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J/ VLeonard Barrack (LB-0355)Gerald J . Rados (GR.-0374)Sheldon L. Albert (SA-2506)BARRACK, RODOS & BACINE3300 Two Commerce Square2001 Market StreetPhiladelphia, PA 19103(215) 963-0600

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Robert A. Hofftnan (RH-7317)Jeffrey B. Gittleman (JG-f 986)BARRACK, DODOS & BACINE14 Kings Highway WestHaddonfield, NJ 0803 3(856) 354-0707

Lead Counsel for Plaintiffsand the Class

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UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEW JERSE Y

IN RE SCHERING-PLOUGH CORPORATIONSECURITIES LITIGATION

PFrTIVEDOff 12 200,

AT 8:x'1

Master File .No .01-CV-0829 (KSH/.12iH)

Jury Trial Demande d

CONSOLIDATED AMENDED CLASS ACTION COMPLAI N

Lead Plaintiff, the Florida State Board of Administration, and additional plaintiffs

identified herein, on behalf of all others similarly situated, allege the following :

NATURE OF THE ACTION

1 . This action is brought against defendants for violations of § 10(b), 20(a) and

20A of the Securities Exchange Act of 1934 . Plaintiffs bring this action as a class action o n

behalf of themselves and all other persons or entities (other than defendants and certain related

yu ,

persons and entities described below) who purchased the securities of Schering-Ploug h

Corporation ("Schering-Plough" or the "Company") during the period from May 9, 2000 throug h

February 15, 2001 ( the "Class Period"), and who were damaged thereby ,

2 . Schering-Plough is a manufacturer of pharmaceutical products and, as such, i s

required to meet the standards for current Good Manufacturing Practices ("cGMPs" or "GMPs" )

established by the federal Food and Drug Administration ("FDA") . The cGMP regulations

(codified at 21 C .F_R. § 210, 211) contain the minimum requirements for the methods ,

facilities, and controls used in the manufacturing, processing and packaging of drug products .

The regulations are intended to ensure that a drug product is safe for use, and that it has th e

ingredients and strength it claims to have . Pharmaceutical products manufactured in violation o f

cGMPs are deemed to be "adulterated" within the meaning of the Federal Food, Drug an d

Cosmetic Act, 21 U.S.C. § 351(a)(2)(B) . Any firm responsible for the manufacture of

adulterated product is subject to FD.A regulatory action . 21 C .F.R. § 210.1(b) .

3 . The FDA seeks to ensure the quality of drug products by monitoring the

compliance of drug manufacturers with cGMPs through periodic inspections . Prior to and during

the Class Period, the FDA conducted a number of inspections of Schering-Plough' s

manufacturing facilities in Kenilworth and Union, New Jersey and Manati and Las Piedras ,

Puerto Pico . These facilities manufacture virtually every significant prescription and over-the-

counter pharmaceutical product sold by the Company. The FDA inspections revealed numerou s

and serious violations of cGMPs across virtually every product line manufactured by Schering-

Plough. Before the start of the Class Period, the FDA, on the following dates , issued four

separate Warning Letters to Schering-Plough as a result of serious deviations from cG.MPs that

were revealed as a result of inspections of the Company's New Jersey and Puerto Rico

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manufacturing facilities : July 29, 1998; October 23, 1998 ; July 21, 1999; and May 8, 2000. In

these letters, Schering-Plougli was warned that as a result of its GMP violations, the FDA could

undertake product seizures or seek injunctive relief . Schering-Plough was also warned that the

FDA might withhold approval of pending New Drug Applications ("NDAs") until the violations

were corrected . In addition to the Warning Letters, the FDA also provided Schering-Plough with

reports of its inspections on Form FDA-483 . These inspection reports also informed the

Company of the numerous, serious and wide-ranging GMP violations at its New Jersey and

Puerto Rico facilities.

4. The deficiencies that were found by the FDA are pervasive, affecting virtually

every aspect of manufacturing and quality control operations at the Company's New Jersey and

Puerto Rico facilities. For example, the FDA inspections found that Schering-Plough, inter alia :

failed to validate manufacturing processes to assure that drug products are consistently produced

with the same quality, purity and safety ; failed to adequately test drug products to assure that

they meet the required specifications ; released numerous "out-of specification" ("DOS'") drug

products for distribution to the public; failed to perform adequate investigations into the causes

of OOS test results; failed to maintain adequate laboratory controls ; failed to follow approved

procedures for cleaning equipment; failed to maintain adequate HVAC systems ; and failed to

perform adequate investigations of consumer complaints . The deficiencies cited by the FDA are

so widespread that they have been found to affect more than 40 of the Company's products .

They include eleven of the Company's top fifteen selling products that accounted for more than

sixty percent of Schering-Plough's sales in 1999 and 2000 .

5. Two of the Warning Letters received by the Company, issued by the FDA on

October 23, 1998 and July 21, 1999, involved, inter alia, manufacturing problems with two

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aerosol inhalation products prescribed to asthma patients, albuterol (brand name, Proventil) an d

Vanceril. The FDA inspections found that Schering-Plough, among other things, failed to

perform adequate tests of these aerosol products and failed to reject product that did not meet th e

required specifications . The problems with the Company's albuterol aerosol inhalers were s o

severe that before the commencement of the Class Period, Schering announced "voluntary"

recalls totaling nearly 60 million canisters of product because some canisters may not have

contained any active ingredient . Since albuterol is used to stop acute asthma attacks, the absenc e

of active ingredient from the canisters was life-threatening .

6. As a result of the public debacle with its asthma inhaler products, Schering-

Plough retained an outside consultant, AAC Consulting Group ("AAC"), to conduct a

confidential audit of the Company's manufacturing facilities . From February 28, 2000 through

April 14, 2000, AAC conducted an audit of Schering-Plough's Kenilworth , New Jersey

manufacturing facility . Prior to the start of the Class Period, on April 27, 2000, AAC submitted

a detailed, confidential audit report in excess of one hundred pages to Schering-Plough .

7. The AAC audit found serious GMP violations that involved not only the

Company's aerosol products, but extended to all product lines manufactured in the Kenilwort h

plant, including tablets, lotions, ointments and creams . In its cover letter to the audit report ,

AAC informed Schering-Plough that :

The results of the audit revealed a number of serious cGMP systems failures andcompliance lapses . It is our view that the facilities and corporation are at

serious risk of a significant FDA regulatory action . This conclusion is based onthe previous firm history and our current audit findings . (Emphasis added .)

AAC identified six "systems ' which are 'broken' that are the cause for many of'tlthe deviations

discovered during the audit" and expressed its concern "that the amount of work required to

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correct all of the deficiencies to assure substantial cGMP compliance is extensive. " (Emphasis

added.)

$ . In spite of the broad and serious nature of Schering-Plough's GMP violations

found by the FDA, and privately by AAC, the Company, before and du ring the Class Period ,

issued statements that created a false impression that the only compliance issues of significanc e

were those associated with the manufacture of its aerosol products at its New Jersey facilities ,

which had already been subject to public, nationwide recalls . For example, in its Form 10-Q for

the quarter ended March 31, 2000 filed with the Securities and :Exchange Commission ("SEC")

on May 9, 2000, the first day of the Class Period, Schering-Plough stated that :

From time to time, the Company has received Warning Letters from the FDApertaining to various manufacturing issues . Among these, the Company hasreceived a Warning Letter from the FDA relating specifically to manufacturingissues identified during FDA inspections of the Company's aerosol products(albuterol and VANCERIL) manufacturing facilities in New Jersey . TheCompany is implementing remedial actions at these facilities . The Company hasmet with the FDA on several occasions to apprise the' agency of the scope andstatus of these activities, An FDA inspection of the Company's New Jerseymanufacturing facilities is ongoing, The Company cannot predict whether itsremedial actions will resolve the FDA's concerns, whether the FDA will take anyfurther action or the effect of this matter on the Company's operations .

These statements were repeated by the Company in identical form without any additiona l

disclosure in subsequent Forms 10-Q filed with the SEC during the Class Period .

9. Each of these Forms l0-Q and other similar statements issued during the Clas s

Period were materially false and misleading in that they failed to disclose :

(a) That there were serious and widespread manufacturing and quality contro l

deficiencies at Schering-Plough's manufacturing facilities in Kenilworth and Union, New Jerse y

and Las Piedras and Manati , Puerto Rico affecting virtually every product line manufactured a t

those facilities , as confirmed by the con fidential AAC Audit Report and the FDA's inspections ;

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(b) That Schering-Plough's serious and widespread manufacturing and quality contro l

deficiencies could not be rectified without the temporary shutdown of at least some production

lines , the expenditure of tens of millions of dollars to upgrade the Company's plants and

equipment, the hiring of hundreds of additional personnel to strengthen its quality control and

production areas and the implementation of major structural and organizational changes to

address quality issues throughout the Company;

(c) That given the serious and widespread nature o fSchering-Plough's manufacturin g

and quality control deficiencies, there was a serious risk that the FDA would withhold approva l

of the Company's pending NDAs or take other significant regulatory action ;

(d) That the FDA' s ongoing inspections involved not only "the Company 's aeroso l

products (albuterol and VANCERIL) manu facturing facilities in New Jersey," but also include d

the entire range of products manufactured at Schering-Plough's facilities in New Jersey and

Puerto Rico ;

(e) That "the FDA's concerns" were not limited to the manufacture of chering-

Plough's aerosol products, but related to numerous cGMP violations affecting a wide range o f

drug products; and

(t That the FDA had issued Warning Letters relating not only to the Company' s

aerosol inhaler products manufactured in New Jersey, but also pertaining to other products

manufactured in both New Jersey and Puerto Rico, including the Company's blockbuster allerg y

treatment medicine, Claritin .

10. Claritin is, by far, Schering-Plough's best-selling drug. In 2000, for example,

sales of Claritin totaled about $3 .0 billion, or nearly 30 percent of the Company's worldwid e

sales . The Company, however, is scheduled to lose patent protection for Claritin in mid-2002 .

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The loss of patent protection will allow competing drug manufacturers to seek FDA approval to

market chemically identical "generic" formulations of Clan-tin . The approval of cheaper generic

versions of the drug will likely cause Schering-Plough to experience a substantial erosion in the

sales, market share and profitability of Claritin .

11 . In order to combat the loss of patent protection for Claritin and maintain it s

advantage over generic competitors, Schering-Plough has been seeking to market a successor

product . In October 1999, the Company filed an NDA seeking clearance to market desloratadine

(trade name "Clarinex") for treatment of seasonal allergies . Given that the FDA's median review

time for an NDA in 1998 and 1999 was approximately 12 months, and given the goal established

under the Prescription Drug User Fee Act for the FDA to review and act on NDAs within twelve

months of their filing, Schering-Plough hoped to obtain approval for Claranex by early 2001 so

that the Company would have two full allergy seasons to convert Claritin users to Clarinex

before Claritin faced generic competition. The Company anticipated that if Claritin users were

converted to Clarinex before generic competition, and Clarinex was demonstrated to be more

effective than Claritin, then allergy patients would be less likely to switch back from Clarinex to

generic brands of Claritin after patent protection for Claritin expired. The investing public

shared this expectation and securities analysts closely followed the Company's NDA for

Clarinex .

12 . The FDA review process for an NDA includes a review of the applicant's

compliance with cGMPs in the form ❑f pre-approval inspections ❑f a firm's manufacturing

facilities . As was known to Company executives, pre-approval inspections are conducted with a

higher level of scrutiny for a firm, such as Schering-Plough, that has a history of cGMP

violations. Compliance Policy Guide 7132 .12 issued by the FDA states that "cGMP deficiencie s

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supporting a regulatory action also support decisions regarding non-approval of drug marketing

applications . . . Therefore, the issuance of a 'warning' letter or initiation of other regulatory

action based upon cGMP deficiencies must be accompanied by disapproval of any pending drug

marketing application . . . ." Schering-Plough was well-aware of FDA policy in this regard. For

example, in its Form 10-K for the year ended December 31, 1999, the Company stated that

"[f]ailure to meet 'good manufacturing practices' established by governmental authorities can

result in delays in the release of products, . . "

13 . Given the FDA policy guidance and the Company's knowledge thereof, Schering-

Plough was also well-aware that its cGMP violations and history of non-compliance gave rise to

a serious risk that its NDA for Clarinex would not be approved . Nevertheless, during the Class

Period, Schering-Plough led the market to believe that Clarinex was on track for FDA approva l

without disclosing the material adverse facts and circumstances relating to the Company's

manufacturing and quality control deficiencies that cast grave doubt on the prospects for

approval. For example, in November 2000, Schering-Plough management held a meeting with

analysts from J .P. Morgan Securities Inc. and expressed "confidence that desloratadine would be

on the market in ample time for the Spring allergy season ." The Company also issued a press

release on November 28, 2000 stating that "it [was] making preparations for the potential

availability of desloratadine for the spring 2001 allergy season ." These statements and others

disseminated by the Company during the Class Period were false and misleading when made

because they failed to disclose the true extent of the Company's GMP violations and the fact that

such violations gave rise to a serious risk that the Company's application for Clarinex would not

be approved .

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14. On January 25, 2001, the Company issued a press release stating it had received

an "'approvable' letter for its nonsedating antihistamine desloratadine on January 19, 2001" from

the FDA. Incredibly, however, Schering-Plough failed to disclose that, consistent with AAC's

assessment, the Company was now faced with a "significant FDA regulatory action" in that the

approvable letter expressly conditioned approval of Clarinex on resolution of the Company's

GMP deficiencies .

15. Less than one month later, in a press release issued after the close of the marke t

on February 15, 2001, the Company finally disclosed the serious and widespread nature of its

manufacturing and quality control deficiencies and the material adverse effects thereof . The

Company reported that it had been cited by the FDA for "deficiencies concerning compliance

with [GMPs], primarily relating to production processes, controls and procedures" at its New

Jersey and Puerto Rico manufacturing facilities . Schering-Plough farther reported sales for the

first quarter of 2001 could decline by as much as fifteen percent from those of the previous year

because its ability to manufacture and ship products had been compromised by the temporary

interruption of production lines to install system upgrades and other efforts to achieve cGMP

compliance. The Company stated that it had committed to spend $50 million "in new equipment,

process and system improvements" and that it had "initiated major organizational changes in its

manufacturing and quality control operations," including the hiring of substantial additional

personnel "dedicated to quality control and compliance ." Finally, "Schering-Plough also

reported that FDA has advised the company that CMP deficiencies cited in facility inspection

reports must be resolved prior to granting approval of the company's pending New Drug

Application (NDA) for CLAPJNEX (desloratadine) Tablets . ► ►

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16 . Investors and analysts reacted strongly to the Company's surprise announcement .

On Friday, February 16, 2001, more than 48 million shares were traded -- 11 times the average

daily trading volume -- and the price of Schering-Plough's common stock suffered a single day

decline of 15 percent from $48.32 to $41 .25 per share, representing a loss of more than $10

billion in market capitalization. Many analysts dropped their ratings of the Company and

drastically reduced their projected earnings, noting that management credibility had been

compromised based on the failure to disclose the delay in approval for Clarinex and previous

disclosures that any manufacturing deficiencies of significance to the market were limited to

those associated with the Company's asthma inhaler products and were being adequately

addressed .

JURISDICTION AND VENU E

17 . The claims asserted below arise under Section 10(b) of the Securities Exchange

Act of 1934 ("Exchange Act"), 15 U.S .C. § 78j(b), Rule 10b-S promulgated thereunder by the

SEC, 17 C .F.R. § 240.14b-5, Section 20(a) of the Exchange Act, 15 U .S .C. § 78t(a) and Section

20A of the Exchange Act, 15 U .S .C. § 78t-1 .

18. Jurisdiction is conferred upon this Court by Section 27 of the Exchange Act, 15

U.S.C. § 78aa, and 28 U .S .C. §§ 1331 and 1337 .

19 . Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S.C. § 1391(b) . Many of the acts and transactions constituting the violations of law described

herein occurred within this judicial district, including, inter alia, the preparation and

dissemination of false and misleading information to plaintiffs and the investing public . In

addition, Schering-Plough maintains its executive offices within this District .

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20. In connection with the acts and omissions alleged in this complaint, defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

not limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets .

PARTIES

Plaintiffs

21 . By Order dated July 2, 2001, the Court appointed the Florida State Board o f

Administration ("FSBA") as Lead Plaintiff. FSBA effects investments for and on behalf of some

15 trust funds, the largest of which is the Florida Retirement System Trust Fund, the pension and

retirement fund for employees of the State of Florida . FBA, as established in 1942 by Section

16 of Article IX of the 1885 Florida Constitution, holds and invests the assets of the Florida .

Retirement System Trust Fund pursuant to Florida Statutes § 121 .51 . The Florida retirement

fund had more than 170,000 retirees and over 650,000 active members, with approximately $95

billion in assets as of August 31, 2001 . FBA purchased the common stock of Schexing-Plough

during the Class Period and suffered damages as a result of the violations of the federal securities

laws alleged herein. During the Class Period, FSBA purchased a total of 2,543,900 shares of

Schering-Plough stock for over $125 million . A schedule of FSBA's purchases of Schering-

Plough stock during the Class Period is annexed hereto as Exhibit A .

22. The persons and entities listed on Schedule B annexed hereto are additional

plaintiffs in this action.. During the Class Period, each acquired the securities of Schering-Plough

as specified on Schedule B, and suffered damages as a result of the violations of the federal

securities laws alleged herein .

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Defendants

23 . Defendant Schering-Plough is a worldwide pharmaceutical corporation based in

New Jersey, with its executive offices located at 2000 Galloping Hill Road, Kenilworth, New

Jersey 07033 . The Company develops and markets drug therapies and treatment programs . Its

core product groups include allergy/respiratory, anti-infective/anticancer, cardiovasculars and

dermatologicals, as well as a global animal health business . Schering-Plough also conducts

health management programs and sells other consumer products . In 2000, the Company had

sales of nearly $10 billion, roughly 85 percent of which were generated f om prescription

pharmaceutical sales . The Company's leading pharmaceutical product is the allergy treatment

medicine, Claritin, generating approximately $3 billion in annual sales and controlling

approximately 45 percent of the market share .

24 . Defendant Richard J . Kogan ("Kogan") was at all relevant times the Chief

Executive Officer and Chairman of the Board of Directors of Schering-Plough.

25 . Defendant Raul E . Cesan ("Cesan") was at all relevant times the President, Chief

Operating Officer and a member of the Board of Directors of Schering-Plough .

