(FORTUNE Magazine) – BIOTECHNOLOGY still generates more headlines than profits, and no major drug company knows that better than Schering-Plough. It made one of the earliest and costliest bets on the science -- and has been devoting up to one-third of a rapidly growing research budget to biotech projects. That may be the biggest share for any large U.S. drug maker. And it has Wall Street wondering whether a company not known for boldness may have moved too fast -- and invested too much -- on a product of uncertain commercial value. The product was interferon, and few drugs have been surrounded by more hype and hope. A natural protein that can be reproduced by gene splicing, interferon was once thought a miracle cure for cancer and viral diseases, including the common cold. Schering-Plough looked on it as a hit product that would ignite growth and anchor a long-range biotech research strategy. The company still believes in its potential, but as scientists have learned more about its complexities, interferon seems less a ''magic bullet,'' as the drug companies say, than a magic BB -- promising but unspectacular. Schering-Plough already has invested more than $100 million in interferon, and the investment is rising. (The average cost of bringing a new drug to the U.S. market is about $94 million.) Eli Lilly, Merck, and others have also gambled large sums on biotechnology. But they have had stronger growth in sales and earnings than Schering-Plough in recent years, so the inevitable delays and disappointments of research haven't socked their profits.

Schering-Plough charged into interferon with the reputation of an underachiever. The broad-spectrum antibiotic Garamycin helped earnings grow 16.8% annually from 1971 through 1980, boosting return on shareholders' equity to an admirable 20% plus. But its success also lulled Schering-Plough into complacency; at one point Garamycin accounted for 25% of sales and 50% of profits. When Garamycin's U.S. patent expired in 1980, the generic drug producers swooped in. Because Schering-Plough had not developed any big sellers to soften the blow, profits crashed from $239 million in 1980 to $179 million in 1981. They have been stagnant ever since, coming to $182 million on sales of $1.9 billion in the last four quarters, while the earnings of the drug industry in general have been growing 12.3% annually. Although Schering- < Plough's share price has risen lately along with other drug stocks, the total return to investors (capital gains plus dividends) came to only .07% annually over the last ten years -- the worst among FORTUNE 500 drug companies. Known for producing mostly ''me too'' drugs, the company failed to develop a well-focused and well-financed research program. Antibiotics and products to treat asthma, colds, allergies, and skin ailments dominate its drug business. Based in Madison, New Jersey, Schering-Plough also produces Maybelline cosmetics, the Dr. Scholl foot care line, and Coppertone sunbathing products as part of a consumer goods arsenal that contributed 44% of last year's sales and 37% of operating profits. But neither stepped-up marketing of these comparatively low profit margin consumer goods nor the steady but unsensational growth of existing drugs will blast Schering-Plough out of its earnings doldrums. The drug industry is galvanized by big scores -- a novel product like SmithKline Beckman's ulcer drug Tagamet (1984 sales: $900 million) or a big improvement on an old medicine like Pfizer's arthritis drug Feldene (1984 sales: $400 million). A new drug is considered a hit if it has strong patent protection and high profit margins, and can tally $200 million in worldwide sales annually within several years of reaching major markets. Although some Schering-Plough prescription drugs have big shares of small markets, security analyst David K. Crossen of Sanford C. Bernstein & Co. says only one had sales of over $50 million last year. That was ol' reliable Garamycin. Thus interferon is critical to Chairman and Chief Executive Robert P. Luciano, 51, the architect of the biotechnology strategy. A voluble, animated leader, he has been an energetic spokesman for the drug -- too energetic, some analysts say. ''Management's persistently bullish public stance on interferon has cost it some credibility among industry observers,'' says Arnold H. Snider of Kidder Peabody & Co., one of the few security analysts who recommends Schering-Plough's stock. (For how Schering-Plough and others are promoting the cancer-fighting capabilities of less exotic products, see Selling.) Luciano has gone beyond words. During tests of interferon's cold-prevention potential, he inhaled interferon nasal spray for 30 days and proudly told analysts he suffered neither colds nor side effects. He still uses the nasal spray under a doctor's supervision. ''I take it when it's inconvenient to have a cold,'' he says, ''like when I'm traveling to make a speech.'' As for charges that he hyped the drug, Luciano counters that the press and security analysts focused on interferon ''because it was glamorous,'' unduly raising expectations. Luciano had been president of American Cyanamid's Lederle Laboratories division when he was hired in 1978 as a Schering-Plough senior vice president, with the virtual assurance that he would run the company. In 1979 he negotiated a deal with Biogen, a Massachusetts biotechnology company pioneering in interferon. In return for paying royalties and putting up $12 million for a 14% equity stake in Biogen, Schering-Plough got