Q,^.IGiNAL
&&,iN 2i 4- L UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -_DOF
x Consolidated Civil Action IN RE BAYER AG SECURITIES No. 03 CV 1546 (WHP) LITIGATION Class Action
x
71 :n = SECOND CONSOLIDATED AMENDED COMPLAINT
Jury Trial Demand
MILBERG WEISS BERSHAD & SCHULMAN LLP Melvyn I. Weiss (MW-1392) Michael C . Spencer (MS-8874) Lee A. Weiss (LW-1130) Jennifer Sclar (JS-7313) One Pennsylvania Plaza New York, NY 10119 (212) 594-5300
Attorneys for Lead Plaintiff
January 14, 2005 i • '
Table of Contents
Page
SUMMARY OF CLAIMS ...... 2
JURISDICTION AND VENUE ...... 8
A. General Jurisdiction and Venue ...... 8
B. Subject Matter Jurisdiction Over Claims of Foreign Purchasers on Foreign Exchanges ...... 8
PARTIES ...... 12
RELEVANT EVENTS ...... 14
A. Background of the Statin Market ...... 14
B. FDA Approval and Introduction of Baycol; Early Safety Warnings ...... 15
C. The FDA Approves an 0.4 mg Dosage, as Defendants Fail to Disclose the Dangers Associated with Baycol ...... 22
D. Bayer Seeks and Obtains Approval of an 0.8 mg Dosage Despite Overwhelming Evidence ofBaycol's Link to Rhabdomyolysis ...... 27
E. Bayer Is Compelled to Withdraw Baycol ...... 40
F. Defendants Continue to Withhold Material Facts Concerning the Dangers Associated With Baycol ...... 43
G. Bayer AG Registers Its ADRs with the SEC ...... 48
H. Defendants' Knowledge of Baycol's Dangers Is Made Public ...... 53
BAYER'S MATERIALLY FALSE AND MISLEADING FINANCIAL STATEMENTS ...... 56
A. U.S. GAAP, IAS and SEC Violations ...... 57
B. German Stock Exchange Rule Violations ...... 62
INDIVIDUAL DEFENDANTS' LIABILITY; DUTY ...... 63
THE MARKET FOR BAYER SECURITIES ; APPLICABILITY OF PRESUMPTION OF RELIANCE; FRAUD-ON-THE-MARKET DOCTRINE ...... 65
CLASS ACTION ALLEGATIONS ...... 67
- i - NO STATUTORY SAFE HARBOR...... 69
CLAIMS FOR RELIEF ...... 71
COUNT I - Violations of Section 10(b) and Rule lob-5 By All Defendants ...... 71
COUNT II - Violations of Section 20(a) By the Individual Defendants ...... 73
JURY TRIAL DEMAND ...... 76
ii 1 ?
Lead Plaintiff, Alan Hevesi, Comptroller of the State ofNew York, as Administrative
Head of the New York State and Local Retirement Systems and as the sole trustee of the New
York State Common Retirement Fund ("NYSCRF"), individually and on behalf of all other
persons similarly situated, by the undersigned attorneys, makes the following allegations for his
Second Consolidated Amended Complaint.
Defendants named in this complaint are Bayer AG (also referred to herein as the
"Company"); Bayer Corporation; David Ebsworth; and Wolfgang Plischke.
Lead Plaintiff's allegations as to himself and his own acts are made upon personal
knowledge, and as to all other matters are based upon an investigation made by his attorneys,
which included, among other things: (i) interviews of former employees of Bayer AG and Bayer
Corp.; (ii) review and analysis of the public filings of Bayer AG, including its filings with the
Securities and Exchange Commission ("SEC") and stock exchanges in Europe; (iii) review and
analysis of news articles, press releases and analysts' reports by or relating to Bayer AG and
Bayer Corp.; and (iv) review of the documents made public by attorneys for plaintiffs who are
suing Bayer AG, Bayer Corp. and Bayer's marketing partner, GlaxoSmithKline PLC, for
products liability and personal injuries related to the drug Baycol. Lead Plaintiff believes that
further evidentiary support for the allegations set forth below will exist after a reasonable
opportunity for discovery.
On September 30, 2004, the Court issued a Memorandum and Order dismissing certain
portions of Lead Plaintiffs' Consolidated Amended Complaint. To the extent allegations
dismissed from the Consolidated Amended Complaint are not repleaded herein, Lead Plaintiff
expressly preserves his right to appeal the dismissal of these allegations, including (without
limitation) dismissal of claims against Werning Wenning and Manfred Schneider. SUMMARY OF CLAIMS
1. This is a class action on behalf of a proposed Class of all persons who purchased securities of Bayer AG between August 4, 2000 and February 21, 2003, inclusive (the "Class
Period") and have been damaged thereby, to recover damages caused by defendants ' violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act").
2. Defendants made repeated statements to the public before and during the Class
Period extolling the safety and commercial potential of cerivastatin, a prescription statin
(cholesterol- and triglyceride-reducing) drug produced and marketed by Bayer under the brand names Baycol in North America and Lipobay elsewhere (usually referred to as Baycol herein).
Bayer introduced Baycol commercially in 1997 and portrayed it as a "sleeping blockbuster" pharmaceutical product that would capture substantial market share from Lipitor, a competitive statin sold by Warner-Lambert that held approximately 40 percent of the worldwide market and surpassed $1 billion in sales in the first eleven months it was on the market. Defendants repeatedly. stated that Baycol was safe and that its success was essential in driving Bayer's future profitability. By August 2001, Baycol had become Bayer's third-best-selling prescription drug.
Securities analysts called Baycol the "key growth product" and a "major strategic pillar" in
Bayer's healthcare business. Internally, a memo sent to defendant Ebsworth, President of Bayer
Corp.'s Pharmaceutical Division, in May 1998, noted that Baycol "must carry the company for the short and long haul."
3. Throughout the period that Bayer was depicting Baycol as safe, and was seeking regulatory approval for higher dosages, evidence was being accumulated inside Bayer and its marketing partner in the United States, SmithKline Beecham (now called GlaxoSmithKline), that
Baycol was unsafe, particularly at higher doses and particularly when used in conjunction with the drug gemfibrozil, with which it was often prescribed. As early as June 1997, when Baycol
2 1 S
first received U.S. regulatory approval, defendant Ebsworth was notified in writing by a
SmithKline Beecham officer that "[s]imple and safe no longer appears to be a viable promotional
platform." By early 1998, Bayer learned that a serious medical condition, rhabdomyolysis, was
afflicting patients taking Baycol. Rhabdomyloysis is a disease that causes acute damage to
skeletal muscle and tissue, leading to kidney failure, heart failure, muscle tissue degeneration,
liver lesions, other organ damage, and often death. Bayer resisted disclosing the severity of the
problem and continued to insist that Baycol had a "proven safety profile" for several years, so as
to continue profiting from the drug.
4. In order to turn Baycol into the blockbuster drug the Company needed it to be, at
the beginning of 2000, Bayer deployed the majority of its marketing efforts toward increasing
Baycol sales in the U.S. By this time, Baycol had been a relative failure in the U.S., as Bayer
had only received FDA approval for relatively weak dosages . Thus, to increase Baycol's market
share, Bayer sought FDA approval of a larger dosage (0.8 mg), without regard for the known
safety risks. One Bayer officer observed, for example, that there was a company strategy to "get
by that July hurdle" - referring to anticipated regulatory approval of a 0.8 mg dosage for Baycol,
which in fact was granted in July 2000. On August 4, 2000, less than two weeks after the FDA
approved the 0.8 mg dosage, a meeting in the U.S. among senior members of Bayer's Global
Drug Safety group, including defendant Wolfgang Plischke, General Manager of Bayer AG's
Pharmaceutical Business Group, reached the conclusion that Baycol's dangers were putting the
brand at risk and posing serious problems with the FDA.1 No action resulted, however, except
that defendant Ebsworth, upon hearing about the meeting, told his senior marketing personnel
1 The date of this meeting was mistakenly given as August 2, 2000, in the Consolidated Amended Complaint.
3 that "there is no safety problem" and that they should "promote the hell out of this product. We need this product to be successful."
5. Bayer's press releases, statements, and filings continued to emphasize the success of Baycol throughout this period. In November 2000, Manfred Schneider, Chairman of Bayer
AG's Board of Management, identified Baycol as a "future blockbuster" for the company. Bayer
AG's annual report for 2000, issued in March 2001, stated that the company "scored great success" with Baycol, which had "surpassed the £500 million sales threshold for the first time, and doubled its market share in the United States." A securities analyst reported in July 2001 that Baycol was the "growth engine" of Bayer Pharmaceutical, driven by market growth and market share gains by Baycol in its new higher dosages.
6. Bayer withheld critical information from the FDA regarding the known dangers of Baycol. However, by August 2001, the FDA had received reports of 31 rhabdomyolysis fatalities associated with the use of Baycol. Thus, the FDA placed immense pressure on Bayer to withdraw Baycol.
7. On August 8, 2001, Bayer bowed to the FDA' s pressure and issued a press release announcing the withdrawal of Baycol from all worldwide markets (except in Japan, where it was withdrawn on August 23, 2001) "because of reports of sometimes fatal rhabdomyolysis." In the press release, the Company admitted that cases of fatal rhabdomyolysis "in association with the use of Baycol have been reported significantly more frequently than for other approved statins."
That information had, however, been known by defendants and other senior officers within
Bayer for several years. Two days after the withdrawal, a J.P. Morgan report noted that "Bayer is left without `the cornerstone' of its ethical [prescription] pharmaceuticals business and growth rates have been substantially reduced."
4 8. Throughout the Class Period until August 8, 2001, defendants had deliberately misrepresented that Baycol was safe and concealed the evidence that it was unsafe, which was known by defendants. In fact, defendants knew that patients taking Baycol faced an increased risk of death and serious injury from the drug's adverse effects . Defendants knew that these problems meant that future earnings and profits from Baycol would not be realized, and that substantial tort liabilities would ensue, once the truth about the product was revealed.
9. On August 8, 2001, upon news of the withdrawal, the price of Bayer securities in the U.S. fell approximately 17 percent, from $39.50 on the prior day's close to $32.85. The prices of Bayer's securities reacted similarly on the major European stock markets. In Frankfurt, the closing price of Bayer securities declined from €45 .35 ($39. 76) to E37.35 ($32.73), while in
London, the closing price of Bayer securities declined from €28.00 ($39.00) to £23.44 ($33.14).
10. Withdrawal of Baycol from the market unfortunately did not end defendants' deceptive misconduct. On August 13, 2001, Manfred Schneider, Chairman of Bayer AG's
Board of Management, told a news conference that Bayer's "top priority" had been to "withdraw
the product quickly" when "it became clear that certain risks could not be excluded." In a press release three days later, Bayer insisted that it "at all times behaved responsibly and acted in the
interest of patient safety and health." As a result, Schneider said the Company was
"unperturbed" by damages actions being brought against it for deaths and injuries caused by
Baycol, and stated that it saw "no reason to establish provisions as a result" - referring to provisions for financial statement reserves to pay litigation claims. Schneider went so far as to
insist on August 23, 2001, that there was "at the moment no evidence" that Baycol had led to
patient deaths, and that lawsuits against Bayer were "groundless." In October 2001, he was
quoted in a trade publication as stating that the Company held an "unassailable position" in the ^. r
litigation because it had responded immediately to safety concerns. Bayer insisted that insurance
would pay for any claims that might be successful. In October 2002, a stock analyst covering
Bayer reported that Werner Wenning, Bayer AG's Chief Financial Officer, "remain[ed]
emphatic that all settlements will be fully covered by product liability insurance," and loss
contingency reserves were not established.
11. Bayer's statements that it had acted prudently and withdrawn Baycol immediately
when safety concerns arose, and consequently that the company's litigation exposure was nil,
were false. As stated above, Bayer officers, including defendants, had actual knowledge of
serious health risks and safety problems throughout the Class Period, and had concluded that the
Baycol brand was at risk, but they deliberately concealed the problems from the public in order
to continue selling the product, including the most dangerous 0.8 mg dosage.
12. On February 22, 2003 (a Saturday), the New York Times published an article
reporting that senior executives at Bayer had been aware that Baycol had serious problems and
presented health risks to patients long before the drug was pulled from the market. "The
documents, made public by lawyers suing Bayer, include e-mail messages, memos and sworn
depositions of executives that suggest that Bayer promoted the drug, Baycol, even as a company
analysis found that patients on Baycol were falling ill or dying from a rare muscle condition
much more often than patients on similar drugs." The article, which coincided with the opening
of the first Baycol trial in Corpus Christi, Texas, noted that more than 10,000 patients had sued,
and that Bayer and GlaxoSmithKline had settled more than 400 cases for individual amounts
between $200,000 and $2.1 million. Four days later, Wenning was quoted as saying that Bayer
"may consider" establishing reserves to settle Baycol-related lawsuits.
6 13. The news that Bayer had not withdrawn Baycol from the market despite the knowledge of senior executives within the Company that it was unsafe, and thus that the
Company was not immune to exposure in Baycol product liability lawsuits, caused the market price of Bayer stock to decline again. On February 24, 2003, the first trading day after the publication of the New York Times article, the price of Bayer securities in the U.S. fell approximately ten percent, from $17 .15 at the prior trading day's close to $15 .44. Similarly, in
Frankfurt, the closing price of Bayer securities declined from £15.83 ($17.11) to £14.29
($15.39), while in London, the closing price of Bayer securities declined from £10 .53 ($16.77) to
£9.95 ($15.78). The following day, all of the markets continued to react to the previously undisclosed adverse news regarding Baycol. On February 25, 2003 , the closing prices of Bayer securities fell to $13.37 on the New York Stock Exchange, £12.31 ($13.24) in Frankfurt, and
£8.43 ($13.25) in London. The first of the securities lawsuits consolidated in this litigation was filed on March 6, 2003
14. Overall, the price of Bayer securities in the U.S. fell from $40.50 at the beginning of the Class Period to $13.37 on February 25, 2003, a 67 percent decline. In Frankfurt, the price of Bayer securities similarly declined from £45 .30 ($40.97) to £12.31 ($13.24). As of December
2004, the company reportedly had settled 2,895 product liability cases involving Baycol for over
$1.1 billion, while over 7,000 cases are still pending. On March 9, 2004, Bayer announced that it had set aside £300 million in 2003, over and above its reported $1.3 billion in insurance, for settlement and legal defense costs related to Baycol.
7 P
JURISDICTION AND VENUE
A. General Jurisdiction and Venue
15. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j (b) and 78t(a), and Rule lOb-5, 17 C.F.R. § 240. 10b-5, promulgated
thereunder.
16. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. § 1391(b). Defendants Bayer AG and Bayer Corp . transact business in this District, and
many of the acts and transactions constituting the violations of law alleged herein occurred in
this District.
17. In connection with the acts, transactions and conduct alleged herein, defendants,
directly and indirectly, used the means and instrumentalities of interstate commerce, including
the United States mails and interstate telephone communications and the facilities of national
securities exchanges and markets.
18. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331.
B. Subject Matter Jurisdiction Over Claims of Foreign Purchasers on Foreign Exchanges
19. As discussed below, defendants' conduct in and concerning the United States was
central to their fraud and a primary cause of the losses suffered by plaintiffs and class members.
