Should Fred return the cash? That's the question raised byForbes, which notes that the bonus would have been "endangered" had the Enhance study of the Vytorin and Zetia cholesterol pills been released in November 2006 or March 2007 as had been expected. The final release earlier this year has caused a sharp drop in the use of the two drugs and in Schering-Plough's stock price.
"It would certainly make me want to investigate the situation further, particularly if I was shareholder," Paul Hodgson of The Corporate Library, a corporate governance research firm, tells the mag. "It would seem to me that given Hassan's reputation for open-mindedness in terms of compensation, that if there were some doubts about whether he should receive a bonus, he would be more likely than others to voluntarily forfeit it. There are not many CEOs I'd say that about, but he would be one of them."
So far, though, Fred hasn't indicated any interest in doing so. Meanwhile, Enhance lead investigator Kastelein of the University of Amsterdam believes if he had full control over the study, the results could have been presented in March 2007. That would have put a set of cash bonuses for 2007 at risk if it had hurt sales and earnings per share, potentially costing Hassan $4 million more, Forbes writes.
Unless Schering's stock takes off before year's end, the mag continues, Hassan will miss out on a five-year incentive plan that is based solely on Schering's total shareholder return outpacing both pharma and the broader markets. But as we have already noted, Hassan's new stock options are already in the money. Schering's board has claimed that the stock price is artificially low but, says Hodgson, "if they really believe that's artificially low, they should have awarded premium price options."
UPDATE: Sue Wolf, Schering-Plough's corporate secretary, vp for governance and associate general counsel, has spent the morning posting a reply to any site that mentioned the Forbes piece. You can see what she wrote - and what she glossed over - by clicking on comments below. One thing she writes is that "market capitalization...was not a performance metric for any incentive plan since Fred joined Schering-Plough." However, Shearlings Got Plowed reminds us that, in fact, the drugmaker did use market cap as a metric in 2006, according to the 2007 proxy (please see page 25).
11 Comments
A Failed Attempt to Improve Misperceived Greatness: The ENHANCE Trial
While it seems that sponsors of clinical trials usually end up with results that clearly favor their meds studied in their trial, there are rare exceptions, and Merck and Schering proved that with their disappointing ENHANCE Trial, which many have heard about through the media not long ago. The drug studied was Vytorin, comparing it with Zocor.
Vytorin is a combination med for high cholesterol and contains Merck’s Zocor, which is now generic, and Schering’s Zetia, which works differently than Zocor, which is one of many statin drugs. Both Vytorin and Zetia are co-promoted by Merck and Schering. So, several years ago, an outcomes study was initiated to prove superiority of Vytorin over Zocor as monotherapy. The trial was named the ENHANCE trial.
After several years passed, a disappointment arrived for the sponsors of this trial, which was first brought to the attention of Schering in March of 2007, yet the results existed since the spring of 2006, I believe. The disappointment is that Vytorin lacked anticipated benefit or superiority over Zocor. Since about 1 million scripts were written for both Vytorin and Zetia every week in 2007, combined with what I believe was about 5 billion in revenue for these two drugs that year, this was a problem for the drug makers. Perhaps for Schering in particular, it was more of a calamity, since over half of their profits and earnings were from these two drugs. Being the responsible corporations both companies are, of course, alterations occurred after such events that fractured numerous rules and regulations with clinical trials.
The trial sponsors delayed the release of the trial results for secrecy reasons, it has been speculated. Results from the trial existed, yet were not disclosed at the time of their discovery. After several months of possessing these trial results that were only known to the manufacturers, they created or implemented some atrocious tactics to improve the trial’s unimpressive results. At the end of 2007, the companies changed the primary endpoint of the trial, which is what the results were measured upon during the entire course of the trial. Since their deliberate concealment of these trial results was clearly wrong, to respond to those who asked where the results were actually while such trial manipulation was occurring and results were being kept secret, Schering stated that continued data analysis from the trial results was the etiology for the delay.
With clinical trials, case report forms are used to record data from the trials, and are created in a manner where further analysis is not normally necessary, as such forms are quite clear and often not subject to interpretation. So at the end of 2007, both Merck and Schering got the attention of relevant government officials who contacted both companies regarding this ENHANCE trial, and an investigation began into the activities of both companies regarding this trial at that point. This became a catalyst for the ENHANCE trial results to be finally released at the beginning of 2008, which caught the attention of major media organizations. In the spring of 2008, a very large cardiology meeting was held, where the audience was told to stick with statins due to this trial’s lack of outcomes for Vytorin, when the ENHANCE trial was discussed at this meeting. Furthermore, a cardiologist at this meeting also suggested that a moratorium should occur with the utilization of Vytorin, since statins are much less expensive, and are highly regarded, as they have been available for a couple of decades. Of course and as expected, Merck and Schering were not pleased, nor were they surprised at the review of Vytorin at this particular meeting. The following month after this cardiology meeting, Schering’s earnings dropped by 48 percent, as I recall.
