On Friday, I wrote that this putative securities fraud class action [“The Iceman (Very Soon) Cometh. . .”] complaint amendment might file early — ahead of the actual September 22, 2008 deadline — and it has. Almost a full-week early!
My goodness — it is truly one whale of a filing: 237 pages, plus about 13 pages of exhibits. Tonight, I’ll concentrate on only one section: pages 103 through 120 — the Senator Grassley “functional unblinding” allegations.
I think this section of the securities fraud case may well make legal history — here, establishing a new method of proving securities fraud scienter — at least in situations where scientific results are material — and where (as here) it is claimed that the scientific trial results have been double-blinded insofar as the company’s officers are concerned. Proving scienter is key — it establishes that the officers, Mr. Hassan, and Mrs. Cox, among others, acted with knowlege that what they were doing was wrong. Here, it is suggested by the sheer force of mathematics, that they must have known.
They must have known, in fact, in much the same way the brute-force of statistical mathematics established that many officers at quite a few public companies were backdating stock option grant dates, a few years back. It could not have occured by chance, it was argued. A very-similar corollary of that brute-force statistical argument is in play, below.
Before we start reading from the complaint — I’ll indulge in some immodesty (I can’t resist it: Told ya’ so!) — I must mention that I predicted that this day would come, back when Senator Grassley wrote his second letter, in early-April of 2008. Now it has — Okay. Let’s dive in, at page 103:
. . . .The Facts Also Support a Strong Inference that Early Analysis of the ENHANCE Data Showed the Study Was Unlikely to Detect a Statistically-Significant Benefit for Ezetimibe, Giving the Exchange Act Defendants a Strong Motive to Delay Release of the ENHANCE Results
258. To reduce the possibility of the results being biased, clinical trials are often “double-blinded,” meaning that neither the patient nor the doctor (nor, with most trials, the pharmaceutical company sponsor) knows whether the patient is in the experimental group (i.e., the group taking the drug under study) or the control group (i.e., the group taking placebo or another drug with known effects in the study population). Despite the obvious (and intended) limitations of blinding a clinical trial, if certain data about the population in the trial are made available, it is possible to discern useful information about the trial’s results, even while the treatment assignments remain blinded. Recognizing this, on February 11, 2008, in the Second Senate Letter, Senator Grassley wrote to Hassan that ENHANCE statisticians would not have needed to unblind the ENHANCE data to know that the study was not likely to show a statistically-significant difference between treatment arms:
It has come to my attention that Schering Plough and Merck would not need to unblind the data to understand that Vytorin performed no better than generic simvastatin. . . . These studies try to detect a statistically significant difference between treatment groups on the primary endpoint. Once the results are recorded, the study is then unblinded to determine which drug is the better performer. However, if the drugs performed the same, meaning there is no statistically significant difference in the treatments, then this information is apparent before the study has been unblinded.
259. Dr. Allen Taylor of Walter Reed reached the same conclusion. Dr. Taylor told Heartwire that, “Somebody had looked at the end-point examination, the IMT results, and, irrespective of group assignment, could know that a groupwise comparison of CIMT changes showed no statistically significant difference. . . . In my view, once that is known, the trial is functionally unblinded.”
260. As discussed above, Schering personnel began “quality control” analyses of IMT measurements as early as 2005, the last patient visit in ENHANCE was in April 2006, Schering knew by the Summer of 2006 that it was not going to get any good news from ENHANCE, and critically, the ENHANCE results, when finally released in 2008, did confirm, as Senator Grassley put it, that “the drugs performed the same, meaning there is no statistically significant difference in the treatments.” Because VYTORIN’s failure in ENHANCE was “apparent before the study ha[d] been unblinded,” the strongest, most compelling inference to be drawn is not that delay was simply the unintended byproduct of otherwise innocent conduct, but rather that the Exchange Act Defendants intended to and did delay the release of the ENHANCE results.
261. Indeed, well-accepted statistical methods available to Schering, Merck and M/SP provided them with the ability to determine whether ENHANCE would be likely to show a statistically-significant change in one group’s CA IMT versus the other using blinded data even before the trial ended. Schering provided an example of this methodology, commonly referred to as an “internal pilot study,” on March 28, 2008 (two days before the release of the final ENHANCE results), when it disclosed that it was adding approximately 5,500 patients to IMPROVE-IT, the Company’s ongoing outcomes trial designed to test whether VYTORIN can reduce heart attacks more than treatment with simvastatin monotherapy. As Dow Jones reported on March 28, 2008, researchers were expanding the trial’s enrollment to as many as 18,000 patients from the previous target of 12,500 because:
The researchers said they determined that more patients were needed in order to detect whether or not Vytorin could provide a statistically significant reduction in risk of heart problems compared with one of its component drugs, simvastatin. . . . The doctors said the increase in the Improve-It study was based on “ongoing evaluation of blinded, aggregate cardiovascular event rates in the trial. . . .” Blinded typically means not knowing which patient is getting which therapy. All trial participants and leaders remain blinded to which treatment the patients are receiving, the doctors said. (Emphasis added.)