20. Bayer executives and outside securities analysts viewed Bayer's pharmaceutical
division as the Company's main earnings contributor in 2000 and beyond, and considered Baycol
as key to the division's success. Defendant Ebsworth explicity endorsed that view, noting that
several other promising Bayer drugs were failing in phase III clinical trials. Furthermore,
according to a former senior member of Bayer Corp.'s Global Strategic Marketing department,
8 r w
located in West Haven, Connecticut, who worked for Bayer from October 1998 through the
beginning of 2000, Bayer elected to target the vast majority of its Baycol marketing efforts to the
U.S., because the U.S. statin market, which comprised 60% of the worldwide market, was
growing, while the remainder of the world's statin markets were stagnant. This former senior
marketing official also reported that Bayer elected to focus on the U.S. market because of the
over-prescription of statins in the U.S. and because of attractive profit margins on U.S.
pharmaceuticals . Accordingly, the United States was the central focus of defendants ' marketing
of Baycol throughout the lifetime of the drug.
21. At the beginning of 2000, Pfizer's Lipitor was the top-selling statin, with an
approximately 30% share of the U.S. market. At an April 2000 Baycol "summit meeting,"
defendant Ebsworth informed all attendees that Bayer was going to push the 0.8 mg dosage of
Baycol to increase its ability to compete against Lipitor. Bayer received FDA approval for the
0.8 mg dosage on July 24, 2000. Eleven days after that approval , Bayer' s Global Drug Safety
Director convened a meeting, in the U.S. to address the mounting data regarding the dangers of
Baycol. The meeting's participants -- who included defendant Plischke, all senior members of
Bayer's Global Drug Safety department, and a former FDA commissioner whom Bayer had
retained as an outside consultant -- concluded that the accumulating adverse safety data
regarding Baycol was putting the brand at risk and that there could be serious problems with the
FDA. No one at Bayer took any steps to communicate the data to the FDA. On the contrary,
defendants used the FDA's approvals of increasingly higher dosages of Baycol as the foundation
for their continued statements about the blockbuster potential of Baycol in the U.S. Therefore,
the United States provided the primary regulatory environment for Baycol, and defendants
focused their worldwide efforts toward regulatory approval for Baycol on the FDA.
9 22. Defendant Plischke confirmed Bayer's focus on the U.S. statin market in statements quoted in an industry publication dated October 1, 2000. Just two months after he, the senior members of Global Drug Safety, and an outside consultant had concluded internally that safety concerns were placing the Baycol brand at risk, Plischke publicly called Baycol one of the Company' s "sleeping blockbusters in the United States" and stated that "We talk about
[Baycol as] a potential $1 billion dollar product in the United States, and we are still not being naive or overly ambitious." Thus, the main purpose of defendants ' concealment of the known adverse facts set forth below was to deceive the investing public into believing that Bayer could boost the performance of its sagging pharmaceutical business by taking advantage of the exploding U.S. prescription statin market.
23. The importance of U.S. Baycol sales became acutely evident upon the withdrawal of the drug. At this time, securities analysts noted that the drug had been viewed as the key growth product in Bayer's Health Care business, and described the withdrawal as a major financial blow for the company. Indeed, at that time, Baycol was the only Bayer pharmaceutical product enjoying strong sales growth.
24. The withdrawal of Baycol gave rise to potential products liability litigation
against the Company concerning Baycol - and the litigation and the financial risk it posed to
Bayer arose predominantly in the United States. Defendants perpetuated their fraud by claiming
that the products liability actions in the U.S. were unfounded, as defendants had acted responsibly in withdrawing Baycol and had not previously known of undue safety risks.
However, as alleged above, defendants' statement that they had taken "voluntary action as soon
as an accumulation of anomalous findings became apparent" was false. Defendants continued to
conceal that they had obtained approval for the 0.8 mg Baycol and focused their Baycol
10 marketing efforts on the U.S. market, despite their contemporaneous knowledge of Baycol's safety problems. Throughout the remainder of the Class Period, securities analysts, unaware of the material adverse facts that were known to defendants well prior to the withdrawal of Baycol, accepted defendants' false statements regarding their supposedly prompt action in withdrawing
Baycol. In this respect, therefore, the final act in the Baycol tragedy is also playing out almost exclusively in the United States.
11 PARTIES
25. NYSCRF purchased Bayer AG securities at artificially inflated prices during the
Class Period, as stated in its certification dated May 12, 2003, and has been damaged thereby.
NYSCRF is the second-largest public pension fund in the nation, in terms of both membership and assets, with nearly one million members, beneficiaries, and retirees, and as of March 31,
2004, had over $120 billion in assets . Lead Plaintiff Alan Hevesi, the Comptroller of the State of
New York, is Administrative Head of the New York State and Local Retirement Systems and the sole trustee of NYSCRF.
26. The Consolidated Amended Complaint also consolidated actions filed in this
District by the following other named plaintiffs, who are also plaintiffs herein: Sanders,
1:03cv1546; Abramsky, 1:03cv1724; Gerber, 1:03cvl882; Ostrzyzek, 1:03cv1959 ; Moyer,
1:03cv2454; Sadowsky, 1:03cv2998; Korsinsky, 1:03cv3209. Order Consolidating Actions;
Appointing Lead Plaintiff; and Approving Selection of Lead Counsel, filed August 13, 2003.
These additional plaintiffs purchased Bayer securities during the Class Period as set forth in their
respective complaints and certifications.
27. Defendant Bayer AG is a diversified international healthcare and chemicals
company, with executive offices in Germany and the United States . Pharmaceuticals comprise
in excess of 30 percent of Bayer AG's worldwide business . Bayer AG manufactured, marketed,
distributed, tested, promoted, and sold Baycol/Lipobay in worldwide markets, prior to
withdrawing the product from most markets on August 8, 2001, and from the Japanese market on
August 23, 2001.
28. Defendant Bayer Corp., a wholly owned subsidiary of defendant Bayer AG, is an
Indiana corporation with its principal place of business in Pittsburgh, Pennsylvania. (In this
complaint, "Bayer" refers to Bayer AG and/or Bayer Corp.) During the Class Period, Bayer
12 Corp. manufactured, marketed, distributed, tested, promoted, and sold Baycol for and in North
American markets, prior to the withdrawal of Baycol from the market on August 8, 2001.
29. Defendant David Ebsworth was Executive Vice President of Bayer Corp. and
President of Bayer Corp.'s Pharmaceutical Division from 1995 through December 1999, and was head of the worldwide Pharmaceutical Business Group of Bayer AG from January 1, 2000, until
he resigned on January 9, 2002.
30. Defendant Wolfgang Plischke was Executive Vice President of Bayer Corp. and
President of Bayer Corp.' s Pharmaceutical Division from January 2000 until June 2002, and has
been serving as the General Manager of the Pharmaceuticals Business Group of Bayer AG since
January 2002.
31. Statements made by the Individual Defendants were made as officers of their
respective companies, Bayer AG and Bayer Corp., as described above. The Individual
Defendants and other corporate employees identified herein were authorized to speak and did
speak on behalf of the companies that employed them.
13 RELEVANT EVENTS
A. Background of the Statin Market
32. The United States Food and Drug Administration (FDA) first approved statins in the late 1980s, beginning with lovastatin (Mevacor) in 1987, and pravastatin (Pravachol) and simvastatin (Zocor) in 1991. The FDA approved other statins such as fluvastatin (Lescol) and atrovastatin (Lipitor), as well as cerivastatin (Baycol), in 1997. Statins are commonly prescribed by physicians to lower cholesterol and triglyceride levels in the bloodstream.
33. In 1997, the worldwide statin market was experiencing dramatic growth, with revenues reported at $6 to $7 billion per year and annual growth rates of 35 to 40 percent. Merck
Pharmaceuticals dominated the statin market with two statin drugs, Mevacor and Zocor, which together held more than 40 percent of the worldwide market. Lipitor was introduced by Warner-
Lambert in the first quarter of 1997. Within eight months of its launch, it obtained more than a
25 percent share of new prescriptions in the U. S. market.
34. Bayer accordingly faced stiff competition. In July 1997, an analyst at Deutsche
Morgan Grenfell, Mariola Haggar, predicted that "Baycol won't do as well as the more potent
Lipitor, but will still capture a significant market share." Even though Baycol was a relative late-
comer (the sixth statin to enter the market), some analysts felt that if Bayer and SmithKline
Beecham could document a distinguishing clinical profile, "Baycol could reach $500 million to
$ 1 billion [in yearly revenue] ," according to one report in Med Ad News in September 1997.
35. Cerivastatin was first introduced on the market as Lipobay in the United Kingdom
on April 14, 1997. The drug was launched in Germany later that year.
36. Bayer sought to gain market share by selling Baycol at a price significantly below
that of other statins, which influenced insurance companies and HMO's to put Baycol on their
lists of preferred or approved drugs.
14 B. FDA Approval and Introduction of Baycol; Early Safety Warnings
37. The FDA approved Bayer Corp .' s application to develop and market 0.05, 0.1, 0.2 and 0.3 mg doses of Baycol for use in the United States on June 26, 1997. Although Baycol is more potent than other statins (i.e., it can begin to reduce cholesterol at a lower dosage), at higher doses, it was less effective at reducing cholesterol than its competitors. Moreover, the increased potency led to increased side effects. Thus, when the FDA approved Baycol, the agency specifically stated that Bayer could not make claims comparing the efficacy of Baycol to other statins. Because statins had been on the market for many years and Bayer was prohibited from making claims of superior efficacy, Bayer was able to obtain FDA approval for Baycol after clinical trials involving only 3 ,000 test subjects -- far fewer than the numbers used in clinical studies involving other statins.
38. On June 27, 1997, only one day after the FDA approval was issued, Jerry
Karabelas, an Executive Vice President for pharmaceuticals at SmithKline Beecham, with which
Bayer had been discussing a marketing partnership for Baycol upon its approval by the FDA, wrote to defendant Ebsworth to express "serious concerns" regarding the safety of Baycol.
Karabelas stated that Baycol appeared to be no stronger than a competing drug, Lescol, and noted that Baycol also caused "drug interactions that could be magnified at higher doses."
Karabelas warned, "[s]imple and safe no longer appears to be a viable promotional platform."
39. Nevertheless, on July 22, 1997, Bayer Corp . entered into a "co-promotion"
agreement with SmithKline Beecham to cooperatively promote, market, and distribute Baycol in
the United States. Despite Karabelas's concerns about drug interactions at "higher doses," Bayer
Corp. and SmithKline Beecham amended their co-promotion agreement on February 3, 1998, to
encourage Bayer Corp. to obtain approval for and market higher doses of Baycol. The
amendment provided for two $4 million milestone payments from SmithKline Beecham to Bayer
15 Corp., one payment following initiation of a study on a 0. 8 mg dose of Baycol, and the second after 1,000 patients had received that dosage for six months.
40. On February 18, 1998, Baycol was launched in the United States. A joint press release issued by Bayer Corp. and SmithKline Beecham quoted defendant Ebsworth as saying,
"Baycol continues Bayer's proud heritage in cardiovascular medicine. We're bringing to the rapidly expanding statin marketplace a new competitively priced drug which offers physicians
and their patients a safe and effective alternative that in addition to diet helps achieve target
cholesterol levels at a good value." Defendant Ebsworth assured the public that studies
confirmed that Baycol had no drug interactions with several commonly used drugs, and was
generally well tolerated.
41. According to a very senior Bayer marketing executive, sales of Baycol in its 0.1,
0.2, and 0.3 mg dose versions were disappointing. When Lipitor quickly rose to the top of the
market with a 1.0 mg dose, Bayer determined it needed to launch higher-dosage versions to
compete successfully. Bayer explored 0.8, 1.6 and 3.2 mg doses, concluding that the latter two
were dangerous and that 0.8 mg was marginally safe only if used after a successful course of the
0.4 mg dosage. Senior executives recommended that the Company seek additional approval for
the 0.4 mg dose only.
42. In 1998, the German equivalent to the FDA (the Bundesinstitut fur Arzneimittel
and Medizinprodukte, or BFArM) reported the death of a patient taking Baycol due to
rhabdomyolysis.
43. On or about May 4, 1998, Bayer AG issued its "Stockholders' Newsletter --
Interim Report for the First Quarter 1998; Report on the 46th Annual Stockholders' Meeting of
16 Bayer AG on April 30, 1998 in Cologne." Included in the newsletter was a reprint of
Schneider's address to the meeting, in which he stated in part:
We expect Health Care to make the largest contribution to this year's growth.
Our expectations are founded mainly on the Pharmaceuticals Business Group, with its top-selling drugs and new medications such as the cholesterol-lowering drug Lipobay/Baycol ... .
The newsletter also stated that net income rose 17 percent to Deutsche Mark (DM) 858 million from DM 710 million in the first quarter of 1997, and that earnings per share rose to DM 1.17 for the first quarter, from DM 0.98 in the first quarter of the previous year.
44. On May 28, 1998, a post-marketing report prepared by Bayer Corp. revealed that four patients who were prescribed the 0.3 mg dose of Baycol had developed rhabdomyolysis and three others had shown marked elevation of creatine kinase levels within 100 days of the launch of Baycol. According to an article published in the Journal of the American Medical Association
(JAMA) on December 1, 2004, "Other information, such as CK levels, treatment duration, symptoms, and complications, was adequate to evaluate the validity of the diagnosis [of rhabdomyolysis]. For lovastatin, a full year of marketing had occurred before 7 cases of rhabdomyolysis were reported with the combination of gemfibrozil. The high proportion of rhabdomyolysis cases in patients who had taken both cervistatin and gemfibrozil strongly suggested a drug-drug interaction."
45. The JAMA article further stated that because the May 28, 1998 data "suggested the possibility of a strong interaction between cerivastatin and gemfibrozil" it would have been appropriate to test this hypothesis, and that such a test could have been performed "within a matter of weeks" by conducting a "3-day pharmacokinetic study." Although Bayer ultimately did test this hypothesis with confirmatory results, the results of its investigation were not released internally until April 2001, and were never published.
17 46. Despite the serious and often fatal consequences of contracting rhabdomyolysis,
Bayer did not inform the FDA of the information it had in its possession on May 28, 1998 until
January 1999.
47. On May 31, 1998, a document sent to defendant Ebsworth by a sales executive stated that the company needed to do everything it could to maximize the sale of Baycol because
"it must carry the company for the short and long haul."
48. At a "Baycol Therapeutic Brand Review" meeting in West Haven, Connecticut, on September 30, 1998, defendant Ebsworth advocated that Bayer adopt what he called "the rule of the market," by pushing marketing materials aggressively and following the philosophy, "we do not know where the legal boundary is until we hit it." He said, "The area is grayer than we treat it, e.g. we can pick the better study for detail aid. It is the role of Marketing to find ways to sell our product to the maximum .... It is the role of Marketing to challenge Regulatory systematically -- and the role of Regulatory to prevent stupid mistakes."
49. Defendant Ebsworth had noted that a highly respected medical journal, The
Medical Letter, had concluded in an article on Baycol dated January 16, 1998, that until safety and effectiveness of higher doses of Baycol had been determined, the more effective older drugs were preferred. In response, defendant Ebsworth suggested creating new promotional materials to entice the editors of The Medical Letter to present Baycol's efficacy in a more positive light.