Now, these cholesterol drugs promoted by Merck and Schering, Zetia and Vytorin, were aggressively marketed in a number of ways, including investing I believe about 200million dollars in 2007 for DTC ads for these products. To add to this, and soon after both meds were launched, reps from both companies made inferences to doctors about outcomes regarding plaque accumulation and how Vytorin was superior in that area, which, of course, this ENHANCE trial proved it is in fact not the case whatsoever. It did not matter, apparently, to both Merck and Schering that such a claim is entirely void of proof, which Is not unique to any pharma rep, in my opinion. Yet what is known now is that these companies performed junk science with their deliberate manipulation of this ENHANCE trial. Last year, Zetia and Vytorin had about 20 percent of the cholesterol lowering market. It does not seem that there will be an increase of this percentage because of this scandal. Worst of all is the harm caused to both doctors and patients. The ENHANCE trial concerned and confused both of these participants in the health care system. Furthermore, it’s likely they were devastated by being so clearly misled by the marketing of both Merck and Schering regarding the false benefits of Vytorin they were led to believe by the companies that promoted them.
This whole situation is another example of the corruption of the scientific method by placing profits over the well-being of patients. Most were shocked by Merck behaving in such a way in particular because of what use to be their excellent reputation as an ethical pharmaceutical company. And this alone shows the progression and infiltration of such damaging corruption that desperately needs to be stopped and corrected for the sake of others. Don’t just say something. Have something to say- to the right people, with conviction and with others who share your views.
“Waste no more time arguing what a good man should be. Be one.” --- Marcus Aurelius
Dan Abshear
Ed, I posted a comment earlier on Forbes.com about their story and I wanted to share it also with your readers so they can have a fuller perspective. Here is what I posted:
The innuendo of this article on the character of our CEO is very unfair.
Fred Hassan has a distinguished track record as a CEO who is virtually synonymous with integrity. We see this in his actions every day.
Fred Hassan also has a proven track record as a CEO who has taken a series of some of the biggest challenges in the world of business and turned them around to the benefit of patients, shareowners and society.
Schering-Plough proved to be the toughest challenge of Fred's career, and he and his management team succeeded against long odds in transforming our company -- including important corporate governance and compliance actions to build business integrity into the DNA of the company and to align management incentives with the interests of shareholders.
When Fred joined us in 2003, when our company was in dire straits, he voluntarily gave up his bonus of up to $2 million. Since then, Fred has invested very large amounts of his own personal assets into Schering-Plough - first buying $4.6 million of Schering-Plough stock soon after he took over as CEO: then again buying another $2 million in company stock in April of this year.
For this article to now invent a $13 million 'giveback' is at odds with good corporate governance and with Fred's record. It is not accurate or fair. It is based on hypotheses and speculation that are not warranted by the facts.
One of the most serious fallacies of the article is to assume that the Merck/Schering-Plough ENHANCE clinical trial could have been presented at the American Heart Association Conference (AHA) in 2006. In fact, as the independent lead investigator for that trial stated at a public press conference in March 2008 – which Forbes editor and writer on the story, Matt Herper, attended – the complete data could not have been available in 2006. So by any calculation it would have been impossible to present the findings of the trial at the 2006 AHA meeting.
Another serious fallacy in the article is that it speculates on what 2006 and 2007 performance might have been if a clinical trial had been completed earlier -- based only on performance in a few months of 2008.
Further, the writers appear to have ignored the fact that the incentives at issue were based on hard performance metrics – sales, earnings from operations and total shareholder return. Performance against these metrics was certified by accountants for the Compensation Committee of the Board. Market capitalization, which the writers focus upon, was not a performance metric for any incentive plan since Fred joined Schering-Plough.
The suggestion that compensation should be voluntarily forfeited, based only on a reporter’s speculation, is inconsistent with good corporate governance processes. It also ignores the fact that this CEO has already put his money where his mouth is -- investing more than $6 million of his own assets in our company.
Meantime, we are pleased by the strong show of support by our shareholders for the re-election of the Board - including Fred Hassan and for each member of the Compensation Committee - in the vote received for the Annual Meeting of Shareholders on Friday, May 16. At that meeting, each Director was re-elected by at least 93% of the shares voting.
