The Bitter Pill

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Lilly’s Worst Zyprexa Nightmare Comes True

Evelyn Pringle May 7, 2007

Eli Lilly is not all that worried about personal injury lawsuits related to Zyprexa because the company has enough money to pay the relatively small pay-outs that arise from such actions, according to Attorney Barry Turner, a professor of law and ethics in the UK and a leading authority on consumer fraud litigation involving the pharmaceutical industry.

But he says the Medicaid fraud lawsuits filed by 9 states thus far, under the Federal and State False Claims Act are another matter. “The biggest penalties so far in Federal and State False Claims Act violations,” Mr Turner reports, “were awarded against drug companies and there are very many more cases under seal.”

But an even larger nightmare for top Lilly officials, he says, arises when a product like Zyprexa causes deaths and injuries to consumers and shareholders face huge losses including the millions of people who have their pensions invested in the company.

When a blockbuster drug is announced, Mr Turner says, it attracts huge investment and if that investment has been attracted to a product that Lilly knew was faulty, the company has risked shareholder funds beyond the pale.

This kind of behavior, he notes, is a Sarbox violation. The Sarbanes-Oxley Act was enacted to restore investor confidence in publicly traded companies in the wake of Enron and similar debacles by improving corporate accountability. Its official title is the “Public Company Accounting Reform and Investor Protection Act of 2002,” named after its sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G Oxley (R-OH), and is commonly referred to as SOX.

One of the features of SOX is the ability to bring an action against those who recklessly and fraudulently deal with stockholder’s money and, “promoting the off label use of a drug with undeclared dangerous side effects, or being negligent as to such promotion, is the kind of behavior justifying an action under Sarbanes Oxley,” according to Mr Turner.

“Those at the top of Eli Lilly,” he states, “gambled with the lives of patients and the money of stockholders in equal bad faith when they engaged in fraudulent and dishonest behavior that allowed a dangerous drug to be marketed.”

“The lifeblood of a business,” he says, “is the investment that goes into it and in the case of Eli Lilly it means the investment of millions of shareholders.”

“Anyone who defrauds them,” he explains, “is defrauding people not business.”

Mr Tuner says it is easy to think of shareholders as “rich lazy fat cats” living off the efforts of others but it is fundamentally wrong by ethical standards to think that if they are defrauded that perhaps they deserve it. “What needs to be understood,” he says, “is that many millions of people who own no stock at all get defrauded in scams all the time.”

“Those who pay into pension funds,” he explains, “are vulnerable to the financial shenanigans not only of fund managers but of boards of companies and CEO’s that fail to police the companies activities or in some cases actively encourage fraud and reckless business practices.”

The worst of all legal nightmares resulting from the Zyprexa “shenanigans,” occurred over a period of 9 days between April 2, 2007 and April 11, 2007, when not one, but 4 shareholder class action lawsuits were announced against Lilly and “certain of its officers and directors” filed in the US District Court for the Eastern District of New York, for violations of the Securities and Exchange Act alleging that the defendants hid the side effects of Zyprexa and engaged in illegal off-label marketing campaigns.

On April 2, 2007, the Law Firm of Schiffrin Barroway Topaz & Kessler, issued a press release to announce that a class action was filed on behalf of all securities purchasers of Lilly from March 28, 2002 and December 22, 2006, charging the defendants with disseminating false and misleading statements regarding Zyprexa.

More specifically, it alleges that they were aware of a “clear link” between Zyprexa and diabetes; and yet failed to warn the public and engaged in an illicit scheme to offset a drop in sales that was certain to occur, and did occur, when reports of Zyprexa’s side effects emerged, by creating a marketing plan which included the evaluation and pursuit of sales for the drug based on “off-label” uses and that the off-label marketing program was a direct violation of Lilly’s own code of conduct.

The complaint further alleges that concealing the side effects and engaging in a massive illegal marketing campaign potentially subjected Lilly to substantial regulatory fines, penalties and other legal action, compromising the company’s overall financial condition and prospects.

The complaint reports that between 2002 and 2004, sales of Zyprexa grew from $3.69 billion to $4.42 billion, and that between July 18, 2002 and May 7, 2004, Lilly’s stock value increased from $43.75 per share to $76.95.

Throughout the class period, the lawsuit says, Lilly had information about the link between Zyprexa and extreme weight gain and diabetes and in the face of mounting research linking the drug to diabetes and weight gain, and the lawsuits filed by persons who developed these conditions, “Lilly emphatically denied any such link.”

The complaint alleges that when public warnings were issued about the safety of Zyprexa, sales slowed and between May 7, 2004 and October 25, 2004, stock prices dropped from $76.95 per share to $50.34, representing a loss of market capitalization of over $30 billion.

The press release cites reports in the New York Times between December 17 and 21, 2006, as disclosing for the “first time” that Lilly had engaged in a decade-long effort to play down the risks of Zyprexa; and actively marketed the drug for illegal off-label uses such as treating elderly patients with symptoms of dementia.