50. On October 30, 1998, Bayer AG issued a press release announcing Mexico's approval of Baycol in a 0.4 mg dose. The press release stated in part:
Mexico leads the way with the first approval of the 0.4 mg. dose of Cerivastatin (Lipobay/Baycol), the novel HMG-CoA reductase inhibitor from Bayer, indicated for patients with primary hypercholesterolaemia. The 0.4 mg dosage of Cerivastatin will be launched in Mexico, Quarter 1 1999, under the brand Baycol.
Approval is expected from regulatory authorities worldwide by the end of 1998 and throughout next year.
18 The 0.4 mg formulation of Cerivastatin ... affords even greater efficacy at a very low dosage whilst maintaining an excellent safety and tolerability profile.
51. In January 1999, the FDA required certain changes in Baycol labeling. In the warning section of the Physician's Desk Reference (PDR), under the heading "Skeletal Muscle," the text was revised to read, "Rare cases of rhabdomyolysis (some with acute renal failure secondary to myoglobinuria) have been reported with cerivastatin and other drugs in this class."
However, Bayer Corp. added the following language to the Adverse Reactions section to cast doubt on reports that Baycol was causing rhabdomyolysis:
The following events have been reported since market introduction. While these events were temporally associated with the use of Baycol, a causal relationship to the use of Baycol cannot be readily determined due to the spontaneous nature of reporting of medical events, and the lack of controls: hepatitis, myositis, rhabdomyolysis, some with associated renal failure (most cases involve concomitant Gemfibrozil), urticaria, angioedema, visual disturbance, blurred vision.
52. On March 16, 1999, the Company issued its 1998 Annual Report, which stated in pertinent part:
After its successful launch in Europe, our lipid-lowering product Baycol/Lipobay has not yet fulfilled our expectations in the United States. However, with the higher dosage scheduled for release in fall 1999, we assume that this product will enjoy greater success in the U.S. market.
53. Although to this point Baycol sales had been disappointing in the U.S., defendants informed analysts that the higher dose version would greatly boost sales. For example, on March
23, 1999, an analyst for ABN-AMRO bank issued a report on Bayer, stating in part:
Baycol (anti-cholesterol) was launched in the US and Europe in 1998. The launch was disappointing by the standards of market leader Lipitor (Pfizer/Warner Lambert). We attribute this to the decision to go ahead and launch the product in the US in the lower dosage formulation. In 1998 sales of DM184m exceeded our estimates of DM150m, after a strong fourth quarter. Baycol is now launched everywhere except Japan where a launch is expected on 18 May. Bayer is
19 looking for over DM500m in sales in 1999 from Baycol. We are revising up our estimates for the product.
54. By April 1999, Bayer was receiving overwhelming evidence that patients were developing rhabdomyolysis when they used Baycol in combination with gemfibrozil, but took no action to inform the public of its findings . For example, on April 1, 1999, an internal Bayer
Corp. document reported that the company had received 29 Baycol-related adverse event reports as of March 1999. On April 23, 1999, Roger Celesk, the Senior Clinical Drug Safety Officer of the U. S. Pharmaceutical Division of Bayer AG, notified his colleague, Mel Sorensen, Bayer
Corp.'s Director of Cardiopulmonary and Oncology, that Bayer Corp.'s Drug Safety department had received 31 U.S . cases and 20 non-U.S . cases of Baycol- related rhabdomyolysis. Further, he said there were an additional seven cases identified in the FDA's Spontaneous Report.
Thirty-two of the reports listed gemfibrozil as a factor. In response, Sorensen conceded that the
Baycol packaging insert should carry a warning reflecting this development. However, his suggested language for the revision was vague and incomplete:
The potential for clinically relevant interaction between gemfibrozil and cerivastatin has not been assessed. However, during post-marketing surveillance, patients on cerivastatin who experienced rhabdomyolysis and associated renal failure, were in most cases taking gemfibrozil. (See Warnings: Skeletal Muscle).
55. On or about April 30, 1999, the Company issued its "Stockholders' Newsletter
'99 - Interim Report for the First Quarter of 1999; Report on the 47th Annual Stockholders'
Meeting of Bayer AG on April 30, 1999 in Cologne." Included within the newsletter was a reprint of Schneider's address during the annual stockholders' meeting, in which he stated in part:
Further opportunities will come from new products such as our new antibiotic Avelox and our lipid-lowering product Lipobay/Baycol.
Both have the potential to become blockbusters, by which I mean products that generate sales of over DM 1 billion worldwide.
20 56. On May 5, 1999, William McGuire, a Bayer employee, e-mailed his colleague,
Leonard James, stating that negative information on Baycol would not be incorporated in the
Baycol packaging insert as earlier agreed unless sanctioned by Dr. Lawrence Posner, Bayer
Corp .'s Senior Vice President, Pharmaceutical Development . James wrote back and expressed concern that this decision "places Drug Safety in a difficult situation. Not only has internal documentation been generated in which it has been mentioned that Drug Safety initiated changes to the Baycol package insert, but we have also gone on record within discussions involving the timing of when these changes should and would be incorporated."
57. Bayer Corp. did not employ the proposed warning language, evidently because it did not want to jeopardize impending FDA approval of a higher dose of Baycol. This higher dose was necessary for Bayer to remain competitive in the statin market, as the lower doses of
Baycol were not as effective at reducing cholesterol as other statins . In order to gain FDA approval of the 0.4 mg dose, Bayer undertook additional studies to demonstrate the safety and efficacy of Baycol. However, the studies demonstrated that adverse events were even more frequent and severe as the dosage amount increased.
58. For example, a study published in 1999 by the Rikshospitalet University Hospital comparing dosages of 0.2 mg Baycol to 0.4 mg Baycol demonstrated that higher dosages of
Baycol were likely to cause significant cell death. In the study, eight patients receiving 0.4 mg dosage and five patients receiving 0.2 mg dosage of Baycol withdrew from the study due to adverse events. Moreover, nine patients in the 0.4 mg group (as opposed to none in the 0.2 mg group) experienced abnormally elevated levels of CPK (a bloodstream enzyme marker for heart injuries) -- an indicator for rhabdomyolysis.
21 C. The FDA Approves an 0.4 mg Dosage, as Defendants Fail to Disclose the Dangers Associated with Baycol
59. On May 24, 1999, the FDA approved the 0.4 mg dose of Baycol. Bayer Corp. failed to disclose to the FDA that rhabdomyolysis and/or increased CPK levels had been identified as adverse events for Baycol patients. Bayer Corp. was silent about the serious and even fatal dangers posed by Baycol. After the approval of the 0.4 mg dosage of Baycol, defendants launched an aggressive marketing campaign trumpeting Baycol's "proven performance," "exceptional value" and "powerful new strength."
60. On May 26, 1999, the Company issued a press release regarding the new higher
dosage Baycol:
"As a result of its higher effectiveness and the fact that is taken only once a day, it is expected that it will become the most-used dosage," Bayer said, adding that it will lead to a significant increase in sales of the drug.
61. Based on unpublished clinical trial results available in July 1999, Bayer scientists
did not believe that it was "acceptable to study 1.6 mg cerivastatin in a broad population"
because of 1) "high incidence of severe CK elevation; 2) "high incidence of minor CK elevation;
and 3) "an exponential increase of side effects from 0.8 to 1.6 mg...[which] is supported by
animal studies ." The minutes of the Cerivastatin Communication Committee Meeting held on
August 2, 1999 reported "The large percentage of patients experiencing CK elevations led to a
consensus by the [company's] committee not to publish the results of the study." Thus, Bayer
scientists were well aware of the increased risk posed by higher doses of Baycol.
62. Unaware of the dangers inherent in the higher-dose version of Baycol, analysts
continued to focus on the new version as the catalyst for improved Baycol sales.
63. On September 27, 1999, an analyst for Commerzbank issued a report on Bayer,
which stated in part:
22 Lipobay on road to success despite start-up difficulties ***
The market for cholesterol-reducing remedies was worth USD 8.6bn in 1998 and is growing 25% a year. * * *
Bayer aims for a world-wide market share of 10%, yielding a sales potential of EUR 1.6bn in line with our estimate for global market volume in 2002. The company is highly successful in Europe, where a 10% target for market share we regard as very conservative. In the US, however, Bayer had to adjust its planning. The co-marketing agreement with SKB did not prove very successful, as the UK company had to deal with important market introductions of its own rather than push Baycol's introduction as hard as expected.
After restructuring the co-marketing agreement (Bayer is now leading the US effort) and especially after introducing a stronger Baycol (originally 0.2 mg or 0.3 mg; mid-1999: 0.4 mg; 2000E: 0.8 mg), we expect that Bayer will at least approach its target for the US market. We view a global market share of 10% as realistic. The current market share in Europe is 8% to 13% and 3.6% in the US. Considering the latest development (sales from January to August 1999: EUR 168m), the sales target of EUR 250m could even be slightly exceeded.
64. On October 18, 1999, an analyst for ABN-AMRO bank issued a report on Bayer, which stated in part:
Baycol (lipid-lowering) sales are estimated at €260m in 1999 and ,6500m in 2000. Although Baycol has performed well in Europe, it has been slow to take off in the US. With the launch of the 400 microgram version in the US in July 1999, sales are beginning to rise more sharply.
65. On October 19, 1999, Celesk (Bayer AG' s senior drug safety officer in the U.S.) expressed concern about a reported 60 percent increase in myopathy (muscular disorder) when
Baycol was used in combination with gemfibrozil. In an e-mail to his colleague, Franz Hulla,
Celesk said that the number of rhabdomyolysis cases continued to increase worldwide and in the
United States. He further said that Bayer Corp.'s marketing department had persuaded a large healthcare provider in the western United States to replace another drug, fluvastatin, with
Baycol, and within one month of the switch two patients had been hospitalized with rhabdomyolysis. He said his research uncovered a similar case in California. All three cases
23 involved the use of Baycol 0.4 mg in combination with gemfibrozil. Despite the foregoing,
Bayer Corp.'s marketing for Baycol misrepresented the known risks associated with the drug, and continued to characterize associated rhabdomyolysis as "rare."
66. On October 25, 1999, the FDA informed Bayer Corp. by letter that its promotional materials on Baycol were "false, lacking in fair balance, or otherwise misleading," and therefore in violation of the Federal Food Drug and Cosmetic Act. The FDA's letter criticized statements made by Bayer Corp. directly claiming or implying that Baycol was superior to other statins. The FDA also told Bayer Corp. that its "presentation of risk information ... lacks fair balance" and that "the most important risk information (risk of myopathy, rhabdomyolysis, etc.) was hidden in the materials not devoted to risk." The FDA instructed Bayer Corp. to immediately cease using these promotional materials and to submit a written response describing its plans for complying with the FDA's directives.
67. In spite of the FDA letter, on October 29, 1999, the Company issued a press release entitled "Cholesterol Lowering Agent, Baycol, Demonstrates Impressive LDL-C
Lowering in Women." The press release stated in part:
The new 0.4 mg dose of Baycol was recently approved in the United States and the 0.8 mg dose has just been submitted for FDA approval. This addition of the 0.4 mg. dose to the portfolio of Baycol provides physicians with even greater options for effective management of their patients.
68. A Bayer AG press release dated November 17, 1999 entitled "Business Picks up in the Third Quarter - Health Care Sales Grow Strongly" stated in part:
In Pharmaceuticals, expanding sales of our lipid-lowering agent Baycol/Lipobay and market introduction of the antibiotic Avelox/Avalox will add to the success of our existing portfolio. We expect that earnings from these products, combined with the effects of our efficiency improvement program designed to save EUR360 million in costs, will produce a sustained increase in the operating margin.
24 69. On December 1, 1999, Bayer Corp. finally added a warning to its label stating that Baycol should not be prescribed with gemfibrozil. However, this did not stem the increasing flow of rhabdomyolysis cases.
70. The minutes of the December 14, 1999 meeting of Bayer's Action Committee on
Adverse Events recommended that "pharmacokinetic and pharmacodynamic interactions should be studied in pharmacological experiments comparing various statins with Gemfibrozil." This suggestion was made fully one and one-half years after the first reported cases of rhabdomyolysis in patients using a combination of fibrate and statin therapies. At this meeting, it was noted that "[t]he incidence of Rhabdomyolysis in ... [cerivastatin] monotherapy treatment was 2 to 6 cases per 100,000 patient years while the other statins, based on data from the
Freedom of Information Act, were in the range of 0.2 to 0.6 cases per 100,000 patient years."
71. Subsequent internal company analysis led Bayer scientists to conclude that "The findings indicate that in patients receiving monotherapy, cerivastatin substantially elevates risk of rhabdomyolysis compared with other statins." Thus, by December 1999 Defendants were aware that Baycol had not only demonstrated a dismal safety record when combined with gemfibrozil in comparison to other statins, but that Baycol's comparative safety record when taken as a monotherapy was also unacceptable when compared with that of other statins.
72. The article in the Journal of the American Medical Association, published
December 1, 2004 (described previously), concluded that "The reporting rate of rhabdomyolysis
for cerivastatin [Baycol] users was strikingly higher than the rate for users of other statins. In the setting of such elevated relative reporting rates, the usual limitations of suspected adverse drug reaction data were largely overcome, in part because estimates of the number of statin users were available and in part because the experience of cerivastatin was compared with that of
25 atorvastatin [Lipitor], which had been approved by the FDA at about the same time as cerivastatin."
73. By the end of December 1999, the number of reported cases of Baycol-related rhabdomyolysis was escalating so rapidly that Bayer Corp.'s Drug Safety Assurance department was overwhelmed and reported delays in processing Serious Adverse Events (SAEs).2 A
December 30, 1999 memorandum prepared by that department for Dr. Lawrence Posner, Bayer
Corp.' s Senior VP for Pharmaceutical Development, and Dr. E. Paul MacCarthy, Bayer Corp.'s
Head of U.S. Medical Science, stated that: "In the past two months, 60 US cases of rhabdomyolysis have been received in Safety Assurance.... The steadily increasing numbers of spontaneous reports of rhabdomyolysis associated with Baycol, along with additional telephone
activity, have overwhelmed the available Safety Assurance resources in terms of processing
SAEs."
74. By this time, more Bayer employees were questioning the safety of Baycol
internally. For example, an e-mail circulated on October 1, 1999 said that a clinical investigator
and consultant for Bayer, Dr. Evan Stein, had criticized the company for failing to honestly
present safety levels. The e-mail stated, "Dr. Stein has been quite vocal about the lack of candor
in presenting our safety level." A February 2000 e-mail from Patricia Stenger, a manager in
Bayer Corp.'s Scientific Affairs division, notified Bayer Corp. officials that Baycol
representatives in the northeastern U.S. had become increasingly uncomfortable with detailing
` An SAE is defined as an "untoward medical occurrence that at any dose: results in death, is life-threatening, requires inpatient hospitalization or prolongation of existing hospitalization, [or] results in persistent or significant disability/incapacity." Clinical safety data management: definitions and standards for expedited reporting, 60 Federal Register 11284, 11285 (Mar. 1, 1995). SAEs are required to be collected in all clinical trials and reported to the FDA.
