Healthy Skepticism Library item: 1170

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Publication type: news

Peterson M.
Big Drug Company Says It May Face Obstruction Case
The New York Times 2003 May 31

Full text:

The Schering-Plough Corporation said yesterday that it could soon be indicted in a federal investigation into its prescription drug marketing practices, and face charges that employees destroyed documents related to the case.

According to the company, prosecutors are examining whether Schering-Plough illegally gave financial grants and other items of value to doctors and other customers, whether it marketed drugs for unapproved uses and whether it submitted false pricing information to the government so that Medicaid paid too much for its products.

Most significant, lawyers said, was Schering-Plough’s disclosure that a grand jury was weighing obstruction of justice charges. Evidence that the company sought to impede a government investigation could prompt prosecutors to take a tougher line against Schering in resolving any charges.

The allegations against Schering-Plough are the latest in a spate of investigations and lawsuits by private parties, state governments and the federal government focused on the pharmaceutical industry’s marketing practices. The cases have been spurred by rapidly rising increases in the costs of prescription drugs and the burden those costs place on governments, employers and patients.

Schering-Plough, which is based in Kenilworth, N.J., said it received a letter Wednesday from the United States attorney’s office in Boston saying it was a target of a criminal investigation of these matters. By law, publicly traded companies must quickly disclose significant information to their shareholders.

Schering reiterated yesterday that it had made changes in its sales and marketing practices, and that it was cooperating with the United States attorney’s office.
The investigation began more than two years ago, and the company has acknowledged aspects of it. But legal experts said the company’s receipt of what it called “a target letter” diminished its chances of being able to settle the matter soon.

In February, the company said it had set aside $150 million to help cover a settlement with federal prosecutors in Boston and Philadelphia. Analysts said they thought that the company, which is struggling with declining sales and a host of other legal matters, would now be forced to pay far more to resolve the case. The company did not disclose any new information about the investigation by the Philadelphia office.

A spokeswoman in the the United States attorney’s office in Boston declined to comment yesterday.

It was not clear what documents the government thinks were destroyed, who it thinks destroyed them or when the events took place. The company declined to comment further, other than to say that prosecutors had given it the chance to submit evidence to defend itself.

If Schering-Plough is ultimately convicted of a felony involving health care fraud, the government could seek to bar its prescription drugs from the federal Medicare and Medicaid programs. Health care companies and their lawyers call such a step “the death penalty,” because of the devastating effect it would have on a company’s business.

To date, no large pharmaceutical company has been excluded from the Medicare and Medicaid programs, even after pleading guilty to felony violations.

Last year, TAP Pharmaceutical Products paid $875 million to settle criminal and civil charges that it had illegally manipulated the Medicare and Medicaid programs. The company was not excluded from the programs, but was forced to enter into a “corporate integrity agreement” in which it agreed to widespread changes in its marketing practices under monitoring by the government.

Some of the charges being leveled against Schering are similar to those in the TAP case. Prosecutors contended that TAP sales representatives gave free samples of Lupron, a drug for prostate cancer, to urologists and then helped the doctors get government reimbursements of hundreds of dollars for each dose.

Other claims against Schering are similar to prosecutors’ findings earlier this year in a case against Bayer. The company, based in Germany, agreed to pay $257 million in April to settle allegations that it had engaged in a scheme with Kaiser Permanente, a large health care provider, to relabel bottles of Cipro, an antibiotic, to hide the low prices it was charging Kaiser. Under federal law, drug companies must sell drugs to Medicaid programs at their lowest price.

The charge that Schering may have been promoting its medicines for uses that the government has not approved is similar to charges raised against Warner-Lambert in a continuing investigation. In that case, the government is looking at whether Warner-Lambert illegally promoted an epilepsy drug called Neurontin for more than a dozen unapproved uses.

Like the Schering-Plough case, the TAP, Bayer and Warner-Lambert investigations all have been conducted by the United States attorney’s office in Boston, which has become known for its aggressive and successful prosecutions of pharmaceutical companies, nearly all of which have drug sales in Massachusetts.

John T. Bentivoglio, a lawyer at Arnold & Porter and a former special counsel for health care fraud at the Justice Department, said he could not comment on the Schering case specifically. But in general, he said, federal prosecutors have become much tougher with companies that seek to obstruct justice since document destruction became an issue in the investigation of Enron’s collapse. Obstruction of justice charges against Enron’s accounting firm, Arthur Andersen, led to the firm’s demise.

“The government is taking this much more seriously,” Mr. Bentivoglio said.

It is not clear what Schering medicines may be involved in the government’s investigation. The company said in November that it had received two grand jury subpoenas from prosecutors in Boston seeking a broad range of information about how the company had marketed Temodar, a brain cancer drug, and Intron A and Rebetron, two medicines that treat hepatitis C.

Neil B. Sweig, a pharmaceutical industry analyst with Fulcrum Global Partners, a New York brokerage firm for institutional investors, said that the investigation could involve all the company’s major lines of medicines, including those for allergies and asthma.

“The fines could be very heavy,” Mr. Sweig said. “There is no way to quantify it.” He said he thought the government would seek a financial penalty substantially higher than the $150 million that Schering had set aside in February.

Shares of Schering-Plough fell 45 cents, or 2.4 percent, yesterday, to $18.45. Its shares are down 17 percent this year.
Schering had sales of $2.7 billion from Intron A, Rebetron and its other medicines for hepatitis C last year, Mr. Sweig said. Its sales of Temodar totaled $278 million, he said.

Mr. Sweig and other analysts said the letter from the prosecutors in Boston was a significant blow to a company that is already reeling from the loss of the patent protecting its top-selling allergy medicine, Claritin, and a host of legal troubles.

A year ago, Schering-Plough agreed to pay $500 million to the government because of its repeated failure over the years to fix problems in its factories and in the manufacturing of dozens of drugs. The company also disclosed that the Food and Drug Administration’s Office of Criminal Investigation was investigating its manufacturing operations in Puerto Rico, where it has two large factories.

In March, the company said that the Securities and Exchange Commission intended to recommend charging the company and its chief executive at the time, Richard Jay Kogan, with violations of financial rules on disclosing information to shareholders.

In April, the company named Fred Hassan, the former head of Pharmacia, to succeed Mr. Kogan. Mr. Kogan said late last year that he planned to retire.