Wednesday, June 19, 2002

BY JOHN P. MARTIN AND DAVID SCHWAB
Star-Ledger Staff

Federal authorities in New Jersey have launched a criminal investigation of Schering-Plough Corp., the Kenilworth-based drug maker that recently paid an industry-record $500 million fine for failing to correct manufacturing problems at its plants in New Jersey and Puerto Rico.

Investigators are looking into whether the pharmaceutical company used imported, relatively inexpensive chemical ingredients not approved for use in the United States, according to sources close to the investigation.

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"They're just at the beginning," one source said of the investigation.

Many U.S. drug makers import key ingredients for their prescription medicines to cut costs, but in compliance with U.S. Food and Drug Administration regulations. However, there are other ingredients approved for use in foreign countries that do not meet the standards of the FDA.

Robert Consalvo, a spokesman for Schering-Plough, said the company had no knowledge of any criminal investigation in New Jersey.

Experts say Schering-Plough's problems with the FDA and the criminal investigations do not mean any of its medicines now on the market are unsafe; otherwise the FDA would have forced a recall or would have shut down its plants. The company says its products are safe and effective.

But the investigation illustrates how seriously federal regulators view violations of strict manufacturing standards, an issue that is a growing concern in the pharmaceutical industry.

The opening of the criminal investigation had been delayed until Schering-Plough completed the negotiations with the FDA that led to its agreement last month to pay the $500 million fine.

Michael Drewniak, a spokesman for the U.S. Attorney's Office in Newark, declined to comment or confirm that an investigation was under way.

Last month the company also revealed it faces a probe in Puerto Rico by the FDA's Office of Criminal Investigation.

Schering-Plough, with about 6,900 employees in New Jersey, was once one of the industry's most profitable companies. Its slick televisions advertisements for the blockbuster allergy medicine Claritin ushered in a new era of consumer advertising for prescription medicines.

But for most of the past two years it has been struggling to overcome manufacturing problems identified by the FDA at its main plants in New Jersey and Puerto Rico.

The investigation began when the FDA noticed irregularities in paperwork about two years ago and approached federal prosecutors, a source said. The U.S. Attorney's Office began a formal criminal investigation this week.

The probe could lead to criminal charges against the company or individuals, the source said. It also could become a civil case.

Claritin is not part of the investigation, the source said. Other details were not available.

Richard Evans, a senior research analyst at Sanford C. Bernstein & Co. reached at his home last night, said another criminal investigation of Schering-Plough would worry investors because most of them assumed the company, by signing the consent order with the FDA, had overcome the worst of its problems.

In addition, the possibility the company used ingredients other than those approved by the FDA is a "very significant" issue, Evans said.

Like other big drug makers, Schering-Plough has come under mounting pressure as it prepares for the loss of Claritin's patent protection, opening the way for far cheaper generic alternatives. Company earnings last year fell 19 percent, an uncharacteristically poor performance.

When prescription medicines go off patent, after years of being the only version on the market, generics can quickly capture up to 80 percent of sales.

Some Wall Street analysts have said they believe criminal investigations in Puerto Rico and New Jersey center around allegations leveled a year ago by the watchdog group Public Citizen, which claimed Schering-Plough shipped asthma inhalers knowing they might not contain the active ingredient.

Schering-Plough recalled millions of inhalers in 1999 and 2000. The company called it a precautionary move, after some inhalers were found lacking the active ingredient, and that consumers were not in danger.

Sidney Wolfe, director of Public Citizen's Health Research Group, said that after the group called for a criminal investigation of the company, he was interviewed by investigators from the U.S. Attorney's Office in New Jersey and the FDA.

Public Citizen -- an organization founded by Ralph Nader that has been a persistent critic of the pharmaceutical industry -- contends Schering-Plough may have been responsible for as many as 17 deaths of patients who were using or attempting to use inhalers in 1998 and 2000 -- before the recalls but after the company became aware of potential problems.

The allegations were contained in letters to Secretary of Health and Human Services Tommy Thompson. Schering-Plough has denied the allegations.

The inhalers were sold under the brand name Proventil and under the generic name Warrick.

Schering-Plough's problems with the FDA began in 1998 with the first of 13 inspections and several warnings from federal inspectors about manufacturing lapses.

In February 2001, Schering-Plough said the FDA found it had failed to fix serious manufacturing problems at its plants in Kenilworth, Union, and the Puerto Rican towns of Maniti and Las Piedras. The agency then delayed its approval of Clarinex, the widely promoted drug the company now hopes will replace Claritin.

Since then, the value of Schering-Plough shares has plunged about 50 percent and speculation has arisen about whether the company would have to merge with another big drug maker to survive. Yesterday, shares fell 12 cents to $25, near their five-year low.

One of the biggest problems facing the company is that the patent protection for Claritin stands to be lost by the end of the year. The company wants to switch consumers to the newer Clarinex. In 2001, Claritin accounted for more than $3 billion in sales, about one-third of the company's total.

Schering-Plough had hoped to put its manufacturing problems to rest last month by entering into the consent decree, a formal agreement with the federal government, in which it agreed to pay $500 million in fines and to upgrade its manufacturing processes. The settlement was approved by U.S. District Court Judge Joel Pisano in Newark.

Criminal investigations add to investors' sense of uncertainty about the company's future.

For example, shares plunged 12 percent after Schering-Plough revealed last month in filings with the Securities and Exchange Commission that the FDA was conducting a criminal investigation in Puerto Rico that may focus on one or more of its products.

The company has said it doesn't know more about the investigation in Puerto Rico, and the FDA has declined to elaborate.

In the past 18 months, three federal prosecutors have left the U.S. Attorney's Office in Newark to join Schering-Plough.