26 Baycol due to rumors of increased incidents of rhabdomyolysis. In another e-mail that same month, Stenger confided to other executives, "[s]o much for keeping this quiet."
75. Prior to the FDA approval of the 0.8 mg dosage of Baycol, Stenger sent an e-mail in June 2000, attaching a document which stated that doctors who reported problems were hearing of similar reports of deaths associated with Bacyol. The attached document went on to state that these doctors "appear to be more angry and concerned and feel that Bayer is hiding information."
D. Bayer Seeks and Obtains Approval of an 0.8 mg Dosage Despite Overwhelming Evidence of Baycol' s Link to Rhabdomyolysis
76. At the beginning of 2000, defendant Ebsworth was under increasing pressure to bring a "blockbuster" drug to market, as many other drugs he sponsored had failed during clinical trials. He therefore pushed for introduction of the 0.8 mg dosage. He observed to a senior marketing executive that Bayer's growth had to be with Baycol, and that he expected
Baycol to contribute about half of the growth of Bayer's pharmaceutical division for the next five years.
77. On March 10, 2000, Dr. Steve Niemcryk, an epidemiologist who was a member of Bayer Corp.'s Drug Safety Surveillance group, sent an e-mail to Dr. Richard Goodstein, Bayer
Corp.'s Vice President for Scientific Relations, stating that his review of FDA data had revealed that Baycol caused patients to develop rhabdomyolysis five times more often that Mevacor, ten times more often than Lipitor and Lescol, 20 times more often than Zocor, and 67 times more often than Lipostat. Incredibly, defendants continued to conceal the dangers posed by Baycol.
78. Soon thereafter, Stenger, the Scientific Affairs division manager, expressed dissatisfaction with the manner in which Bayer Corp. had fielded questions about the high incidence of Baycol-related rhabdomyolysis at an earlier Baycol Project Team meeting. Stenger
27 stated in an e-mail: "The first question from the participants: How does this compare to other statins. The answer. I don't know." She questioned this response and noted that another Bayer employee at the meeting, Bob Tota, reported that he had examined the data on other statins, and found that "we [Bayer] clearly have a higher incidence, which begged the question of the 0.8 mg approval."
79. On May 13, 2000, Goodstein responded to Stenger's e-mail. He told a colleague that:
I see a false comfort factor in place across the company for obvious reasons. It appears the strategy is to get by that July hurdle and continue to be silent [an obvious reference to a meeting with the FDA to obtain approval of a 0.8 mg dose].... The message seems very clear given the total lack of response to my note two weeks ago, that the subject is in the control of Global DS [Drug Safety] now and they will respond per Worldwide Marketing. We are a minority of one and have been told to stay away upon severe penalties. We may face some tough personal decisions as this progresses.
80. However, with FDA approval of Baycol 0 .8 mg dose on the horizon, Bayer Corp executives conspired to deceive the FDA as to the dangerous nature of the drug that the administration was about to sanction. During a teleconference of Bayer Corp. executives held on
June 27, 2000, to discuss problems with Baycol and rhabdomyolysis, participants decided to withhold critical information from the FDA. A participant in the teleconference summarized the decisions made as follows: "Patient information leaflet should be prepared before 12 July 2000 when a meeting is scheduled with the FDA to discuss labeling for 0.8 mg tablet. Paul mentioned that this leaflet should not be distributed prior to 0.8 mg Baycol approval, otherwise it will most likely delay the approval."
81. On March 16, 2000, the Company issued a press release entitled "Strong 1999 performance in a difficult business environment; Bayer Group net income climbs 24 percent to
28 EUR 2 billion; Good start to 2000: Sales jump by 20 percent in January/February." The press release stated in part:
The company also plans to raise profitability through extensive restructuring measures , the continuing success of its star products Ciprobay, Adalat and Aspirin, and also that of future blockbusters such as Avelox, Lip6bayBaycol and Kogenate.
(Emphasis added.)
82. On March 16, 2000, the Company issued its 1999 Annual Report, which stated in part:
Our products Lipobay/Baycol, Ciprobay, Avelox/Avalox and Kogenate give us strong potential for future growth.
Sales of the Pharmaceuticals Business Group grew considerably faster than the world market, increasing by 15 percent over 1998. Exceptional charges from the successful integration of Chiron Diagnostics Inc. and temporary production problems for biological products hampered the growth in operating profit, which nevertheless increased by 10.5 percent to £1.1 billion, giving a 13 percent return on sales. By 2002 this will reach 20 percent, driven by our future pharmaceutical blockbusters Lipobay/Baycol, Kogenate and Avelox/Avalox and a consistent cost management program.
***
We nevertheless continue to regard Kogenate as a future blockbuster along with Lipobay/Baycol and Avelox/Avalox. This would give the Health Care segment three more products with sales of over £500 million each in addition to the current blockbusters Ciprobay, Adalat and Aspirin.
83. On March 20, 2000, an analyst for J.P. Morgan issued a report on Bayer, which stated in part:
A robust fourth-quarter performance in Healthcare - Pharmaceuticals got off to a good start in 2000 as well. The fourth-quarter sales increase of 15% was a little uninspiring given the 22% reported in the third quarter. However, we were buoyed by management 's comments on the very strong start to the year in the pharma business. In the first two months, pharma sales increased by 26%, driven by Cipro (up 34% and Baycol, up 134%), although 13 percentage points of this growth was derived from foreign exchange gains. * * *
29 Baycol appears to be doing exceptionally well with sales up 134% in the first two months of this year.
84. In April 2000, defendant Ebsworth conceived of and chaired a "Baycol Summit" meeting in New York City, attended by senior managers responsible for Baycol in many worldwide markets. Ebsworth outlined his strategy to push for approval and marketing of the
0.8 mg dosage to increase Baycol's competitive position as against Lipitor. According to a manager at the "summit," attendees were told there was no problem with the 0.8 mg dosage and they should "go with the flow" to get the dosage introduced.
85. On or about May 12, 2000, the Company issued its "Stockholders' Newsletter
2000 -- Interim Report for the First Quarter of 2000; Report on the 48th Annual Stockholders'
Meeting of Bayer AG on April 28, 2000 in Cologne." The report stated in part:
After the excellent start to 2000, we are optimistic about business developments over the rest of the year. The favorable economic environment and strong demand for our products should create a solid framework for further growth. We therefore anticipate double-digit growth rates in sales and earnings from continuing operations for the full year.
We expect this growth to come primarily from the Health Care segment, particularly the Pharmaceuticals Business Group. The demand for our new products Baycol and Avelox has increased sharply and the temporary difficulties we experienced with our biological products have been rectified. We see considerable growth potential for this segment.
86. The report also reprinted Schneider's address at the Company's annual
stockholders' meeting, wherein he stated in pertinent part:
There is no doubt that we need to considerably increase our presence in pharmaceuticals, especially in the crucial U.S. market.
Our excellent product portfolio gives us a very good chance of achieving this. We have two medicines with sales of over £1 billion each : Cipro and Adalat. Our cholesterol-lowering agent Baycol, which will post sales of over €500 million this year, will be the next product to pass the E1 billion threshold. In Kogenate and Avelox we have another two drugs with enormous potential.
30 87. On July 7, 2000, Ernst Weidmann, head of Global Drug Safety for Bayer, received an e-mail from Dr. Gerald A. Faich, President of Pharmaceutical Safety Assessments,
Inc., a former FDA Commissioner and consultant whom Weidmann had retained in connection with the Company' s application to the FDA for approval of the 0.8 mg dose of Baycol, with a
"quick assessment" on Baycol. Dr. Faich said, "[i]f the FDA is already tuned into this, you may have some resistance about the higher dose . Also, what further efforts are you prepared to take to inform providers and patients?" On July 10, 2000, a hand-written note at the bottom of a memo outlining a telephone discussion involving several Bayer executives indicated a "very strong signal" involving Baycol. A "signal" is a term used to denote the fact that negative information has been received about a drug.
88. Despite the accumulating evidence that Baycol was unsafe, defendants pressed ahead with their plans and received FDA approval to market an 0.8 mg dose in July 2000.
During this time, defendants continued to receive notice of adverse events associated with
Baycol, both directly from doctors and from the FDA. These adverse events were more frequent with doses of 0.4 mg and higher.
89. On July 24, 2000, the Company issued a press release entitled "FDA Approves
New 0.8 mg Baycol Dosage and Important HDL-C Indication for the Brand." The press release stated in part:
The U.S. Food and Drug Administration have just approved the marketing of a new 0. 8mg dosage of Bayer' s Baycol (cerivastatin sodium tablets) for the treatment of primary hypercholesterolemia and mixed dyslipidemia, along with an additional indication for the brand for raising HDL cholesterol. ***
"Baycol 0. 8 mg is a highly effective and safe treatment for patients with primary hypercholesterolemia who need aggressive lipid management in order to achieve NCEP-recommended goals," Professor Insull stated.
31 With Baycol you get premium power not premium price, making it a very attractive option for both physicians and patients. Bayer expects the new 0.8mg dosage of Baycol to be available to physicians and patients by August 14th. It will be available in bottles of 30 and 90 tablets.
(Footnotes omitted.)
90. At the time Bayer launched the 0.8 mg version of Baycol in the U.S., its own studies showed that starting a patient's treatment at the high dose was very dangerous. Over the objections of the Baycol marketing executives, senior management of Bayer's Pharmaceutical
Division instructed Baycol sales representatives to give doctors samples of only the 0.8 mg dose pills, in order to ensure that the 0.8 mg version captured market share quickly. A senior marketing executive explained the dispute as follows:
Their argument was that the sales reps will remind the physician that even though there's a sample of 0.8, they should still start the patient on 0.4. Our attitude was very simple. We've been in sales ourselves. Doctors are doctors. If you go in there and talk up the 0.8 mg, you leave a sample, and that sample is only 0.8, that's most likely what they're going to use. It's just statistics.
91. On August 1, 2000, Bayer Corp. distributed a "Dear Doctor" letter to doctors promoting the 0.8 mg dose of Baycol. The letter acknowledged that the combined use of cerivastatin and gemfibrozil was contradicted due to a risk of rhabdomyolysis, without disclosing that Bayer was aware of adverse events increasing as the dosage increased, even without
concomitant gemfibrozil use. Remarkably, in the letter, Bayer Corp. continued to insist that
Baycol had a "proven safety profile."
92. On August 4, 2000, Weidemann, the Global Drug Safety director, conducted a
meeting to address the overwhelming reports of adverse events related to Baycol. The meeting
attendees included defendant Plischke and all senior members of Global Drug Safety, and an
outside consultant and former FDA commissioner, Dr. Gerald Faich. The participants concluded
that the data regarding Baycol's dangers was putting the brand at risk and that there was the
32 potential for serious problems with the FDA. Upon learning of the results of the meeting, defendant Ebsworth told his senior marketing personnel that "there is no safety problem" and that they were directed "to promote the hell out of this product. We need this product to be successful." Despite this conclusion, defendants did not update any of their prior statements regarding Baycol, set forth above, at this time, or at any time thereafter.
93. On August 11, 2000, an analyst for Merck Finck & Co. issued a report on Bayer, which stated in part:
Health Care was the best performing segment with sales up 21 % to €4.7bn and OP up 86% to £700m in H1, mostly driven by its pharma division. This was significantly higher as we expected. The strong earnings increase was a consequence of increasing demand for their products Baycol/Lipobay (+86% to £280m), Cipro (+11 % to £806m), Adalat (+28% to £604m) and a price increase of up to 2% in the USA. We expect the strong growth to continue and see the pharma division as Bayer's main earnings contributor already in this FY as well as in the future.
94. On August 11, 2000, an e-mail marked "urgent" from an employee named
Masanori Katsuki, of Bayer's Japanese subsidiary Bayer Yakuhin, advised Bayer AG officials that three patients involved in an ongoing Baycol high-dose study at the Fukuoka University
Hospital had been withdrawn from the studies after they experienced a "high CPK elevation
(more than 5 times the normal range)." Baycol administration was discontinued, and one of the patients was hospitalized and diagnosed with rhabdomyolysis. The patient's doctor, Dr. Jun
Sasaki, immediately discontinued the Baycol study. The e-mail stated that:
Dr. Sasaki was very serious about securing the safety of the patients under treatment not only in his hospital, but also in other hospitals. He strongly recommended to inform all investigators of these facts and to stop the drug administration in all treated patients due to Rhabdomyolysis during the clinical trial..... He complained strongly because we (Bayer) didn't come up with countermeasure despite the critical issue which actually occurred to his patient.... It seems that under this situation, he cannot and has no intention to continue the study in his hospital.
33 95. Katsuki reported further that he consulted with the external medical consultant for the Baycol study, Yamamota, who recommended the immediate discontinuation of the development of high-dose Baycol. Yamamota said, "If we promptly stop the HD [high dose] development, it would not cause impact on the currently approved doses of Baycol." The e-mail noted that "we cannot deny the fact that the frequency of CPK elevation in cerivastatin high dose is fairly high in Japanese patients."
96. On October 1, 2000, an article in Pharmaceutical Executive, entitled "Bayer
Crosses Over: President Wolfgang Plischke Tackles the US Market," reported:
"We really have sleeping blockbusters in the United States," [Plischke] declares. "Baycol will make close to $300 million in sales this year. We have a market share of only 5 percent among the statins. But the market is growing by-double digit numbers. It will probably grow even faster in the future. There are only six competitors in this market. It's heaven for marketers."
Plischke observes that the third product in the statin market, BMS' Pravachol (pravastatin), has a 15 percent market share--the company's "minimum aspiration" for Baycol. "We talk about a potential $1 billion product in the United States, and we are still not being naive or overly ambitious," he says.
97. Defendant Plischke 's statements , describing Baycol as a "blockbuster" drug and
indicating its purported potential to be a "$1 billion product," were materially false and misleading because defendants had concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health dangers to patients, which would ultimately materially affect or completely prevent sales of the drug.
98. By the fall of 2000, so many adverse events regarding Baycol had been reported
to the Arznei Telegram, a drug safety information bulletin based in Germany, that the German health ministry put the drug on a watch list. By the end of October 2000, doctors had reported
482 cases of rhabdomyolysis among Baycol users worldwide.
34 99. On October 11, 2000, Bayer AG' s Japanese associate, Takeda Chemical
Industries, Ltd. (the largest pharmaceutical company in Japan), wrote to Bayer Corp. expressing concern about the frequency of rhabdomyolysis based on information contained in a publication posted on the World Health Organization (WHO) database. The letter said:
The reported incidents of rhabdomyolysis, arthralgia, myalgia is fairly high in BAY w 6228 compared to other statins (Table III). Furthermore, as the data on (Baycol) were collected before March 1999, i.e. before 0.8 mg was approved in (the) US, there is a possibility that the frequency of these events are higher now with the 0.8 mg in the market.
Takeda's representative, F. Kumamoto , faxed to Bayer AG a copy of the publication excerpted from the WHO database, stating, "we are anxious about the high frequency of rhabdomyolysis in
BAY w 6228, which is 2.1%, whereas in other statins, it is 0.2 - 0.5%."
