Schering CEO in the hot seat
Fred Hassan's solid record atop the pharma firm has been overshadowed by the Vytorin crisis. Will he - and his reputation - survive the storm?
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(Fortune) -- As Schering-Plough unveils full-year financial results for 2007 tomorrow, CEO Fred Hassan is likely to be peppered with questions about how he managed a recently released study of embattled cholesterol drug, Vytorin.
It is not the topic he'd prefer to be discussing. Three years ago, when Merck was embroiled in a managerial mess that culminated in its Vioxx recall, Wall Street dreamed up scenarios under which the pharma giant could be saved. One of the most popular analyst fantasies involved a merger between Merck and Schering-Plough, in which Hassan would manage the combined companies back to health. Wall Street saw Hassan as a skillful turnaround man and a hands-on manager.
That never came to pass, although Schering and Merck did enter into a lucrative joint venture - which right now looks like it could lead to Hassan's undoing. Some investors seem to be hinting that Hassan should lose his job. Earlier this month, Ben Halliburton, chief investment officer of Tradition Capital Management, told Reuters: "This definitely tarnished his image. This is the worst PR disaster I think I ever recall, and he's got to take part of the blame." Tradition Capital Management holds 454,000 Schering-Plough shares.
On January 14th, Merck and Schering released long-awaited data from a study of the companies' jointly marketed cholesterol-lowering drug, Vytorin. The drug trial ended in April of 2006, and Schering's research institute took an unusually lengthy amount of time to interpret the data. It turns out the 720-patient study, known as ENHANCE, suggests that Vytorin, while reducing cholesterol to lower levels than generic drugs, was no better at keeping patients' arteries clear of dangerous plaque. That Schering and Merck took some 20 months to interpret and publicize those negative results looks bad - especially since sales of Vytorin grew some 35% between mid-2006 and the January 2008.
Vytorin is a cholesterol-lowering therapy that combines Schering's (SGP, Fortune 500) Zetia with Merck's (MRK, Fortune 500) Zocor. The Zetia/Vytorin franchise garnered roughly $5 billion in sales in 2007. Vytorin means a lot more for Schering than Merck. While the franchise is responsible for just 25% of Merck profits, it represents about half of Schering's annual net income. Even so, both companies' shares have fallen roughly 20% since the ENHANCE findings were made public.
The incident puts Hassan's leadership abilities in the spotlight. Many on Wall Street are quietly grumbling that Hassan should lose his job over the matter. That's a far cry from how they viewed the CEO until now. Before taking the helm at Schering, Hassan led Pharmacia, cleaning up shop before selling it to Pfizer in 2002. He cultivated a reputation as a change-agent, a communicator, and a deft manager. Hassan has been an industry darling, known for his skills as a turnaround artist.
And prior to the Vytorin revelations, Hassan had much to be proud of - indeed, Hassan can take credit for turning Schering around. When he took over in 2003, Schering's sales were on the decline. The company was under a federal consent decree for poor manufacturing practices, the company had just lost patent protection on Claritin, its biggest drug ever, and it had little in the way of a pipeline of future medicines.
Under Hassan, Schering has flourished. Hassan fortified the company's scientific core by boosting Schering's annual investment in research to 21% of sales (well above the industry average of 15% of revenues). He oversaw the recovery of Schering's manufacturing plants. And, last March, Hassan orchestrated the $14.4 billion acquisition of Dutch biotech Organon Biosciences, adding several promising compounds to Schering's pipeline in the process, including sugammedex, a novel agent used to pull patients out of anesthesia.
But, for many investors who saw Hassan as an unfailing miracle-worker, his mismanagement of ENHANCE is earth shaking. "It's going to take time to heal those wounds," says Leerink Swann & Company analyst Seamus Fernandez. "There were plenty of investors who stepped into the stock while management was saying 'Don't worry about ENHANCE'."
Hassan has stated publicly that he didn't know about the results of the unfavorable study until just four days before it was released on January 14th. That position puts Hassan in an impossible bind. Why wasn't he aware of potentially market-changing results of a critical study? Were Hassan's scientists keeping the bad news from their boss? None of this looks good for a manager reputed to be a hands-on communicator.
The answers to these questions are sure to emerge, as federal regulators and several state attorneys general are now looking into - among other things - whether Schering and Merck made false marketing claims while peddling Vytorin to doctors and patients.
"Hassan has to take some flak for this. It's inevitable," says Herman Saftlas, an analyst with Standard & Poors. "The whole thing is an unfortunate occurrence. Overall, you're not going to take away what he's done already. Those accomplishments are there." 
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