world marketing rights to several interferon products. Seven months later Biogen announced that it had cloned the first human interferon. Previously the substance was extracted from white blood cells, a process that yielded minute, impure amounts. Gene splicing produces a purer protein and yields more in a week than could be made in a year under the old process, drastically reducing the cost. MANY CELLS produce interferon naturally when the body is attacked by a virus. But by treating a patient with interferon, doctors can increase the size of the army defending against disease. Schering-Plough is working with three types of interferon: alpha, beta, and gamma. Alpha and beta, which the company licensed from Biogen, appear to behave similarly when a virus invades. They trigger a chemical reaction that protects healthy cells, while stimulating killer cells in the body's immune system to attack infected cells. Schering-Plough is developing gamma interferon with Suntory Ltd. of Japan. Early tests indicate that gamma may be more effective at fighting cancer than alpha or beta, partly because it can activate more killer cells. After closing the Biogen deal, Schering-Plough poured most resources into alpha-2 interferon, one of at least 15 versions of alpha. ''It backed that one version to the hilt before it was clearly evident what the potential was,'' says Ronald M. Nordmann, a security analyst with Paine Webber. ''In poker you don't bet all your chips when you've just seen the first two cards.'' Unfortunately for Schering-Plough, alpha-2 seems to work better against several rare cancers than against more common tumors of, say, the lung or breast. In April, Schering-Plough began selling an alpha-2 product called Intron A in Ireland as a treatment for Kaposi's sarcoma, a cancer associated with acquired immune deficiency syndrome (AIDS), and multiple myeloma, a cancer of certain bone marrow cells. The Philippines also has approved Intron A for these uses. But the U.S. is the crucial market. Although Schering-Plough has asked the Food and Drug Administration to approve Intron A to treat Kaposi's sarcoma, multiple myeloma, and a skin cancer called malignant melanoma, an okay from the government is unlikely before 1986. The company also has asked the FDA and several foreign regulators to approve Intron A as a treatment for genital warts (a sexually transmitted virus) and the common cold. U.S. consumers spend more than $1 billion a year on prescription and over-the-counter cold and cough drugs, and heaven knows how much on chicken soup. As a cold remedy, interferon would probably first be used on high-risk patients in hospitals -- asthmatics, the elderly -- for whom a cold would be more than an inconvenience. Many who follow the drug, however, say nagging side effects, like nasal stuffiness and bloody mucus, cast a pall over interferon's marketability. An analysis in the August 1984 issue of the Journal of Infectious Diseases concurs. ''At this point, interferon does not appear to be a suitable candidate for prevention or treatment of common colds,'' wrote Dr. Robert B. Couch of the Baylor College of Medicine in Houston. Side effects, he said, were ''not severe,'' but still represented an ''unacceptable price for the prevention of common colds in normal, healthy persons.'' Retorts Luciano: ''I think the side effects issue has been blown up out of proportion.'' All the hoopla over interferon has obscured some major changes at Schering-Plough. Luciano has doubled the company's annual research budget in five years (to $180 million this year), increased the R&D staff by 60%, and built new research facilities. In 1982 Schering-Plough bought DNAX Research Institute, a biotech firm in Palo Alto, California. DNAX is investigating the immune system, with the aim of developing drugs to treat allergies, arthritis, and infectious diseases. Despite dull earnings growth, Schering-Plough could absorb the research and acquisition costs because the good old Garamycin days left it solid as a fortress: it has $616 million in cash and short-term investments, little long-term debt, and high credit ratings from Moody's Investors Service and Standard & Poor's.

NEVERTHELESS, many security analysts say Schering-Plough will grow slowly into 1986. They show little enthusiasm for drugs in the pipeline. As for interferon, the questions about its cancer-fighting abilities, the problems with side effects, and the lengthy regulatory reviews have led to conservative sales estimates. ''Interferon is no more than a $50-million-a-year drug worldwide by 1990,'' says John P. Curran, an analyst with L.F. Rothschild Unterberg Towbin. And that, he says, is ''if everything goes right.'' Although Luciano says he has no second thoughts about the drug, he sounds less bullish than he did a few years ago. ''Interferon happens to have been there at the time we decided to get involved in biotechnology,'' he says. ''Even if it does zero in sales -- which is not going to be the case -- it is an extraordinarily valuable learning curve for our scientific team.'' That doesn't provide much comfort for stockholders who have endured four years of profits going nowhere. BOX: INVESTOR'S SNAPSHOT SCHERING-PLOUGH SALES (LATEST FOUR QUARTERS) $1.9 BILLION CHANGE FROM YEAR EARLIER UP 2% NET PROFIT $182.4 MILLION CHANGE UP 5% RETURN ON COMMON STOCKHOLDERS' EQUITY 13% FIVE-YEAR AVERAGE 15% RECENT SHARE PRICE $48 PRICE/EARNINGS MULTIPLE 13 TOTAL RETURN TO INVESTORS (12 MONTHS TO 7/19) 23% PRINCIPAL MARKET NYSE Explanatory notes: page 250