26 . Defendant Jack L. Wyszomierski ("Wyszomierski") was at all relevant times the

Chief Financial Officer of Schering-Plough .

27. Defendant Thomas H. Kelly ("Kelly") was at all relevant times the Vice President

and Controller of Scheting-Plough .

28 . During the Class Period, defendants Kogan, Cesan, Wyszomierski and Kelly

(collectively, the "Individual Defendants") as senior officers and/or directors of Schering-Plough

were privy to confidential and proprietary information concerning Schering-Plough, its

operations and present and future business prospects . The Individual Defendants had access to

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non-public information about Schering-Plough's business, operations, prospects an d

manufacturing and quality control deficiencies via access to internal corporate documents, th e

confidential report of its consultant, AAC, conversations and connections with corporate officer s

and employees, attendance at management meetings and committees thereof and via reports and

other information provided to them in connection therewith . The Individual Defendants also had

access to material, non-public information via communications and reports received from the

FDA. Each of the Individual Defendants reviewed or were aware of the false and misleadin g

statements, disseminated during the Class Period alleged herein, that were contained in, inter

alia, SEC filings and press releases .

29. Each defendant is liable as a direct participant in, and a co-conspirator, with

respect to the wrongs complained of herein . In addition, the Individual Defendants, by reason o f

their status as senior officers and/or directors were "controlling persons" within the meaning o f

Section 20 of the Exchange Act and had the power and influence to cause the Company t o

engage in the unlawful conduct complained of herein . Because of their positions of control, the

Individual Defendants were able to and did, directly and indirectly, control the conduct o f

Schering-Plough's business and its dissemination of information to the investing public .

CLASS ACTION ALLEGATION S

30. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civi l

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchase d

Schering-Plough securities during the period from May 9, 2000 through and including February

15, 2001, and who were damaged thereby . Excluded from the Class are defendants, members o f

the immediate family of each of the Individual Defendants, any subsidiary, affiliate or contro l

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person of any such person or entity, officers and directors of Schering-Plough and the lega l

representatives, heirs, successors or assigns of each such excluded party .

31 . The members of the Class are so numerous that joinder of all members i s

impracticable. While the exact number of Class members is unknown to Lead Plaintiff at thi s

time and can only be ascertained through appropriate discovery, Lead Plaintiff believes that there

are tens of thousands of members of the Class. As of October 31, 2000, there were close to 1 .5

billion shares of Schering-Plough common stock outstanding . Schering -Plough common stock

was listed on the New York Stock Exchange and actively traded, with average daily volume of

more than 4.6 million shares duri ng the Class Period . Record owners and other members of th e

Class may be identified from records maintained by Schering-Plough and/or its transfer agent s

and may be notified of the pendency of this action by mail, using a form of notice similar to tha t

customarily used in securities class actions .

32. Plaintiffs' claims are typical of the other members of the Class as all members o f

the Class were similarly affected by defendants' wrongful conduct in violation of the federa l

securities laws as complained of herein .

33 . Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation .

34. Common questions of law and fact exist as to all members of the Class an d

predominate over any questions solely affecting individual members of the Class . Among the

questions of law and fact common to the Class are whether :

(a) the federal securities laws were violated by defendants' acts and omission s

as alleged herein;

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(b) defendants participated in and pursued the common course of conduct

complained of herein;

(c) documents, filings, releases and statements disseminated to the investing

public during the Class Period, omitted and/or misrepresented material facts concerning

Schering-Plough's business , operations and prospects ;

(d) defendants acted knowingly , willfully or recklessly in omitting to stat e

and/or misrepresenting material facts ;

(e) the market price of Schering-Plough securities was artificially inflated du e

to the material omissions and misrepresentations complained of herein ; and

(f) the members of the Class have sustained damages and, if so, th e

appropriate measure thereof.

35 . A class action is superior to other available methods for the fair and efficient

adjudication of this controversy . Since the damages suffered by individual Class member may

be relatively small, the expense and burden of individual litigation make it virtually impossibl e

for the Class members to seek redress for the wrongful conduct alleged . Plaintiffs know of no

difficulty which will be encountered in the management of this litigation which would preclud e

its maintenance as a class action .

SUBSTANTIVE ALLEGATIONS

A. COMPANY BACKGROUN D

36. Schering-Plough is a worldwide pharmaceutical corporation that develops an d

markets drug therapies and treatment programs . Its core product groups includ e

allergy/respiratory, anti-infective/anticancer, cardiovasculars and dermatologicals, as well as a

global animal health business . Schering-Plough also conducts health management programs an d

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sells other consumer products . Over the years, Schering-Plough has developed a solid reputatio n

in the investment community for its consistent earnings growth. Through 2000, the Company

had recorded fifteen consecutive years of double digit growth in earnings per share . The

Company had also declared seventeen increases in its quarterly dividend since 1986. In 2000 ,

the Company had sales of nearly $10 billion, roughly 85 percent of which was generated from

prescription pharmaceutical sales .

37. Schering-Plough's leading pharmaceutical product is the allergy treatmen t

medicine, Claritin, accounting for approximately $3 billion in sales in 2000 and controlling

approximately 45 percent of the market share, The Company, however, is scheduled to los e

patent protection for Claritin in mid-2002 . The loss of patent protection will allow competing

drug manufacturers to obtain FDA approval to market chemically identical "generic"

formulations of Claritin . The approval of generic versions of the drug sold at cheaper prices i s

widely expected to cause Schering-Plough to experience an erosion in the sales, market share

and profitability of Claritin.

38. In anticipation of the loss of patent protection for Claritin. and to maintain it s

advantage over generic competitors, Schering-Plough licensed a chemical compound known a s

desloratadine from Sepracor, Inc ., a company specializing in the development of chemically-

similar variants of existing drugs . Desloratadine is a metabolite of Claritin (i .e ., it is one of the

chemical compounds that is formed after Claritin is metabolized by the body). As such ,

Schering-Plough believes that Clarinex may offer certain advantages over Claritin in terms o f

effectiveness .

39. In October 1999, the Company filed an NDA seeking clearance to market

desloratadine for treatment of seasonal allergies . The Company is seeking to market

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desloratadine as a successor to Claritin under the Clarinex brand name . Given that the FDA' s

median review time for an NDA in 1998 and 1999 was approximately 12 months, and given the

goal established under the Prescription Drug User Fee Act for the FDA to review and act on

NDAs within twelve months of their filing, Schering-Plough hoped to obtain approval fo r

Clarinex by early 2001 so that the Company would have two full allergy seasons to convert

Claritin users to Clarinex before Claritin faced generic competition . The Company anticipate d

that if Claritin users were converted to Clarinex before generic competition, and Clarinex was

demonstrated to be more effective than Claritin, then allergy patients would be less likely to

switch back from Clarinex to generic brands of Claritin after such brands become available .

40 . During the Class Period, securities analysts following Schering-Plough noted ,

given the information available to them, that they expected FDA approval of Clarinex and tha t

they considered approval important in light of the looming expiration or the Claritin patent . For

example :

(a) On October 4, 2000 Sutro & Co ., Inc . issued a report stating , inter alia , "It is our

judgment that the company will replace almost all of Claritin sales with their new antihistamine

product desloratadine, prior to the patent expiration of Claritin . We anticipate approval of

desloratadine in the first quarter of 2001 . . . The Company's announced goal is to replace almos t

all of Claritin usage with desloratadine prior to generic competition arising to Claritin . We

believe that this can be done; "

(b) On October 24, 2000, Lehman Brothers, Inc . issued a report, stating, inter alia ,

"[W]e expect notice for approval (or approvable) at any time . We would expect key timing for

launch early next year, in front of the allergy season . The Company is clearly excited about the

pending approval and launch for [desloratadine] ; "

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(c) On October 24, 2000, Deutsche Banc Alex Brown analyst Barbara A . Ryan issued

a report noting that, "[w]e expect investors will hold on to the stock or continue to buy the stoc k

in anticipation of an approval for desloratadine, the Clan-tin follow-on product, which we expec t

to come by year end ;"

(d) On October 25, 2000 Bear Stearns & Co. Inc . analyst Joseph P . Riccardo issued a

report stating, inter alia , "[f]or 2001, we are projecting stronger top-line growth of 12%, driven

by early-2001 product launches (in the U.S .) of desloratadinc [and two other products] . . . These

products provide an opportunity for [Schering-Plough] to convert existing business to ne w

molecules with extended exclusivity and provide a platform for growth ;"

(e) On January 18, 2001, T .P. Morgan Securities Inc . analyst Carl Seiden issued a

report stating, inter alia, "[i]n allergies, management appears quite confident that desloratadine

will be on the shelves for the spring 2001 allergy season (which is essential, in our view), and

after a flurry of supplemental filings in late 2000 [of NDAs for approval of different

formulations of Clarinex], there should be a full line of desloratadine products with wid e

indications by year-end;" and

(f) On January 26, 2001, J .P. Morgan Securities Inc. analyst Carl Seiden issued a

report stating , inter alia , „[t]he EPS implications of Clarinex missing the Spring allergy seaso n

are for 2003 - less Clarinex to Claritin conversion will leave higher residual Claritin sales for

generic erosion."

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B. SCHERING-PLOUGHIS REPEATED AND WIDESPREAD FAILURE TOCOMPLY WITH FDA REGULATIONS FOR GOOD MANUFACURINGPRACTICES

1. The FDA Requires All Drug Products To BeManufactured in Compliance With Its RegulationsEstablishing Current Good Manufacturing Practices

41 . As a manufacturer of pharmaceutical products, Schering-Plough is required t o

meet the standards for current Good Manufacturing Practices established by the FDA. The FDA

regulations (codified at 21 C .F.R. §§ 210, 211) "contain the minimum current good

manufacturing practices for methods to be used in, and the facilities and controls to be used for ,

the manufacture, processing, packing or holding of a drug to assure that such drug meets the

requirements of the [Federal Food, Drug and Cosmetic Act] as to safety, and has the identity an d

strength and meets the quality and purity characteristics that it purports or is represented t o

possess ." 21 C .F,R. § 210 .1(a) . Pharmaceutical products manufactured in violation of cGMPs

are deemed to be "adulterated" within the meaning of the Federal Food, Drug and Cosmetic Act,

21 U.S .C. § 351(a)(2)(B), and any firm responsible for the manufacture of adulterated produc t

„shall be subject to regulatory action ." 21 C.F.R. § 210 .1(b) .

42. The FDA's cOMP regulations stri ctly control the manufacture of all dru g

products . They require every drug manufacturer to develop and follow detailed writte n

procedures for all aspects of the production, testing, storage, labeling and distribution of dru g

products . They provide, for example, the standards for the buildings and facilities used in th e

manufacture of drug products (§§ 211 .42-58); equipment used in the manufacturing process (§ §

211 .63-72); the control of drug product components, containers and closures (§$ 211 .80-94) ,

including written procedures for the receipt, identification, storage, handling, sampling, testing ,

and approval and rejection of components, drug product containers and closures (* 211 .80) ;

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production and process controls (see § 211 .100-115), including, inter aliu : "written procedures

for production and process control designed to assure that the drug products have the identity,

strength, quality, and purity they purport or are represented to possess" (§ 211 .100(a)) and

written justification for any deviation from those procedures (§ 211 .100(b)) ; the packaging and

labeling of drug products see §§ 211 .122-137); and record keeping and reporting requirements

(see 211 .180-198), including written procedures for the handling of complaints concerning drug

products (§ 211 .198) .

43 . Significantly, the cGMP regulations also provide for the establishment of a

quality control unit within each drug manufacturer whose responsibilities include approving or

rejecting "all components, drug product containers, closures, in-process material, labeling, and

drug products," and the review of "production records to assure that no errors have occurred or,

if errors have occurred, that they have been fully investigated" ( 211 .22(a)) . The quality

control unit is also required to approve or reject "all procedures or specifications impacting on

the identity, strength, quality, and purity of the drug product" (21 G .F.R. § 211 .22(h)) . The

cGMP regulations also require adherence to laboratory controls (§§ 211 .160-176), including the

"establishment of scientifically sound and appropriate specifications, standards, sampling plans,

and test procedures designed to assure that components, drug product containers, closures, in-

process materials, labeling and drug products conform to appropriate standards of identity,

strength, quality, and purity. "

44. Compliance with cGMPs is required not only for existing drug products, but is an

essential requirement for the FDA's approval of NDAs . The FDA conducts pre-approval

inspections of the facilities identified by the firm for the manufacture of a new drug and such

inspections will likely be conducted with a higher level of scrutiny for a firm that has a history o f

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cGMP compliance violations. Compliance Policy Guide 7132.12 issued by the FDA states that

"cGMP deficiencies supporting a regulatory action also support decisions regarding non-

approval of drug marketing applications . . . Therefore, the issuance of a 'warning' letter or

initiation of other regulatory action based upon cGMP deficiencies must be accompanied by

disapproval of any pending drug marketing application . . , " (Emphasis added . )

45 . Schering -Plough was well aware of FDA policy in this regard . For example, in its

1999 Form 10-K, the Company stated that "[flailure to meet 'good manufacturing practices '

established by governmental authorities can result in delays in the release of products . . . „

2. By The Start Of The Class Period, Defendants Had Actual Knowledge Of SeriousAnd Widespread Manufacturing And Quality Control Deficiencies At Schering-Plough's Manufacturing Facilities In New Jersey and Puerto Rico, AffectingVirtually .Every Significant Drug Product Sold By The Compan y

46. The FDA seeks to ensure the quality of drug products by monitoring th e

compliance of drug manufacturers with cGMPs through periodic inspections . Before, during and

after the Class Period, the FDA conducted a total of at least a dozen inspections of Schering-

Plough's manufacturing facilities in Kenilworth and Union, New Jersey and Manati and La s

Piedras, Puerto Rico . These facilities manufacture virtually every significant prescription and

over-the-counter pharmaceutical product sold by the Company. The FDA inspections revealed

serious and numerous violations of cGMPs across virtually every product line manufactured at

these facilities .

47 . The FDA informed Schering-Plough of the results of its inspections through ,

among other things, the issuance of "Warning Letters" and reports of inspectional observations

on FDA-483 . The FDA issues Warning Letters to drug manufacturers when violations are of

"regulatory signi fcance ." A matter is deemed to be of regulatory signi iicance if the failure to

correct adequately and promptly violations noted in the Warning Letter may be expected to resul t

-21-

in enforcement action . The FDA-483 is intended for use in notifying the inspected firm's to p

management in writing of significant conditions, relating to products and/or processes, that were

observed during an inspection, and is typically issued to a drug manufacturer at the conclusion o f

an inspection. Inspectors are instructed to list only significant observations that reveal violation s

of FDA regulations , including violations or GMPs.

48. The FDA provided Schering-Plough with a report, on FDA-483, of each of it s

inspections of Company's New Jersey and Puerto Rico manufacturing facilities . These

inspection reports informed the Company of numerous and wide-ranging cGMP violations .

Moreover, before the Class Period, between June 1998 and May 2000, the FDA . issued fou r

separate Warning Letters to Schering-Plough as a result of significant deviations from cGMPs .

In these letters, Schering-Plough was cited for the manufacture of "adulterated " products and wa s

warned that as a result of its cGMP violations, the FDA could undertake product seizures or see k

injunctive relief. Schering-Plough was also warned that the FDA could withhold approval o f

pending NDAs until the violations were corrected .

(a) FDA Inspections Before The Class PeriodReveal Significant Violations Of cGMPs

(i) March-May 1998 FDA Inspection Of Schering-Plough'sLos Piedras, Puerto Rico Manufacturing Facility

49. On June 29, 1998, the FDA sent Schering-Plough a Warning Letter arising from

an inspection of the Company's manufacturing facility in Las Peidras, Puerto Rico betwee n

March 18, 1998 and May 7, 1998 . The letter informed the Company that during the inspectio n

"our investigators documented deviations from the [cGMP regulations] and the requirements for

NDA Field Alert Reporting " and that such "deviations cause Theo-Dur Extended Release Tablets

-22-

to be adulterated" within the meaning of the Food , Drug and Cosmetic Act. With regard to

Theo-Dur tablets, the Warning Letter cited Scheriuig -Plough for :

• "Extension of the expiration period beyond the 24 months approved for Theo-DurExtended Release Tablets; "

• "Failure to conduct in-process testing of all lots of intermediate materials used in themanufacturing or Theo-Dur Extended Release Tablets;" and

• Failure to timely file a Field Alert Report notifying the FDA that the Company hadreleased for distribution a single lot of Theo-Dar 300 mg. Extended Release tablets that

failed to meet established speci fi cations .

50. Significantly, the Warning Letter also expressed the FDA's concerns regarding

Schering -Plough 's leading Claritin product . The FDA stated :

[W]e are concerned about your solution to address the variability in absorbanceduring testing of Claritin 10 mg tablets by recording the maximum at only 280nm. The question still remains as to why the maximum of the standard solutionand samples changes so drastically within the same run . Your firm shouldconduct a full investigation to assess the cause of the problem .

51, The June 29, 1998 Warning Letter also noted that the violations listed were no t

intended to be all-inclusive and that failure to correct the deficiencies could result in the

imposition of sanctions, including non-approval of pending NDAs :

The above identification of violation is not intended to be an all inclusive list ofdeficiencies at your facility . It is your responsibility to assure all requirementsunder the Food Drug and Cosmetic Act and the regulations promulgatedthereunder are being met . . . . [P}ending NDA, ANDA, or export approvalrequests may not be approved until the above violations are corrected .

You should take prompt measures to correct these deviations . Failure to promptlycorrect these deviations may result in regulatory action without further notice .Such action include[s] seizure and/or injunctions .

