Is Schering-Plough's Kogan in a Corner?

The FDA may be too big a foe for the drugmaker's CEO

Growing up in New York in the mid-1950s as the son of a bar-and-grill owner in Hell's Kitchen, Richard Jay Kogan knew when to back off from an uneven fight. Once, when he had a job selling peanuts in Yankee Stadium, a group of vendors pressed him to join their union. "He told them he didn't have to join any damn union, so they beat the hell out of him," says Gerald J. Mossinghoff, a longtime colleague. "Then he did join."

Kogan, 60, now chairman and chief executive of pharmaceutical company Schering-Plough Corp. (SGP ), seems to have lost some of his self-preservation skills. Over the past decade, he turned a niche-player company into one of the drug industry's top performers--nearly quintupling its market value between 1996 and 2000. But now the tightfisted and feisty Kogan is contending with manufacturing and regulatory problems big enough that he may be forced to sell Schering as distressed merchandise. This predicament would be difficult for any executive, but it must be particularly galling for Kogan. The traits that helped him fight his way to the top--a talent for making his numbers and an unusual amount of backroom savvy--may be responsible for his comedown.

BLOCKBUSTER. Kogan has been at war with the one government agency no drug executive can afford to antagonize, the Food & Drug Administration. As he tried to wring a few more years of patent protection for the $3 billion-a-year blockbuster antihistamine Claritin, which accounts for a third of Schering's sales and about 40% of its profits, he has been anything but diplomatic. Kogan has come under attack in Washington for lavishly funded and ultimately unsuccessful congressional lobbying efforts to weaken the FDA's authority over patent issues. And he has publicly berated the agency for "extraordinarily lengthy" reviews of drug applications.

Meanwhile, just as Kogan has pressured his managers to cut costs aggressively, the FDA has repeatedly found fault with Schering's manufacturing practices. The FDA, fed up with the company's ineffective efforts to improve quality control and testing of drug ingredients, took drastic action in February. The agency told Schering it won't approve Clarinex, a follow-on drug to Claritin, until Kogan cleans up plants in New Jersey and Puerto Rico. And as if that weren't enough, the FDA wants Schering to sell Claritin over the counter, which would seriously hurt profits.

Belatedly, Kogan is trying to fix the company's manufacturing mess and placate regulators. "Right now, this is my No. 1 priority and the FDA is my No. 1 customer," Kogan told analysts on June 28. That was just six days after the company disclosed that it had failed new agency inspections. In a hurried effort begun this spring, Kogan is spending more than $60 million on manufacturing improvements and hiring 500 quality-control and production employees.

But that will take time, and the company's troubles have already taken a toll. Since February, the share price has fallen from $50 to about $36. Schering's first-quarter gains of $564 million were 10% below last year's, while sales shrank 3%, to $2.3 billion, as product shortages and higher research spending cut into results. That's quite a reversal for the CEO: From 1996, when Kogan took over, until the end of 2000, annual net income doubled, to $2.4 billion, while sales rose 73%, to $9.8 billion. At best, net income might grow 1.6% to $2.5 billion this year, while Schering ekes out a 3% rise in sales, to $10.2 billion, estimates CIBC World Markets analyst Mara Goldstein. "There's deep concern over the lack of care given to its underlying franchises," she says.

FOR SALE? Indeed, much as Kogan says he'll tough it out, the company's problems may be more than he or other managers can handle. His heir apparent, Raul E. Cesan, resigned as president on June 27. Cesan, who was directly accountable for plant operations, may have taken the blame for the problems. Or he may have left because it looked likely that he wouldn't have a role in the company if it were sold. Merck & Co. could be interested since it is already working with Schering to develop a few new drugs. Kogan declined to be interviewed, though the company answered some questions in writing. He still insists Schering can remain independent.

As Kogan rose from executive vice-president to president to CEO over 14 years, he was the consummate drug executive: someone who understood the political and marketing challenges of the industry, as well as its scientific complexities. His decisions since 1993 to mount an all-out ad campaign for Claritin turned a modestly effective allergy reliever into one of the world's best-known and most lucrative medicines. And while he has contained manufacturing costs, he more than doubled R&D spending over the years, to $1.4 billion, which led to groundbreaking drugs for hepatitis C and cancer. It is those drugs that would attract bids for Schering. Plus, as a leader of the trade group Pharmaceutical Research & Manufacturers of America (PhRMA), Kogan helped defeat Clinton Administration efforts to impose drug price controls. For that, Mossinghoff, a former PhRMA president, says Kogan is "one of my heroes."

Over the years, Kogan has fared extremely well, too. He is one of the industry's best-paid chiefs, earning $21 million in cash and stock options in 2000. His salary, bonus, and stock options have netted him $86.8 million over the past three years. Only two drug execs pocketed more. They are the recently retired heads of Bristol-Myers Squibb Co. and Pfizer Inc.--bigger companies whose returns to shareholders substantially topped Schering's. Even as troubles have mounted, Kogan has been penalized only modestly: The board cut his 2000 bonus by $300,000, to $1.87 million.

To his credit, and now detriment, Kogan has never managed by half-measures. In 1998, he cited "vigilant and rigorous control" over costs as a main goal. But his penny-pinching approach to manufacturing has cost Schering dearly. It faced a near-disaster in late 1999 and 2000 when it was forced to recall 59 million asthma inhalers after finding that some of the potentially lifesaving devices didn't contain the active ingredient. Afterward, Schering conducted an audit of its Kenilworth (N.J.) plant. The scathing report by AAC Consulting Group of Rockville, Md., leaked to the consumer-advocacy group Public Citizen, found that managers felt "a continual push for increased production and decreased downtime sometimes at the expense of high-quality work." AAC also said that Schering supervisors "adopted a wait-and-see attitude, to determine if upper management will `walk the talk' with respect to long-term commitment to product quality."

The FDA's lack of confidence will dog Kogan for a while. That means Schering has less time to switch patients to Clarinex before Claritin's patent expires at the end of 2002. Even if Kogan can deliver other new drugs, they may be too little, too late. The stubborn onetime peanut vendor may have to cry uncle again.

By Joseph Weber in Chicago

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