Schering’s ability to analyze blinded, aggregate data in IMPROVE-IT to draw a conclusion regarding the trial’s capacity to show a statistically significant benefit of VYTORIN over simvastatin supports a strong inference that Schering researchers could, and in fact did determine, based on blinded data, that ENHANCE would not be likely to demonstrate a statistically significant difference between treatment arms, even before the conclusion of the trial.
262. When comparing two groups of unblinded observations with roughly bell-shaped distributions, a statistical test known as Student’s t-test can be applied to determine whether the observed difference between the groups will be statistically significant. The key number is the difference between the mean outcome in each treatment group divided by the standard deviation of the observations. If that ratio (difference of means divided by standard deviation) is large, then the difference between the two treatment groups will be statistically significant. That is, the standard deviation is the “natural scale” of the data, and, for differences to be significant, they must be measured relative to that scale. How large this ratio must be to attain statistical significance depends upon the sample size.
263. For example, in the final ENHANCE carotid IMT data, first disclosed by the Company on March 30, 2008, the change outcomes were 0.0058 mm. in 320 patients receiving only simvastatin and 0.0111 mm. in 322 patients receiving simvastatin plus ezetimibe. The standard deviation of the change was about 0.068 mm. so that the key ratio was (0.0111-0.0058)/0.068 = 0.078, and favoring simvastatin alone. To attain significance, this ratio needed to be about 0.155, about twice its actual value.
264. With an internal pilot study, standard deviation can be monitored while a trial is underway, without unblinding, assuming the two true standard deviations (parameter values) are the same. This method uses pooled data without knowledge of which treatment was received by a particular patient. Even with this limitation, analysis can extract important information about the likelihood a trial will come to a clear conclusion.
265. Because the treatment arms remain blinded, the mean and standard deviation within each group cannot be determined. However, using results seen in prior clinical trials or other data, it is possible to establish benchmarks against which the standard deviation of pooled results from an incomplete clinical trial can be compared. An observed standard deviation that is markedly larger than the prior estimate is a signal that the trial is unlikely to yield statistically significant results to support the efficacy hypothesis being tested. In ENHANCE this approach could have been used repeatedly.
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266. As alleged herein, the Exchange Act Defendants acted with scienter in that, among other things: (i) they had access to internal data concerning ENHANCE; (ii) they knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false, incomplete or misleading; (iii) they knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and (iv) they knowingly or recklessly participated or acquiesced in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws.
267. As officers and controlling persons of a publicly-held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, and is traded on the NYSE, and governed by the provisions of the federal securities laws, the individual Exchange Act Defendants each had a duty to disseminate promptly, accurate and truthful information with respect to the Company’s drug products and drug testing, its business, financial condition and performance, growth, operations, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company’s securities would be based upon truthful and accurate information. The individual Exchange Act Defendants’ material misrepresentations and omissions during the Class Period violated these specific requirements and obligations.
268. The individual Exchange Act Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of or recklessly disregarded their materially false and misleading nature. Because of their senior executive and managerial positions with Schering, each of the individual Exchange Act Defendants had access to the adverse undisclosed information about Schering’s business prospects and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Schering and its business issued or adopted by the Company materially false and misleading.
269. The individual Exchange Act Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each of the individual Exchange Act Defendants was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the individual Exchange Act Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
270. Each of the individual Exchange Act Defendants, by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, and financial condition, as alleged herein. Said Defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws. . . .
[From earlier in the Complaint — Ed:]
. . . .74. As discussed below, each of the Exchange Act Defendants –- i.e., Defendants Schering, M/SP, Hassan, Cox, Bertolini and Koehler –- is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Schering securities by disseminating materially false and misleading statements and/or concealing material adverse facts regarding the failure of the ENHANCE trial. The scheme: (i) deceived the investing public regarding Schering’s business, operations, management and the intrinsic value of Schering securities; (ii) enabled Defendants to artificially inflate the price of Schering securities; (iii) enabled Schering insider Cox to sell over $28 million of her own Schering shares and allowed the Company itself to register and sell over $4.08 billion in newly issued securities during the Class Period while in possession of material adverse non-public information about the Company; and (iv) caused Lead Plaintiffs and other members of the Class to purchase Schering securities at artificially-inflated prices. . . .
I predict this will all get increasingly combative, now — there is no tried and true answer for the “functional unblinding” theory/allegations — Schering will be feeling its way through, from here on. And if Mr. Hassan’s recent history (related to making judgment calls of this magnitude) is any guide, Schering is in for a very bumpy ride. As is Mrs. Cox — she is copiously lashed for the size, and timing of her sales, pre-ENHANCE results disclosure (in much greater detail than the thumbnail outline, immediately above). But more (much) on that, at some point tomorrow. I am off-the-grid for a good chunk of the day, tomorrow — but will check in, on Schering news, SGP stock prices, etc. by iPhone ‘net connect.