(ii) June-July 1998 FDA Inspection of Schering -Plough'sKenilworth And Union , New Jersey Manufacturing Facilitie s

52 . Schering-Plough's manufacturing facilities in Kenilworth and Union, New Jerse y

were inspected by the FDA between June 29, 1998 and July 30 , 1995. A Warning Letter arising

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from those inspections was issued by the FDA to Schering-Plough on October 23, 1998. The

Warning Letter advised the Company that the FDA's investigators had "found significant

deviations from [cGMP ] regulations" and "[s]uch deviations caused finished pharmaceuticals to

be adulterated within the meaning of the [Federal Food, Drug and Cosmetic Act] ." Products for

which deviations were observed included Claritin-D 12 Hour Repetabs , Diprolene Ointment,

Nasonex Nasal Spray (one of Schering-Plough 's leading allergy/respiratory products which

generated $415 million in sales in 2000), and Proventil Inhaler (one of Schering-Plough's

leading allergy/respiratory products which generated $ 197 million in sales in 2000 ) . The FDA

found, among other things, that :

"There is no assurance that the written production and process control proceduresestablished for coating the Claritin-D 12 Hour Rcpetabs are sufficient to produce aproduct that has the quality it is purported or represented to possess ;"

The Company partially released for distribution batches of various products for whichout-of-specification ("OSS") test results had been obtained, even though no data existedto invalidate the OSS results, Products that were the subject of partial releases includedClaritin-D 12 Hour Repetabs, Diprolene Ointment, Prov'entil Inhaler and Nasonex Nasal

Spray. With regard to the release of product for which OS5 results had been obtained,the FDA bluntly warned Schering Plough that :

"Released products are expected to conform to establishedspecifications from the beginning to the end of production .Current regulations specify that drug products failing to meetestablished standards or specifications and any other relevantquality control criteria shall be rejected . Reprocessing may beperformed, provided certain criteria are met according to writtenprocedures . The practice of partial releases, no matter howstringent the re-sampling, raises doubt as to the safety and efficacyof the product being released . It is not acceptable to substitutetesting over adequate control of a process ;,,

• The "mingling and subsequent repackaging" of one pallet of semi-finished bottles ofrejected Nasonex Nasal Spray with another batch of the same product that wassubsequently released in part ; and

• The absence of data supporting the time period established to fill canisters of ProventilAerosol Inhaler.

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(iii) April-May 1999 FDA Inspection Of Schering-Plough'sKenilworth and Union, New Jersey Manufacturing Facilities

53. Between April 12, 1999 and May 28, 1999, Schering-Plough's manufacturing

facilities in Kenilworth and Union, New Jersey were again inspected by the FDA . On May 28,

1999, an FDA-483 was issued to the Company listing twelve violations of cGMPs . Products

affected by the cGMP violations included Proventil Inhaler Aerosol, Vanceril DS Aerosol

Inhalers (a leading allergy/respiratory product with sales of $127 million in 2000) and Vaaicenase

Pockethaler (a leading allergy/respiratory product with sales of $175 million in 2000) .

Violations included :

• A reduction in the number of canisters of Proventil Inhaler Aerosol that were subjected tothe heat tunnel/stress test . The Company failed to obtain FDA approval for this change inquality control, violating both FDA regulations and Schering-Plough's own internalprocedures (known as SOPs) . Violations also included the release of certain batches ofVanceril DS Aerosol for distribution, even though those batches failed to meet requiredspecifications for particle size .

• The Company failed to make timely filings with the FDA of adverse drug experiencereports . In one instance, the FDA found that a report of a serious adverse drugexperience was 600 days overdue . Many other similar reports were more than twentydays overdue. The FD.A also round that the Company had erroneously classified"serious" adverse experiences as "non-serious ." For example, in one instance, apharmacist reported that a patient had experienced convulsions after the first dose ofalbuterol . The Company nevertheless classified the incident as non-serious .

54. On July 21, 1999, the FDA issued a Warning Letter to Schering-Plough after

determining that the Company had failed to satisfactorily respond to many of the observations

noted on the May 28, 1999 FDA-483 . Like the previous Warning Letter received by the

Company in 1998, the July 21, 1999 Warning Letter advised Schering-Plough that the FDA's

investigators had "found significant deviations from [cGMP] regulations" and "[s]uch deviations

caused finished pharmaceuticals to be adulterated within the meaning of the [Federal Food, Drug

and Cosmetic Act] ." Deviations found by the FDA included :

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• Failure to reject batches Vanceril DS Inhalation Aerosol that "did not meet established

test specifications ;"

• Failure to follow written test procedures with respect to certain batches of Vanceril DSInhaler;

• Failure to subject Proventil Inhalation Aerosol to required testing ; and

• Using equipment to conduct certain testing that was not qualified to perform such tests .

55 . The Warning Letter underscored the serious nature of the Company's cGM P

violations, noting that Schering-Plough agreed to "voluntarily" cease distribution of Proventil

inhalation Aerosol in response to findings of the FDA's investigators. Indeed, following the

inspection, a meeting between representatives of the FDA and Schering-Plough was held on June

7, 1999 at the FDA's New Jersey District Office to discuss the investigators' observations

concerning the testing of Proventil Inhaler and the Vanceril particle size deviations . Another

meeting was held at FDA Headquarters on June 17, 1999 between representatives of CDBR (the

FDA's Center for Drug Evaluation and Research) and the Company "to discuss the conditions

under which your firm may resume shipment of the Proventil Inhalers." The Warning Letter also

noted that on June 25, 1999, CDER sent the Company a letter detailing a four phase proposal of

the "interim steps to be taken by your firm in order to continue distribution of this product . "

56, The July 21, 1999 Warning Letter also rebuked the Company for failing to

respond adequately to many of the observations in the May 28, 1999 FDA-483 and made clear

that Schering-Plough had failed to rectify problems that had been identified in the Warning

Letter issued ten months earlier:

As we pointed out in our previous Warning Letter of October 23, 1998, drugproducts failing to meet established standards or specifications and any otherrelevant quality control criteria shall he rejected . Retesting later is not anacceptable practice. The approved [deleted] specification of [deleted] with[deleted] testing for Vanceril DS Inhalation Aerosol must be adhered to until suc h

-26-

time as a supplement to the appropriate NDA is filed and approval is receivedfrom agency officials .

Like the previous Warning Letters received by the Company, the July 21, 1999 Warning Letter

informed Schering-Plough that the violations listed were not intended to be all-inclusive and

warned that "[failure to promptly correct these violations may result in regulatory action without

further notice, such as seizure and/or injunctions . "

57. In the wake of the FDA inspections of Schering-Plough's Kenilworth and Unio n

manufacturing facilities in the Spring of 1999, and the FDA-483 and Warning Letter issued

connection therewith, Schering-Plough's Warrick Pharmaceuticals subsidiary, on September 9,

1999, announced a recall of a single lot of albuterol metered dose inhaler aerosol, the Company's

"generic" version of Proventil Aerosol Inhaler . The recall was initiated after it was discovered

that some canisters of alhuterol may not have contained any active ingredient . Inasmuch as

albuterol is used to stop acute asthma attacks, the absence of active ingredient from the canisters

was life-threatening. The recall involved approximately 190,000 units and, according to the

Company's press release , was "being conducted in cooperation with the U .S. Food and Drug

Administration."

58. On December 2, 1999, Schering-Plough announced another recall relating to one

of its aerosol inhaler products . The recall involved five lots of Vanceril Double Strength

Inhalation Aerosol and was again undertaken after it was discovered that some canisters may not

have contained any active ingredient . The recall affected more than 80,000 units of product .

(iv) December 1999 - February 2000 FDA Inspection Of Schering-Plough'sKenilworth And Union, New Jersey Manufacturing Facilities

59. The FDA conducted yet another inspection of Schering-Plough's Kenilworth and

Union, New Jersey manufacturing facilities between December 9, 1999 and February 25, 2000 .

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At the conclusion of the inspection, Schering-Plough was issued another FDA-483 that listed

eighteen separate observations, many of which contained multiple subparts . The first

observation bluntly informed the Company that "[t]here is no assurance that canisters with no

active ingredient, drug concentrate only, propellant only or empty canisters, will not be found in

batches ❑ f Proventil (Alhuterol), Vanceril, Vanceril Double Strength and Vancenase Pocket

Inhalation Aerosols manufactured prior to 11122199 ." Other violations included : failure to

conduct an adequate investigation of consumer complaints ; failure to conduct a complete

investigation when empty canisters were discovered on the marketplace ; failure to record batch

times correctly on the Company's batch records ; failure to obtain proper authorization prior to

implementing changes in quality control ; failure to qualify the Company's checkweigher, a vital

piece of equipment used to check the weight of aerosol canisters; failure to complete yearly

reviews of inhalation aerosols ; and failure to investigate why the Company's method validation

data for the new albuterol analytical method did not meet acceptance criteria .

60. The observations on the February 25, 2000 FDA-483 plainly revealed that the

Company had failed to correct cGMP violations for which it had previously been cited . For

example, the Company was once again cited for failing to subject Proventil to adequate testing

and for releasing batches of Vanceril DS Inhalation Aerosol for distribution even though the y

failed to meet particle size specifications . The Company also failed to adequately investigate

known problems . In connection with the September 1999 recall of albuterol, for example, the

Company determined that canisters in the lot recalled may not have contained any active

ingredient because an air hose connected to the drug concentrate became loose during the filling

process. Nevertheless, FDA inspectors found that the Company's investigation of this incident

was inadequate "in that batches of inhalation aerosol products in the marketplace were no t

-2S-

evaluated to determine if similar mechanical. problems to the drug concentrate filling head s

existed. The investigation also failed to require filling operators to isolate and 100% weigh t

inspect canisters back to the last acceptable weight check when the filling machine is no t

operational (i .e . downtime) due to mechanical problems concerning the concentrate or propellan t

filling stations ." The Company's investigation of consumer complaints was similarly inadequate .

The FDA-483 noted several instances where complaints concerning empty canisters had been

received, yet the Company closed its complaint investigations "without testing to determine i f

the canisters contained drug product ."

61 . As a result of the February 25, 2000 FDA-483 observations, as well as a meeting

held between Schering-Plough and the FDA on March 8, 2000, Schering-Plough, on March 29 ,

2000, announced a "voluntary" recall of all inhalation aerosols manufactured before Septembe r

30, 1999. Again, the recall was initiated after the Company could not assure adequately that al l

canisters distributed in the marketplace contained active ingredient . The recall included nearly

59 million units of ProventillAlbuterol ; over 5 million units of Vanceril 42 mcg . ; over 800,000

units of Vanceril 84 mcg .; and more than 2.7 million units of Vancenase .

(v) November 1999-March 2000 FDA Inspection OfSchering-Plough 's Manati, Puerto Rico Manufacturing Facility

62. Between November 30, 1999 and March 28, 2000, the FDA conducted . an

inspection of Schering-Plough's Manati , Puerto Rico manufacturing facility . The inspectors

found significant GMP violations and issued an FDA-483 to the Company on March 28, 2000 .

The GMP violations affected a variety of products : including Vancenase AQ Nasal Suspension ;

Betamcthasone Dipropionate ; Trilafone Injection ; Garamycin Ophthalmic Solution ; Banamine

Solution; Gentocyn Ophthalmic Solution; Ampligen, Diprolene Gel ; and Celcstone Phosphate

-29-

Injection. According to the FDA-483, the FDA. inspectors observed numerous cGMP violations

at the Manati facility, including :

• "Failure to have adequate laboratory controls ; "

• Failure to submit timely Field Alert Reports on certain released products in spite of beingaware that those products had failed stability tests ;

• "Failure to adequately identify and control the length of time between the end ofprocessing and each cleaning step during the cleaning validation of equipment used in themanufacture and filling of creams and ointments ;, ,

• "Failure to always perform adequate analytical laboratory investigations into the causesof product out-of speci fication (OOS) and atypical results ; "

• Release of one lot of Banamine Solution "after demonstrating throughout investigationthat the sterility of this lot is questionable ;"

"Use of non-stability indicating methods to test products for which a stability indicatingmethod has been developed and approved ;"

• Release for distribution of several lots of Vancenase AQ nasal spray whose pumpassemblies failed to meet specifications ; and

• Failure to conduct annual reviews of bulk substances used in the manufacture of drugproducts .

63. On May 8, 2000, the FDA sent Schering-Plough a Warning Letter arising from it s

November 1999-March 2000 inspection of the Manati, Puerto Rico facility . The Warning Letter

informed the Company that "pharmaceutical products manufactured at the facility are adulterated.

. . . because they were not manufactured in accordance with Good Manufacturing Practic e

Regulations." The Warning Letter reiterated many of the same observations made on the March

25, 2000 FDA-483 :

• "Failure to perform adequate investigation into the cause of out-of-specification resultsfor stability testing; "

• "Inadequate laboratory controls;"

+ "Failure to follow written procedures for cleaning equipment ; "

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• "Failure to test drug product components to assure they meet current specifications ;" and

• "Failure to use reliable, meaningful and specific test methods for stability testing of drugproducts . "

Like the other Warning Letters received by Schering-Plough, the May 8, 2000 Warning Letter

advised the Company that the list of violations was not intended to be all-inclusive and warned

that "[fJailure to take prompt action to correct these deviations may result in regulatory action

without further notice . "

(b) A Confidential Audit Conducted Before The Class Period By Schering-Plough 's Consultant, AAC Consulting Group, Confirms Serious AndWidespread cGMP Violations And Warns Of A "Serious Risk Of ASignificant FDA Regulatory Action" Against The Compan y

64 . In the wake of the pre-Class Period FDA inspections uncovering serious problem s

with Schering-Plough's aerosol inhaler products, and the recalls of tens of millions of units o f

product in connection therewith , the Company retained an outside consultant , AAC Consulting

Group , to undertake a confidential review the Company 's manufacturing systems and procedures,

and its compliance with cGMP regulations . Among the tasks performed by AAC was a detailed

study of the Company's Manufacturing and Packaging Departments at its Kenilworth, New

Jersey facility, including their interaction with the Quality Control Department . Between

February 28, 2000 and April 14, 2000, AAC conducted interviews with managers , supervisors ,

and operators to obtain employee input on problems concerning, inter alia, manufacturing and

packaging processes, personnel policies and company culture .

65 . On April 27, 2000, twelve days before the commencement of the Class Period

defined herein , AAC provided Schering -Plough with a detailed, con fidential report, exceeding

one hundred pages , of its audit of the Kenilworth facility (the "Audit Report") . A cover letter

enclosing the Audit Report from Anthony Celeste, President of AA C, to John E. Nine, Schering-

-31-

Plough's Corporate Vice President and President of Technical operations, emphasized th e

severity of problems uncovered by the audit, the serious risk of regulatory action by the FDA an d

the extensive effort that would be required to correct the deficiencies. The letter states, inter

alia :

The results of the audit revealed a number of serious cGMP systems failures andcompliance lapses . It is our view that the facilities and corporation are atserious risk of a significant FDA regulatory action. This conclusion is based onthe previous firm history and our current audit findings .

Basic cGMP areas where there are substantial non-co mpliance issues and outof control situations include :

• Validation of processes , support systems (including water and HVAC) andcleaning operations

Out of control E'VAC system in tablet granulation an d compression areas,creating serious cross-contamination possibilities

• Quality Control/Quality Assurance activities, including lack of peer levelpersonnel in manufacturing areas, vendor audit program, materials sampling, etc .

• Poor quality of variance, complaint, and MRB [Materials Review Board]investigations

• Manufacturing organizational structure and span of contro l

0 Quality culture, performance management, and training documentatio n

The above areas are viewed as the "systems " which are "broken" That are thecause for many of the deviations discovered during the audit. Please review theaudit report for the details of our findings .

It is our recommendation that this report be utilized to prepare additional actionitems that will be incorporated into the overall cGMP Action Plan . These itemsshould be given very high priority for completion . We are concerned that theamount of work required to correct all of the deficiencies to assure substantialcGMP compliance is extensive. (Emphasis added . )

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66, The Audit Report contained an "Executive Summary," of the "major deficiencie s

and vulnerabilities ." Each of these matters was, in turn, discussed in greater depth in the body o f

the report . In regard to the Company's validation of processes, support systems and cleanin g

operations, the Executive Summary stated that :

• "The process validation documentation for all product lines was found tobe inadequate . Many of these activities were conducted several years agoand have not been reviewed to assure they meet present regulatoryrequirements . There is no master plan in place to manage and monitorvalidation activities. Many of the validation approaches do not meetFDA or industry standards. Critical processing steps often were notidentified and properly verified through elevated sampling plans.Acceptance criteria for validation activities were not always properlyestablished and many reports are inadequate or non-existent ." (Emphasisadded. )

+ "There is no packaging line qualification for and of the packagingoperations. Much of the packaging equipment is quite old and seems to becausing a lot of packaging problems, presenting an even greater need forline qualification."

• "Cleaning validation was found to be lacking or very inadequate . . .,"

"Validation of the water system is lacking. The system was initiallyinstalled several years ago . It has undergone several upgrades andchanges and there is no consolidated, adequate validation of the currentoperating systems . "

Elsewhere, the Audit Report also observed that "[t]here is a critical lack of standards an d

procedures within the validation group" and that the "Standard Operating Procedure (SOP) book

for the group included only three documents . "

67 . The Audit Report also identified the Company's "quality control/assuranc e

activities" as an area of "major vulnerability ." In this regard, the Executive Summary stated that :

• "There is insufficient QC/QA presence in Kenilworth, resulting in failureto assess variances and process batch records in a timely manner , performall in-process tests as scheduled, and adequately check daily performanceof manufacturing operations ."

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"Component and raw material vendor audits are not being performedaccording to established schedules ; audit frequency may not be sufficientcompared to current industry standards, e .g. active ingredients ; componentsupplier audits lack some key assessment elements, e.g. pre-determinedsampling procedures . "

• "Procedures for warehouse sampling of containers sent to Supplier QC areout-of-date/unauthorized and do not assure sampling of all lots in a multi-lot shipment . "

• "Several GMP issues were identified in the in-process, component, andraw mate rial testing labs . "

"The change control process is slow and cumbersome, resulting in delaysin approving proposed changes and the use of draft, unauthorizedprocedures . "

Elsewhere, the Audit Report emphasized the Company's lack of adequate quality contro l

personnel :

Manufacturing supervisors and managers continually stressed to us how a lack ofthe proper QC personnel at Kenilworth was adversely affecting productionefficiency and quality . The vacancy of an in-process QC manager for 1 8 monthswas mentioned by several people . It was reported that there are not enough QCsupervisors with the authority to sign documents such as variances, so productiongoes on without them . QC in-process inspectors verify line start-ups and performattribute testing of products during production runs . They perform no otherchecks of manufacturing operations. We strongly recommend an increasedpresence of appropriate QA/QC at Kenilworth to improve manufacturing qualityand productivity . We believe this will have a significant positive impact on GMPcompliance.

68. The Audit Report also confirmed the existence of profound problems with

Schering-Plough's corporate culture that negatively impacted product quality . AAC asked

supervisors, managers and operators if they perceived a real change in the Company's

commitment to improving product quality following the massive recall of aerosol products . The

Audit Report records the response to this inquiry as follows :

Most managers/supervisors have adopted a wait and see attitude, to determine ifupper management will "walk the talk" with respect to long term commitment toproduct quality . They state that for many years they have long been under

-34-

significant pressure to get production out and don 't feel they have had enoughtime or people to do a quality jolt. They indicated that there has been in the pasta continual push for increased production and decreased down time sometimesat the expense of high quality work and GMP compliance . They believe therehas been and imbalance between quality and production, leaning considerablytoward the side of production. (Emphasis added.)

