Schering's Dr. Feelbetter?

Fred Hassan is out to revive the drugmaker. It's a big job

Fred Hassan had been running Schering-Plough (SGP ) Corp. for all of one month when he received the letter. On May 28, the U.S. Attorney's Office in Massachusetts notified the company that the federal government was planning to indict it for a number of alleged violations, including improper marketing and obstruction of justice. If the company settles, which is likely, the fine could come to hundreds of millions of dollars.

Just what he needed. Schering-Plough was already in trouble with regulators: In May, 2002, it agreed to pay a $500 million fine to the Food & Drug Administration for manufacturing lapses. Then, in December, the patent on the company's most important drug, the allergy medicine Claritin, expired, which could cost Schering more than $1 billion in lost sales this year. None of its other products can possibly make up for that. "I don't see how you turn [Schering] around quickly," warns Dr. John R. Borzilleri, portfolio manager at State Street Research & Management (STT ) Co., which recently sold some of its Schering stock. "There is not enough to work with."

Hassan, a 57-year-old Pakistani-born executive who has been in the business for more than three decades, has never said anything about being able to revive Schering quickly. In fact, it could be a long, grueling process that still results in a much-diminished company. And that's assuming Schering can survive on its own. But for Hassan, it sure beats what he faced after selling Pharmacia (PFE ) Corp. to Pfizer (PFE ) Inc. this year: the prospect of becoming vice-chairman and watching Henry A. McKinnell Jr. run the show. "I like adventure, and I like a challenge," he says.

Even before news of Schering's possible indictment (which he declines to discuss), Hassan had identified festering problems. "This company was lulled into a false sense of comfort for too long," he says. "We need to change the culture." Certainly, Schering had been too lax in supervising its plants -- one in New Jersey shipped a few asthma inhalers without any medicine in them -- but it had also been too stingy when it came to spending on science. Hassan intends to exert more control over the manufacturing operations; he says he devotes about a quarter of his time to monitoring the changes that the FDA has required. And he has appointed the head of R&D to the senior management committee in hopes that a greater focus on science will help the company fill in its product portfolio.

He has also tried to infuse the company with some of his own personality, which can most easily be described as effusive. "I'm like the CEO at Mercedes who has a passion for cars," he says. "I have a passion for the products." At Pharmacia, he often went home with a stack of trade publications to read and sent managers handwritten notes about everything from drugs they might want to license to tax issues they might want to study. When he joined Schering, he turned the very formal executive suite into a meeting room and moved into the office of the former chief operating officer (whom he's not going to replace). He says he has given up his one after-hours activity, golf, because there are no after hours anymore. But he does make sure to have tea with his wife every morning.

Still, none of that will ease Schering's immediate predicament. Claritin sales are expected to fall to just $800 million this year, from $1.9 billion in 2002, according to Morgan Stanley (MWD ) analyst Jami Rubin. And Schering's franchise of hepatitis C drugs is expected to decline as rivals enter the market. In all, Schering's sales could drop 16% this year, to $8.6 billion, while net income sinks 55%, to $932 million. Meanwhile, the company will probably increase its reserves because of its legal woes and could cut its dividend.

Hassan's short-term cure for the company is the conventional one: Spend more on marketing what drugs it has, and buy whatever it can. What Schering has already is Clarinex, the follow-up to Claritin, and Zetia, a cholesterol-lowering drug Schering discovered and markets with Merck (MRK ) & Co. But Clarinex has been a disappointment so far, and sales growth of all cholesterol drugs are slowing. So even though Hassan wants to develop the company's own scientific expertise, he is also scouting for products to license and acquire. "Half of what we sell should come from other people's labs," he asserts.

This isn't the first time Hassan has come in to run an ailing company. He led a cultural overhaul at Pharmacia in the late 1990s. The company, formed by the 1995 merger of Pharmacia and Upjohn, hadn't integrated operations. When Hassan joined two years later, he centralized control in a new headquarters in New Jersey and remade the upper ranks almost from scratch.

Hassan also had a knack for spotting untapped potential. He and his marketing staff took what was supposed to be a modest seller, bladder control medicine Detrol, and turned it into a $757 million drug by 2002.

But Hassan's time at Pharmacia was not without problems. After orchestrating a merger with Monsanto Co. in 2000, Hassan failed to deliver on Wall Street's earnings expectations. He concedes that some shareholders may have been disappointed on that score but points out that Pharmacia's stock performed much better than its peers' during his tenure.

At Schering, Hassan doesn't have to worry about keeping expectations in check. All most investors hope for is that he can get the company out of its legal mess and in reasonably good shape so that someone will buy it. That someone could be Merck, which is counting on the success of a new cholesterol-fighting product it will share with Schering to get it out of its slump. Merck officials won't comment. But "[the drug] has too much potential for Merck not to be interested," says Dr. Kris H. Jenner, an analyst at T. Rowe Price Associates (TROW ) Inc., which holds Schering shares. For now, Hassan deflects such notions, saying: "By nature I'm a builder, not a seller." Certainly he wouldn't want to watch yet another CEO run what had been his company. But that could be wishful thinking.

By Amy Barrett in Philadelphia

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