Schering-Plough Climbs Out Of Its Sickbed

Fred Hassan said getting the drugmaker on its feet might take years. Investors are beginning to see the virtues of patience

In the 25 or so years he has spent turning troubled drug companies around, Schering-Plough (SGP ) CEO Fred Hassan has met his share of demoralized, dejected, and often disgusted employees. On Mar. 12, he faced one of his toughest crowds ever. Schering-Plough Corp. had just announced it would buy Netherlands-based Organon BioSciences for $14.4 billion. Organon, a unit of chemical giant Akzo Nobel (AZKOY ), had been preparing to go public on the Euronext Amsterdam exchange, and the abrupt change of plans stunned its 19,000 employees.

Hassan marched into a packed auditorium at Organon's headquarters in the Dutch city of Oss and shared his vision of how the two companies would complement each other. At first, Hassan recalls, "It wasn't a happy audience." But by the time he turned to leave, the mood had changed and the applause was loud.

The incident sums up everything that defines Hassan: dealmaker, communicator, consensus-seeker. They are the same traits that helped him engineer a difficult turnaround at Pharmacia (PFE ), which he sold to Pfizer (PFE ) for $56 billion just before Schering's board recruited him in 2003. Back then, Kenilworth (N.J.)-based Schering was dealing with fallout from manufacturing lapses, a Securities & Exchange Commission investigation, two federal probes into alleged Medicaid fraud, and the loss of patent protection on its $3 billion-a-year allergy drug, Claritin. Within days of taking the job, Hassan laid out a plan to investors and employees, defining it in the starkest of terms: "Stabilize, repair, turn around, build the base, break out." He warned them it might take around seven years to achieve.

Those who were patient are reaping the benefits of what some drug industry insiders call the Fred Factor. The Pakistani-born executive, who came to the U.S. in 1970 to get his mba at Harvard, announced on Apr. 19 that Schering pulled in first-quarter sales of $3.6 billion, up 21% from the same period in 2006. Profits soared 55%, to $543 million. The results included a 48% rise in sales of cholesterol drugs Vytorin and Zetia, which Schering co-markets through a joint venture with Merck (MRK ) & Co. The investigations have been settled, with $1 billion in fines levied. Schering is nearly free of a consent decree with the U.S. Food & Drug Administration that required a complete overhaul of its manufacturing plants. And on Apr. 20, Schering announced it had begun late-stage testing of a promising anti-clotting drug.

Even skeptics are starting to come around. Says Cowen & Co. analyst Steve Scala: "I thought, 'Why the heck should this take seven years?' Now Schering is back on course." The stock has nearly doubled, to 31.70, during Hassan's tenure.

Acquiring Organon is part of Hassan's plan to "build the base." One source of Schering's travails was its overdependence on Claritin, and the company had virtually no new products queued up when it went generic. Organon, a top maker of vaccines for pets and livestock, bolsters Schering's presence in animal health. And it brings the company into the market for women's health products such as contraceptives, as well as adding drugs to treat nervous system disorders. Organon has five products in late-stage trials, including Asenapine for schizophrenia and bipolar disorder.

PEACE MISSION

Organon had been on Hassan's radar for more than three years. Akzo's CEO had been saying that he wanted to separate the pharmaceutical unit from the company's core chemical and coatings business. Late last year, Pfizer pulled out of a co-development deal for Asenapine, opening the door for other pharma companies to swoop in. Akzo turned down offers from private equity firms in January and planned instead to spin out a minority interest in Organon in an IPO. Then Hassan showed up. "He recognized we had value in our pipeline," says Keith Nichols, Akzo's senior vice-president of finance. They inked the deal over a marathon weekend, hours before the IPO prospectus was to be released.

Soon after, Hassan's peace-seeking mission began. Organon CEO Toon Wilderbeek, who had become good friends with Hassan through New Jersey's close-knit pharma community, was devastated that the IPO was shelved. He sent a memo to employees expressing "extreme disappointment." Hassan says he's been urging Wilderbeek to take a management role in the combined company. Wilderbeek declined to comment.

Hassan's effort to get Wilderbeek on board is typical of his amiable, inclusive style. The day he took the Schering job, he polled employees to find out what they thought he needed to do. "He wanted to do that in the first hour of his first day," recalls John Stanek, CEO of polling firm Towers Perrin-ISR, who put together the survey. There were open-ended questions such as: "What are the five most urgent issues the new CEO should address in his first 200 days?" Then Stanek took a more extensive survey, which revealed that Schering rated well below typical high-performing companies on everything from job satisfaction to communication. Hassan started meeting with small groups of rank-and-file employees to hear about problems firsthand.

One of the biggest changes Hassan made was to slash the hierarchy. At the old Schering, managers around the world had near-total power over their regions. Often, top brass didn't find out about problems until it was too late to fix them. Hassan eliminated layers between country managers and himself, and boosted accountability for regional results. Says Hassan: "We can't totally eliminate surprises, but it reduces the probability." While cutting the dividend 68%, Hassan froze bonuses for the first year, including his own. And he ended half-day Fridays for top executives during the summer.

Hassan believes solidarity ultimately boosts the bottom line. When Vytorin was approved in 2004, he assigned it to all of his primary-care sales forces as well as deploying a more dedicated team. He also took the unusual step of changing the salary/bonus split for sales reps from 60/40 to as much as 80/20. The goal was to reform Schering's hard-sell image, which along with regulatory issues had caused doctors to lose trust. "He said, 'If you earn trust, profits will come,'" says board member Carl E. Mundy Jr.

What will it take for Schering to break out? The endgame in Hassan's five-point plan may hinge on finding another blockbuster drug. Or it could be a megamerger. Breaking out, he says, "is something that will transform us in a dramatic way once the engine is running well. Right now, we're letting the engine run."

By Arlene Weintraub

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE