In sum, we’ll need to think about why pre-trial civil discovery is allowed, in the federal courts, more generally.

Civil discovery is allowed (prior to trial) so that a plaintiff may know — in advance — whether his or her case is tenable. It is also designed to allow truly innocent, honest, law-abiding defendants/companies to “clear themselves” quickly, and efficiently — and avoid the burdensome costs and distractions of any protracted, but mostly meritless, litigation.

Dechert — in its letter of last night — would turn this system on its head. Schering (through its lawyers) argues that the Polk MDL 1938 plaintiffs will need to lay out, with exclusivity — on pain of dismissal — right now, and precisely, each of the legal theories upon which they intend to rely at trial — in order to decide whether they will even be allowed to conduct discovery — thus foregoing all other theories that might emerge as the “truth, slowly outs, tailing gossamer veils of ambiguity” — – that is, as the facts emerge, from the documents and depositions. And this, before Schering (or Merck) has ever substantively answered one question, under oath, about the-admitted over-18-month ENHANCE disclosure delays.

Dechert would suggest the federal rules of MDL discovery require a sort of random crap-shoot, with a loaded (or perhaps, unloaded) gun, all while wearing a blind-fold, ear-muffs and thick oven-mitts.

The alternative, here? Open discovery based on the theories that seem most plausible at the moment?

Dechert tells Judge Cavanaugh that it would be too-unwieldy to contemplate — but I think not.

If Merck and Schering really are “in the clear“, here — that is, have nothing to hide — then each may turn over the documents, and have their executives offer depositions, free of any fear that some “other” theory of liability would be established in the process.

Said more plainly — there can be no public policy justification for large, supposedly-sophisticated multinational pharma companies hiding any evidence of wrong-doing, when it involves an FDA regulated human health-care drug — complete, voluntary, and willing candor (not wily procedural obfuscation) is the operative standard, here.

These companies are, by dint of our carefully-crafted geopolitical/economic system, handed a truly-collosal set of monopoly-marketing priviledges, in the twin-forms of requisite FDA Approvals, and iron-clad patent-law protections — to sell what are purported to be life-enhancing medicines, largely free of competition, to our citizenry.

The very least we should expect of them is that they promptly — and completely candidly — tell us the entire truth, as they learn it, about whether any particular monopoly good is providing a measurable, outcome-based benefit to us, for the multiple billions of dollars each year we collectively spend purchasing it.

So — the Dechert letter-page snippet (at above right, click to enlarge), gets it exactly backwards. I suspect Judge Cavanaugh will tell them so, eventually.

If King Pharma’s CEO was considered “Overpaid” in 2007 — What to Say of CEO Fred Hassan (who made more than ALL of King’s “top five”), in 2008?

This morning, Ed Silverman quite keenly noted that the CEO of King Pharmaceuticals was named No. 23 of the 25 most overpaid public company CEOs by the watchdog firm, Glass Lewis & Co.

Now, while the Glass Lewis rankings (see page 41 of that PDF file) list Schering-Plough CEO Fred Hassan among its “higest paid” CEOs (No. 33 overall — just a little behind the likes of the Lehman CEO, for example!) — attributing $27.45 million to him as 2007 total compensation — he didn’t place among the “25 most overpaid” — for 2007. This is the law of stale data, in operation.

I can guarantee my readership that he’ll be near the top of the “most overpaid” list (and, even with financial sector debacles, he’ll likely be No. 1 for pharma), next year — when the full-year data for 2008 stock performance is available.
Ed notes, in pertinent part, here:

. . . .King Pharmaceuticals ceo Brian Markison shows up on the firm’s ranking of the S&P 500 Overpaid 25, a dubious distinction. To be specific, Brian ranked No. 23 with about $30.3 million in total compensation, while King stock fell about 36 percent and earnings per share growth plummeted nearly 37 percent. . . .

By way of comparison, CEO Hassan’s compensation will include a new mega-grant of options, made May 2, 2008, and overall compensation that may approach $34 million for 2008 — unless the compensation committee of the Schering-Plough board of directors acts now to cirumscribe it. This, while Schering’s stock price has declined about 51.4 percent from January 2008, as of this morning.

Jaw-slackingly, Hassan made more in 2008 than the entire top five at King in 2007. The Glass Lewis rankings point out (at page 38) that King’s top five executives, collectively, made $21.7 million in the aggregate in 2007, all while the King stock fell 37 percent.

On simple SEC proxy-tally basis (for 2007) — hold onto your hats, here! — Schering’s Top Five made, in the aggregate, more than three times more than the King top five — or about $65.8 million (for 2007), all while in 2008, Schering’s stock’s value has been literally cut in two – declined, by over half!

Remember also that special equity incentive grants were handed out by Hans Becherer on May 2, 2008, and that Dr. Koestler was given a 16 percent bump (and an 80 percent bonus opportunity) during the year 2008.

When the dust settles, from this current credit pinch, Schering’s compensation committee decision-making processes are likely to come under a very powerful electron microscope. And the bugs and wiggly thingies there apparent will be truly horrific.

Will Schering-Plough Garner 1 of Every 7 Roubles spent on Drugs in Russia, in 2008?

I admit I cannot resist this — the level of implausibility of Mr. Hassan’s recent statements — on the Russian market — simply demands a good Fisking (demands to be clearly outlined). So, here goes:

If, as I established in my last post, it would take 48 to 43 billion Roubles of new Russian sales to fill Schering’s 2008 EPS “gap” — then, according to this summary research report, Schering-Plough will need to take home, to America, one Rouble out of every seven spent in Russia this year on pharmaceuticals, or about 15 percent of the overall Russian spending in the category. As many have cogently observed, Pfizer is big into Russia, especially lately — so that kind of share seems a stretch, at best.

Can Schering garner 15 percent of all Russian pharma Rouble expenditures, in 2008?

I think not.

In any event, here is a relevant snippet from the above report, on Russian pharma market sizes — I’ve allowed for 15 percent growth over 2007 levels, in the middle of the more optimistic scenarios outlined in the report:

. . . .According to BMI’s latest estimate, Russia’s pharmaceutical market reached a total value of US$11.7bn in final consumer prices 2007, representing 20% year-on-year (y-o-y) growth in dollar terms and bringing total per capita annual spending on medicines to US$82.3, twice 2004 levels. This is broadly in line with the growth rate recorded by local research groups DSM (20.2%) and RMBC for 9M07 (21%). More modest local currency growth rates of 11.2% reflect the distorting effect of the weakness of the US dollar. Looking forward, BMI’s five-year forecast, extended to 2012, sees annual average dollar growth of 10.9%, a lower but potentially more sustainable growth rate, in particular if the rouble continues to appreciate against the dollar through the forecast period. . . .

How Many Billion Roubles Are Spent in Russia, on Drugs, Each Year, Overall?

So — and, to follow-up on my last post, I decided to figure out just how many billion Russian Roubles of new net income Schering-Plough will need, in order to “fill the gap” in the United States.

Well, then, if we assume Vytorin/Zetia US market share erosion gets no worse in 2008 — that is, it stays about 30 percent below 2007 levels, for the full year 2008 (and perhaps I am being too generous here, I know) — Schering will have an Equity Income 2008 “hole” of about $614.7 million on its 2008 income statement (or, 30 percent of the $2.049 billion of 2007 Equity Income it reported on its last Form 10-K).

The Russian Rouble — thus far in 2008 — has traded between 23.50 and 26.20 Roubles to the Dollar (it opened 2008 at 24.50 Roubles to the Dollar). Said another way, Schering-Plough will need between 23 and 26 Roubles for EACH US Dollar it is “in the hole“. so, Fred’s math will never work:

Yep — Mr. Hassan needs between 16 and 14 BILLION Russian Roubles of Equity Income in 2008 alone. To get that income, he’ll likely need three times as much – in Rouble-denominated sales (very-generously assuming he’ll garner 33 percent margin in Russia). . . .

Said another way, he’ll need between 48 and 43 billion Roubles of new sales in Russia, to generate the above equity income levels:

Two words, here: “No way!” — and, “No how“.

“Russia Will Save Schering”?! — CEO Hassan’s Latest Goofy Mantra

[UPDATED -- Schering-Plough will need about 16 billion Russian Roubles of income, or 48 billion Russian Roubles of sales, to meet "Fred's Folly", below. . . .]

In one of those truly-priceless CNBC “twinning” moments, yesterday afternoon, while the markets were melting before our very eyes, Schering-Plough CEO Fred Hassan appeared on not just one, but two video segments. In the second, he served as a “guest TV-journalist” (What?!), questioning officials about the State of California’s ovetures for a federal loan — should it experience an instant liquidity crunch.

Tellingly, Mr. Hassan opined that the markets are literally “awash in cash” — that liquidity is no problem – and that California ought to look to “pare its balance sheet“, before borrowing, or seeking to otherwise raise capital (can one own stock in California? I think not. And even if one could, why would one want to? — I wonder). Well now, that’s interesting advice, coming from a guy who tapped the debt and equity markets extensively last Fall (September 2007) to acquire Organon, while his balance sheet was breaking out with a case of increasingly-doubtful-asset “chicken pox” (think Vytorin/Zetia and “no good news” from ENHANCE). But I digress.

Mr. Hassan’s other interview is the one most-relevant here. In it, Mr. Hassan opined that Russia would be the engine (CNBC video link) to cover what was assumed-but-unstated as Schering’s United States market shortfalls in 2008. One Hassan soundbite:

. . . .We are seeing good growth in Russia, and we are increasingly able to get reimbursement for our products, there. . . .

Okay. Let us decode that decidely cheerful-sounding talking point, into its four far less-than-cheerful actual component-truths:

(1) Mr. Hassan’s use of the word “reimbursement” means Schering is not running a “cash on delivery” drug business in Russia, but is applying for — and waiting on — Russian government payments for all the drugs it provides — in many cases, wating more than 180 days, before it gets “paid“. . . . so it is short funds, out-of-pocket, during that gap period.

(2) The word “paid” is in quotes above, because the Russian government certainly pays for those long-ago delivered Schering-Plough drugs in local currency – Roubles, not United States dollars. We already know that Schering is increasingly exposed to currency volatility, given that it chose to go largely “unhedged” — back when it was easier, and cheaper, to purchase such currency hedges (prior to the present crisis).

(3) While Mr. Hassan flatly states he is seeing “good growth” in Russian sales — he neglects to mention that given the extreme weakness of the Rouble, vis-a-vis the Dollar (or even the euro), Schering may actually report declining sales in Russia, overall, on a constant currency basis, this year. Without hedges, applicable GAAP rules will require Schering — when it consolidates its worldwide results at year-end — to value these Russian sales at a assumed (not a “spot“) conversion rate.

(4) That nominal-accrual/currency-exchange-rate is very-likely to reflect the weakness of the Russian currency, as compared to the dollar. Thus, it is highly likely that Mr. Hassan effectively “gave away” a very substantial portion of his pricey drug inventory to the Russian markets — once all is reconciled, and expensed on the 2008 year-end income statement — taking into account the US GAAP-required currency conversions.

So — all I can say is “You’re doin’ a heckuva’ job, there, Fred!” Here’s how the “rubber meets the (Russian) road” — on this folly:

Said another way, he’ll need between 48 and 43 billion Roubles of new sales in Russia, to generate the above equity income levels:

Two words, here: “No way!” — and, “No how“.

Mark this day — October 6, 2008 — on CNBC, Fred Hassan told the investing public to look for real growth — on Schering’s 2008 bottom-line — from Russia.

Mark also, now, my prediction — it will actually look like like “bottom line contraction“, once the inevitable delays in payment, relative-dearth of protective hedges, and erosive currency conversions are all factored in. Schering just engaged, unwittingly, in a drug product “giveaway” in Russia.

Are you plaintiffs’ lawyers taking notes, here? I hope so. This would seem to be an ongoing-securities count, for your to-be amended class-action complaints.

Merrill Lynch Downgrades Schering to Underperform: “Continuing” Vytorin® Safety Woes. . . .

I think, at the same moment an anonymous commenter posted this, I must have been reading it, as well. Perhaps the worst of it for CEO Hassan, Cox, and the Top Six in Kenilworth is that Merrill pegs the Schering-Plough price target at $18. Ouch.

This, from a firm whose new-parent-to-be (Banc of America) bought (and hawked to its clients — see prospectus page, below) over $800 million of Schering-Plough equity securities just a year ago now, at $27.50. This is truly a slice of humble pie, being served:

. . . .LONDON (MarketWatch) — Merrill Lynch cut its rating on Schering-Plough to underperform from neutral and lowered its price target to $18 from $22, saying it expects the efficacy and safety controversies around Vytorin^®/Zetia^® to continue. In addition, the broker told clients that the drugmaker has the greatest currency risk of U.S. peers. . . .

New York Apparently Followed Illinois’ LEAD, Here, on Vytorin®. . . .

Although I noted the State of New York’s change to Vytorin^®’s status yesterday (having given New York too-much fanfare, perhaps), apparently as early as July 1, 2008, Illinois Medicaid and Illinois Cares Rx Plus had transferred Vytorin^® to “non-preferred” status (see page 10 of this July 1, 2008 PDF file):

Preferred Drug List
Illinois Medicaid and Illinois Cares Rx Plus
July 1, 2008
Changes are highlighted in blue
and marked with an asterisk (*)

NON-PREFERRED:

Lipotropics – Statins & Combinations — Vytorin^®*. . . .

I’ll likely keep a running state-by-state tally now, in the left-margin, starting tomorrow.

New York State Moves Vytorin® to “NON-PREFERRED” Status — as of 10.01.08

This is very-likely to be one of many states (and perhaps — the federal Medicaid system, itself, as well) to require “prior authorization” before Vytorin^® may be submitted for reimbursement, by any doctor whose patient is a New York Medicaid recipient.

This probability was predicted by several writers in February 2008 (including the author of this blog). Consequently, it is unlikely that Vytorin^® will ever again show significant quarter over quarter sales growth in the United States. This franchise (along with Zetia^®) represents at least 50 percent of Schering’s expected 2008 profitability. It is hard to overstate the importance of this event. Buckle your chin-strap, Kenilworth — as Round Two of the Layoff Crash Car Derby is about to begin. . . .

An image of the actual page of the New York State Medicaid document coming — in mere moments – here (click to enlarge):

NEW YORK STATE MEDICAID
PREFERRED DRUG LIST
All non-preferred drugs in these classes require prior authorization. . . .

HMG-CoA Reductase Inhibitors

NON-PREFERRED AGENTS

Vytorin^®. . . .

Oddly, Zetia — of which Vytorin is partially comprised — retains preferred status as an LDL lowering agent — but apparently not a CV outcomes-approved (Reductase Inhibitor) agent. I am actively seeking feedback on that portion of this event. Any comment? Any docs out there?

[All with a sincere, and huge, Hat Tip to Anonymous Commenter No. 24, at CafePharma.com, here.]

It is October 1, 2008.

Back on May 28, 2008, I explained why I thought Schering-Plough common stock was fairly valued at an intrinsic price per share of between $17 and $16. This morning, I post an update, in part to make a record of the outcome of a much-earlier bet on the Yahoo! stock chat-boards — I had said that SGP would be closer to $17, than to several others’ predictions of $26, come 10.01.08.

And so, here is how Schering opened, on the NYSE, this morning:

Schering-Plough @ 10:10AM ET: $17.96, Down $0.51, Off 2.76%

QED

How are those 2008 Republican Donations Workin’ Out for Ya’, Mr. Hassan?

As this blog had noted as early as May 1, 2008, Schering-Plough generally, and Fred Hassan particularly, is giving far more (almost 11 to 1, as of March) to Republican candidates than Democratic ones, in the 2008 election cycle — bucking an important trend reversal at other big pharma companies, at least for this cycle — especially notable at companies like Johnson and Johnson (where giving has completely flip-flopped, this year — now showing a 60 to 40 clip to Democrats, over Republicans, in 2008).

Schering and Hassan? They are (presently) giving about 60 to 40 — to Republicans, over Democrats, per an Ed Silverman piece, of last week.

Thus I find it truly ironic, and delicious, to learn that Bloomberg is quoting Schering-Plough CEO Hassan this morning — on the morning after 134 (that total including one Republican, Weller, who failed to cast any vote, as a “No”) 195 Republicans Republicans in the House voted “No” to the Latest Bi-Partisan Compromise Amendment to the Original Paulson Bailout Plan — woefully lamenting the “mess” his candidates have made of these attempts to right our domestic financial system, thus:

. . . .”It is a pity that this has developed into such a mess,” said Fred Hassan, chief executive officer of drugmaker Schering- Plough in Kenilworth, New Jersey. “The probability of recession has gone up“. . . .

Regardless of whether one believes this bailout fund was the “right approach” — given Mr. Hassan’s comments of this morning — I must observe that it looks like his (and Schering’s) money wasn’t very well-spent, there, partner. . . .