Indeed, in the Executive Summary to the Audit Report, AAC recommended that "[u]pper

management needs to demonstrate its long term commitment to product quality, such as throug h

increased staffing/budget resource allocations and investments in new equipment, in order t o

supplant the traditional emphasis on production and firmly establish a company culture in whic h

quality is, in fact, the number one priority . "

69 . With regard to manufacturing operations, the Audit Report placed particula r

emphasis on the severe deficiencies of the Kenilworth Iacility's HVAC system. The Executiv e

Summary to the Audit Report noted :

There is serious concern about the design, qualification, maintenance andmonitoring of the HVAC system in the granulation and compression areas . Itappears the system was not properly designed, has not been properly validated,and no meaningful monitoring of the operations is performed . During the courseof the audit, operating conditions were found to be totally unacceptable in that thedesigeed negative pressures in the processing areas were not being maintained . Infact, some processing areas were positive to surrounding areas creating seriouscross contamination possibilities .

The poor state of the Company's manufacturing facilities was also underscored by AAC's

observation that fecal matter had contaminated the room where albuterol solution was bein g

produced . The Audit Report stated :

Backup of sewage in the corridor adjacent to the room where albuterol solutionfor inhalation is manufactured has been occurring periodically over the last yearor two without a plan for permanent correction and without any documentation ofthe problem or evaluation of product impact . During the early part of the audit,large pools of sewage were observed to form which were then tracked through theproduction facility. Ingredient containers and hoses came in contact with thefloor and fecal organisms were observed to have a pathway into the product .

-35-

Drugs produced in this area were not evaluated for exposure to fecalcontamination .

Indeed, the Audit Report made clear that notwithstanding the significant recalls of aerosol

products that had occurred in the previous months, the manufacturing problems in this area were

still receiving inadequate attention :

It is our understanding, based on interviews with supervisors and managers, thataerosol products are a major money maker for the company . In addition,significant manufacturing problems have been experienced with this productclass, which is indicative of insufficient technical expertise and managerialoversight. This production area does not have the visibility and importance froman organizational standpoint that it needs in order to quickly and effectivelyrecover from past problems, maintain satisfactory -regulatory compliance, attractand retain necessary expertise, and grow in the future .

(c) FDA Inspections During The Class Period Confirm The Persistence OfSevere Manufacturing And Quality Control Deficiencies At Schering-Plough's New Jersey And Puerto Rico Facilitie s

70 . In spite of five separate FDA inspections conducted between the Spring of 1998

and the Spring of 2000 and the issuance of four Warning Letters arising therefrom, as well as the

confidential, detailed AAC Audit Report issued on April 27, 2000, all of which documented th e

existence of serious and widespread manufacturing and quality control deficiencies, defendants,

commencing on May 9, 2000, as detailed in paragraphs S6-113 below, proceeded to disseminate

information conveying a false impression that any significant issues relating to manufacturing

and quality control were limited to the Company's asthma inhaler products and that Clarinex was

on track for FDA approval . Subsequent FDA inspections during the Class Period, conducted in

late 2000/early 2001, confirmed the persistence and deepening of all of the problems that were

already well known to Schering-Plough management . The results of those inspections are

summarized below .

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(i) November-December 2000 FDA Inspection OfSchering-Plough's Manati, Puerto Rico Manufacturing Facility

71 . The FDA again inspected Schering-Plough's Manati, Puerto Rico manufacturin g

facility between November 9, 2000 and December 14, 2000 . The inspection found still more

cGMP violations affecting a variety of products, including : Integrilin Injection (one of Schering-

Plough's leading cardiovascular products with sales of more than $170 million in 2000) ;

Gentocin otic solution; Nasonex Nasal Spray ; Garainycin Ophthalmic Solution ; and Mometainax

Ointment . An FDA-483 was issued to Schering-Plough on December 14, 2000 .

72, The FDA-483 recorded numerous cGMP violations , including , inter alia :

• FDA inspectors observed that since February 1999 all stability testing of batches ofGentocin "has revealed a contamination of the product ." In October 2000, Schering-Plough determined that the contamination was occurring because a chemical wasleaching from the adhesive used to adhere the label to the product container. Incredibly,however, the FDA found that "[t]here is no evidence that the firm has taken any action toensure the safety and efficacy of the Gentocin otic solution and has continued todistribute the product with the label causing . . . the contamination. Furthermore, the firmhas not determined the effect the leaching may have on other products, includingGaramycin ophthalmic solution, which use labels with the same adhesive ; "

• "The manufacturing process for Mometsone Furoate Active Pharmaceutical Ingredient(API) (i .e. the active ingredient for Nasonex Nasal Spray] is not validated" in that, inter

alia, "there is no validation protocol for the specific process being validated;" "[t]here isno scientific or statistical justification for the sampling plan used during the validationeffort ;" and "30% of the Mometasone Furoate lots manufactured in 2000 needed to bereprocessed in order to meet specifications; "

"Your firm' s reprocessing procedure for Mometsone Furoate (MMF-E) is not validated ;"

• "Antimicrobial Effectiveness (AE) Method Validation for Nasonex Nasal Spray (KTL) isnot adequate ; "

• The Company's retest procedure for Uniformity of Spray Content in connection withNasonex Nasal Spray "allows the hnn to retest 005 results without supportinginformation that reveals an assignable cause, or a strong possible cause, for the initialOSS result ;" and

• Failure to timely file Field Alert Reports on products that were released without meetingspecifications.

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(ii) November 2000-January 2001 FDA Inspection OfSchering-Plough 's Kenilworth Manufacturing Facility

73 . The FDA conducted an inspection of Schering -Plough's Kenilworth facility

between November 1, 2000 and January 19, 2001 . Upon conclusion of the inspection, FDA

inspectors issued an eighteen-page FDA-483, detailing widespread cGMP violations affectin g

many products. Products identified in the FDA-483 included : Claritin l0mg . Tablets, Claritin

Syrup and Claritin D-24 Hr . ER Cores; Proventil Syrup ; Nasonex Nasal Spray ; Vanceril ;

Vancenase Pockethaler; Lotrisone Lotion (one of Schering-Plough's leading dermatologica l

products with sales of more than $190 million in 2000) ; Elocon Lotion and Elocon Cream

(another of Schering-Plough's leading dermatological products with sales of more than $170

million in 2000); K-Dur Tablets (one of Schering-Plough's leading cardiovascular products wit h

sales of $290 million in 2000 ) ; Afrin Nasal Spray, Extra Moisturizing Spray and Children' s

Nasal Spray; Lotrimin AF Solution and Lotrimin Lotion ; Chlor-Trimetozn Rcpetab Tablet Cores ;

Tinactin Solution ; A&D Ointment w/zinc oxide ; Trilafon Tablet Cores; Diprolene Get 0.05%;

Estinyl Cores; Beclornethosone Dipropionate ; Celestone 0.5mg; Aclovate Ointment ; Trinalin

Repetabs ; Proglycem Oral Suspension ; Mometasone Furoate Inhalation Powder; Miradon

Tablets ; and Etrafon Tablet Cores .

74. The January 19, 2001 FDA-483 offered a particularly harsh indictment of

Schering-Plough's Quality Control Unit :

The Quality Control Unit failed to assure that drug products were manufactured incompliance with cGMl's and therefore have the safety, quality, and purity thatthey purport, or are represented to possess . The Quality Control Unit failed touphold their responsibilities to assure valid performance of manufacturingprocesses, suitability of equipment, support systems, and analytical methods fortheir intended use, and prevention of contamination through proper cleaningprocedures .

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The process validation for mazy products fails to support claims thatmanufacturing processes were capable of consistently producing products withthe same quality, purity, and safety . The Validation Department and the QualityControl Unit routinely generate and approve protocols and reports, which containcritical deficiencies . . .

75. The January 19, 2001 FDA-483 recorded many cGMP violations including, inte r

alia :

• "The use of Loratadine Active Pharmaceutical Ingredient from Schering, Singapore foruse in Clan-tin Syrup was not supported or qualified in that there were no validationbatches manufactured with this new source;,"

• "The process used to manufacture Proventil Repetabs was not validated in that 28% offinished tablet batches were rejected during the production period of September 1, 1999

to August 31, 2000 ;"

+ "Manufacturing and packaging equipment items used to produce active pharmaceuticalingredients and drug products were not all qualified ;"

+ "The Validation Department had no written procedure for performing cleaning validationof drug products . There was no assurance that the cleaning of manufacturing andpackaging equipment was appropriate to prevent contamination that would alter thesafety, identity, strength, quality or purity of drug products ; "

+ "14VAC Systems supporting drug manufacturing and packaging areas were not qualified .. . . Principal Project Engineers, Maintenance and Facilities Department, QualityControl/Validation and consultants routinely generate, sign and approve reports, whichcontain critical deficiencies before corrective actions are completed and fail to assureproper performance ;"

"The accuracy and security of data generated by computer systems used to handle andcontrol manufacturing processes and generate and store laboratory data had not beendemonstrated through validation of each specific software program;" and

"Laboratory and Manufacturing deviations were not adequately investigated according towritten procedures, and in a way that provides a timely and scientific conclusion onwhich to base the disposition of a batch . "

76. Significantly, the January 19, 2001 FDA-483 also made clear that Clarinex -- th e

product that the Company had hoped to market during the Spring 2001 allergy season as a

replacement for Claritin -- was not being manufactured in compliance with cGMPs . In essence ,

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FDA inspectors found that the Company's manufacturing facilities in New Jersey and Puert o

Rico were incapable of producing identical Clarinex tablets of the same quality. The FD A

inspectors observed, inter cilia :

• "There was no assurance that the manufacturing process, parameters, equipment, orprotocols and their acceptance criteria, conducted and generated at multiple sites for theproduction of Clarinex (Desloratadine Tablets, 5 mg) are equivalent, or capable ofproducing product of the same quality . Batch records, including process parameters, andvalidation protocols, were written separately at each individual site without a comparisonor joint review to ensure equivalency . Differences include equipment sizes and models,processing parameters, acceptance criteria established in protocols, and acceptancecriteria for analytical method transfers ; "

• "The test method transfer from Schering, Kenilworth to Schering, Union failed todemonstrate that accurate and reliable results could be obtained from the QC laboratory .

. ;t t

• "The test method transfer from Schering, Kenilworth to Schering, Puerto Rico failed todemonstrate that accurate and reliable results could be obtained from the QC laboratory .

. . ;" and

"There was insufficient comparability data for the drug substance, Desloratadine,manufactured at the firm's Ireland and Singapore sites to assure equivalence of drugsubstance supply . "

77, The FDA-483 was not the only communication received by Schering-Plough from

the FDA on January 19, 2001 . On the same day, the Company also received an "approvable"

letter in connection with its pending NDA for desloratadine . In the approvable letter, the FDA

took precisely the sort of "significant regulatory action" that AAC had warned was a "serious

risk" for the Company before the start of the Class Period . The approvable letter advised the

Company that desloratadine would not receive FDA approval until the Company's cGMP issue s

were satisfactorily addressed.

78. On February 16, 2001, Schering-Plough sent the FDA written responses to the

January 1.9, 2001 FDA-483 . In a cover letter to those responses, defendant Cesan acknowledge d

"the need to make broad, deep and lasting changes in our manufacturing and quality operations "

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and that "[o]ur basic approach to improving GMP compliance throughout the entire company

must and will change." As set forth below, only hours earlier, after the close of the market on

February 15, 2001, the Company issued a press release in which it made its first public

acknowledgement of the true extent of its manufacturing and quality control deficiencies .

(d) Schering-Plough 's Manufacturing And Quality Control Deficiencies Were SoSevere That, Even Since The FDA Withheld Approval Of Clarinex, They

Have Not Been Cured

79. Even after the FDA' s "significant regulatory action" in withholding approval o f

the NDA for Clarinex, Schering-Plough was unable to promptly correct the severe deficiencies in

its manufacturing and quality control operations . After the end of the Class Period, Schering-

Plough received reports of additional FDA inspections of the Company's New Jersey and Puerto

Rico facilities . The FDA inspections found additional cGMP violations and that many of the

violations cited during previous inspections remained uncorrected . Reports of those FDA

inspections are summarized below .

(i) February 2001 FDA Inspection Of Schering-Plough'sManatl , Puerto Rico Manufacturing Facility

80. Between February 1 and 16, 2001, the FDA conducted an inspection of chering-

Plough's Manati, Puerto Rico manufacturing facility . Once again, an FDA-483 was issued for

numerous cGMP violations affecting a wide variety of products, including: Nasonex Nasal

Spray; Afrin Severe Congestion, Sinus No-Drip and Extra Moisturizing No-Drip Nasal Spray ;

Lotrimin Cream ; Gentocin otic solution ; Gentocin Veterinary Solution ; Garamycin Injection ;

Garamycin Cream; Diprolene Ointment; and Diprolene Cream . The FDA-483 listed ten separate

cGMP violations, including, hater alia :

• "Your firm can not assure the processes used to manufacture finished pharmaceuticalproducts can consistently produce product which meet their pre-determinedspecifications ;"

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• "Since February 1999 all stability testing of batches of Gentocin otic solution . . . hasrevealed contamination of the product . . . The investigation conducted by the firmconcluded, in October 2000, that the product was contaminated with [DCHP] . . . [andthat] the DCI- P was leaching from the adhesive used to adhere the label to the productcontainer . There is no evidence the firm has determined the effect the leaching may haveon all other products . . . which use the same container and label adhesive combination ."

• "The firm does not perform identification of unknown degradation products andimpurities for products that are listed under the product quality review program ;" and

"Since 1998 the firm has been receiving consumer complaints concerning the spraydelivery for Nasonex Nasal Spray . Consumer complaints have [been] increasing in thelast three quarters of 2000 with a total of approximately 275 complaints in the year 2000regarding the non-functioning of the drug delivery system . Despite this fact the firm stillhas not implemented a corrective action . The firm has not conducted an assessmentconcerning the safety and effectiveness of the product in that the problem with the spraydelivery system can affect the dose release . "

(ii) February 2001 FDA Inspection Of Schering-Plough'sLas Piedras, Puerto Rico Manufacturing Facilit y

81 . Between February 1 and 16, 2001, the FICA also conducted an inspection o f

Schering-Plough's Las Piedras, Puerto Rico manufacturing facility . An FDA.-483 was also

issued at the conclusion of this inspection, listing fourteen separate inspectional observations of

cGMP violations affecting a wide variety of products, including: Rebetol (used in combination

with Intron A to treat hepatitis C, the combination therapy is the Company's leading anti-

infective/anticancer product with over $1 .3 billion in sales in 2000) ; Claritin ; K-Dur 20 mg .

tablets ; Theo-Dur; Labetalol ; Uni-Dur ; and Normodyne 200 mg . and 300 mg, tablets. cGmP

violations observed by the FDA inspectors included , inter cilia :

+ "Your laboratory failure investigations are inadequate in that you re-test without anyscientific justification until passing results are obtained and/or fail to take correctiveactions to prevent recurrence of the possible assigned cause ;"

• "Your validation process for several of your products reviewed is inadequate in that itfails to provide documented evidence that you are capable of producing a product with ahigh degree of assurance that the specific processes will consistently produce a productmeeting it's predetermined specifications and quality attributes ;"

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• "You fail to test your stability samples at the scheduled intervals ; "

"Your Analytical Laboratory SOP for Out of Specification [OOS] results is inadequate inthat it fails to assure that the FDA [will] be -notified through a field alert report of a failingresult within 3 working days of becoming aware [of such result] ;" and

• "The tracking system for investigations into OOS results is not adequate because not allinvestigations are included . "

(iii) May -June 2001 FDA Inspection Of Schering-Plough'sLas Piedras , Puerto Rico Manufacturing Facility

82. Between May 1 and June 5, 2001, the FDA conducted another inspection o f

Schering -Plough's Las Piedras, Puerto Rico manufacturing facility. An FDA-483 was issued a t

the conclusion of the inspection which made clear that the Company had failed to implement

corrective actions that it had committed to implement as a result of the inspections during the

previous two years. The FDA inspectors identified eighteen separate cGMP violations affectin g

a variety of products, including: Clan-tin 10 mg. tablets ; Rebetol 200 mg. tablets; K-Dur

Extended Release Tablets ; Eulexin (one of Schering-Plough's leading anti-infective/anticancer

products with more than $125 million in sales in 2000); Theophyline 200 mg ., 300 mg. and 450

mg. tablets ; and Normadyne tablets . The FDA inspectors observed, inter alia :

• "You have not developed validation/qualification master plans encompassing process,cleaning, computer and analytical method validation as directed by the Corporate QualityAssurance Guideline titled Master Plans for Validation/Qualification issued 10/12/1999 ; "

• "Corrective actions you committed to in your response dated October 12, 1999 to theFDA-483 issued on September 21, 1999 concerning data maintenance and security inlaboratory instruments has not been completed . . . These systems have not been assessedand you have not developed the individual action plans necessary to bring these systemsinto compliance ; "

• "Your Out of Specifications (OOS) laboratory investigations system is inadequate" inthat: (a) "[a]fter your laboratory obtained an OOS value, they performed the re-testingwithout a justification documented ;" (b) "[y]our laboratory investigations fail to supportthe conclusion and/or assignable cause, which invalidated the original analytical data andvalidated the data obtained during re-testing ;" and (c) "[y]our laboratory investigationsfail to have adequate corrective actions to prevent the recurrelice of OOS results ;" and

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+ "The process for 200mg, 300mg and 450mg theophyline tablets is not validated in thatthe observations on the FDA-483, Inspectional Observations, issued to your firm onFebruary 16, 2001 have not been corrected . In addition, according to Schering-PloughProducts LLC management, there are no plans to validate[] this process . However, yourfirm has continued to distribute theophyline tablets manufactured using the unvalidatedprocess after February 16, 2001 ."