We are proud to have Fred Hassan as our CEO.
Susan Ellen Wolf Corporate Secretary, Vice President - Governance And Associate General Counsel
Hi Sue,
Thanks for the note. And I appreciate your many points. A couple of observations, though. The guys at Forbes wrote that Kastelein believes that, if he had full control of the study, the results could have been released in March 2007, although you only mention 2006. Can you please clarify?
Also, I'm curious to know why the May 1 options grant wasn't priced higher. This topic was already addressed on Pharmalot but you didn't respond to it then and you whizzed right by it in your reply this morning. Can you address that now? Here's the link to our previous post...
http://www.pharmalot.com/2008/05/fred-hassan-in-graceland-lots-of-cheap-options/
Thanks for writing in, ed
Should he give it back? Absolutely! Will he give it back? Absolutely not! After all, he doesn't think he's made enough and his personal wealth has been adversely affected by the ENHANCE disaster.
He talks about trust. There is no more in Schering-Plough. He talks about integrity. He and Schering-Plough are believed not to have any. His reputation? Out the window! He can scratch and claw all he wants to. He can send his hired guns after the big, bad media, but to no avail. Who cares if he and his board were re-affirmed at the stockholders meeting? So were a lot of other embattled CEOs in the past. This result means little. What means more is that after some questionable events at AHP and Pharmacia, there is now one that will dog him for a long, long time!
Stick a fork in him! He's done as a respected pharmaceutical executive. His reputation has been irrevocably damaged by the ENHANCE fiasco and it just keeps getting worse and worse all the time. For a man who apparently has a gigantic ego and thrives on what others think of him, this is a very undesirable fate.
Sue:
This just seems like typical corporate spin-doctoring, the type we at OBS have heard since the takeover was announced.
Do you understand The Butterfly Effect? When the fruit of a simple transgression manifests itself in such far flung ways, people have a right to be annoyed. The initial projections for ENHANCE were for it to be presented at the 2006 AHA. As such, I feel that FORBES (and all other comers) are entitled to back date their projections of Vytorin/Zetia sales which directly affected executive bonuses and finally, SGP's ability to leverage the OBS deal.
Although FH talks a good game, I see too many skeletons in the closet of the current SGP leadership (Genotropin, fen-phen) balanced against but one shining moment (Pfizer's purchase of Pharmacia, which is probably more attributable to their lack of pipeline and desire to control Celebrex, just a bit of luck). When you control these events versus the performace of the companies he controlled at the time versus the market it general, FH does not look like the 5-tool superstar you assert, but more of a trading deadline pick-up that sparks a borderline play-off team to a short-lived run towards also ran status.
As ever, thanks for the link -- and the clear thinking, today, Ed! Mine was greatly improved by talking it through with you. . . .
-- condor
One very key point that is being overlooked is all of this is the licensing agreement with Bayer. Bayer in that year licensed Cipro IV/PO, Avelox IV/PO, and Levitra over to SGP as a key factor in SGP's turn around to profitability. Bayer just filed in Delaware Chancery Court for not receiving any royalties since 2004. Take out Vytorin/Zetia, rejection worldwide of dual inhibition, loss of Bayer's products and what are they left with? Nasonex, fighting generics and losing, and then Asmanex ?
How is this "earning trust every day".
Will this House of Cards tumble?
Ellis Taylor
To comment on your update:
As I stated earlier, SP is notorious for its spin-doctoring, using that which it finds useful and ignoring more salient, nay damning, evidence.
Sue:
You do realize that by proactively responding to posts on this and so many other boards on the internet that you have robbed SP of the ability of filing future 10-Q statements regarding the disclosure of information which may already be rumored in this new public domain. We are all aware of the fact that internally, SP has scoured the internet to try to keep up with the word on the street, so much so that many execs are rumored to have hissy fits (nice put) over their characterizations and the dissemination of "company secrets." Sorry, you can't stick your head back in that hole. (The air is probably fresher out here anyway!!!)
It seems that Sue may be taking over for the infamous Ken, who has not been heard from for quite some time. I'm guessing that market cap won't be included in the calculation of any 2008 rewards since it appears that Schering-plough has the proverbial "snowball's chance in hell" of turning that around this year. Given the debacle that has surrounded the cursed ENHANCE trial, Fred should indeed be questioned as to how he has demonstrated added value in the past year. If his inflated head is having trouble tolerating it, too bad! Just think of all the employees who are losing their jobs while some of the top executives probably are gloating in their good fortune because they are such wise stock traders. It seems that Schering-Plough is currently under the corporate microscope, so they should get used to it.