100. Bayer AG failed to respond to Takeda's queries . An e-mail from Darril Palidwar of Bayer Corp., dated December 20, 2000, stated that Bayer AG's Japanese marketing colleagues were very upset by this failure, and advised Bayer AG to produce "an official letter from Bayer
Headquarters with an official rebuttal/response to the publication of cerivastatin safety data in the publication. This letter should state why there was a higher incidence of rhabdomyolysis in cerivastatin, and how the launch of the 0.8 mg dose would affect this data."
101. Desperate to increase sales and present a proven safety profile for the 0.8 mg dose of Baycol, Bayer had The British Journal of Cardiology publish the results of a favorable Bayer study purporting to demonstrate the safety of that dosage. However, the journal was not peer- reviewed, and the articles it contained were published based on payment by the author or submitting party. A former senior marketing executive for Baycol observed that this amounted to a "big thrust from global marketing to have this data quickly published in a pretty Mickey
Mouse journal and use that as your primary data to support how safe the product is," in order to conceal the fact that reliable data pointed to the opposite conclusion.
35 102. Indeed, between October 1997 and December 2000, 35.7% of all statin-associated suspected adverse drug reaction reports received by the FDA (involving statin monotherapy) were associated with cerivastatin (Baycol), and 80.6% of all statin-associated suspected adverse drug reaction reports involving the combination of statins and fibrates (like gemfibrozil) were associated with Baycol. These numbers are staggering and impossible to ignore . Yet Bayer kept searching for any entity that would offer confirmation of its desire that Baycol be safe and effective, and continued to willfully ignore the growing clamor over Baycol 's demonstrated safety record.
103. On November 21, 2000, the Company issued a press release entitled "Bayer AG
3rd Quarter & 9 Mths Results ." The press release stated in part:
The Bayer Group posted excellent sales and earnings growth from continuing operations in the first three quarters of 2000. Speaking at the company's Fall Financial News Conference, Bayer Management Board Chairman Dr. Manfred Schneider announced that sales increased by 22 percent to £22.2 billion, while the operating result improved by 29 percent to £2.7 billion.
With respect to the business segments, the Bayer CEO was particularly pleased with the performance of the Health Care segment, which boosted sales by 21 percent to £7.3 billion and its operating result by 40 percent to £1.1 billion. "Sales of the Pharmaceuticals Business Group increased by 23 percent. This was considerably faster than the world market, which only grew by 9 to 10 percent. In addition to the encouraging double-digit growth in sales of our proven blockbusters Adalat and Cipro, three future blockbusters, in particular - Baycol, Kogenate, and Avelox - registered very good growth."
104. The statements in the November 21, 2000 press release were materially false and
misleading because defendants had concluded, but did not disclose, that the Baycol brand was at
risk, as Baycol posed serious health dangers to patients, which would ultimately materially affect
or completely prevent sales of the drug.
36 105. In December 2000, Bayer Corp. hired Pacificare, a managed care company, to analyze Baycol' s risks among its members. Although the study did not include patients taking the highest dose of Baycol, adverse results still were reported, which troubled officials at
Pacificare, but which Bayer wished to keep under wraps.
106. Asa result, on January 25, 2001, Dr. David Berenbeim, Medical Director and
Vice President for Health Services at PacifiCare, wrote an e-mail to another PacifiCare employee, Ed Feaver, expressing dissatisfaction with Bayer Corp.'s approach regarding the
Baycol study. The e-mail was forwarded to Stephen Hanceford in the corporate accounting department at Bayer:
Bayer has been a real pain on the study we are doing with respect to rhabdomyolysis, and their product. They are insisting on contracts and which is a point K&R believes we should not. In this case where we are examining an agent from the perspective of adverse drug effects this would even be more problematic; to relinquish or compromise our ability to publicly communicate this type of problem could potentially open us up to medical - legal liability issues. I believe they are playing a game of chicken and in the end, like the other pharma clients, will see that as it relates to ADRs [Adverse Drug Reactions3] there isn't much room for compromise. This would clearly be a different matter if we were simply reporting some incremental benefit of one agent over another.
107. In response to the PacifiCare e-mail, Hanceford wrote to his colleague, Ralph
Googooian at Bayer Corp.: "Ralph, this does not reflect well on Bayer. It fails to demonstrate a strategic business relationship between our companies. The issue of Medical ethics and integrity
(or lack thereof) is disturbing."
3 An Adverse Drug Reaction, as it relates to marketed medicinal products, is defined as "[a] response to a drug which is noxious and unintended and which occurs at doses normally used in man for prohylaxis, diagnosis, or therapy of disease or for modification of physiological function." Clinical safety data management: definitions and standards for expedited reporting, 60 Federal Register 11284, 11285 (Mar. 1, 1995).
37 108. Meanwhile, in England, David Sommerville from Bayer UK wrote to Ernst
Weidman and Kuno Sprenger at Bayer Corp., expressing concerns regarding the drug safety message that should be conveyed to their UK marketing colleagues:
I recall that during Kuno's presentation a statement was made to the effect that, as a company, we currently have no particular concerns over rhabdomyolsis incidence rate when cerivastatin is correctly titrated through the dosage regime up to 800mcg, and it is not used in combination with gemfibrozil. I also, however, recall seeing data that suggested that even when the product has been used as specified there still appear to be six times greater incidence of rhabdomyolysis in patients receiving 800mcg in comparison to those receiving 400mcg or less.
I am concerned that from a marketing perspective the efficacy data would suggest that the higher the dose, up to 800mcg, the better response in terms of lipid lowering. If my recollection from Kuno's presentation (is) correct I feel it may well be appropriate to, at least, temper marketing enthusiasm with a caution that over use of 800mcg might precipitate a significant rise in the number of cases of rhabdomyolsis which, in turn, could have a detrimental effect on the product as a whole. Clearly any message going to out local marketing needs to be consistent with advice currently offered by Global Drug Safety to Strategic Marketing and higher management.
109. In March 2001, the Arznei Telegram, the German medical information service,
informed German doctors that, based on reports it had received of rhabdomyolysis associated
with Baycol, it saw no reason for doctors to prescribe Baycol, since it provided no therapeutic
advantage over other statins.
110. On March 26, 2001, a teleconference took place between several Bayer officials,
including Ernst Weidmann, Roger Celesk, K. Sprenger, and F. Monteagudo, to discuss certain
data and U.S. reports of Baycol related deaths. The minutes of that meeting stated that "it was
agreed that current labeling was inadequate to discourage a starting dose of 0.8 mg. Spontaneous
reports of deaths in the U.S. (12 since the beginning of the year) were overwhelmingly
associated with use of the 0.8 mg dose . Only one of these cases noted concomitant use of
gemfibrozil .... [G]lobally, a total of 231 deaths from all sources had been reported in the GDS
38 [Global Drug Safety] database. Of these, 53 deaths were noted in cases where rhabdomyolysis was reported . This total was without regard to whether there was possible drug association with deaths."
111. In April 2001, the FDA again mandated stronger warning labels, emphasizing in particular the risk of prescribing gemfibrozil in conjunction with Baycol. Acting in response to an FDA directive, on May 21, 2001, Bayer Corp. finally sent out a "Dear Doctor" letter, which belatedly called attention to some of the dangers associated with Baycol, particularly when combined with gemfibrozil. Nonetheless, Bayer continued to misrepresent and conceal the dangers associated with Baycol. For example, the Company insisted "When used as directed,
Baycol effectively and safely treats patients ... [with high cholesterol levels]."
112. On July 9, 2001, an analyst for ABN-AMRO bank issued a report on Bayer, which stated in part:
Baycol -- heavyweight drug
Currently Baycol is the growth engine of Bayer Pharmaceutical. Baycol sales rose a massive 84% to £636m in 2000, Growth is driven by two factors: underlying market growth of 15%; and market share gains by Baycol in its new higher dosages. The launch of the 0.4 mg dosage in the US in July 1999, coincided with a marked improvement in Baycol sales . The 0.8 mg dosage was launched in August 2000. In addition, Bayer has boosted sales through a rental sales force. We estimate sales of£lbn in 2001. The market continues to grow at 15% pa, with expectations of an increased usage in the US.
113. In July 2001, the European Medicines Evaluation Agency announced that it was investigating the side effects of Baycol.
114. Notwithstanding the Company's rosy projections, Baycol was unquestionably unsafe. According to the December 1, 2004, JAMA article, between January 1990 and March
2002, a staggering 1,899 (or 57%) of the 3,339 suspected adverse drug reaction cases of statin- related rhabdomyolysis occurred in patients taking cerivastatin (Baycol). In approximately that
39 same time period only 9.8 million (or 2.0%) of 484 million statin prescriptions were written for
Baycol. Given that 57% of rhabdomyolysis suspected adverse drug reactions occurred in 2% of the relevant population, this means the estimated relative reporting rate for cerivastatin was approximately 65 times higher than for all other statins combined.
115. As the December 1, 2004, JAMA article reported, in an analysis performed by
FDA scientists using sales data to estimate the number of users of each statin "the reported mortality rates from rhabdomyolysis for cerivastatin users were 16 to 86 times higher than those of the other statins. After exclusion of statin users who had also used gemfibrozil, the reported mortality rates were still 10 to 50 times higher for cerivastatin."
116. According to another report, 166 cases of confirmed rhabdomyolysis occurred in approximately 3,000 patients taking 0.4 mg of cerivastatin monotherapy for an average of 9 months. That is an incidence rate of approximately 270 cases per 100,000 person-years - a rate approximately 50 times higher than that of the other statins evaluated in long-term clinical trials.
E. Bayer Is Compelled to Withdraw Baycol
117. By August 2001, even though Bayer had withheld critical data, the FDA had evidence that Baycol was causing fatal rhabdomyolysis at significantly higher rates than other statins. The FDA then placed overwhelming pressure on Bayer to withdraw Baycol from the market.
118. On August 8, 2001, Bayer AG issued a press release entitled "Bayer withdraws cholesterol-lowering drug Baycol/Lipobay," which stated:
Bayer has withdrawn all dosages of its cholesterol-lowering drug with the brand names Baycol/Lipobay (active ingredient: cerivastatin) with immediate effect throughout the world, except in Japan, and is withdrawing supplies of the product currently in the market.
The reason for this voluntary action lies in increasing reports of side effects involving muscular weakness (rhabdomyolysis), especially in patients who have
40 been treated concurrently with the active substance gemfibrozil despite a contraindication and warnings contained in the product information. Japan is unaffected by this move because gemfibrozil is not available there.
"We have decided on this action in the interest of patient safety. We will continue to conduct further assessments over the next few months to evaluate the benefit/risk ratio of cerivastatin," explains Dr. David Ebsworth, Head of Bayer's Pharmaceuticals Business Group. Any possible resumption of the marketing of certain dosages of Baycol/Lipobay will be the subject of extensive consultations between Bayer and the regulatory authorities.
In view of the financial burden and loss of earnings for Bayer's Health Care segment resulting from the withdrawal of its cholesterol-lowering drug, as well as the continuing weakness of the world economy, which particularly affects the industrial business, it is now assumed that earnings for the full year will fall substantially short of previous estimates. The target of a 20 percent return on sales (before exceptional items) in the Health Care segment in 2002 can no longer be met.
On the same day, Bayer Corp.'s Pharmaceutical Division issued a press release which, apart from the paragraph with the quoted language from defendant Ebsworth, contained statements virtually identical to Bayer AG's press release.
119. On August 8, 2001, the FDA also issued a press release, which stated in part:
FDA today announced that Bayer Pharmaceutical Division is voluntarily withdrawing Baycol (cerivastatin) from the U.S. market because of reports of sometimes fatal rhabdomyolysis, a severe muscle adverse reaction from this cholesterol-lowering (lipid-lowering) product. The FDA agrees with and supports this decision. Baycol (cerivastatin), which was initially approved in the U.S. in 1997, is a member of a class of cholesterol-lowering drugs that are commonly referred to as `statins,' Statins lower cholesterol levels by blocking a specific enzyme in the body that is involved in the synthesis of cholesterol. While all statins have been associated with very rare reports of rhabdomyolysis, cases of fatal rhabdomyolysis in association with the use of Baycol have been reported significantly more frequently than for other approved statins.
Fatal rhabdomyolysis reports with Baycol have been reported most frequently when used at higher doses, when used in elderly patients, and particularly, when used in combination with gemfibrozil (LOPID and generics), another lipid lowering drug. FDA has received reports of 31 U.S. deaths due to severe rhabdomyolysis associated with use of Baycol, 12 of which involved concomitant gemfibrozil use.
41 120. Incredibly, on the day of the withdrawal, Bayer AG CFO Werner Wenning stated that "We expect no claims for compensation from the U.S."
121. On the day the withdrawal was announced, the price of Bayer securities in the
U.S. fell approximately 17 percent, from $39.50 on the prior day's close to $32.85. The prices of
Bayer's securities reacted similarly on the major European stock markets. In Frankfurt, the closing price of Bayer securities declined from €45.35 ($39.76) to €37.35 ($32.73), while in
London, the closing price of Bayer securities declined from £28.00 ($39.00) to £23.44 ($33.14).
122. On August 10, 2001, J.P. Morgan issued a report emphasizing the importance of
Baycol to Bayer AG, which stated in part:
Following yesterday's announcement that Bayer was withdrawing Baycol, the key growth product in its Healthcare business, the company this morning announced Q2 results well below expectations.
***
Following the withdrawal of Baycol, Bayer is left without "the cornerstone" of its ethical pharmaceuticals business and growth rates have been substantially reduced.
It therefore appears that Bayer withdrew this drug because it could not control inappropriate prescribing and has acted in the interests of patient safety. While the company expects compensation claims to be filed it is insured against this type of action.
123. On August 13, 2001, Bear Stearns issued a report similarly describing Baycol's importance to Bayer AG, which stated in part:
We consider that this is a major financial blow for the company, and its pharma business in particular, since it forecast sales in 2002 of Eurl.5bn for the product ... Furthermore, we estimate that Baycol probably enjoyed a very high gross margin (around 95%). The company has therefore clarified that it expects around Eur600m to Eur650m lower operating profits than previously expected within its Healthcare division. It believes around Eur250m to Eur300m of these will be exceptional, principally in relation to buying back inventory. Bayer has not provided any guidance for the earnings impact in 2002 or beyond. In
42 conjunction, Bayer has totally scrapped its 2002 operating margin targets of 20% for its healthcare business and 22% for pharmaceuticals. ***
In conjunction with the loss of the majority of the sales from the Baycol product, the company itself has admitted that it has lost a major strategic pillar from its pharma business. We note that Baycol was the company's only major product that was currently enjoying strong sales growth (H12001 +85% versus H1 2000) and contrasted to overall Healthcare sales growth ofjust 3.8% (H1 2001 versus HI 2000).
F. Defendants Continue to Withhold Material Facts Concerning the Dangers Associated With Baycol
124. On August 13, 2001, in his address during a Baycol/Lipobay news conference in
Leverkusen, Germany, Schneider attempted to ease the concerns of investors and the public and to protect his company by stating:
First of all I would like to emphasize that our top priority was to withdraw the product quickly in view of our responsibility to patients.
If the use of this medicine has resulted damage to health, that is something we deeply regret. We do everything we can to eliminate such risks.
