Is It Too Late To Save Schering? CEO Fred Hassan has a hair-raising task: fixing the drugmaker's problems in the lab, in the plants, and in the market.
By John Simons

(FORTUNE Magazine) – Fred Hassan talks like a professional therapist. Not in a cooing, I-feel-your-pain, Oprah sort of way, but with a gentle authority that, no matter how harsh the pronouncement, is still soothing. Schering-Plough needs such treatment. Since taking over as CEO of the troubled pharmaceutical company four months ago, Hassan has had to fire senior managers, cut salaries, and shut down research. At the same time, he is campaigning to restore morale within the company and trust outside it. It's a tricky prescription, but his verbal balm is soothing.

On a Friday in July, Hassan is doing it again, this time in a small meeting room on the grounds of Schering's sprawling Kenilworth, N.J., headquarters. Eleven midlevel researchers are seated around the table eating cold cuts and potato salad. Hassan has called them together to hear their opinions on what ails Schering. A computer technician speaks up, arguing that new drug applications go through too many hoops before going to the Food and Drug Administration. "I'm sensing that because we made mistakes in the past, 'speed' is a bad word around here," says Hassan in his mild Pakistani accent. "Am I right?" Everyone nods. The technician, as if waiting for years for someone to utter those words, lets out a long "yessss."

His management style may seem soft and fuzzy, but Hassan insists that it is the stuff of which great CEOs are made. Doing well in business, he says, is about "getting to the hearts of people--that's something you don't learn in business school. Can you teach someone to engender trust? That separates leaders from managers."

All that's nice. But no one will really care unless it means Hassan can fix Schering. With annual sales of $10.1 billion, it is the country's ninth-largest drug firm. It specializes in allergy and respiratory drugs and anti-infection, cancer, and cardiovascular treatments. The company is best known for Claritin, the breakthrough allergy medicine that didn't make users drowsy. Schering also produces such respiratory drugs as Afrin and Nasonex; foot-care products like Dr. Scholl's insoles; antifungal medicines Lotrimin and Tinactin; Coppertone and Bain de Soleil sunscreen products; and animal health treatments.

Until recently investors loved Schering-Plough, and it's easy to see why. In 2000 the company posted its 15th consecutive year of double-digit growth in earnings per share and raised its dividend for the 17th time since 1986. During the 1990s its shares soared 978%.

But Big Pharma is suffering through difficult times. Since 2000 the S&P pharmaceuticals index has fallen 19%, while the S&P 500 is off 13%, and the drug industry has not recovered as fast. While every drug company faces serious challenges in one or two areas, Schering has problems in all of them--sales, marketing, research, and manufacturing. Take a look at sales. The most important thing to know is that revenues are dwindling--fast. At its peak in 2001, Claritin generated $3.2 billion, almost a third of Schering's total revenues. Since Claritin lost its patent protection last year, cheaper knockoffs have cut its sales by 97%, and management bungled the introduction of its successor, Clarinex. Schering's next-largest franchise, the Intron family of hepatitis C medicines (sales in 2002: $2.7 billion), is also losing ground.

In the labs Schering is mediocre at turning R&D investment into patents (see chart). The single bright spot is Zetia, a cholesterol-lowering drug developed as a joint venture with Merck. Zetia could generate $711 million for Schering by 2006.

The manufacturing division is even more troubled. Executives entered a consent agreement in May 2002 in response to the FDA's accusations of unsafe manufacturing practices, such as the production of defective tablets and asthma inhalers (see "Bitter Medicine," on The FDA imposed its largest fine ever--$500 million--and forced Schering to bolster its oversight of production, which is proving costly.

Schering is also the subject of a separate FDA criminal investigation into whether company officials knowingly distributed faulty products. In addition, the attorneys general of Massachusetts and Pennsylvania are investigating allegations that the sales division marketed certain drugs for unapproved or "off label" uses. And the SEC is looking into a charge of selective disclosure of financial information.