(iv) May-June 2001 FDA Inspection Of Schering-Plough'sManati, Puerto Rico Manufacturing Facility

83. Between May 1 and June 13, 2001, the FDA conducted another inspection o f

Schering-Plough's Manati, Puerto Rico manufacturing facility. A detailed twenty-five page

FDA-483 was issued at the conclusion of the inspection which amounted to a scathin g

indictment of the firm's Quality Assurance Unit . The FDA-483 also made clear that th e

Company had failed to implement corrective actions that it had committed to implement as a

result of the previous inspections of the Manati facility . Thirteen separate observations of cGMP

violations were identified affecting virtually every drug product manufactured at the plant ,

including : Nasonex Nasal Spray ; Vancenase AQ Nasal Suspension ; Integrillin Injection ; Elocon

Ointment ; Afrin Sinus Congestion No Drip, Severe Congestion No Drip, Extra Moisturizing N o

Drip Nasal and Menthol Nasal Spray ; Lotrimin and Coyne-Lotrimin Cream ; Celestone Soluspan

Suspension ; Garamycin Cream ; Diprolene Topical Gel ; Betasone Suspension; Solganal

Suspension ; Optimmune Ophthalmic Ointment ; Gentocin Durafilm Ophthalmic Solution ; and

Ocuclear Ophthalmic Solution .

84. The FDA inspectors observed, inter alia :

• "Your firm's Quality Assurance Unit lacks sufficient responsibility and authority toexercise the controls necessary to assure that consistent and reproducible manufacturingprocesses and controls are established and followed; that appropriate productspecifications are established; that scientifically sound and appropriate testing methodsand procedures are established and followed ; and that appropriate corrective actions aretaken when process deviations or failures of product to meet established specificationsoccur for drug products manufactured by your firm . The Quality Assurance Unit also

-44-

failed to assure that accurate and complete records of production and control activitieswere prepared and maintained appropriately and that timely, accurate and completereports were submitted to the FDA when appropriate . "

"Your firm does not have an adequate system for verifying the accuracy of productionand control information to assure that oral and written information is consistent andcorrect . In addition, you do not have an adequate system to assure that relevant orrequired information is submitted to the FDA in a complete, accurate and timelymanner."

Indeed, one of the many instances of "incorrect, incomplete, inconsistent and untimelyinformation" cited by the FDA appears to have been an outright fabrication by Companypersonnel :

"During this inspection, your personnel repeatedly informed FDA investigators thatinvestigation into the source of bezophenone impurity found in Nasonex Nasal Sprayincluded evaluation of stability samples for lots which were already distributed andwithin expiration date and also included testing of unlabeled bottles ofthe product . Yourpremise is that the benzophenone impurity is ]caching from the printed label, through thebottle and into the product . Your personnel informed the investigators that test results forthe stability samples and the unlabeled bottles found no henzophcnone in these samples .When review of the test data was requested to determine the stability intervals tested andthe methods used for testing, your personnel reported that the testing had never beenperformed. "

There is insufficient evidence to ensure that the current process used for manufacture ofthe [eight] products listed below will consistently produce a product meeting itspredetermined specifications . In addition, none of the products cited during the previousinspection that ended on 2/16/01 for inadequate or lack of validation have beenrevalidated ; "

• "You fail to have adequate microbiological controls in your sterile process operations" asevidenced by, inter alias "lack [ofJ adequate validation of your cleaning and sanitationprocess for the different filling areas ;" "no assurance that your Water for Injection (WFI)system has been properly qualified in that continuous problems in maintaining therequired temperature are encountered ;" "environmental samples are not collected;""fail[ure] to have validated holding times for your sterile products after the products arefiltered;" and "[w]hen samples are not available, assumptions are made that results arewithin specifications even though there is no evidence to support this assumption ;"

"Your laboratory investigations are inadequate in that atypical and unexpected analyticalresults are invalidated without adequate investigations which include examination ofpossible causes for the problem, determination of the root cause of the problem, possibleinvolvement of other lots of the product or other products, and appropriate correctiveactions to prevent recurrence of the problem; "

-45-

• "You fail to have stability indicating analytical methods for the following products ."(Thirty- four products are listed thereafter) ;

• "You fail to investigate consumer complaints in a timely manner;" and

• "There is no assurance that the training provided during year 2000 and 2001 to youranalysts is adequate" because, inter alia, "numerous training sessions are performedduring the same day . "

(v) May-June, 2001 FDA Inspection Of Schering- Plough'sKenilworth Manufacturing Facility

85 . Between May 7 and June 13, 2001, the FDA conducted another inspection o f

Schering-Plough's Kenilworth, New Jersey manufacturing facility . An FDA-483 was issued at

the conclusion of the inspection, demonstrating that many of the cGMP violations cited by th e

FDA just six months earlier rema ined uncorrected . The FDA inspectors found, inter cilia :

• Lack of validation of the process used to manufacture Proventil Repetabs, documented on1/19101, remains uncorrected ;

"The inability of process validation studies to support current manufacturing processes,documented on 1/19/01, remains uncorrected ;"

• "The lack of equipment qualification to assure proper performance of manufacturing andpacking equipment, documented on 1/19/01, remains uncorrected;"

• "The lack of assurance that cleaning procedures were appropriate to preventcontamination of drug products , documented on the 1/19/01 FDA-483 , remainsuncorrected ; "

• "The failure to address all unresolved deviations before approval [of HVAC system] wasobtained , documented on the 1/19/01 FDA-483, remains uncorrected;" and

• "Failure to complete work order requests within specified timeframes to ensure properfunctioning of equipment and control systems , documented on 1/19/01 FDA-483,remains uncorrected ."

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C. DEFENDANTS' FALSE AND MISLEADINGSTATEMENTS DURING THE CLASS PERIOD

Schering-Plough Conveys A False Impression That Any Significant IssuesPertaining To Manufacturing And Quality Are Limited To The Company'sAerosol Products Which Had Already Been The Subject Of Public,Nationwide Recall s

86. Less than two weeks after receiving the AA.C Report , and the day after the FD A

sent the Company its fourth Warning Letter in two years, Schering-Plough, on May 9, 2000 --

the first day of the Class Period -- filed with the SEC its Report on Form 10-Q for the quarter

ended March 31, 2000 (the "3/31/00 Form 10-Q") . The 3/31/00 Form 10-Q was signed b y

defendant Kelly. Notwithstanding the numerous, serious and widespread manufacturing an d

quality control deficiencies that were known to defendants as a result of, inter alia, the FDA

inspections and the ACC Audit Report, the 3/31/00 Form 10-Q nevertheless conveyed th e

impression (falsely) that any significant issues relating to manufacturing and quality control wer e

limited to the Company's asthma inhaler products which had already been subject to three public ,

nationwide recalls over the preceding six months .

87. The Management's Discussion and Analysis ("MD&A") portion of the 3/31/0 0

Form 1 p-Q contained a section entitled "Additional Factors Influencing Operations ." In this

section, the Company stated, inter alia :

The Company is subject to the jurisdiction of various national, state and localregulatory agencies and is, therefore, subject to potential administrative actions .Of particular importance is the Food and Drug Administration (FDA) in theUnited States. It has jurisdiction over all the Company's businesses andadministers requirements covering the testing, safety, effectiveness, approval,manufacturing, labeling and marketing of the Company's products . From time totime, agencies, including the FDA, may require the Company to address variousmanufacturing, advertising, labeling or other regulatory issues . Failure to complywith governmental regulations can result in delays in the release of products,seizure or recall of products, suspension or revocation of the authority necessaryfor the production and sale of products, fines and other civil or criminal sanctions .

-47-

From time to time, the Company has received Warning Letters from the FDApertaining to various manufacturing issues . Among these, the Company hasreceived a Warning Letter from the FDA relating specifically to manufacturingissues identified during FDA inspections of the Company's aerosol products(albuterol and VANCERIL) manufacturing facilities in New Jersey . TheCompany is implementing remedial actions at these facilities . The Company hasmet with the FDA on several occasions to apprise the agency of the scope andstatus of these activities. The Company cannot predict whether its remedialactions will resolve the FDA's concerns, whether the FDA will take any furtheraction or the effect of this matter on the Company's operations .

88. The 3/31/00 Form 10-Q also expressly incorporated by reference Item I of

Schering-Plough's Form 10-K for year ended December 31, 1999 filed with the SEC on March 2 ,

2000 (the "1999 Form 10-K"), The 1999 Form 10-K was signed by each of the Individua l

Defendants. Under the heading, "Government Regulation," Item 1 of the 1999 Form 10-K.

stated :

Pharmaceutical companies are subject to extensive regulation by a number ofnational, state and local agencies . Of particular importance is the United StatesFood and Drug Administration (FDA). It has jurisdiction over all the Company'sbusinesses and administers requirements covering the testing, approval, safety,effectiveness, manufacturing, labeling and marketing of the Company's products .In some cases, FDA requirements and/or reviews have increased the amount oftime and money necessary to develop new products and bring them to market inthe United States .

On an ongoing basis the FDA regulates the facilities and procedures used tomanufacture pharmaceutical products in the United States or for sale in the UnitedStates. All products made in such facilities must be manufactured in accordancewith "good manufacturing practices " established by the FDA. The FDAperiodically inspects the Company 's facilities and procedures to assurecompliance .

Failure to comply with government regulations can result in delays in the releaseof products, seizure or recall of products, suspension or revocation of theauthority necessary for the production and sale of products, fines and other civilor criminal sanctions .

89. Under the heading , "Cautionary Factors That May Affect Future Results," Item

of the 1999 Form 10-K stated :

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Failure to meet "good manufacturing practices" established by governmentalauthorities can result in delays in the release of products, seizure or recall ofproducts, suspension or revocation of the authority necessary for the productionand sale of products, fines and other civil or criminal sanctions .

90. The statements set forth above in Schering-Plough's 3/31/00 Form 10-Q, and

statements from Item 1 of the 1999 Form 10- incorporated therein by reference, wer e

materially false and misleading in that they failed to disclose :

(a) That there were serious and widespread manufacturing and quality contro l

deficiencies at Schering-Plough's manufacturing facilities in Kenilworth and Union, New Jerse y

and Las Piedras and Manati, Puerto Rico affecting virtually every product line manufactured a t

those facilities , as confirmed by the confidential AAC Audit Report and the FDA's inspections ;

(b) That Schering-Plough's serious and widespread manufacturing and quality contro l

deficiencies could not be rectified without the temporary shutdown of at least some production

lines, the expenditure of tens of millions of dollars to upgrade the Company's plants and

equipment, the hiring of hundreds of additional personnel to strengthen its quality control and

production areas and the implementation of major structural and organizational changes t o

address quality issues throughout the Company;

(c) That given the serious and widespread nature of Schering-Plough's manufacturin g

and quality control deficiencies, there was a serious risk that the FDA would withhold approva l

of the Company' s pending NDAs, including Clarinex, or take other significant regulatory action ;

(d) That the FDA's ongoing inspections involved not only "the Company's aeroso l

products (albuterol and VANCERIL) manufacturing faci lities in New Jersey," but also include d

the entire range of products manufactured at Schering-Plough's facilities in New Jersey an d

Puerto Rico,

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(e) That "the FDA's concerns" were not limited to the manufacture of Schering-

Plough's aerosol products, but related to numerous cGMP violations affecting a wide range of

drug products; and

(f) That the FDA had issued Warning Letters relating not only to the Company' s

aerosol inhaler products manufactured in New Jersey, but also pertaining to other products

manufactured in both New Jersey and Puerto Rico, including : Ciaritin; Theo-Dur Extended

Release Tablets ; Nasonex Nasal Spray ; Diprolene Ointment; Gentocin Ophthalmic Solution ;

Garamycin Ophthalmic Solution ; Trilafon Injection ; Vancenase AQ ; Banarnine Solution ; and

Celestone Phosphate Injection.

Schering-Plough Falsely Assures Investors That All ProblemsRaised By The FDA's May 8, 2000 Warning Letter Are Resolve d

91 . On July 5, 2000, Bloomberg News Service reported that the FDA had issued a

Warning Letter to Schering-Plough on May 8, 2000 in connection with an inspection of one of

the Company's plants in Puerto Rico . According to the report, the FDA "found a number of

problems with the company's quality control system" involving "quality tests for Schering-

Plough's Gentocin and Garamycin antibiotics and its Vancenase and Nasonex allergy drugs ."

The report further stated that Schering-Plough, through its spokesman, Ron Asinari, "considers

the problems raised in the warning to be resolved . "

92 . Schering-Plough's representation that the problems raised in the FDA's May 8,

2000 Warning Letter were resolved was materially false and misleading because ;

(a) Such problems were not, in fact, resolved . Indeed, an FDA inspection of

Schering-Plough's Manati, Puerto Rico manufacturing facility (the facility that was the subject of

the May 8, 2000 Warning Letter) conducted just four to five -months after the Company claime d

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to have resolved the problems raised by the May 8, 2000 Warning Letter, showed that many of

the same problems involving the same products still existed; and

(b) The representation failed to disclose that, apart from the specific problems

identified in the FDA's May 8, 2000 Warning Letter, Schering-Plough was in violation ❑f the

FDA's cGMP regulations in numerous respects at its manufacturing facilities in New Jersey and

Puerto Rico, affecting virtually every product line manufactured at those facilities .

Schering-Plough Fails To Disclose That its cGMP Violations Constitute A SeriousRisk That The FDA Will Withhold Approval Of Clarinex And Continues To LimitDisclosure Of Manufacturing And Quality Issues To Those Associated With ItsAerosol Products

93. On July 12, 2000, Schering-Plough issued a press release announcing its financial

results for the quarter ended June 30, 2000 and quoting portions of a speech given on that day b y

defendant Kogan to more than 250 analysts and portfolio managers . In his speech , defendant

Kogen discussed, inter alia , certain new drug products, including Clarincx, that the Company

was seeking to market . The press release stated that "Schering-Plough's largest therapeutic

category is allergy/respiratory , where the company plans to build on its CLARITIN franchise and

make it stronger by introducing important new entrants, including desloratadine [Clarinex], a

nonsedating antihistamine currently under review by U.S. and European Union (EU) regulatory

authorities ." This statement was materially false and misleading because it failed to disclose that

the Company had serious and widespread cGMTP violations as detailed above and that, as a

result, there was a serious risk that the FDA would withhold approval of Clarinex .

94 . On August 9, 2000, Schering-Plough filed with the SEC its Report on Form 10-Q

for the quarter ended June 30, 2000 (the "6/30/00 Form 10-Q"). The 6130/00 Form 10-Q was

signed by defendant Kelly. The MD&A, portion of the 6/30/00 Form 10-Q contained a section

entitled "Additional Factors Influencing Operations ." In this section, the Company repeate d

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verbatim its previous statements in the 3/31/00 Form i0-Q pertaining to a Warning Letter sent by

the FDA concerning manufacturing issues in connection with its aerosol products manufacture d

in New Jersey :

The Company is subject to the jurisdiction of various national, state and localregulatory agencies and is, therefore, subject to potential administrative actions .Of particular importance is the Food and Drug Administration (FDA) in theUnited States . It has jurisdiction over all the Company's businesses andadministers requirements covering the testing, safety, effectiveness, approval,manufacturing, labeling and marketing of the Company's products . From time totime, agencies, including the FDA, may require the Company to address variousmanufacturing, advertising, labeling or other regulatory issues . Failure to complywith governmental regulations or other manufacturing issues can result in delaysin the release of products, seizure or recall of products, suspension or revocationof the authority necessary for the production and sale of products, fines and othercivil or criminal sanctions .

From time to time, the Company has received Warning Letters from the FDApertaining to various manufacturing issues . Among these, the Company hasreceived a Warning Letter from the FDA relating specifically to manufacturingissues identified during FDA inspections of the Company's aerosol products(albuterol and VANCER.i.L) manufacturing facilities in. New Jersey. TheCompany is implementing remedial actions at these facilities . The Company hasmet with the FDA on several occasions to apprise the agency of the scope andstatus of these activities. The Company cannot predict whether its remedialactions wilt resolve the FDA's concerns, whether the FDA will take any furtheraction or the effect of this matter on the Company's operations .

95. Like the 3/31/00 Form i0-Q, the Company's 6/30/00 Form I0-Q also expressly

incorporated by reference item I of Schering-Plough's 1999 Form IO-K . Thus, the Company

effectively repeated, inter alia , the following statements from Item I of the 1999 Form IO-K :

Pharmaceutical companies are subject to extensive regulation by a number ofnational, state and local agencies . Of particular importance is the United StatesFood and Drug Administration (FDA) . It has jurisdiction over all the Company'sbusinesses and administers requirements covering the testing, approval, safety,effectiveness, manufacturing, labeling and marketing of the Company's products .In some cases, FDA requirements and/or reviews have increased the amount oftime and money necessary to develop new products and bring them to market inthe United States .

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On an ongoing basis the FDA regulates the facilities and procedures used tomanufacture pharmaceutical products in the United States or for sale in the UnitedStates . All products made in such facilities must be manufactured in accordancewith "good manufacturing practices" established by the FDA. The FDAperiodically inspects the Company's facilities and procedures to assurecompliance .

Failure to comply with government regulations can result in delays in the releaseof products , seizure or recall of products, suspension or revocation of theauthority necessary for the production and sale of products , fines and other civilor criminal sanctions .

Failure to meet "good manufacturing practices" established by governmentalauthorities can result in delays in the release of products, seizure or recall ofproducts, suspension or revocation of the authority necessary for the productionand sale of products, fines and other civil or criminal sanctions .

96. The statements set forth above in Schering-Plough's 6/30/00 Form 10-Q, and the

statements from Item 1 of the 1999 Form 10-K incorporated therein by reference, were

materially false and misleading for the reasons set forth in paragraph 90 above .

97 . On September 5, 2000, Schering-Plough issued a press release announcing that i t

had filed an NDA with the FDA seeking clearance to market desloratadine (Clarinex) for the

treatment of hives of unknown cause . The press release noted that "[a]pplications to market

desloratadine for the treatment of seasonal allergic rhinitis (SAR) are currently pending in the

United States and European Union."

98 . On October 10, 2000, Schering-Plough issued a press release announcing that a

committee of the European Agency for the Evaluation of Medicinal Products had issued a

positive opinion recommending the approval of desloratadine for the treatment of seasonal

allergic rhinitis . The press release further noted that "[m]arketing applications for desloratadine

are currently pending in the United States for the treatment of seasonal allergies and chronic

[hives] ."

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99. On October 24, 2000, Bloomberg News Service reported on Schering-Plough' s

release of financial results for the quarter ended September 30, 2000 . Reporting that net incom e

had increased by fourteen percent based, in part, on an increase in the sales of Claritin, the repor t

further stated that :

Schering-Plough will seek to persuade doctors to switch patients to a newer formof Claritin before a key U .S . patent on the original drug expires in 2002 .

"We are currently awaiting approval for desloratadine in the United States," saidGeraldine Foster of Schering-Plough's investor relations department on aconference call about third-quarter results .

Schering-Plough developed the newer form of the drug with Sepracor Inc ., aMarlborough, Massachusetts-based biotechnology company . Sepracor is"confident" that the drug "will be approved in the fourth quarter of this year andavailable for launch in the beginning ofne ct year," Timothy Barberich, Sepracor'schief executive said on a Sepracor conference call .

100. The statements set forth above in paragraphs 97 and 98 , as well as the statement

of Schering-Plough's spokesperson set forth in paragraph 99, were false and misleading becaus e

they failed to disclose that the Company had serious and widespread cGMP violations as detailed

above and that, as a result, there was a serious risk that the FDA would withhold approval o f

Clarinex .

101. On November 13, 2000, Schering-Plough filed with the SEC its Report on For m

10-Q for the quarter ended September 30, 2000 (the "9/30/00 Form 10-Q") . The 9/30/00 Form

10-Q was signed by defendant Kelly . The MD&A portion of the 9/30/00 Form 10-Q contained a

section entitled "Additional Factors Influencing Operations ." In this section, the Company again

repeated word-for-word its previous statements in the respective 3/31/00 and 6/30/00 Forms 10-

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Q pertaining to a Wa rn ing Letter sent by the FDA conce rn ing -manufacturing issues in

connection with its aerosol products manufactured in New Jersey :

The Company is subject to the jurisdiction of various -national, state and localregulatory agencies and is, therefore, subject to potential administrative actions .Of particular importance is the Food and Drug Administration (FDA) in theUnited States . It has jurisdiction over all the Company's businesses andadministers requirements covering the testing, safety, effectiveness, approval,manufacturing, labeling and marketing of the Company's products . From time to

time, agencies, including the FDA, may require the Company to address variousmanufacturing, advertising, labeling or other regulatory issues . Failure to complywith governmental regulations or other manufacturing issues can result in delaysin the release of products, seizure or recall of products, suspension or revocationof the authority necessary for the production and sale of products, tines and othercivil or criminal sanctions .

From time to time, the Company has received Warning Letters from the FDApertaining to various manufacturing issues . Among these , the Company has

received a Warning Letter from the FDA relating specifically to manufacturingissues identi fied during FDA inspections of the Company's aerosol products(albuterol and VANCERIL) manufacturing facilities in New Jersey. The

Company is implementing remedial actions at these facilities . The Company hasmet with the FDA ❑n several occasions to apprise the agency of the scope andstatus of these activities . The Company cannot predict whether its remedialactions will resolve the FDA's concerns , whether the FDA will take any furtheraction or the effect of this matter on the Company's operations .

102. Like the 3/31/00 and 6130/00 Forms 10-Q, the Company's 9130100 Form 10-Q

also expressly incorporated by reference Item I of Schering-Plough's 1999 Form 10-K . Thus ,

the Company effectively repeated , inter ulia , the following statements from Item 1 of the 199 9

Form 10-K:

Pharmaceutical companies are subject to extensive regulation by a number ofnational, state and local agencies . Of particular importance is the United StatesFood and Drug Administration (FDA) . It has jurisdiction over all the Company'sbusinesses and administers requirements covering the testing, approval, safety,effectiveness, manufacturing, labeling and marketing of the Company's products .In some cases, FDA requirements and/or reviews have increased the amount oftime and money necessary to develop new products and bring them to market inthe United States .

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On an ongoing basis the FDA regulates the facilities and procedures used tomanufacture pharmaceutical products in the United States or for sale in the UnitedStates. All products made in such facilities must be manufactured in accordancewith "good manufacturing practices" established by the FDA . The FDAperiodically inspects the Company's facilities and procedures to assurecompliance.

Failure to comply with government regulations can result in delays in the releaseof products, seizure or recall of products, suspension or revocation of theauthority necessary for the production and sale of products, fines and other civilor criminal sanctions.

Failure to meet "good manufacturing practices" established by governmentalauthorities can result in delays in the release of products, seizure or recall ofproducts, suspension or revocation of the authority necessary for the productionand sale of products, fines and other civil or criminal sanctions .

103 . 1.' he statements set forth above in Schering-Plough's 9/30/00 Form '10-Q, and the

statements from Item 1 of the 1999.Form 10-K incorporated therein by reference, were

materially false and misleading for the reasons set forth in paragraph 90 above .

104. On November 28, 2000, Schering-Plough issued a press release pursuant to SE C

Regulation FD (Fair Disclosure ), a regulation that had recently been promulgated by the SEC to ,

among other things, prohibit the selective disclosure of information by company management t o

analysts and others without disclosing the information generally to the investing public . The

press release stated that :

Schering-Plough . . . today affirmed that it is awaiting U.S . regulatory approvalfor desloratadine, a new nonsedating antihistamine . The company said that as amatter of policy it cannot make predictions regarding regulatory actions and hasnot made a prediction regarding the timing of U .S. regulatory approval fordesloratadine . It is common business practice for pharmaceutical companies toprepare for a potential product launch in advance of possible regulatory approval .Accordingly, the company stated that it is making preparations for the potentialavailability of desloraladine for the spring 2001 allergy season . (Emphasisadded.)

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105. Schering-Plough's November 28, 2000 Regulation FD press release wa s

occasioned by a private meeting that Company management had with analysts from J .P. Morgan

Securities Inc. ("J .P. Morgan") on the same day. Attending the meeting on behalf of Schering-

Plough were, among others, defendants Kogen, Cesan and Wyszomierski . On November 29,

2000, J .P. Morgan analyst Cari Seiden issued a report on the meeting :

Yesterday we had private meetings with Schering-Plough management at theirheadquarters in Kenilworth, New Jersey . The mood was upbeat and positiveand, . . . , we were most impressed with management 's confidence thatdesloratadine would be on the market in ample time for the Spring allergyseason. Our meetings included sessions with the Chairman & CEO, the COO,CFO, head of the Pharmaceutical business and heads of Drug Discovery andDevelopment .

Although there has been a great deal of speculation about the regulatory status ofdesloratadine since the passage of the user-fee deadline in late October {i .e . thegoal established under the Prescription Drug User Fee Act for the FDA to reviewand act on New Drug Applications within 12 months of their filing] without anannouncement, ultimately the nature of the delay is relatively unimportant as longas launch occurs ahead of the spring 2001 allergy season. Management offeredno new facts on the reason for the delay or the nature of ongoing FDA discussion,however, in our view Management's tone and body language consistentlyreflected a high level of confidence that desloratadine would be approved withample time for launch ahead of the Spring allergy season. We found thisoptimistic posture particularly persuasive given their historically cautious stanceon anticipating FDA actions . . . (Emphasis added . )

106. On December 13, 2000, Schering-Plough issued a press release announcing that i t

had submitted two NDAs for new forms o f desloratadine. The press release stated, inter alia :

The first NDA seeks clearance to market desloratadine syrup for the treatment ofseasonal allergic rhinitis (SAR) and chronic idiopathic urticaria (CIU), or hives ofunknown cause, in patients as young as 2 years of age. The second NDA seeksapproval to market desloratadine in a fixed combination with the decongestantpseudoephedrine sulfate as a twice-daily treatment of SAR in adults and children12 years of age and older.

Dcsloratadine syrup and the combination of desloratadine and a decongestant arethe second and third formulations o1' desloratadine to be submitted for marketin g

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approval to the FDA. Separate marketing applications for desloratadine tabletsare currently pending with the FDA for the treatment of SAR and CIU .

107. On December 21, 2000, Schering-Plough issued a press release announcing it bad

filed yet another NDA for desloratadine, this time in the farm of a rapidly disintegrating tablet .

The press release stated, inter alia :

Desloratadine in a rapidly disintegrating tablet is the fourth formulation ofdesloratadine to be submitted for marketing approval to the FDA . Separatemarketing applications for desloratadine tablets are currently pending for SAR[seasonal allergic rhinitis] and CIU [hives of unknown cause] . The company hasalso submitted separate applications to the FDA for desloratadine syrup as atreatment of SAR and CIU in patients as young as 2 years of age and fordesloratadine tablets in a fixed combination with a decongestant as a twice-dailytreatment of SAR for adults and children 12 years of age and older.

108 . On January 16, 2001, Schering-Plough announced that it had received approva l

from the European Union to market desloratadinc 5 mg . tablets for the treatment of seasonal

allergies . With regard to the Company's pending NDAs for dcsloratadine in the United States ,

the press release stated :

In the United States, marketing applications for desloratadine tablets are currentlypending with the U .S. Food and Drug Administration (FDA) for the treatment ofSAR and chronic idiopathic urticaria (CIU), or hives of unknown cause, and fordesloratadine in a rapidly disintegrating tablet formulation as a treatment of SARand CIU . The company has also submitted separate applications to the FDA fordesloratadine syrup as a treatment of SAR and CfU in patients as young as 2 yearsof age, and for desloratadine tablets in a fixed combination with a decongestant asa twice-daily treatment of SAR for adults and children 12 years of age and older ,

109. On January 18, 2001, Schering-Plough announced that it .had sought approval to

market desloratadine in the European Union for the treatment of hives and in a syrup formulation

for the treatment of seasonal allergies in children . In connection therewith, the Company

repeated the statements set forth in paragraph 108 concerning its pending NDAs for

desloratadine in the United States .

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110. The communications of Schering-Plough's management identified in paragraph

105 above and the statements set forth in the Company press releases identified in paragraphs

104, 106-109 were materially false and misleading in that they failed to disclose that that the

Company had serious and widespread cGMP violations as detailed above and that, as a result,

there was a serious risk that the FDA would withhold approval of Clarinex .

Schering-Plough Fails To Disclose That FD A"Approvable" Letter Actually Withholds Approval Of Clarinex

Ill . On January 19, 2001, Schering-Plough received an "approvable" letter from th e

FDA in connection with its pending NDA for desloratadine . In the approvable letter, the FDA

took precisely the sort of "significant regulatory action" that AAC had warned was a "serious

risk" for the Company before the start of the Class Period . The approvable letter advised the

Company that desloratadine would not receive FDA approval until the Company's cGMP issues

were satisfactori ly addressed .

112. On January 25, 2001 , Schering-Plough issued a press release "confirm[ing] toda y

that it received an 'approvable' letter for its nonsedating antihistamine desloratadine an Jan . 19,

2001, from the U .S. Food and Drug Administration (FDA) . The product is subject to final

approval by the FDA." The January 25, 2001 press release was false and misleading because, as

set forth above, it failed to disclose that the FDA's January 19, 2001 approvable letter expressly

withheld approval of desloratadine until, inter alia, satisfactory resolution of numerous and

widespread cUMP deficiencies cited in FDA inspection reports .

113. Indeed, far from disclosing the truth concerning the January 19, 2001 approvable

letter, defendants actively encouraged the investing public to believe that Clarinex would receive

FDA approval in time to be marketed for the Spring 2001 allergy season . For example, on

January 26, 2001, Morgan Stanley Dean Witter released on report commenting on th e

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Company' s disclosure of the approvable letter. The report noted that "[w]hile details of the letter

have not emerged, Achering-Plough, still expects a timely approval (of desloratadine/ to

prepare for the spring allergy season. [MJanagement still believes it will receive a timely

approval." (Emphasis added.) Of course, given that the approvable letter withheld approval of

desloratadine based on the Company's manufacturing and quality control deficiencies,

defendants were completely devoid on any good faith basis for informing analysts that timely

approval of the drug was expected .

D. THE TRUTH CONCERNING SCHERING-PLOUGH'SMANUFACTURING DEFH"ICiENCIES IS FINALLY REVEALE D

114. On February 15, 2001, after the close of the market, Schering-Plough issued a

press release that finally revealed the true extent of the Company's manufacturing and quality

control deficiencies, which defendants had known of throughout the entire Class Period as a

result of the FDA inspections, Warning Letters and FDA-483s, as well as the Audit Report based

on the investigation of AAC, the Company's own consultant. The press release stated, inter alia,

that the FDA had cited the Company for failure to comply with cGMPs, primarily relating to

production processes, controls and procedures, and that, as a result, some production lines had

been temporarily interrupted and first quarter earnings per share could be as much as 15 percent

lower than those of the previous year . The press release also publicly disclosed that the

"significant FDA regulatory action" that AAC had said privately was a "serious risk" for the

Company ten months earlier had now been realized in that the FDA had withheld approval of

Clarinex until the cGMP deficiencies cited by the FDA were resolved :

Schering-Plough Corporation (NYSE : SGP) today reported that manufacturingprocess and control issues have led to reduced sales of certain products in the U. S .marketplace, with the result that first quarter and full-year 2001 sales and earningswill be lower than expected .

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The company said the U .S. Food and Drug Administration (FDA) has beenconducting inspections of the company's manufacturing facilities in New Jerseyand Puerto Rico, and has issued reports citing deficiencies concerningcompliance with current Good Manufacturing Practices (GMPs), primarilyrelating to production processes, controls and procedures.

Schering-Plough anticipates that first quarter 2001 diluted earnings per sharewill be lower by as much as 15 percent versus the 42 cents per share reportedfor the same period last year. Some factors affecting first quarter results also areexpected to negatively affect earnings for the full year 2001 . . . .

Schering-Plough said among the issues affecting its ability to manufacture andship certain pharmaceutical products has been the temporary interruption ofsome production lines to install system upgrades and further enhancecompliance, and other technical production and equipment qualification issues.

After the company experienced manufacturing problems in the fall of 1999involving aerosol inhaler products, Schering-Plough undertook a broad review ofmanufacturing systems and procedures with the help of outside consultants . Fromthis, Schering -Plough developed a GMP action plan applicable to allmanufacturing sites regulated by FDA. The company had designed and wasimplementing improvements under that plan when FDA initiated the recentgeneral GMP inspections of Scheri ng-Plough's New Jersey and Puerto Ricomanufacturing facilities . While Schering-Plough has taken extensive measuresintended to enhance its manufacturing processes and controls , the company notesthat FDA's inspection reports and its own internal reviews indicate thatimprovements are required .

As part of its effort to improve manufacturing and qualit y-control functions, thecompany has committed to spend more than $50 million in new equipment,process and system improvements . In addition, the company has increased thenumber of personnel dedicated to quality control and compliance. By year-end2001, the company will have increased the number of authorized quality-relatedpositions at its FDA-regulated sites by 30 percent since 1999 . The company hasalso initiated major organizational changes in its manufacturing and qualitycontrol operations , appointing a new senior vice president of technical operationsand creating a quality unit headed by a new senior vice president . In addition,new senior managers in manufacturing have been brought in from outside thecompany.

Schering-Plough also reported that FDA has advised the company that GM Pdeficiencies cited in facility inspection reports must be resolved prior togranting approval of the company's pending New Drug Application (NLJ4) forCLARINEX (desloratadine) Tablets. (Emphasis added.)

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115 . Investors and analysts reacted strongly to the Company's announcement. On

Friday, February 16, 2001, more than 48 million shares were traded -- 11 times the average daily

trading volume -- and the price of Schering-Plough's common stock suffered a single day 15

percent decline from $48.32 to $41 .25 per share, representing a loss of more than $10 billion in

market capitalization .

116. Many analysts immediately issued reports on February 16, 2001, cutting thei r

ratings of the Company and drastically reducing their projected earnings, noting that

management credibility had been compromised based on the failure to disclose the delay in

approval for Clarinex and previous assurances that any manufacturing deficiencies of

significance to the market were limited to those associated with the Company's asthma inhaler

products and were being adequately addressed . For example :

(a) J.P. Morgan analyst Carl Sciden issued a report on February 16, 200 1

downgrading his rating of the stock and cutting his estimate of 2001 earnings per share from

$1 .91 to $1 .67. Describing the Company's February 15, 2001 press release as a "bombshell

announcement," the report noted that "[m]anufacturing problems were first evident at Schering in

the Fall of 1999 with a recall of Vanceril, the inhaled asthma medication ; however, management

has long claimed to haveft ed all deficiencies." The report further noted that in addition to the

Company's disclosure of manufacturing deficiencies, "[a]dding insult to injury, [Schering-

Plough] also reported that the FDA will not grant approval for Clarinex (des)oratadine) until

deficiencies in the Clarinex manufacturing line are resolved - an issue management claims they

were notified of via the January 19, 2001 "approvable letter." The report also criticized

management's lack of specificity as to the nature of the deficiencies and products affected, noting

that "[t]here is so little information to go on at this point" and "we were shocked to learn tha t

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management has no current plans for a conference call or other meaningful communication t o

investors on this crisis ." (Emphasis added . )

(b) Deutsche Banc Alex Brown analyst Barbara Ryan cut her estimate of 2001

earnings per share from $1 .88 to $1 .64. Commenting on the manufacturing deficiencies, Ryan

observed that "[w]e have no sense on the timing of the resolution of these issues, but fina l

Clarinex approval is tied to it. These manufacturing issues are resolvable, but the question is

when . These issues with the FDA ran often get protracted, and hence there is little visibility a t

the current time . Furthermore, we believe management credibility is shattered, shareholders

feed deceived bused upon the lack of disclosure of the Clarinex delay ." (Emphasis added.)

(c) ABN AMRO, Inc . analyst Mario V. Corso cut his estimate of 2001 earnings per

share from $1 .95 to $1 .60, noting that "we believe management needs to regain credibility wit h

the investment community,"

(d) UBS Warburg analyst Jeffrey A. Chaffkin lowered his estimate of 2001 earnings

per share from $1 .88 to $1 .63 based on "the significant uncertainties surrounding the delay of th e

Clarinex launch and the shortened period to switch Claritin patients to the newer therapy, as wel l

as the dramatic loss ofmanagement credibility."

(e) A.G. Edwards & Sons, Inc. analyst Ken Nover cut his rating from "Buy" to

"Maintain," noting that the manufacturing issues "ha[ve] been affecting [Schering-Plough] fo r

some time (but ha[vej remained unreported) ."

(f) Raymond James & Associates analyst Mike Krensavage told The Record, in an

article published on February 16, 2001 , that Schering-Plough had been a favorite of investors

because for years the Company had met or exceeded profit estimates quarter after quarter .