For us, the safety and health of patients who put their trust in our medicines and rely on them to improve their health has priority over all other interests. That is why, when it became clear that certain risks could not be excluded, we did not hesitate to withdraw the product voluntarily and quickly.
125. Schneider's statement that Bayer's "top priority was to withdraw the product quickly" was materially false and misleading because officials of Bayer AG and Bayer Corp., including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the
Baycol brand was at risk, as Baycol posed serious health dangers to patients.
126. On August 16, 2001, Bayer AG issued a press release entitled "Bayer says claims are without foundation," which stated in part:
43 Bayer AG confirms that actions for damages have been brought in the United States in connection with alleged side effects of the cholesterol-lowering drug Lipobay/Baycol. The company regards these claims as unfounded and will defend them vigorously.
Bayer has at all times behaved responsibly and acted in the interest of patient safety and health. The company is therefore unperturbed by this litigation and sees no reason to establish provisions as a result.
The reference to "provisions" meant reserves for loss contingencies associated with product liability lawsuits or other claims concerning Baycol.
127. On August 17, 2001, the Company issued a press release entitled "Facts prove that Bayer gave authorities proper notification," in which defendant Ebsworth stated:
[W]e have acted in the interest of patient safety at all times .... Throughout the development of the cholesterol-lowering drug Lipobay we have always put the safety and health of patients first. We took voluntary action as soon as an accumulation of anomalous findings became apparent.
128. The statements in the August 16 and 17, 2001 press releases and concerning the withdrawal of Baycol were materially false and misleading in that defendants failed to disclose that officials of Bayer AG and Bayer Corp., including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health dangers to patients.
129. On August 23, 2001, Schneider told reporters that there was "at the moment no evidence" that using Baycol/Lipobay had led to the reported deaths, and in a news report, Bayer reiterated its position that the lawsuits against the Company for selling Baycol were meritless, stating, "Bayer insists the claims are `groundless' and that it worked closely with regulators on both sides of the Atlantic." This statement was materially false and misleading because, by that time, defendants had long been in possession of overwhelming evidence that Baycol caused fatal
44 (and non-fatal) rhabdomyolysis and defendants failed to disclose that officials of Bayer AG and
Bayer Corp., including defendants, had known of the serious health problems associated with
Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health dangers to patients.
130. On or about August 23, 2001, Bayer withdrew Baycol in Japan:
Japan was the last market where Baycol had remained available after being pulled from all other areas worldwide on August 8. ***
An official from the Japanese Health Ministry said that although there have been 84 cases of rhabdomyolysis in Japan linked to Baycol use (none fatal thus far), Bayer's withdrawal was wholly voluntary, and not influenced by the government.
131. On October 1, 2001, Med Ad News published an article on Baycol, discussing the huge expectations that Bayer Corp. had had for Baycol and the importance of the 0.8 mg version to those expectations:
First approved in the United States in 1997, Baycol generated $210 million in sales in 2000. Baycol is known outside the United States as Lipobay. Bayer had jointly marketed Baycol in the United States with GlaxoSmithKline Plc. Analysts at ABN Amro Inc. had projected Baycol sales of $880 million in 2001. According to analysts at Datamonitor Plc., Baycol's significant growth was largely driven by the launch of a higher-dose, 0.8-milligram tablet in 2000.
132. According to the article, Bayer's management stated that "the possibility that [the product liability] lawsuits will be successful has been overstated by the financial community.
Bayer executives have not allotted for any expenses from legal damages arising from Baycol litigation. `We believe and indeed are convinced that we hold an unassailable position,' says
Manfred Schneider, Ph.D., chairman at Bayer. `We do not believe that such claims will be successful. We therefore see no reason to make provisions."' Analysts repeated these positive statements to investors: "`Although it is imprudent to comment on U.S. litigation, Bayer is insured and appears to have done everything according to the book,' says Andrew Benson, an
45 analyst at Salomon Smith Barney Inc. `Bayer is a very conservative company and the fact that it has not taken any provisions indicates a degree of confidence in its position."'
133. The statements attributed to Bayer management in the October 1, 2001 Med Ad
News article were materially false and misleading because defendants failed to disclose that
officials of Bayer AG and Bayer Corp., including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had
concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health
dangers to patients.
134. The significance of Baycol to Bayer's overall growth strategy cannot be
overstated. The day Baycol was withdrawn from the U. S. market, Bayer's CFO, Werner
Wenning, stated that "Baycol was a cornerstone of our pharma strategy. The consequences will
have a significant impact on the pharma business and therefore for Bayer as a whole." U.S.
securities analysts agreed about the significance of Baycol to Bayer's overall outlook.
135. In the days following the withdrawal of Baycol from the U.S. market, analysts
were uniformly negative. An analyst from UBS Warburg stated that "most people think pharma
is no longer a viable stand-alone business" for Bayer. Another analyst from Lehman Brothers
observed that with such a low profit base for its pharmaceutical division Bayer would have to
struggle to launch new drugs and that a partnership with a larger entity was inevitable. In a note
sent to its clients, JP Morgan stated that "Baycol was Bayer's only real growth product, and this
news is concerning, leaving the company with no visible sales growth over the next five years."
An equity strategist at Commerzbank Securities stated that the withdrawal of Baycol "is a big
chunk out of their revenue and another severe blow to management. Given this final blow,
Bayer becomes a takeover target." An investment analyst at Barclays Stockbrokers stated that
46 "It's all bad news, it's one of the company's main growth drivers." Similarly, an equity manager at Kempen & Co. stated "It's disastrous, one of their main profit makers is falling away." A pharmaceutical analyst at DG Bank in Frankurt stated that "Bayer is now very, very weak in comparison to other pharmaceutical companies."
136. Defendant Ebsworth admitted as much when he stated that "We need to think broadly about various alternatives for the [pharmaceutical] unit. We were convinced we could go alone with Baycol, for which we estimated peak sales of 2.5 billion euros by 2005 or 2007.
It's possible we may buy a company, or cooperate with others." Manfred Schneider stated that
Bayer might have to "lower its sights on management control" in the pharmaceutical operations, and might even consider selling them. Prior to the withdrawal of Baycol, Schneider had steadfastly refused to entertain the break-up of any of Bayer's "core" businesses including pharmaceuticals, chemicals, farm chemicals and polymers despite shareholder pressure to do so.
As a result of the withdrawal of Baycol Bayer was forced to cut 1,800 jobs and close 15 plants.
137. On November 14, 2001, the Company issued its "Stockholders' Newsletter 2001 -
- Interim Report for the First Three Quarters of 2001," reporting that net income dropped 47.5 percent WE 825 million from £ 1.567 billion for the first three quarters of 2000, while earnings per share dropped to £ 1.13 from £ 2.15 for the same period in 2000. These figures were materially false and misleading because even though Baycol had been recalled, the Company did not disclose that officials of Bayer AG and Bayer Corp., including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health dangers to patients.
47 G. Bayer AG Registers Its ADRs with the SEC
138. On December 20, 2001, the Company filed a Form 20-F Registration Statement with the SEC, in order to register its American Depositary Shares (ADRs) for trading on the New
York Stock Exchange. The Registration Statement stated in part:
Marketing withdrawal of Cerivastatin products
Baycol/Lipobay (cerivastatin) is a statin, one of a class of medications used to lower elevated blood levels of cholesterol and other lipids, or fatty substances. We launched cerivastatin in its original dosages of 0.1 mg, 0.2 mg and 0.3 mg in 1997. We later obtained regulatory marketing approval for higher dosages, up to 0.8 mg.
Statins are powerful medications that can reduce the risk of coronary heart disease. However, they can also cause significant side effects, including rhabdomyolysis. This is a serious condition which, in its most severe form, can lead to life-threatening kidney failure.
Rhabdomyolysis has been reported more frequently in patients taking cerivastatin than other statins. This was particularly true in patients taking cerivastatin in combination with gemfibrozil, another lipid-lowering medication, and in patients taking cerivastatin in the 0.8 mg dosage. We are currently aware of approximately one hundred patients diagnosed with rhabdomyolysis while taking cerivastatin who have died.
We had provided prescription information that warned of the risk of rhabdomyolysis and contained strong warnings and a contraindication against the combination of cerivastatin and gemfibrozil. However, we continued to receive reports of this condition in patients who had been taking cerivastatin. Accordingly, we voluntarily ceased marketing cerivastatin in August 2001.
Cerivastatin-related actions. In August 2001, we voluntarily ceased marketing our cerivastatin anticholesterol products in response to reports of serious side effects in some patients. See Item 4, Information about the Company - Health Care - Pharmaceuticals - Products. Since this withdrawal, more than 277 lawsuits, many of them putative class actions, have been initiated in the United States against Bayer Corporation and Bayer AG. The actions in the United States have been primarily on theories of product liability, consumer fraud, medical monitoring, predatory pricing and unjust enrichment. These lawsuits seek remedies including compensatory and punitive damages, disgorgement of funds received from the marketing and sale of cerivastatin and the establishment of a trust fund to finance the medical monitoring of former cerivastatin users. We
48 expect the MDL Panel to consolidate the federal court cases before a single judge for coordinated discovery and other pre-trial proceedings. In addition, several actions have been initiated against other companies of the Bayer Group in other countries. We expect additional lawsuits to be filed in the United States and elsewhere. If the plaintiffs in these actions were to be successful, it is possible that the ultimate liability could be material to our results of operations and cash flows. We believe that we have meritorious defenses in these actions, and intend to defend them vigorously.
139. The Company subsequently filed amendments to the Registration Statement with
the SEC, on January 14 and January 15, 2002, which contained substantially the same
statements . In the January 15, 2002, second amended Registration Statement, the Company
revealed for the first time that "We are currently aware of... approximately 1,600 patients
assessed with non-fatal cases of rhabdomyolysis."
140. The Registration Statement and subsequent amendments thereto were materially
false and misleading in that defendants failed to disclose that officials of Bayer AG and Bayer
Corp., including defendants, had known of the serious health problems associated with Baycol
long before the product was withdrawn and defendants had concluded, but did not disclose, that
the Baycol brand was at risk, as Baycol posed serious health dangers to patients. Moreover,
defendants knew that evidence being produced to plaintiffs in pending products liability lawsuits
would subject the Company to potentially billions of dollars in judgments, settlements, and legal
fees from these suits. Defendants' statements also concealed the fact that Bayer's records
contained files and a-mails showing that defendants had intentionally concealed the severity of the health hazards of Baycol from both the medical and the investor communities.
141. On or about March 19, 2002, the Company issued its Annual Report for 2001, which stated in part:
We also aim to ensure the safety of our products and their proper usage by customers. For example, when we received a growing number of reports of side effects associated with our cholesterol-lowering drug Lipobay/Baycol, especially in patients who had been prescribed the active substance gemfibrozil 49 concomitantly despite specific warnings and a contraindication in the product information, we voluntarily withdrew all dosages of the product from the market in August 2001 in the interest of patient safety despite the adverse financial consequences for the enterprise.
142. The 2001 Annual Report also contained a feature on Lipobay/Baycol, which stated in part:
A responsible decision
The voluntary withdrawal of the cholesterol-lowering drug Lipobay/Baycol has had far-reaching consequences for the Bayer Group. Yet there was no alternative to this responsible decision. The safety and health of our patients had priority over economic interests.
Expertise with Responsibility - these words taken from Bayer's mission statement are more than a slogan. Taking Lipobay/Baycol off the market was a decision made in line with this principle. Behaving responsibly in a situation like this meant investigating the scientific aspects objectively, making the requisite corporate decisions and ultimately implementing the product's worldwide withdrawal rapidly.
***
When physicians - and, in a few cases, patients themselves - submitted spontaneous reports indicating in particular that the combination of cerivastatin with the fibrate gemfibrozil was associated with an elevated risk of potentially life-threatening rhabdomyolysis, Bayer took further steps to prevent concomitant use of the two products. These included contraindicating the combination of these two drugs in the Lipobay/Baycol product information and running an information campaign aimed specifically at health care professionals.
143. Defendants' descriptions in the Annual Report concerning Baycol were materially false and misleading because defendants failed to disclose that officials of Bayer AG and Bayer
Corp., including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the Baycol brand was at risk, as Baycol posed serious health dangers to patients.
50 144. On or about May 8, 2002, the Company issued a "Stockholders' Newsletter 2002
- Interim Report for the First Quarter; Report on the 50th Annual Stockholders' Meeting of
Bayer AG on April 26, 2002 in Cologne." The newsletter stated in part:
With regard to the cholesterol-lowering drug Lipobay/Baycol, which Bayer voluntarily withdrew from the market last year, Schneider explained Bayer's position in detail. * * * "We cannot understand the accusation that we did not immediately notify the relevant supervisory authorities, the stockholders and the public of our decision," said Schneider. "On the contrary, we did everything in our power to explain our decision and its consequences to our stockholders and the public, and above all of course to the affected patients and their physicians."
145. The statements in the May 8, 2002 Stockholders' Newsletter were materially false
and misleading because defendants failed to disclose that officials of Bayer AG and Bayer Corp.,
including defendants, had known of the serious health problems associated with Baycol long before the product was withdrawn and defendants had concluded, but did not disclose, that the
Baycol brand was at risk, as Baycol posed serious health dangers to patients.
146. On June 24, 2002, the Company filed a Form 20-F Annual Report with the SEC, which repeated the statements in the Company's December 20, 2001 Registration Statement and provided additional facts concerning the prevalence of Baycol-related rhabdomyolysis, including the statement that Bayer was "currently aware of approximately one hundred patients diagnosed with rhabdomyolysis while taking cerivastatin who have died, as well as approximately 1,600 patients assessed with non-fatal cases of rhabdomyolysis." The Company stated that it did not intend to reintroduce Baycol. Further, the Company provided an update on the U.S. lawsuits:
Cerivastatin-related actions. In August 2001, we voluntarily ceased marketing our cerivastatin anticholesterol products in response to reports of serious side effects in some patients. See Item 4, Information about the Company - Health Care - Pharmaceuticals - Products. Since this withdrawal, about 1,700 lawsuits, many of them putative class actions, have been initiated in the United States against Bayer Corporation and Bayer AG. * * * We believe that we have meritorious defenses in these actions and are defending them vigorously. Without acknowledging any liability, we have settled a small number of these cases in the past. We may, on a case-by-case basis, settle additional cases for reasonable 51 amounts when, in our judgment, settlement is economically feasible given the risks and costs inherent in any litigation.
147, The Company's Form 20-F Annual Report was materially false and misleading in
that defendants failed to disclose that officials of Bayer AG and Bayer Corp., including
defendants, had known of the serious health problems associated with Baycol long before the
product was withdrawn and that defendants had concluded, but did not disclose, that the Baycol
brand was at risk, as Baycol posed serious health dangers. Defendants' statements contained in
the Form 20-F Annual Report were also materially false and misleading in that defendants failed
to disclose that the misconduct of officers of Bayer Corp. and Bayer AG in connection with
Baycol exposed the companies to potentially billions of dollars in judgments, settlements, and
legal fees from the product liability lawsuits.