Put it all together, and it is no surprise that Schering's net income for the first half of 2003 dropped 71%, to $355 million, from $1.2 billion the previous year. The stock has lost almost 75% of its value since November 2000 (see chart) and could drop further after the recent announcement of a sharp cut in the dividend. Hassan did not help matters when he failed to participate in an Aug. 21 conference call to explain the decision. Even friendly analysts were piqued by his absence.

Ducking the analysts was uncharacteristic for Hassan. What sets him apart from other CEOs in the industry is that he is, first and foremost, a communicator. Sure, he's been known to stand at a podium flipping slides while droning on about "seamless product flow." And he isn't exactly Mr. Flair. His suits range in color from slate to charcoal. His ties run the gamut from red to maroon. His shirts are white. It's a safe bet that his base annual salary of $1.5 million (through 2006), plus stock and options worth $14 million, will not be spent on frippery.

His formal demeanor, however, is not a forbidding one. Hassan likes to talk tactics with salespeople and show off his scientific background with the techies. In the numerous large town-hall meetings and smaller roundtables he has held to engage workers, people are not afraid to say tough things. One evening in early August, for example, he's having dinner with salespeople from the New York--New Jersey region. He has barely stuck a fork into his roasted chicken when the complaints start: The staff wants more products to sell and is tired of fending off rants about the company's problems. The main question: Is he planning to do away with the 60-40 salary-commission split? Hassan gives it to them straight. "The problem," he says, is that the commission is "just too high." The industry standard is 30%.

After each meeting, Hassan answers employees via e-mail. As with the salespeople, he cannot always tell employees what they want to hear. Still, the fact that he is trying to communicate comes across loud and clear. After one roundtable, a researcher comments, "I couldn't tell you what the former CEO [Richard Jay Kogan] looked like. We got an e-mail from him once a year. That was it."

One asset Hassan can count on is that Schering's 30,000 employees haven't given up. "When I leave here sometimes around seven at night, I still see many cars in the parking lot. That's a good sign," he says. "Now, whether they're waiting for traffic on the New Jersey Turnpike to clear up is another question."

Farid Hassan (his original name) left Pakistan at age 17 to study chemical engineering at the University of London. He stumbled into business when he returned to Pakistan in 1967 and began a painfully boring job at a fertilizer plant. In the meantime he met his wife, Noreen, whom he credits with helping him recognize his aptitude for management. By the summer of 1970 the newly married Hassan was off to Harvard Business School. After graduation he took a job with Sandoz Pharmaceutical Corp. (now Novartis). It was there that he began pulling off a string of turnarounds. In 1975, Sandoz executives sent Hassan to Lincoln to reorganize a marketing unit in disarray. He did. Five years later he went back to Pakistan to run the company's then-miserable operations. Within three years the unit went from the No. 15 drug seller to No. 4. By 1987, Hassan had become CEO of Sandoz. He left to take the top job at Wyeth in 1989. In 1997, he became CEO of Pharmacia, two years into a disastrous merger of Sweden's Pharmacia and Upjohn Co. of Kalamazoo, Mich.

Cultural differences were at the heart of the problem. In one case Pharmacia's European managers--who ran their own marketing and research operations--ignored a promising antibiotic known as Zyvox simply because it had been developed in Kalamazoo. Rather than fight one cultural battle after another, Hassan moved the company's headquarters from England to northern New Jersey. That consolidated the company in new territory. He also merged the various marketing and research efforts.

On Hassan's watch Pharmacia's revenues grew from $8.9 billion to $14 billion, while earnings per share tripled. In 2000 he orchestrated a merger with Monsanto, which brought in Celebrex, the company's top-selling arthritis pain reliever (sales last year: $3 billion). Pfizer took notice, paying $60 billion to acquire Pharmacia in 2002. Critics say that a genuine turnaround would have enabled Pharmacia to stay independent. That is a debate for the business schools: The fact is, Hassan put himself out of a job--and made Pharmacia shareholders very happy.

