Guilty Plea Seen for Drug Maker

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http://www.nytimes.com/2004/07/16/business/16settle.html?th

 

July 16, 2004

Guilty Plea Seen for Drug Maker

By GARDINER HARRIS

 

The drug giant Schering-Plough has agreed to pay $350

million in fines and plead guilty to criminal charges

that it cheated the federal Medicaid program,

according to people involved in the case.

 

The settlement, expected to be announced next week

with federal prosecutors in Philadelphia, stems from a

six-year investigation prompted by three

whistle-blowers who accused Schering-Plough of selling

its products to private health care providers for far

less than it sold them to Medicaid.

 

Federal law requires drug makers to offer their lowest

prices to Medicaid, the federal and state health

program for the poor.

 

In the settlement, which is still subject to final

approval from a judge, Schering-Plough is expected to

admit that it gave grants to the private providers to

conduct patient education and marketing programs as

part of a kickback scheme to induce them to buy

Schering-Plough's drugs at relatively high prices,

according to a person involved in the investigation

and another informed of the negotiations.

Schering-Plough then billed Medicaid officials at

these high prices - without giving the offsetting

grants.

 

Last year, Bayer paid $257 million and GlaxoSmithKline

paid $86.7 million to settle similar allegations.

 

A Schering-Plough spokesman declined to comment, as

did a spokesman for Patrick L. Meehan, the United

States attorney in Philadelphia, whose office has been

conducting the investigation. The Schering-Plough case

is part of a broad assault by federal prosecutors into

the drug industry's marketing practices.

 

Federal investigations in Philadelphia, Boston and

Washington have resulted in subpoenas to nearly every

big drug maker, seeking information about suspected

aggressive and illegal sales techniques that cost

taxpayers billions of dollars.

 

Many of the cases were started by whistle-blowers

under a Civil War-era statute that allows citizens to

file suits on behalf of the government in cases of

suspected defrauding of taxpayers. If government

prosecutors take up such a case, resulting in a

conviction or settlement, the whistle-blower is

entitled to a portion of the award. Since 2001, drug

companies have agreed to pay more than $2 billion in

fines to settle suits brought by whistle-blowers.

 

Of those fines, tens of millions were paid directly to

the whistleblowers.

 

In one recent case, Pfizer agreed in May to pay $430

million to settle allegations that a subsidiary

marketed a pain drug improperly. Of that settlement,

$27 million went to a former executive who brought the

original claim against the company.

 

As a result of these cases, most drug companies say

that they are overhauling their marketing programs and

strengthening their internal policing of sales

practices.

 

Inquiries like the one involving Schering-Plough focus

in part on an exception to the 1990 Medicaid " best

price " law that has allowed drug makers sometimes to

sell their products for a " nominal " price - defined as

less than 10 percent of the manufacturer's average

price, without having that price counted as part of

the calculation of what Medicaid is charged. The

exception was intended to encourage drug makers to

sell their products at steep discounts to charitable

organizations and clinics, like Planned Parenthood.

 

But some drug makers have used " nominal " prices in

sales to hospitals and managed care organizations,

subverting the intent of the law, officials contend.

 

When prosecutors bring these cases, drug companies

rarely contest the charges because the risks of a

court battle are too great. The sanctions prosecutors

could seek include a ban on all sales to the

government - an unthinkable penalty for a drug maker,

because government health programs are among the drug

industry's largest customers.

 

Schering-Plough, with sales last year of $8.33

billion, is one of the world's largest drug makers.

But the company, based in Kenilworth, N.J., has

struggled since 2002 when it lost its patent on its

best-selling allergy pill, Claritin. And its legal

problems have been extensive. In 2002, the company

paid a $500 million fine to the Food and Drug

Administration to settle claims that it had failed for

years to manufacture its products safely. Among other

issues, a citizens' group contended that the deaths of

17 people might have resulted from their use of faulty

asthma inhalers manufactured by Schering-Plough.

 

Richard Kogan, the former chairman and chief

executive, left Schering-Plough last year under

criticism for having met with selected investors just

before a steep decline in the company's share price

and before the company announced its results to the

public. Last September, the company and Mr. Kogan

settled a resulting selective-disclosure investigation

by the Securities and Exchange Commission; the company

paid a fine of $1 million and Mr. Kogan paid $50,000.

 

Even with the various settlements so far,

Schering-Plough's legal troubles are not over. The

company remains under investigation by prosecutors in

Boston and Washington over whether it paid physicians

to prescribe its drugs and whether it reported

inflated wholesale prices to the government's Medicare

program, leading government health officials to pay

more for its drugs than necessary. Over the last two

years, the company has set aside $500 million to pay

fines expected in those cases and the Philadelphia

inquiry.

 

The new chairman and chief executive, Fred Hassan, has

promised to change the company's manufacturing and

marketing operations. The company's most recent annual

report is titled " Building the NEW Schering-Plough, "

with the subtitle " To earn trust, every day. "

 

Copyright 2004 The New York Times Company