Friday Class Actions Update: Schering has filed Several Motions to Dismiss. . . .

All of them are rather pedestrian, and make all the typical suggestions. So I’ll not bother with them, for now.

By far the most interesting motion Lowenstein Sandler has filed, on behalf of Schering, appears in the putative ENHANCE securitites class action, originally called Manson v. Schering, et al. (Case No. 08-397) — it suggests, improbably, that all the allegations about early scienter (and thus, early, and unlawful, common stock sales by Carrie Cox, and others, presumably including GC Tom Sabatino) ought to be stricken — because the allegations in those counts of the amended complaint rely, at least in part (but importantly, only in part), on anonymous postings at CaféPharma for support. Let me quote a little of this line of argument from the motion, to give you a flavor:

. . . .CaféPharma is designed for use by sales representatives at competing drug companies. Messages left there are anonymous and, according to CaféPharma itself, their authors can never be traced. With that license of complete anonymity, CaféPharma is a haven for racism, misogyny, wild speculation, and misinformation. Crude comments about the physical appearance of female executives and sales representatives, as well as the sexual prowess of their male counterparts, flood the site. Minorities are denigrated and pilloried. Individuals pose as “insiders” at competing drug companies for the purpose of smearing their products, in the apparent hope of securing a competitive edge in the marketplace.

Rumormongering abounds on the board; indeed, if the messages were to be believed, then Schering should have long ago disappeared through a corporate merger or acquisition.

CaféPharma is, literally, the cyberspace equivalent of scrawls left on a men’s room wall. And it is from this source that plaintiffs draw allegations of so called “facts” to suggest the scienter and knowledge required to support their claims of securities fraud in this case. . . .

Odd — this motion to strike seems to assume that the sole support for the insider trading allegations is the CaféPharma postings. That is simply not the case. There are also, as we much-earlier noted, here, “confidential” witnesses to these matter. My Prediction? This will not fool Judge Cavanaugh.

Moreover, this line of argument smacks of “soft elitism” — to suggest that statements ought to be stricken simply because they are often surrounded by offensive, or profane writings or speech — is not logical. I suppose Lowenstein Sandler — and CEO Hassan — would also suggest that each has never heard a true word uttered on a ship-yard loading dock, construction site or in the dark under-belly of a coal mine. Actually, it is a fair bet Hassan hasn’t spent any real, meaningful time in any of these places. Perhaps the same is true of these white-shoe lawyers at Lowenstein. I dunno.

In any event, this is exactly the role, at trial, a jury ought to play — to decide how much credibilty any given statement ought to be accorded — so, this is simply a rather-sophisticated attempt to keep some pretty damaging, but apparently accurate, evidence from ever reaching the jury. It ought to be resisted. [If Lowenstein were going to prove its proposition, it ought to have submitted proof that almost all of what appears on CaféPharma is false. And that, they know, ’tis too tall an order. Most of it is generally true — but entirely unauthorized.]

Back to the chase, then — note that these CaféPharma statements in question turned out to be particularly “reliable” — in the parlance of the federal Rules of Evidence — in that each was posted many months before Schering ever admitted there was a problem with ENHANCE — and at least some of them accurately described the nature of the problem.

If a public, anonymous, but virtual “men’s room wall scrawl” contains supposedly treasured, “secret, non-public, inside information” that turns-out to be exceedingly-accurate, months in advance — is it such a stretch to infer that the actual Schering insiders who avoided massive losses by trading well in advance of the “official-Schering” disclosure (but after the CaféPharma postings) of those “secrets” — might also have had access to the information, and more importantly, used it?

Evidence often appears in the most unlikely of places.

In fact, just ask Rod Blagojevich about that proposition — I bet he agrees with it, now. Heh. Much more to come on this — I need to attend to other matters now.

ENHANCE: What Did Carrie Cox Know — And When Did She Know It?

We’ll post a little more tonight, from the Amended Consolidated ENHANCE Securities Fraud Complaint — at pages 83 to 84 — note that “CW” refers to “confidential witnesses” — and the number following the “CW” refers to individual confidential witnesses. CW 1, for example, avers s/he knows Carrie Cox knew there would be “no good news from ENHANCE.” That was in the summer of 2006. Let’s look in, now:

. . . .211. Based on interviews with former Schering employees conducted by counsel for Lead Plaintiffs, Exchange Act Defendants Hassan and Cox were closely involved with ENHANCE and regularly briefed on its details. As discussed above, CW 1 interacted with Schering’s Brand Team on a daily basis regarding ZETIA and VYTORIN, and updates regarding ENHANCE were shared in quarterly Brand Review Meetings that CW 1 attended, which were conducted by Defendant Cox. According to CW 1, there was a quality control assessment of ENHANCE data done in late 2005 to early 2006, and by the Summer of 2006, CW 1’s team “knew that they were not going to get any good news from” ENHANCE.

212. CW 1’s statements are corroborated by CW 3. According to CW 3, throughout the Class Period, Cox attended a monthly meeting with the cholesterol franchise Brand Team and the individuals in charge of ENHANCE, Drs. Veltri and Strony. CW 3 was personally involved in the preparation of certain materials for these meetings. According to CW 3, the Company’s other senior executives, including Hassan, also attended certain of these meetings. According to CW 3, ENHANCE, its progress, and results, were regularly discussed by Drs. Veltri and Strony with Cox and the other senior executives in attendance. At the meetings, discussions and detailed PowerPoint presentations updated the participants on developments with VYTORIN and ZETIA, involving not only the marketing and commercial aspects of the drugs, but also the status of ongoing research. As CW 3 has stated: “Nobody keeps this kind of stuff from management when it is going to have a huge impact on the product.” When CW 3 asked Drs. Veltri and Strony how ENHANCE was going, “years ago,” “they always seemed a bit worried.” They told CW 3 that “they did not like the kind of results they were seeing and that they had to take another look at something.”

213. According to CW 3, Schering’s marketing department for the drugs, headed by Ray Russo, “wanted to control the science; it was very much marketing driven and not science driven,” and Schering is “not concerned with the data as much as they are selling the drug”. . . .
[Emphasis supplied.]

Again — we do know Carrie Cox exercised and sold on the twentieth day of April, 2007 and first day of May 2007 — netting something like $11 million, on a series of transactions which grossed around $29 million.

Fascinating — and all filed with the SEC on Forms 4 — right here, and immediately above. . . .

Massive 237-Page Amended Consolidated ENHANCE Securities Fraud Complaint Filed Against Schering-Plough, and its Officers, among others. . . .

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.

* * *

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.

G’night.

Full Complaint (PDF) here.