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Krensavage was quoted as stating, "1'm stunned . Here you have a company famous for its

earnings consistency imploding . "

Ill . On March 1, 2001, Public Citizen, the consumer watchdog group, sent a letter to

Tommy Thompson, Secretary of the Department of Health and Human Services ("HHS"),

requesting HHS "to investigate the possibility of criminal behavior on the part of those Schering-

Plough officials who may have knowingly shipped defective pharmaceutical products for use in

unsuspecting patients ." In its letter, Public Citizen disclosed that it had obtained a copy of the

confidential AAC Audit Report and portions of the report were quoted therein . The letter also

referred to the Warning Letters and FDA-483s that had been received by the Company, quoting

portions of the January 19, 2001 FDA-483 that had been issued in connection with the FDA's

inspection of Schering-Plough's Kenilworth, New Jersey manufacturing facility . Public Citizen

made the letter available to the press, and its contents -- including quotations and other

references to the Audit Report and January 19, 2001 FDA 483 -- were widely-reported in

numerous media outlets, including Bloomberg, The Wall Street Journal and .The New York Times

on March 1 and 2, 2001 .

118. Investors reacted negatively to revelation of the AAC Audit Report and the details

of the FDA inspection reports. Schering-Plough's stock price fell by more than $2 .00 per share,

from $41 .10 on February 28, 2001 to $38 .01 on March 2, 2001 . Trading volume on March i and

2, 2001 was more than three times the average daily trading volume of Schering-Plough stock

during the Class Period . Hermant Shah, an analyst with HKS & Co . told The Wall Street Journal

that in spite of the Company's general acknowledgement of its problems on February 15, 2001,

Wall Street was nevertheless " .taken aback' by the details in the FDA report . 'It suggests many

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people may have thought the problems were more transient and could be solved more quickly"'

and that the newly disclosed information "'confirms that this is a very serious issue ." '

119 . Following the March 1, 2001 disclosures by Public Citizen, Schering-Plough

continued to experience a lack of credibility in the investment community for failing to fully

disclose its problems. For example, on May 1, 2001, Merl ild News published an article noting

that "on January 19, 2001, Schering-Plough received FDA notification that some of the

company's New Jersey manufacturing facilities were not in compliance with good manufacturing

practices and the deficiencies would impede final approval of Clarinex ." The article further

observed that :

Analysts believe that one of the main issues surrounding Schering-Plough is thetiming of the company's disclosure to investors. By withholding the informationfor almost a month, Schering-Plough may have damaged its credibility in theinvestment community . [Mario Corso, an analyst with ABN Arnro Inc .commented that] "Schering-Plough is very tight-lipped around important issue s. [and] [r]ight now, it is not serving the company very well . "

120 . On June 22, 2001, Schering-Plough, in response to the most recent round of FD A

inspections conducted earlier that month, issued a press release acknowledging that the FDA

inspections had found additional cGMP violations and that many of the violations cited six

months earlier remained uncorrected . The press release also outlined the measures that were

being undertaken to bring the Company into compliance with FDA regulations :

Schering-Plough Corporation (NYSE : SGP) today reported that the U .S . Food andDrug Administration (FDA) has completed inspections conducted during Mayand June at the company's manufacturing facilities in Kenilworth and Union, NewJersey, and Las Piedras and Manati, Puerto Rico, and has issued new inspectionreports (Form FDA-483), which cited some continuing and some additionaldeficiencies concerning compliance with current Good Manufacturing Practices

(cGMP). Depending on when the Form FDA-483 was received, Schering-Ploughhas either responded to or is in the process of responding to these observationsand is continuing to discuss these matters with FDA . The company cannot predictthe outcome of these issues or the timing of any resolution .

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On. May 1, 2001, Schering-Plough submitted to FDA a comprehensive cGMPWork ' Plan designed to take a broad, systemic approach to all aspects ofmanufacturing and serve as a blueprint for quality and compliance initiatives.

Schering-Plough believes that the manufacturing issues identified by FDA will beaddressed in the cGMP Work Plan now being implemented . The planencompasses all FDA-regulated manufacturing sites, consolidates all ongoingcGMP actions and addresses six key areas : quality assurance, facilities andequipment, materials management, production, laboratories, and packaging andlabeling. The plan covers all product lines and takes a uniform approach toquality, production and maintenance at all FDA-regulated manufacturing sites .

Under this plan, Schering-Plough has undertaken major structural andorganizational changes. A new Worldwide Quality Operations unit has beenformed and given the authority and independence to address quality issuesthroughout the company. This unit is responsible for all quality-related issues,including technology transfer, validation, investigation, change authorizationpolicies and other quality-related procedures, protocols and documentation . TheQuality function of all FDA-regulated sites reports directly to this new unit.

In order to address its manufacturing issues, the company is making extensiveimprovements to its operations, including :-- In quality control and production, some 500 people will be added to strengthenthese areas . The company is about half way to this goal, and has recruited anumber of senior level executives from outside the company ;-- In the area of equipment requalification and revalidation, the company hasrecruited highly qualified executives, scientists and consultants to improverevalidation studies and set up a validation review board to oversee therequalification of manufacturing equipment and the revalidation processes andsupport systems;-- In certain production areas where appropriate, equipment and manufacturinglines are being upgraded, notably in aerosol production and tablet manufacturing ;- In global quality control, improved electronic document management andlaboratory information systems are being installed ; and-- A GMP Review Board has been formed, which includes three prominentformer FDA officials . This Board is overseeing progress on the company's cGMPcompliance efforts and providing periodic reports to FDA .

121 . On June 27, 2001 Schering-Plough issued a press release announcing th e

resignation of defendant Cesan as President and Chief Operating Officer of the Company and as

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a member of its Board of Directors . A June 28, 2001 report by American Health Line noted that

defendant Cesan had been responsible for the oversight of the Company's manufacturing division

since becoming president in 1994.

121 On June 28, 2001, defendant Mogen addressed a meeting of analysts and portfolio

managers. Commenting on the manufacturing issues faced by the Company, defendant Kogen

reported that more than $60 million had already been spent on quality-related and validation

projects, primarily in New Jersey and Puerto Rico, and that the Company had committed

significant additional funds . He also stated that the manufacturing issues had affected a number

of other areas, including the Company's share repurchase program . The share repurchase

program was suspended by the Company in February 2001 because, according to defendant

Kogen, "we believed it would be prudent to stop until these issues were clarified."

123 . The June 28, 2001 meeting did little to quell the investment community' s

concerns with the Company's manufacturing issues and management's credibility . A report

carried by The Street. Corn quoted Sanford Bernstein analyst Richard Evans as saying, "'Clearly,

no one feels any better about the manufacturing problems,' adding that there was a 'lack of

diplomacy' during the Q & A session of the meeting as angry fund managers asked questions and

company executives repeatedly refused to answer . "

E. DEFENDANTS ACTED WITH SCLENTE R

124. As alleged herein, defendants acted with scienter in that defendants knew or

recklessly disregarded that the public documents and statements, issued or disseminated by or in

the name of the Company, were materially false and misleading ; knew or recklessly disregarded

that such statements or documents would be issued or disseminated to the investing public ; and

knowingly and substantially participated or acquiesced in the issuance or dissemination of suc h

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statements or documents as primary violators of the federal securities laws . As set forth

elsewhere herein in detail, defendants -- by virtue of their receipt of information reflecting the

true facts regarding Schering-Plough and its business, operations and manufacturing and quality

control deficiencies, their control over and/or receipt of Schering-Plough's allegedly materially

false and misleading statements and/or their associations with the Company which made them

privy to confidential proprietary information concerning Schering-Plough -- were active and

culpable participants in the fraudulent scheme alleged herein . Defendants knew and/or

recklessly disregarded the false and misleading nature of the information which they caused to be

disseminated to the investing public . The ongoing fraudulent scheme described in this complaint

could not have been perpetrated over a substantial period of time, as has occurred, without the

knowledge and complicity of the personnel at the highest level of the Company, including the

Individual Defendants .

125 . Each of the defendants had actual knowledge or were reckless in not knowing of

Schering-Plough's manufacturing and quality control deficiencies and the adverse effects thereof

because, inter alia :

* Prior to the start of the Class Period, defendant Schering-Plough received four

Warning Letters and at least seven FDA-483s from the FDA . As set forth above, each of these

Warning Letters and FDA-483s informed defendants of numerous, widespread and significant

manufacturing and quality control deficiencies in violation of cGMPs ;

• On April 27, 2000, defendant Schering-Plough received the Audit Report from

AAC, The Audit Report informed defendants, inter alias of numerous, widespread and

significant manufacturing and quality control deficiencies in violation of cGMPs ; that because of

the Company's "serious cGMP systems failures and compliance lapses," Schering-Plough was

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„at serious risk of a significant FDA regulatory action ;" and that the Company needed to inves t

significant funds to upgrade equipment and strengthen its quality control personnel ;

* The October 23, 1998, July 21, 1999 and May 8, 2000 Warning Letters received

by Schering-Plough from the FDA were sent to John E . Nine, a Corporate Vice President and

President of Technical operations . The AAC Audit Report was also sent to Mr. Nine. During

the Class Period , Mr. Nine was one of thirteen corporate- level officers: at Schering-Plough . Each

of the Individual Defendants was a corporate-level officer of Schering-Plough (defendants

Kogan and Cesan were the highest officers of the Company) and Mr. Nine reported directly to

defendant Cesan . Thus, the Individual Defendants had access to, either saw or were aware of or

were egregiously reckless in not being aware of the contents of the FDA Warning Letters an d

AAC Audit Report;

* The FDA-483s were sent by the FDA to tipper level Schering-Plough

management who, in turn, forwarded them to Mr. Nine, defendant Cesan and the other Individua l

Defendants ;

• Defendant Cesan was directly responsible for oversight of the Company' s

manufacturing operations and was intimately involved in responding on behalf of the Company

to the FDA Warning Letters and FDA-483s . Both before and during the Class Period , defendant

Cesan, either in person or telephonically, communicated with representatives of the FD A

regarding the cGMP deviations observed by FDA inspectors and the Company's response s

thereto ;

• Following the FDA inspections of Schering-Plough's Kenilworth and Union

facilities in April-May 1999, Schering-Plough established a Task Force to develop a "GM P

Action Plan ." As described in a July 6, 1999 letter from Schering-Plough to the FDA, the Task

Force included representatives from all relevant areas of the Company, including Manufacturing,

Quality Control, Corporate Quality Assurance and Worldwide Regulatory Affairs . The Task

Force was chaired by Dr. David Mazzo, Senior Vice President of Development Operations at

Schering Plough's Research Operations Unit, who reported directly to defendant Cesan.

Members of the Task Force, including Dr. Matzo, met with representatives of the FDA to

discuss corrective actions that were supposed to have been initiated by the Company in response

to the Warning Letters and FDA-483s. One such meeting was .held on September 21, 1999 to

discuss, inter alia, the Company's responses to observed cGMP violations in connection with

Claritin and Proventil . The FDA's minutes of the meeting reflect that Douglas Ellworth, the

FDA's District Director, "expressed his disappointment with the firm's recent problems . "

• In 1999, a Quality Assurance Council operated at Schering-Plough whose

function was to provide corporate oversight on quality and compliance issues. According to an

August 9, 1999 letter from Schering-Plough to the FDA, the Quality Assurance Council was also

given the responsibility for "monitor[ing] the progress of the Task Force in completing the

[GMP] Action Plan . The Council was chaired by Hugh D'Andrade, Vice Chairman of Schering-

Plough's Board of Directors who reported directly to defendant Kogan .

• After the GMP Action Plan was developed in 1999, Schering-Plough conducted

internal assessments of its c MP compliance. These internal assessments, as well as the AAC

Audit, showed that the cGMP Action Plan was inadequate and/or was inadequately implemented

and that serious violation of cGMP regulations continued to exist . In a letter to the FDA dated

February 1 6 , 2001, defendant Ccsan acknowledged his responsibility for and his knowledge of

the significant manufacturing and quality control problems existing at Schering-Plough during

the Class Period, stating, inter alia :

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Our basic approach to GMP compliance throughout the entire company must andwill change. We now realize that the approach we took did not ensure properimplementation or achieve sustainable change in our total corporate practices .Haste will surrender to a consistent approach .

+ As set forth above, Schering-Plough in its public filings, acknowledged th e

importance of compliance with cGMP regulations . The FDA Warning Letters, FDA- 483s and

AAC Audit Report establish that there were serious and pervasive deficiencies across the entire

range of manufacturing and quality control operations at Schering -Plough's New Jersey and

Puerto Rico facilities . The Warning Letters, FDA-483s and AAC Audit Report also establish

that well over forty of Schering -Plough's drug products were affected by the company's

manufacturing and quality control de ficiencies. Those products included chcring-Plough's all-

important allergy drug, Cla ri tin, as well as ten other leading products that accounted for more

than sixty percent of the Company's sales in 1999 and 2000 . Given the importance of cGMP

comp li ance, the serious and widespread nature of the deficiencies and the significance of the

products involved , the individual Defendants were aware at all relevant times of the Company's

manufacturing and quality control de ficiencies .

• Defendants knew, as was acknowledged in Schering-Plough's public fi lings, that

failure to comply with cGMPs could "result in delays in the release of products ." They also

knew that Schering-Plough's NDA for Clarinex could not be approved without a pre-approval

inspection of the firm's manufacturing facilities and that firm's history of cGMP violations would

subject its NDA for Clarinex to a higher level of scrutiny. They were also aware, through the

AAC Audit Report and the FDA inspections, that, inter alia : the Company's plants and

equipment were inadequate and outdated ; that its quality control personnel were insufficient in

number and lacked adequate experience and expertise ; and that its manufacturing processes and

procedures were inadequate to ensure that drug products were produced with the requisit e

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strength, quality, purity and safety. Therefore, defendants were aware from the beginning of the

Class Period of all of the adverse effects of Schering-Plough's severe manufacturing and quality

control deficiencies that were ultimately announced on February 15, 2001, i.e ., that approval of

Clarinex would be delayed ; that the Company was required to spend of tens of millions of dollars

to upgrade the Company's plants and equipment; that hundreds of additional personnel were

needed to strengthen its quality control and production areas ; and that major structural and

organizational changes needed to be implemented to address quality issues throughout the

Company .

126 . Defendants had the opportunity and motive to commit the wrongful acts allege d

herein . Each of the Individual Defendants, by virtue of his position as a senior executive and/or

director of the Company, controlled the reports, press release, public filings, communications

with analysts and other statements issued by Schering-Plough during the Class Period . Thus,

each of the Individual Defendants controlled the public dissemination of the false and misleading

statements to the investing public during the Class Period .

127. Defendants were motivated to conceal the true extent of Schering-Plough' s

manufacturing deficiencies because : (i) acknowledgement of such deficiencies -- both to the

FDA and to the public -- would increase the likelihood that the FDA would delay approval for

Clarinex, negatively impacting the Company's plans for converting Claritin users to Clarinex

before generic forms of Claritin are marketed; (ii) public confidence in the safety and

effectiveness of the Company's drug products would be undermined ; and (iii) the Individual

Defendants sought to enhance the value of their personal Schering-Plough stock and allow for

their profitable insider stock sales which yielded them proceeds totaling in excess of $30 million .

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128 . At or about the times that defendants were issuing statements to the investin g

public that contained material omissions or misrepresentations, the Individual Defendants, who

had access to confidential information and were aware of the truth concerning Schering-Plough's

manufacturing deficiencies, were benefiting from the illegal course of conduct described herein

by selling shares of Schering-Plough stock at artificially inflated prices without disclosing the

material adverse facts about the Company to which they were privy . The following table shows

the insider selling of the Individual Defendants during the Class Period :

Defendant Date Shares Price Proceeds

Richard J . Kogan 6/14/00 30,000 $48 .63 $ 1,458,900 .006/14/00 28,000 $48 .69 $ 1,363,320 .006/14/00 17,000 $48 .75 $ 828,750 .00

6/26/00 28,665 $48 .25 $ 1,383,086 .2 56/26/00 19,000 $48 .19 $ 915,610 .006/26/00 6,000 $48 .31 $ 289,860 .00

10/26/00 30,900 $53.00 $ 1,637,700 .0010/26/00 21,500 $52,93 $ 1,137,995 .0010/26/00 20,100 $52.88 $ 1,062 ,888.0010/26/00 16,700 $53.08 $ 886,436.0010/26/00 9,000 $53.13 $ 478,170.0010/26/00 2,000 $53.31 $ 106,620.0010/26/00 1,700 $53.38 $ 90,746.0010/26/00 1,700 $53.25 $ 90,525 .0010/26/00 1,600 $53.19 $ 85,104.0010/26/00 569 $53.44 $ 30,407.36

12/15/00 75,000 $58.00 4,350,000.00

Total $16,196,117.61

Raul E . Cesan 11/21/00 25,057 $53 .94 $ 1,351,574.58

12/05/00 11,500 $54.50 626.750.00

Total $ 1978,324.58

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Jack L . Wyszomierski 6/14/00 101,200 $48.50 $ 4,908,200 .00

6/26/00 32,000 $48.25 1,544,000 .00

12/04/00 21,272 $54.50 $ 1,159,324 .00

12/12/00 45,791 $55.88 $ 2,558,801 .08

Total $10,170,325.08

Thomas H . Kelly 6/26/00 32,000 $48.19 $ 1,542,080 .00

12/04/00 10,368 $54 .94 $ 569 617.92

Total $ 2,111 ,697.92

Total Proceeds of the Individual Defendants $30.456,465.1 9

F. NO SAFE HARBO R

The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

The specific statements pleaded herein were not identified as "forward-looking statements" when

made. 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 Schering-Plough who knew that those statements

were false when made .

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COUNT I(Against All Defendants for Violation of Section 10(b) of the

Exchange Act and Rule IOb-5 Promulgated Thereunder)

129. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein .

130. During the Class Period, defendants each carried out a plan, scheme and course o f

conduct which was intended to and, throughout the Class Period, did : (a) deceive the investing

public, including plaintiffs and other members of the Class, as alleged herein ; (b) artificially

inflate and maintain the market price of Schering-Plough securities ; and (c) cause plaintiffs and

other members of the Class to purchase Schering-Plough common stock at inflated prices . In

furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them,

took the actions set forth herein .

131 . Defendants (a) employed devices, schemes and artifices to defraud ; (b) niade

untrue statements of material fact and/or omitted to state material facts necessary to make th e

statements not misleading ; and (c) engaged in acts, practices and a course of conduct which

operated as a fraud and deceit upon the purchasers of Schering-Plough securities by concealing

the serious manufacturing and quality control deficiencies of the Company in an effort to

maintain artificially high market prices for Schering-Plough securities in violation of Section

10(b) of the Exchange Act and Rule 1 Qb-5 promulgated thereunder. All defendants are sued as

primary participants in the wrongful and illegal conduct charged herein .

132. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business,

operations, regulatory status and future prospects of Schering-Plough as specified herein .