148. On June 21, 2002, an analyst for Bank Gesellschaft Berlin issued a report on
Bayer, which stated in part:
As regards the legal risks relating to Baycol, Bayer let it be known that provisions will not have to be set up. Given that side effects of Baycol are acute, a lengthy medical supervision and control of patients, who have not yet suffered any side effects, is not expected.... We share the management's opinion that risks of Baycol cannot be compared with those of the fen-phen case. Bayer referred to a "conservative" insurance coverage which will cover the costs relating to Baycol (cost of litigation, lawyer's costs etc.). We think that our estimates concerning the Baycol risks (discount of EUR lbn on the enterprise value) are rather conservative.
149. On October 21, 2002, an analyst for Commerzbank issued a report on Bayer, which stated in part:
Bayer is now defending 3,500 lawsuits relating to Baycol, its anti-cholesterol product withdrawn last year, according to the Financial Times Deutschland today. This has increased from 2,000 at the start of the year. Clearly this news is worrying, and will weigh on the share price. However, Mr. Wenning, CEO, remains emphatic that all settlements will be fully covered by product liability insurance, unless it is proven that Bayer actually did something wrong (which appears unlikely given its voluntary withdrawal of the product). We believe that
52 the market is currently assuming a cost to Bayer of c.Elbn - E2bn. The court process is expected to begin in Ql 2003.
150. On November 27, 2002, an analyst for Julius Bar, an investment firm, issued a report on Bayer, which stated in part:
A short note on the Lipobay/Baycol litigation: as communicated earlier this month, Bayer is currently aware of around 5,700 individual lawsuits being filed, of which a majority originating in the US. Trials will start in early 2003 and we do not expect a final court decision until after 2003. While we still believe that Bayer has a fairly good chance of defending itself successfully, we acknowledge the risk of a US lawsuit with a jury decision. We currently forecast Bayer having to ultimately pay EUR2bn on a DCF basis. This would be more on a future cash flow basis, bearing in mind that payments are typically made over a decade. EUR2bn divided by the current number of shares would cost another EUR2.74 per share. Bayer continues to say that most of the current settlements done are covered by the `usual amount of product liability insurance' and so are the legal costs.
H. Defendants' Knowledge of Baycol's Dangers Is Made Public
151. On Saturday, February 22, 2003, The New York Times published an article entitled "Papers Indicate That Bayer Knew of Dangers of Its Cholesterol Drug." It stated:
Newly disclosed company documents indicate that some senior executives at Bayer were aware that their anticholesterol drug had serious problems long before the company pulled it from the market.
The documents, made public by lawyers suing Bayer, include e-mail messages, memos and sworn depositions of executives that suggest that Bayer promoted the drug, Baycol, even as a company analysis found that patients on Baycol were falling ill or dying from a rare muscle condition much more often than patients on similar drugs.
The lawyers are suing Bayer, which is based in Germany, and its British marketing partner, GlaxoSmithKline, in federal court in Minneapolis and in dozens of other cases around the country. Though the documents do not paint a full picture of what the companies knew, or how early they knew it before Baycol was pulled from the market in 2001, they provide a rare glimpse inside a major drug company's marketing efforts in the face of mounting indications of trouble.
Bayer, which developed Baycol, says the drug was marketed appropriately and is safe when used properly.
53 But approximately 100 deaths and 1,600 injuries worldwide have been linked to a muscle disorder caused by the drug, according to regulatory filings by the company. Similar drugs are at least as effective as Baycol but cause the disorder much less frequently, according to the Food and Drug Administration.
The F.D.A., which allowed the sale of two higher doses of Baycol in the years after initially approving the drug, said it did not see a rapid increase in deaths until the spring of 2001, and Bayer took the drug off the market shortly after the agency raised serious concerns about it with company executives in late July.
The drug, which studies found to be less effective at its initially approved strength than competing medicines, caused more problems at higher doses. Senior executives at Bayer and GlaxoSmithKline were aware that this might be possible as early as 1997, according to a letter that is part of the court filings.
***
More than 10,000 patients who took Baycol or the families of those who died have filed lawsuits against Bayer and GlaxoSmithKline. The first trial, in Corpus Christi, Tex., began Tuesday.
Bayer and GlaxoSmithKline have settled more than 400 of the cases for individual amounts ranging from $200,000 to $1.2 million, according-to lawyers for the patients. At that rate, the drug makers could pay billions of dollars to resolve all the lawsuits. The companies deny the allegations in the lawsuits, and Bayer says that no more than 15 percent of the patients who have sued actually suffered any injury and that it is trying to settle most of those claims. Lawyers for the plaintiffs dispute that estimate.
The companies have agreed that Bayer, which discovered the drug and played the biggest role in marketing it, will pay 95 percent of the cost of settling cases.
152. The securities markets were closed on the day the article was published. On the next trading day, February 24, 2003, the price of Bayer securities in the U.S. fell approximately ten percent, to $15.44 from the prior trading day's close of $17.15. Similarly, in Frankfurt, the closing price of Bayer securities declined from E15.83 ($17.11) to €14.29 ($15.39), while in
London, the closing price of Bayer securities declined from £ 10.53 ($16.77) to £9.95 ($15.78).
The markets continued to react to the previously undisclosed adverse news regarding Baycol on
February 25, 2003, as the closing prices of Bayer securities fell to $13.37 on the New York Stock
Exchange, E12.31 ($13.24) in Frankfurt, and £8.43 ($13.25) in London.
54 153. On February 26, 2003, The New York Times published an article entitled "Bayer
Says It Is Trying to Settle Another 500 Lawsuits Over Its Drug for Cholesterol." It stated:
Bayer A.G., the German drug maker, said today that it was trying to settle another 500 lawsuits over its anticholesterol drug Baycol.
Baycol, once the mainstay of a drugs unit that Bayer is trying to spin off, was withdrawn in August 2001 after dozens of deaths worldwide. Credit analysts at Merrill Lynch said reports that management knew of the risks of Baycol as much as four years before recalling the drug could expose the company to claims of up to 5 billion euros ($5.4 billion), if negligence was proved.
Bayer has already reached settlements in 450 cases concerning the medicine, at a cost of $125 million, and its lawyer, Philip S. Beck, said the group was in talks to settle additional cases involving patients who suffered side effects.
"We have 500 cases altogether where we are in active discussions with plaintiffs' lawyers," Mr. Beck said from Corpus Christi, Tex., where the first case over Baycol is being heard.
Most of the 7,800 lawsuits filed over Baycol, however, did not come from people who had experienced any adverse side effects, he said. He said that Bayer intended to defend itself vigorously in cases with no evidence of side effects.
A majority of settlements so far have been at the lower end of the $200,000 to $1.2 million range suggested in the media, he added.
55 BAYER'S MATERIALLY FALSE AND MISLEADING FINANCIAL STATEMENTS
154. During the Class Period, Bayer violated Generally Accepted Accounting
Principles in the U.S. ("U.S. GAAP"), SEC rules, the rules of the International Accounting
Standards Committee ("IASC"), and stock exchange rules in Germany by failing to properly report its financial results for FY 2000 through 2002. Bayer manipulated its financial statements by not adequately disclosing loss contingencies associated with the Baycol lawsuits and by not
adequately disclosing the risks and uncertainties surrounding Baycol as a future revenue generating drug.
155. U.S. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Regulation S-X (17 C.F.R. §210.4-01 (a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with U.S. GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also
comply with U.S. GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements.
17 C.F.R. §210.10-01(a).
156. The IASC rules and the related International Accounting Standards (lAS) are those standards which set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in financial statements in an international environment.
157. The undisclosed adverse information concealed by defendants during the Class
Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts
56 to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.
A. U.S. GAAP, IAS and SEC Violations
158. The Company registered its securities with the SEC pursuant to Section 12(b) of
the Securities Exchange Act 1934 on December 21, 2001, using Form 20-F. The registration
included financial statements for the years ended December 31, 2000.
159. Bayer filed its annual reports with the SEC pursuant to Section 13(a) of the
Securities Exchange Act 1934 for the years ended December 31, 2001 and December 31, 2002
using Form 20-F4. The financial statements were represented to have been prepared in
conformity with GAAP in Germany, and in accordance with the rules of the IASC and IAS.
160. The SEC allows foreign issuers to prepare their financial statements in accordance
with a comprehensive body of GAAP other then U.S. GAAP, provided that such statements
contain a reconciliation to U.S. GAAP.
161. Item 18 of Form 20-F provides, among other things, that the financial statements
shall disclose an informational content substantially similar to financial statements that comply
with U.S. GAAP and SEC Regulation S-X. Item 18 also provides that the financial statements
contain a discussion of the material variations in accounting principles, practices and methods
from those generally accepted in the U.S. and a quantification of each material variation.
162. Item 9 of Form 20-F provides that a registrant shall describe any known trends or
uncertainties that have had or the registrant reasonably expects will have a material favorable or
4 Bayer is listed on several other stock exchanges including exchanges in the United Kingdom, Spain, France, Belgium, Switzerland, Netherlands, Luxembourg, Italy and Japan.
57 unfavorable impact on net sales or revenues or income from continuing operations in the management discussion and analysis section ("MD&A").
163. Defendants knew or recklessly disregarded that Bayer's public filings with the
SEC were materially false and misleading during the Class Period because they failed to disclose the uncertainties in its MD&A and financial statements due to serious medical safety concerns surrounding Baycol which existed at least as early as August 2000 in violation of Item 9 of Form
20-F and U.S. GAAP. On August 4, 2000 Bayer's Global Drug Safety Director conducted a meeting to address the adverse events related to Baycol. It was concluded at the meeting that the data regarding Baycol's dangers was putting the brand at risk and there was potential for serious problems with the FDA.
164. Defendants also failed to disclose in Bayer's NID&A the significant risks and uncertainties as to Baycol ' s future revenue potential in light of the medical safety concerns of
Baycol in violation of Item 9 of Form 20-F. Baycol was a significant source of revenue for
Bayer and the loss of this revenue was extremely likely to have a negative effect on Bayer's future financial performance. This information is the type of information which is of paramount importance to investors but which defendants knowingly or recklessly excluded from their financial statements in violation of GAAP and SEC requirements.
165. In addition, U.S. GAAP requires that financial statements disclose significant risks and uncertainties associated with an entity' s business. American Institute of Certified
Public Accountant's Statement of Position No. 94-6.
166. Defendants intent to deceive investors is further evidenced by Bayer's failure to disclose Baycol safety concerns in its financial statements during the class period in conformity
58 with U.S. GAAP and Statement of Financial Accounting Standard No. 5 Accounting for
Contingencies (March 1975).
167. SFAS No. 5 ¶ 10 requires that financial statements disclose contingencies when it is at least reasonably possible (i.e., a greater than slight chance) that a loss may have been incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss, a range of loss, or state that such an estimate cannot be made. Similarly,
International Accounting Standard ("IAS") 37 Provisions, Contingent Liabilities and Contingent
Assets (July 1998), provides similar disclosure requirements to SFAS No. 5 and states that
"contingent liabilities are disclosed unless an outflow is only remotely likely."
168. The SEC considers the disclosure of loss contingencies to be so important to an
informed investment decision that it issued Article 10-0 1 of Regulation S-X [17 C.F.R. § 210.10-
01], which provides that disclosures in interim period financial statements may be abbreviated
and need not duplicate the disclosure contained in the most recent audited financial statements,
except that "where material contingencies exist, disclosure of such matters shall be provided
even though a significant change since year end may not have occurred."
169. In violation of U.S. GAAP, IAS's and SEC regulation Item 9 of Form 20-F,
Bayer's financial statements for the year ended December 31, 2000 and interim periods
improperly failed to disclose the medical safety concerns with Baycol. In addition, Bayer
continued to issue misleading positive statements to the public regarding Baycol until 2002.
Indeed, the first disclosure in the financial statements regarding Baycol was not made until 2001
in Form 20-F filed with the SEC on January 15, 2002. Given that the defendants knew or recklessly disregarded the safety concerns with Baycol at least as early as August 2000 and that
Baycol was the Company's third best-selling drug, it is apparent that defendants deliberately and
59 materially misled the investing public by not disclosing the potential contingencies related to
Baycol in its annual financial statements in 2000.
170. Additionally, Bayer did not disclose the significant uncertainties and risks to
Baycol's future revenue potential from Baycol in light of these medical safety concerns and the impending financial impact upon the company in violation Item 9 of Form 20-F. As a result,
Bayer's financial statements during the Class Period were materially false and misleading.
171. Bayer also violated the SEC requirement to furnish a Form 6-K promptly. Form
6-K is issued by foreign private issuers, upon material "changes in the financial condition and results of operations; material legal proceedings ...after they are made public...." There was no
Form 6-K filed upon the August 2001 withdrawal of Baycol, or upon subsequent development of the lawsuits filed against Bayer as required by Rule 12b [17 CFR 240.12b], until April 2003.
172. Defendants had an affirmative duty to disclose the safety issues with Baycol in its interim financial statements in accordance with U.S. GAAP. As indicated by APB Opinion No.
28, ¶ 22, Interim Financial Reporting (December 1973), "Contingencies and other uncertainties that could be expected to affect the fairness of presentation of financial data at an interim date should be disclosed in interim reports in the same manner required for annual reports."
173. In addition to the false financial reporting noted above, Bayer' s financial statements violated at least the following provisions of U.S. GAAP for which each Defendant is necessarily responsible:
a) The principle that financial reporting should provide information that is useful to present and potential investors in making rational investment decisions and that information should be comprehensible to those who have a reasonable understanding of business and
60 economic activities (Financial Accounting Standards Board (FASB) Statement of Concepts No.
1, 34);
b) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated
(FASB Statement of Concepts No. 1, ¶40);
c) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners
(stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general. (FASB Statement of
Concepts No. 1, 50);
d) The principle that financial reporting should provide information about an enterprise's financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although-investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.
(FASB Statement of Concepts No. 1, 42);
e) The principle that financial reporting should be reliable in that it represents what it purports to represent. The notion that information should be reliable as well as relevant is central to accounting . (FASB Statement of Concepts No. 2, 58-59);
61 f) The principle of completeness, which means that nothing, is left out of the information that may be necessary to ensure that it validly represents underlying events and conditions. (FASB Statement of Concepts No. 2, 80); and
g) The principle that conservatism be used as a prudent reaction to uncertainty to try
to ensure that uncertainties and risks inherent in business situations are adequately considered.
The best way to avoid injury to investors is to try to ensure that what is reported represents what
it purports to represent. (FASB Statement of Concepts No. 2, 95, 97).
B. German Stock Exchange Rule Violations
174. In addition to the foregoing U.S. GAAP, SEC and related IAS violations, the
Defendants also violated IAS and stock exchange rules in Germany in 2000 and 2001.5 The
exchanges in Germany are governed by the Exchange Supervisory Authority. Each exchange
has different rules and regulations, which include, among other things, the requirement to issue
annual and quarterly reports, apply international accounting standards (IAS's or U.S. GAAP) and
provide ad-hoc disclosures. The exchanges are governed by high international transparency
requirements. During the Class Period, defendants were necessarily subject to these
requirements.
175. Defendants knew or recklessly disregarded that Bayer's financial statements and
quarterly reports under IAS 37 and German stock exchanges rules failed to disclose their serious
medical safety concerns with Baycol.