If he can turn around Schering, Hassan could become one of the most influential pharma executives in the country. True to his orderly ways, he ticks off a plan: "One, stabilize; two, repair; three, turn around; four, build the base; and five, break out." For the past few months he has tackled the first and second steps: investigating problems, looking at the books, and figuring out where to cut costs. In late August he announced plans to eliminate nearly $200 million in annual spending. A thousand jobs will go, as well as the company jet, merit salary increases, the executive dining room, and bonuses (including his own). In an e-mail to employees Hassan reinforced the new tenor of austerity. "We must attack our cost structure with a renewed sense of urgency," he wrote. "Each person in our organization must think like an owner." The most draconian measure was to cut the annual dividend from 64 cents a share to 22. The immediate response of many shareholders who had held onto the stock solely because of its dependable dividend record was to cash in. The share price dived.

As for the rest of Hassan's revival plan, he will devote the immediate future to addressing the company's legal and regulatory issues. Six to nine months from now he plans to turn his attention to further reducing costs and wringing more productivity out of the company's labs, so that "we're no longer relying on just a single blockbuster" like Claritin. On that basis, the company can turn itself around, and in five to eight years be in good shape.

That's the idea, but almost no one on Wall Street is convinced. "I don't see what's driving this company or how it can spend money to revitalize earnings growth," says Herman Saftlas, a senior investment analyst at Standard & Poor's. The five-point program is "not growth-driving. I'm just not positive on this company." Barbara Ryan of Deutsche Bank is a rare analyst who is comparatively bullish on Schering, but her praise is damningly faint. "I love this stock because everyone else is wringing his hands about it."

The key to success, says Hassan, is step five (breakout), which he vaguely describes as doing something that sets Schering apart. How could that happen? Some lucky researchers could develop two or three Claritin-sized blockbusters. Or maybe Schering could license a few breakthrough medicines from biotech firms. The problem is that each of those breakout strategies is far-fetched. The company admits it doesn't have any likely blockbusters in the pipeline, much less a series of them. As for licensing, why would a biotech company hoping to hit it big go with Schering rather than better-financed Merck or Pfizer? Hassan insists that Schering can compete because he knows how to form personal relationships with managers. If charm could buy bestselling medicines, Schering would indeed be well positioned. But it can't.

Some Wall Streeters speculate that the only chance for Schering to turn around its financial performance is for Hassan to tend to the legal problems, pare down operations, get rid of noncore businesses like Dr. Scholl's, and then sell the rest to Merck, with which it has a good track record, thanks to the Zetia joint venture. Merck executives say they're not interested. (Merck hasn't made a major drug company acquisition in 50 years.) Neither is Hassan. "We have the ability to do a lot with the company," he says. "Why would selling be the alternative?"

It's a good question, and one that comes up in every single meeting Hassan has with Schering employees. Many of them wonder if his grand plan is to sell Schering off, as he did Pharmacia. He is adamant that the company can and will go it alone. "This is a fix-and-build thing," Hassan says. "Not fix and sell." Granted, it's hard to raise morale with the rallying cry of "Let's make ourselves good enough to be eaten by Pfizer!" But Hassan cannot really be that certain of Schering's destiny.

Given the realities of industry consolidation, soaring costs, rising competition, and looming legal woes, it's hard to see how Schering can survive as an independent player. A much safer bet is that within five years Schering-Plough will add another hyphen to its name (or lose it altogether).

Sure, it's possible that the clouds will part and that labs will save the company by churning out a slew of profitable new products that hit the market without delay. Or that licenses will rain down on Schering like manna. Such developments would, however, border on the miraculous. If the goal is to keep Schering independent while making it profitable, Fred Hassan may be heading toward his first high-profile failure. Hassan "did a nice job at Pharmacia," concludes Tony Butler, senior pharmaceutical analyst at Lehman Brothers, "but this is a different bag of rocks to turn into diamonds."