-75-

Defendants employed devices, schemes and artifices to defraud while in possession of material

adverse non-public information and engaged in acts, practices, and a course of conduct as alleged

herein in an effort to assure investors of Scherixng-Plough's value and performance and continued

substantial growth, which included the making of, or the participation in the making of, untrue

statements of material facts and omitting to state material facts necessary in order to make the

statements made about Schering-Plough and its business, operations, regulatory status and future

prospects in light of the circumstances under which they were made, not misleading, as set forth

more particularly herein, and engaged in transactions, practices and a course of conduct which

operated as a fraud and deceit upon the purchasers of Schering-Plough common stock during the

Class Period .

133 . The Individual Defendants' primary liability arises from the following facts : (a)(i)

defendant Kelly signed each of the false and misleading Forms 10-Q filed during the Class

Period; (ii) each of the Individual Defendants signed the false and misleading '1999 Form 10-K,

Item t of which was expressly incorporated by reference into each of the Forms l0-Q filed

during the Class Period; (iii) defendant Kogen disseminated false and misleading information to

the investing public in his speech to securities analysts and portfolio managers on July 12, 2000 ;

and (iv) defendants Kogen, Cesan and Wyszomierski disseminated false and misleading

information to the investing public through their meeting with analysts from J .P. Morgan on

November 28, 2000; (b) each was a high-level executive and/or director of the Company during

the Class Period and a member of the Company's management team or had control thereof ; (c)

each, by virtue of his responsibilities and activities as a senior officer and/or a director of the

Company, was privy to and participated in the drafting, reviewing, and/or approving the

misleading statements, releases, reports and other public disseminations of and about Schering-

-76-

Plough; (d) each had significant personal contact and familiarity with the other defendants and

was advised of and had access to other members of the Company's management team, internal

reports, reports of the Company's consultants, FDA Warning Letters and inspection reports and

other information and data about the Company's business, operations, regulatory status and

prospects at all relevant times ; and (c) each was aware of the Company's dissemination of

information to the investing public which they knew or recklessly disregarded was materially

false and misleading .

134_ Defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth herein, or acted with reckless disregard of the truth, in that they failed to

ascertain and disclose such facts, even though such facts were available to them . Defendants

material misrepresentations and/or omissions were done knowingly or recklessly and for the

purpose and effect of concealing Schering-Plough's manufacturing deficiencies, violations of

FDA regulations, ongoing FDA investigations and the negative impact thereof on Schering-

Plough's ability to obtain FDA approval for Clarinex from the investing public and supportin g

the artificially inflated price of its securities . As demonstrated by defendants' statements

throughout the Class Period, if they did not have actual knowledge of the misrepresentations and

omissions alleged, they were reckless in failing to obtain such knowledge by deliberately

refraining from taking those steps necessary to discover whether those statements were false or

misleading .

135 . At all relevant times, the market for Schering-Plough common stock was an

efficient market for the following reasons, among others :

(a) Schering-Plough common stock met the requirements for listing and was listed on

the New York Stock Exchange ("NYSE"), a highly efficient and automated market . The

-77-

Company's stock was actively traded, with average daily volume during the Class Period of more

than 4 . 6 million shares ;

(b) As a regulated issuer, Schering-Plough filed periodic reports with the SEC and th e

NYSE;

(c) Schering-Plough regularly communicated with public investors via establishe d

market communication mechanisms, including through regular dissemination of press releases

on the national circuits of major newswire services and through other wide-ranging publi c

disclosures, such as communications with the financial press and other similar reporting services ;

and

(d) Schering-Plough was followed by numerous securities analysts employed b y

major brokerage firms , including but not limited to those identified herein, who wrote research

reports that were distributed to the sales force and certain customers of their respective brokerage

firms and which were quoted or reported in the financial press .

136. As a result, the market price for Schering-Plough securities promptly digeste d

current information regarding the Company from all publicly available sources and reflecte d

such information in Schering-Plough's stock price . Under these circumstances, all purchasers o f

Schering-Plough shares on the open market during the Class Period suffered similar injur y

through their purchase of shares at artificially inflated prices, and a presumption of relianc e

applies to plaintiffs' claims arising under Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder. Plaintiffs will also rely upon the presumption of reliance established b y

a material omission of fact as it pertains to these same Section 10(b) and Rule lab-5 claims.

137. As a result of the dissemination of materially false and misleading informatio n

and failure to disclose material facts, as set forth above, the market prices of Schering-Plough' s

-78-

publicly-traded securities were artificially inflated, and relying directly or indirectly on the fals e

and misleading statements made by defendants, or upon the integrity of the market in which the

securities trade, and/or the absence of material adverse information that was known to o r

recklessly disregarded by defendants but not disclosed in public statements by defendants durin g

the Class Period, plaintiffs and the other members of the Class acquired Schering-Plough' s

securities during the Class Period at artificially high prices and were damaged thereby .

138. At the time of said misrepresentations and omissions, plaintiffs and other

members of the Class were ignorant of their falsity and believed them to be true . Had plaintiffs

and the other members of the Class and the marketplace known of the true facts that were no t

disclosed by defendants, plaintiffs and other members of the Class would not have purchased o r

otherwise acquired their Schering -Plough securities during the Class Period, or, if they acquire d

such securities during the Class Period, they would not have clone so at the artificially inflate d

prices which they paid .

139. By virtue of the foregoing, defendants have violated Section 10 (h) of the

Exchange Act and Rule 1 Ob-5 promulgated thereunder.

140. As a direct and proximate result of defendants' wrongful conduct, plaintiffs an d

the other members of the Class suffered damages in connection with their purchases of Schering-

Plough common stock during the Class Period.

COUNT II(Against the Individual Defendants For Violation

Of Section 20(a) of the Exchange Act )

141 . Plaintiffs repeat and reallcge each and every allegation contained above as if fully

set forth herein .

-79-

142. The Individual Defendants acted as controlling persons of Schering-Plough within

the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their positions

as senior executives and/or directors, the Individual Defendants were provided with, or had

unlimited access to, copies of the Company's internal reports, reports of the Company's

consultants, FDA Warning Letters and inspection reports and other information and data about

the Company's business, operations, regulatory status and prospects . By virtue of their positions

and senior executives and/or directors, the Individual Defendants had the power to influence and

control and did influence and control, directly or indirectly, the decision-malting of th e

Company, including the content and dissemination of the various statements that plaintiffs

contend are false and misleading . The Individual Defendants were provided with or had

unlimited access to copies of the Company's reports, press releases, public filings and other

statements alleged by plaintiffs to be false and misleading prior to and/or shortly after these

statements were issued and had the ability to prevent the issuance of the statements or cause the

statements to be corrected.

143 . In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein and exercised the same.

144. As set forth above, Schering-Plough and the Individual Defendants each violated

Section 10(b) and Rule lOb-5 by their acts and omissions as alleged in this Complaint . By virtue

of their positions as controlling persons, the individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct,

-SU-

plaintiffs and other members of the Class suffered damages in connection with their purchases of

the Company's common stock during the Class Period .

COUNT i(Against Defendants Cesan, Wyszomierski and Kelly for

Violations of Section 20A of the Exchange Act)

145 . Plaintiffs repeat and reallege each and every allegation contained above as if full y

set forth herein.

146. The claim is asserted against defendants Cesan, Wyszomierski and Kelly (the

"Insider Trading Act Defendants") for violations of Section 20A of the Exchange Act, 15 U.S.C .

78t-1, by plaintiffs FSBA and Joseph Eichenbaum on behalf of all persons who purchase d

Schering-Plough common stock contemporaneously with the sale of Schering-Plough commo n

stock by those defendants and who were damaged thereby .

147. During the Class Period, the Insider Trading Act Del`endants occupied a positio n

with Schering-Plough that made them privy to confidential information concerning Schering-

Plough's business, operations, manufacturing deficiencies, regulatory status and prospects ,

including but not limited to, the materially false and misleading information disseminated to the

investing public . Notwithstanding their duty to refrain from trading in Schering-Plough commo n

stock unless they disclosed the foregoing material adverse facts, and in violation of thei r

fiduciary duties to plaintiffs and other members of the Class, during the Class Period thos e

Insider Trading Act Defendants sold their Schering-Plough stock for millions of dollar s

contemporaneously with plaintiffs' and other Class members' purchases of Schering-Plough

common stock as detailed in paragraph 128 and Schedules A and B attached hereto .

148. The Insider Trading Act Defendants sold their shares of Schering-Plough

common stock as alleged above, at market prices artificially inflated by the nondisclosures and

_81-

misrepresentations of material adverse facts in the reports, public filings, press releases and other

public statements released during the Class Period .

149. The Insider Trading Act Defendants knew that they were in possession of material

adverse information that was not known to the investing public, including plaintiffs and other

members of the Class. Before selling their stock to the public, they were obligated to disclose

the information to plaintiffs and other members of the Class .

150. By reason of the foregoing, the Insider Trading Act Defendants, directly an d

indirectly, by use of the means or instrumentalities of interstate commerce and/or of the mails,

employed devices, schemes and artifices to defraud, and engaged in acts and transactions and a

course of business which operated as fraud or deceit upon members of the investing public who

purchased Schering-Plough common stock contemporaneously with the sale of such stock by the

Insider Trading Act Defendants .

151 . This action was commenced within five years after the sales by the Insider

Trading Act Defendants while they were in possession of material, non-public information .

152. As a result of the foregoing, plaintiffs referred to in this Count and the othe r

members of the class who purchased Schering-Plough common stock contemporaneously with

the sales of Schering-Plough common stock by the Insider Trading Act Defendants have suffered

substantial damages that are appropriately measured by the amount of profits gained or losses not

incurred by reason of the Insider Trading Act Defendants stock sales .

W1-IEREFORE, plaintiffs, on behalf of themselves and the other members of the Class,

pray for relief and judgment:

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(i) Declaring this action to be a proper class action maintainable pursuant to Rule 2 3

of the Federal Rules of Civil Procedure and declaring Lead Plaintiff to be a proper representativ e

of the Class ;

(ii) Awarding compensatory damages in favor of plaintiffs and the other members o f

the Class against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

(iii) Awarding plaintiffs and the Class their reasonable costs and expenses incurred i n

this action, including counsel fees and expert fees ; and

(iv) Such other and further relief as the Court may deem just and proper .

JURY TRIAL. DEMANDED

Plaintiffs hereby demand a trial by jury on all issues so triable .

Dated: October 11, 2001 BARRACK, RODOS & BACIN E

By: @k~d- a~~~ SRobert A. HoffmanJeffrey B . Gittleman14 Kings Highway WestHaddonfield, NJ 08033(856) 354-070 7

and-

-83-

BAR

By:

IS ALINE

Leonard barrackGerald J . RodosSheldon L. Albert3300 Two Commerce Square2001 Market StreetPhiladelphia, PA 19103(215) 963-460 0

Lead Counsel for Plaintiffs and the Clas s

BERGER & MONTAGUE, P .C .Sher rie R. SavettDouglas M . Risen1622 Locust StreetPhiladelphia, PA 19103-6365(215) 875-3000

BERMAN DEVALERTO PEASE TOBACCOBURT & PUCILL O

Jeffrey C. BlockN. Nancy GhabaiOne Liberty SquareBoston, MA 02109(617) 542-8300

BULL & LIF HITZ, LLPJoshua M. Lifshitz18 East 41 s` StreetNew York, NY 10017(212) 213-6222

CAULEY GELLER BOWMAN & COATES, LLPPaul J . GellerOne Boca Place2255 Glades Road, Suite 421ABoca Raton, FL 3343 1(561) 750-3000

-84-

FARUQI & FARUQI, LLPAnthony Vozzol o320 East 39th StreetNew York, NY 100161(212) 983-9330

LAW OFFICES OF LIONEL Z. GLANCYLionel Z. Glancy1801 Avenue of the Stars, Suite 311Los Angeles , CA 90067(310) 201-915 0

LAW FIRM OF HARVEY GREENFIELDHarvey Greenfiel d60 East 42d Street, Suite 2001New York, NY 101.65(212) 949-5500

KANTROWITZ, GOLDHAIMER & GRAIFMANGary S . Graiftnan210 Summit AvenueMontvale , NJ 07645(201) 391-700 0

LOCKRTDGE GRINDAL NAUEN P.L.L.P .Richard A . Lockridge100 Washington Avenue SouthSuite 2200Minneapolis, MN 55401(612) 339-690 0

MILBERG WEISS BERSHAD HYNES& LERA H LLP

Salvatore 1 . GrazianoSusan M. GreenwoodOne Pennsylvania PlazaNew York, NY 10119-0165(212) 594-5300

POMERANTZ HAUDEK BLOCK GROSSMAN& GROSS LLP

Stanley M. GrossmanGregory Linkh100 Park Avenue, 261}' FloorNew York, NY 10017(212) 661-110 0

-85-

SAVETT FRUT IN PODELL & RYAN, P .C .Barbara A. Podel lConstitution Place in Society Hill325 Chestnut Street , Suite 700Philadelphia , PA 19106-2614(215) 923-5400

STULL, STULL & BRODYJules Brod y6 East 45'h StreetNew York, NY 10017(212) 687-7230

WECFHSLER HARWOOD HALEBIAN& FEFF F,R LLP

Robert I . HarwoodSamuel K, RosenJoshua D . Clatter488 Madison AvenueNew York, NY 10022(2 .12) 935-7400

WOLF POPPER LI,,PRobert C . FinkelCatherine Anderson845 Third AvenueNew York, W. i 0022(212) 759-4600

Counsel for Plaintiffs

-86-

FLORIDA STATE BOARD OF ADMINISTRATION PURCHASE S

~LC(0UNT,LUMBER DATE FiAI E PRICE/ H. AMQUNT

2 1 1 2/01/001 30,50C

30,500

3 06/02/00 100,40006/05100 76, 10006/06/00 33,40006/06/00 45,90006 106100 23,700

.--_

---06/08/0006/12/00

55,0001 5,500

08/11/00 77,1 0008/29/00 76,40008/30/00 50,00 009/05/00 100,4001 0/09/00 50,0001 0110100 -100,00012101100 35,70012/06/00 .. .193, 00012/08/00 259 ,4001211 1 /00 147, 00012/12/00 160, 30012/13/00 61,90012/14/00 50,0000 11041 1 -' 450, 4000111 l rol 153,200

314,400

4 06/02/00 26,500_ 07/ 1 8100 21,900

08/21/00 21,10 001/10/01 4 1,10001/29/01 48,600

SCHEDULE A

53.5761 1,634 ,071 .05

-1 ,634,071 .05 1

43 . 9682 4,396 ,820.0044.2053 3,364 , 023.33

.43 . 6629. 1,468,360 .8643 .9629

.

2,017 ,897 .1 143.9629 1 , 041,920 ,7344,0147 2,420,808 .5043.6875 677,156.2541 .1348 3,171 ,493 .0840.1777 3,069,576.2839.8375 1,991,875.0039 .1520

_3 ,930,860.80

46 .8684 2,343, 420.0048 .1468 4 ,814,680.0053 .2714 1, 901,788 .9853.2500 10, 277 , 250.0054,524 1

_14,143 ,551 .54

58.2056 8,556 ,223 .2 056.14 00 8, 999,402 .3056.6926 3,509 ,271 .9456.9198 2,845 ,990.0 049.X004 22 ,294, 980. 1 649.9787 7,656, 736.84

11 4,8§4,-CB-6 90 11-4,894,086 . 90

44 .1988 1,171 ,268.20'45.9291 .1,005,847.2--'-.41 .8750 883,562 .5052.4711 2,156, 562 .2149.3447 2 398, 152.42

FLORIDA STATE BOARD OF ADMINISTRATION PURCHASES SCHEDULE A

159, 200 7,615,392 .62 7, 615 392 .62

ENE=1ME=BOOMNEEMEXEMP11111701A71,111,5

6 10/02/00 1,100 45.6563 50 , 221 .8810/10!00 400 49,1563 19 , 662.5010/17/00 800 52.7071 42,165.6712/20/00 100 58.4750 5,847.5001/24/01 200 51 .1250 10,225.0001126/01 100 51 .4375 5,143.75 ,02/09/01 100 51 .2000 5,120.00

2,800 . 1318, 386 . 30 138 , 386.30

lm~lsum WIIIXWA WEA

7

8 02/13/01 31,400 50 .9594 1,600,125 .16- '-0 50 .5757 283,223 .92

37,000 128.0-3.,349 .08 1, 883 ,349.08

126,165 ,285.95

'r V

PURCHASES OF ADDITIONAL PLAINTIFFS

BRIDGEWATER PARTNER S

OSEPH EICHENBAUM

STEVEN B GREEN S

LABORE RS DISTRICTCOUNCI L CONSTR UCTIONINDUSTRY PENSION FUN D

MARTIN J MARA CO

EUGENE OLSO N

ELIZABETH B PFEIFLE

S POL ICY

MARC RATZERSDORFE R

BRADLEY SINCLAI R

BRYNA STEPAK

10/24/00 100 49,9370 4 993.70

10/17/001 29,245 j 51 .11 70 1,494,916,67

11128/00 11 43.8700 _ 482-57

121011001 691 53 .18751 3,669.

1 0/16/0 0 ~ 600 50.6250 30,

12/01/00 . 20-0 . 52.7500 10, 550.00

02/15/01 1 - 2,000 47-7400 95,480 .

05/30/00 5 47.E446 238 .2208/29/00 7 40.294 282 .0611/28/00 5 55.0310 275.1 6

17 795 .44

PURCHASES OF ADDITIONAL PLAINTIFFS

VID WINS TON

SCHEDULE B

021141011 1601 49.1100 ; ~ ..4, 911 .00

01/22/01 50 51 .0700-

2,553 .50-"02/01/01 50 49 .4306 ' 2,471 .5 0

.1 005,025.00

05/30/00 7-

47.6446 333.5108/10/00 24 40.1250 963.0008/29/00 9 40.2942 362,6511128/00 6 55.0316 330.1 9

461 11,989,35

CERTIFICATE OF SERVICE

I, Robert A. Hoffman, hereby certify that on this I I `h day of October, 2001 , 1 caused a

copy of the foregoing Consolidated Amended Class Action Complaint to be served via Federa l

Express Overnight Delivery to defendants ' counsel as follows :

John F . Savarese, Esq. Douglas S . Eakeley, Esq .Wachtel] Lipton Rosen & Katz Lowenstein Sandler PC51 W. 52' Street 65 Livingston AvenueNew York, NY 10019 Roseland, NJ 07068

Robert A . Hoffiu'M