176. IAS 37 states that "an enterprise should disclose a contingent liability, unless the
possibility of an outflow of resources embodying economic benefits is remote." 119. German
5 Bayer is listed on the following exchanges in Germany: Frankfurt, Berlin, Bremen, Dusseldorf, Hamburg, Hannover, Stuttgart, Munich.
62 stock exchange rules require that issuers publish quarterly reports in accordance with the same accounting principles as annual financial statements. Defendants misleadingly did not disclose matters related to Baycol in its quarterly reports until August 21, 2001, misstating its quarterly and annual reports from August 2000 through August 21, 2001.
INDIVIDUAL DEFENDANTS' LIABILITY; DUTY
177. The Individual Defendants , as officers of Bayer AG and Bayer Corp., are controlling persons of those entities within the meaning of Section 20(a) of the Exchange Act. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false or misleading information contained in the Company's public filings and statements in Bayer AG and Bayer Corp. press releases and other publications, as alleged herein, result from the collective action of this narrowly defined group of defendants. By reason of their senior positions with Bayer AG and Bayer Corp., they were able to and did, directly or indirectly, in whole or in material part, control the content, and participate in the dissemination, of public statements issued by or on behalf of Bayer AG and Bayer Corp. They participated in and approved the issuance of such statements made throughout the Class Period, including the materially false and misleading statements and omissions identified herein. The materially false and misleading statements are presumed to be the work of the Individual Defendants, and thus, they are each individually liable for all of these statements.
178. By reason of their senior positions with Bayer AG and/or Bayer Corp., the
Individual Defendants had access to internal Company documents, reports and other information, including the adverse, non-public information concerning the Company' s sales, services, financial condition, and prospects, and attended management and/or board of directors meetings.
As a result of the foregoing, they were responsible for the truthfulness and accuracy of the
63 Company's public statements described herein and knew or recklessly disregarded the falsity thereof.
179. Bayer AG, Bayer Corp. and the Individual Defendants, as officers of a publicly
held company, had a duty to and failed promptly to disseminate truthful and accurate information
with respect to Bayer AG and to promptly correct any public statements issued by or on behalf of
Bayer AG and Bayer Corp. which had become false and misleading.
180. Each of the defendants knew that the misleading statements and omissions
complained of herein would adversely affect the integrity of the market for Bayer securities and
would cause the price of those securities to become artificially inflated or distorted. Each of the
defendants acted knowingly or in such a manner as to constitute a fraud and deceit upon
plaintiffs and the other members of the Class.
181. Defendants are liable, jointly and severally, as direct participants in and co-
conspirators, for the wrongs complained of herein.
64 THE MARKET FOR BAYER SECURITIES; APPLICABILITY OF PRESUMPTION OF RELIANCE; FRAUD-ON-THE-MARKET DOCTRINE
182. Bayer AG securities, as the term is used in this complaint, includes the capital
stock and American Depositary Receipts (ADRs) of Bayer AG. During the Class Period, Bayer
AG securities were traded in the United States and on exchanges in Germany and other countries
in Europe.
183. Plaintiffs will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
a) defendants made public misrepresentations or failed to disclose material facts
during the Class Period;
b) the omissions and misrepresentations were material;
c) the securities of the Company traded in an open and efficient market;
d) the misrepresentations and omissions alleged would tend to induce a reasonable
investor to misjudge the value and prospects of the Company's securities; and
e) plaintiffs and members of the Class traded in Bayer AG securities between the
time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.
184. At all relevant times, the market for Bayer securities was an efficient market, for the following reasons, among others:
a) Bayer securities met the requirements for listing, and were listed and actively traded, on the New York Stock Exchange and exchanges throughout Germany and other
European countries, which were all highly efficient and interrelated markets;
b) As a regulated issuer, Bayer AG filed periodic reports with the SEC and exchanges throughout Germany and other European countries;
65 c) Bayer AG securities were followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and customers of their respective firms. These reports were publicly available and entered the public marketplace; and
d) Bayer AG regularly issued press releases which were carried by national and international newswires. Each of these releases was publicly available and entered the public marketplace.
185. Based upon the foregoing, the market for Bayer securities promptly digested current information with respect to Bayer AG from all publicly available sources and reflected such information in the price of Bayer AG securities. Under these circumstances, all purchasers of Bayer securities during the Class Period suffered similar injury through their trades in Bayer securities at artificially inflated or distorted prices and a presumption of reliance applies.
66 CLASS ACTION ALLEGATIONS
186. Plaintiffs bring this action as a class action pursuant to Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure. The Class is defined as all persons who purchased securities of Bayer AG between August 4, 2000, and February 21, 2003, inclusive (the "Class
Period") and were damaged thereby. Excluded from the Class are defendants; members of the
Individual Defendants' immediate families; and the officers, directors, affiliates, legal representatives, heirs, predecessors , successors , or assigns of any defendant.
187. The members of the Class are so numerous that joinder of all members is impracticable. The exact number of Class members is not known to plaintiffs at this time but can readily be ascertained in discovery. Plaintiffs believe that there are, at a minimum, thousands of members of the Class who purchased Bayer AG securities during the Class Period. As of June
30, 2003, the Company had over 730 million shares of capital stock outstanding.
188. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class . Among the questions of law and fact common to the Class are:
a) whether the federal securities laws were violated by defendants' acts as alleged herein;
b) whether Bayer AG and Bayer Corp. issued false and misleading statements during the Class Period;
c) whether the Individual Defendants issued and caused Bayer AG and Bayer Corp. to issue false and misleading statements during the Class Period;
d) whether defendants acted knowingly or recklessly in issuing false and misleading statements;
67 e) whether the market price of Bayer AG securities during the Class Period was
artificially inflated or distorted because of defendants' conduct complained of herein; and
f) whether the members of the Class have sustained damages and, if so, what is the
proper measure of damages.
189. Plaintiffs' claims are typical of the claims of the members of the Class as
plaintiffs and members of the Class sustained damages arising out of defendants' wrongful
conduct in violation of the federal securities laws as complained of herein.
190. Plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class actions and securities
litigation. Plaintiffs have no interests antagonistic to or in conflict with those of the Class.
191. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy since joinder of all members of the Class is impracticable.
Furthermore, because the damages suffered by the individual Class members may be relatively small, the expense and burden of individual litigation makes it impracticable for the Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
08 NO STATUTORY SAFE HARBOR
192. The statutory safe harbor provided for forward-looking statements under certain circumstances , Section 21E of the Exchange Act, 15 U.S.C. § 78u-5, does not apply to any of the false statements pleaded in this complaint. Moreover, the statutory safe harbor in the Securities
Act (Section 27A, 15 U.S.C. §77z-2), does not apply to any of the false statements in the
Registration Statement and amendments thereto pleaded in this complaint. Certain of the specific statements pleaded herein, including, among others, statements made in conferences with analysts and investors, were not identified as "forward-looking statements" when made.
Nor was it stated with respect to any of the statements forming the basis of this complaint that actual results "could differ materially from those projected." To the extent there were any forward-looking statements , there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward- looking statements because at the time each of those forward-looking statements was made the particular speaker knew that the particular forward-looking statement was false and/or the forward-looking statement was authorized and/or approved by an executive officer of Bayer who knew that those statements were false when made.
193. To the extent that defendants' written statements regarding the Company's expected revenues, earnings, earnings per share and growth, are deemed to be forward-looking statements, those statements are actionable for the following reasons:
a) such statements were material to investors;
b) the statements were not accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the
f9 purportedly forward-looking statements. Rather, defendants merely advised investors that the
Company's results could differ based upon general risks and uncertainties. Such statements
themselves were materially false and misleading for failing to disclose the concrete present facts
and risks set forth above; and
c) at the time the statements were made, they were made by and/or with the approval
of senior Bayer executives, including the Individual Defendants, among others, who knew that
the particular statements were materially false and misleading for the reasons set forth above.
194. In addition, defendants' oral statements during the Class Period regarding
expected growth of revenues and earnings based on increased Baycol sales are not protected by
the safe harbor provision of the PSLRA because:
a) such statements were material to investors;
b) such statements were not identified as forward looking;
c) such statements were not accompanied by a caution that actual results could differ
materially from those projected;
d) defendants failed to identify a readily available written document containing
information about factors which could cause actual results to differ materially from those projected; and
e) defendants had actual knowledge that such statements were false because, in light of the then-existing market conditions, the projected results for Baycol sales could be achieved only if the FDA approved, and defendants marketed, an 0.8 mg version of Baycol, which they knew to be strongly linked to potentially fatal rhabdomyolysis.
70 CLAIMS FOR RELIEF
COUNT I
[Violations of Section 10(b) and Rule 10b-5 By All Defendants]
195. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
196. This Count is asserted against all defendants and is based upon Section 10(b) of
the Exchange Act, 15 U.S.C. §78j(b), and Rule lOb-5 promulgated thereunder.
197. During the Class Period, defendants , singly and in concert, directly engaged in a
common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or
recklessly engaged in acts, transactions, practices and courses of business which operated as a
fraud and deceit upon plaintiffs and the other members of the Class; made various deceptive and
untrue statements of material facts and omitted to state material facts necessary in order to make
the statements made, in light of the circumstances under which they were made, not misleading;
and employed devices, schemes and artifices to defraud in connection with the purchase and sale
of securities. The purpose and effect of said scheme, plan, and unlawful course of conduct were,
among other things, to: (a) conceal the adverse facts concerning the Company's operations,
particularly with respect to its financial condition and prospects; (b) artificially inflate or distort
and maintain the market price of Bayer AG securities; and (c) cause plaintiffs and the other
members of the Class to trade in Bayer AG securities at inflated or distorted prices.
198. During the Class Period, defendants, pursuant to said plan, scheme, and unlawful
course of conduct, knowingly and/or recklessly, participated directly or indirectly in the preparation and issuance of deceptive and materially false and misleading statements to the
investing public as identified above.
71 199. The Individual Defendants, by virtue of their positions at the Company, had actual knowledge of the materially false and misleading statements and material omissions alleged herein and intended thereby to deceive plaintiffs and the other members of the Class, or, in the alternative, the Individual Defendants acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would reveal the materially false and misleading nature of the statements made, although such facts were readily available to defendants. Said acts and omissions of defendants were committed knowingly or with reckless disregard for the truth and defendants knew or recklessly disregarded that material facts were being misrepresented or omitted as described above.
200. The Individual Defendants are liable both directly and indirectly for the wrongs complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of the Company. As officers and directors of a publicly held company, the Individual Defendants had a duty to disseminate timely, accurate, and truthful information with respect to the
Company's businesses, operations, future financial condition and future prospects. As a result of the dissemination of the aforementioned false and misleading reports, releases and public statements, the market price of Bayer AG securities was artificially inflated or distorted throughout the Class Period. In ignorance of the adverse facts concerning Bayer AG's business and financial condition which were concealed by defendants, plaintiffs and the other members of the Class traded in Bayer securities at artificially inflated or distorted prices and relied upon the price of the stock, the integrity of the market for the stock and/or upon statements disseminated by defendants, and were damaged thereby.
72 201. During the Class Period, Bayer AG securities were traded on the New York Stock
Exchange and other exchanges throughout Germany and other European countries, all active and efficient markets. Plaintiffs and the other members of the Class, relying on the materially false and misleading statements described herein, which the defendants made, issued or caused to be disseminated, or relying upon the integrity of the market, traded in Bayer AG securities at prices artificially inflated or distorted by defendants' wrongful conduct. Had plaintiffs and the other members of the Class known the truth, they would not have traded in Bayer AG securities or would not have traded in Bayer AG securities at the inflated or distorted prices that were paid.
At the time of the purchases by plaintiffs and the Class, the true value of Bayer AG securities was substantially lower than the prices paid by plaintiffs and the other members of the Class.
The market price of Bayer securities declined sharply upon public disclosure of the facts alleged in this complaint.
202. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly or indirectly, violated Section 10(b) of the Exchange Act and Rule 10-5 promulgated thereunder. As a direct and proximate result of their wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with purchasing the Company's securities during the Class Period.
COUNT II
[Violations of Section 20(a) By the Individual Defendants]
203. Plaintiffs repeat and reallege each and every allegation contained in the foregoing paragraphs as if fully set forth herein.
204. During the Class Period, the Individual Defendants participated in the operation and management of the Company, and conducted and participated, directly and indirectly, in the
73 conduct of Bayer AG's business affairs. By virtue of Individual Defendants' high-level and senior positions, they knew the adverse non-public information about Bayer AG sales, services, financial condition, and future prospects, or recklessly disregarded such adverse facts.
205. As directors and officers of a publicly owned company, the Individual Defendants had a duty to disseminate accurate and truthful information with respect to Bayer AG's financial condition and prospects, and to promptly correct any public statements issued by Bayer AG which had become materially false or misleading.
206. Because of their positions of control and authority as senior officers and directors of Bayer AG and Bayer Corp., the Individual Defendants had the power and authority, and exercised the same, to control the contents of the various reports and press releases which Bayer
AG disseminated in the marketplace during the Class Period concerning the Company' s sales, services, financial condition, and future prospects. Throughout the Class Period, the Individual
Defendants exercised their power and authority to cause Bayer AG and Bayer Corp. to engage in the wrongful acts complained herein. Therefore, each was a "controlling person" of Bayer AG and/or Bayer Corp. within the meaning of Section 20(a) of the Exchange Act. In their capacities, the Individual Defendants culpably participated in the unlawful conduct alleged which artificially inflated or distorted the market price of Bayer AG securities.
207. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20 of the Exchange Act for the violations of Bayer AG and Bayer Corp. As a direct and proximate result of their wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with purchasing the Bayer AG's securities during the Class Period.
74 WHEREFORE, Lead Plaintiff prays for judgment against defendants as follows:
a) Declaring this action to be a proper class action under Rule 23 of the Federal
Rules of Civil Procedure;
b) Awarding compensatory damages and interest thereon in favor of plaintiffs and the other members of the Class against defendants;
c) Awarding Lead Plaintiff the fees and expenses incurred in this action, including reasonable allowance of fees for Lead Plaintiff's attorneys and experts, and other costs; and
d) Granting such other and further relief as this Court may deem just and proper.
75 JURY TRIAL DEMAND
Plaintiffs demand a trial by jury of all issues so triable.
Dated: January 14, 2005 Respectfully submitted,
MILBERG WEISS BERSHAD ^ -, SCHULMAN LLP
B : ----,^.•.< elvyn I. Weiss (MW-1392) EMichael C. Spencer (MS-8874) Lee A. Weiss (LW-1130) Jennifer Sclar (JS-7313) One Pennsylvania Plaza New York, NY 10119-1065 Telephone : 212/594-5300 212/868-1229 (fax)
Attorneysfor Lead Plaintiff
76 Lt a
CERTIFICATE OF SERVICE
I, Francisco R. Malonzo, hereby certify that I caused a true and correct copy of the
foregoing Second Consolidated Amended Complaint to be served upon counsel listed below, via
U.S. mail, on this 14th day of January, 2005:
Walter C. Carlson, Esq. Sidley Austin Brown & Wood LLP Bank One Plaza 10 South Dearborn Street Chicago, Illinois 60603
Roger J. Hawke, Esq. Sidley Austin Brown & Wood LLP 787 Seventh Avenue New York, New York 10019
ILA'" R - Francisco R. Malonzo 1.1^^