Therefore, the lawsuits alleges, the over $30 billion decline in stock value between May 7, 2004 and October 25, 2004 was the direct result of defendants’ fraudulent conduct.

In addition it says, the publication of the Times articles caused another $3.49, or 6.4%, decline in stock value and represented a further market loss of approximately $3.5 billion.

Two days after the first class action was announced, on April 5th, the Lerach Coughlin Stoia Geller Rudman & Robbins Law Firm announced that another had been filed.

The second complaint also charges Lilly and certain of its officers and directors with violations of the Securities Exchange Act, and alleges that at the beginning of the class period, defendants contended that Zyprexa did not cause diabetes-related side effects and that once the clinical data rendered that position untenable, defendants argued instead that Zyprexa did not cause any more side effects than its competitors.

Eventually, the press release notes, more and more clinical data showed that, in fact, Zyprexa does cause such side effects and to a greater extent than its competitors and the “revelations sharply curtailed the sales growth of Zyprexa and resulted in thousands of product liability lawsuits against Lilly and hundreds of millions of dollars in settlements.”

It also alleges that defendants intentionally suppressed and misrepresented data showing that Zyprexa causes weight gain, high blood sugar, and diabetes, citing the series of articles in the Times, with excerpted “documents detailing defendants’ deception.”

The release says the documents revealed that defendants intentionally misled patients, doctors, and investors and as a result, “the price of Lilly’s stock declined almost 6% in the five trading days during which the series of articles was published.”

The members of the class, it notes, invested in Lilly securities unaware that defendants’ fraud had artificially inflated the prices of those securities and when “the truth was finally revealed those investors lost many millions of dollars as a result of defendants’ fraud.”

Four days after the second lawsuit was announced, on April 9th, the Schatz Nobel Izard Law Firm announced the third case seeking class action status on behalf of all persons who purchased or otherwise acquired securities of Lilly between March 28, 2002 and December 22, 2006.

This lawsuit also alleges that the same defendants violated securities laws by making misleading statements and specifically that they “contended that Zyprexa did not cause diabetes-related side effects,” and later that, “Zyprexa did not cause more side effects than its competitors.”

This press release also quotes the Times articles as showing “that defendants intentionally misrepresented the side effects of Zyprexa,” and “suppressed and misrepresented data showing that Zyprexa causes weight gain, high blood sugar, and diabetes “

“In the five trading days during which the series of articles was published,” the press release advises, “the price of Lilly’s stock declined almost 6%.”

Two days later, on April 11th, the Harwood Feffer Law Firm announced a fourth class action accusing the same defendants of making misleading statements and specifically that they failed to disclose: (i) dangerous side-effects resulting from the use of Zyprexa; (ii) the decade-long illegal campaign to increase sales by marketing Zyprexa for off-label uses not approved by the FDA, in violation of FDA regulations that proscribe such marketing.

As a result of these fraudulent business practices, the press release states, sales of Zyprexa rose from $3.69 billion to $4.42 billion between 2002 and 2004, and the value of stock increased from $43.75 per share to $76.95, between July 18, 2002 and May 7, 2004.

The release says defendants had knowledge of a link between Zyprexa and extreme weight gain and diabetes and when sued by private individuals who developed these adverse effects, “the Company adamantly refused to acknowledge any wrongdoing.”

The Law Firm goes on to note that as public agencies raised warnings about Zyprexa, sales plummeted and stock price dropped from $76.95 per share to $50.34, between May 7, 2004 and October 25, 2004, amounting to a loss of market value of over $30 billion.

Subsequently, the press release alleges, after the Times published a series of articles the price of Lilly stock “collapsed” an additional $3.49 per share, or 6.4%, and amounted to a further loss of market value of approximately $3.5 billion.

Zyprexa was FDA approved for the limited use of treating adults with the most severe mental illnesses, schizophrenia and manic episodes of bipolar disorder, but it quickly became Lilly’s best selling product.

In order to find that Lilly did not make the drug its top seller by illegally promoting it for off-label uses, a jury would have to believe the highly unlikely scenario that doctors in every field of medicine came up with the idea of prescribing a schizophrenia drug to patients as young as 2 and as old as 100, for every kind of condition imaginable from anxiety and attention deficit disorder to autism and dementia.

On April 25, 2007, the New York Times reported that the FDA was examining whether Lilly provided the agency with accurate data about the side effects of Zyprexa. However, that may be a dead issue in light of the fact that on May 4, 2007, Lilly issued a press release of its own to announce that Alex Azar II will be joining the company as a senior vice president, who until February 3, 2007, just happened to be the Deputy Secretary of the US Health and Human Services Department.

According to Lilly, “Azar supervised all operations of the HHS, including the regulation of food and drugs,” and among others, agencies under his direction included the FDA.

Filed under: 2007, Azar, Eli Lilly, FDA, Fraud, SOX, Zyprexa

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