Jones Lang LaSalle
Schering-Plough's Hassan hits obstacles as he tries to rejuvenate company
Sunday, March 12, 2006
BY GEORGE E. JORDAN
Star-Ledger Staff
When Fred Hassan took the helm at Schering-Plough, many investors hoped he would do for the troubled drugmaker what he had done for his previous employer, Pharmacia: Dress it up for a sale.
He quickly won praise inside the company and out for restoring calm and focus to a business rocked by huge losses and a record fine by the Food and Drug Administration to settle manufacturing problems.
But three years after Hassan sold Pharmacia to Pfizer for $53 billion and moved down the road to Schering-Plough, he faces a number of obstacles to a repeat performance.
One issue is a co-marketing agreement Schering-Plough has with Merck for the cholesterol-lowering drug Vytorin. While the deal has boosted revenue, it could complicate any effort to sell Schering-Plough, since either partner has the right to buy out the other's share in the event a merger.
Then there's the turnaround itself.
When Schering-Plough's board hired him in April 2003, Hassan immediately announced a multi-step plan to turn the Kenilworth-based company around in five to seven years. But in a recent interview, Hassan acknowledged he won't meet his deadline, mainly because it's taking longer than expected to rejuvenate the company's research pipeline. In company news releases, the time frame has quietly slipped to "six to eight years."
"Things are on track with the action agenda," said Hassan, a Pakistani-born chemical engineer whose Urdu accent gives his speech a singsong cadence. "My goal here is to build the business. The idea is not to do a quick fix and make a quick exit."
He has pleaded with investors to remain patient, and will probably ask for more time at the company's annual shareholder meeting this spring.
AGAINST THE CLOCK
Wall Street has generally looked favorably on Hassan's turnaround efforts, though it's not clear how much longer they'll give him the benefit of the doubt.
The company has no 2006 earnings guidance, the stock price has been essentially flat since 2003, and earnings per share last year were a paltry 12 cents. And there's no telling when it will restore the quarterly dividend slashed in 2003 to 5 1/2 cents per share, from 17 cents.
On Friday, Prudential Financial analyst Timothy Anderson issued a report saying that while the drugmaker's pipeline is improving, Schering-Plough "desperately needs to get its hands on more products." Anderson suggested Hassan's best bet would be to buy a smaller drugmaker such as Kos Pharmaceuticals of Cranbury.
If Hassan's latest timetable is correct, he may not be around to see the final results of his plan. At 60, he's five years away from mandatory retirement.
"It's enough time to make a difference. Maybe not enough time to count the numbers, but the time to get that research engine going and do good," he said.
Most Wall Street analysts remain in his corner -- for now. After all, the rest of Big Pharma is suffering from the same drug development issues plaguing Schering-Plough. And while shares of Pfizer, Merck and Bristol-Myers Squibb are below where they were three years ago, Schering-Plough's stock is modestly higher.
"While Schering-Plough still has its work cut out for it, it has come along way since he (Hassan) arrived," Deutsche Bank analyst Barbara Ryan said. "At the end of the day, Schering-Plough has to have an exit strategy. Either they turn it around and it's going to be a growth company from here, or it's going to be sold.
"Which way it's going to go is still an open question."
THE 'CHAMELEON'
If Hassan knows the answer, he wouldn't say in two recent interviews. He is known to keep his cards close to the vest -- and to play a bad hand very well.
"There is no doubt about it -- that's why they (investors) are willing to give him the time," said Frank Abella, chief executive of IPG Investment Partners Group in Plainfield, who manages a fund that owns restricted shares of Schering-Plough.
Hassan's $14.9 million in compensation last year made him one of the pharmaceutical industry's highest-paid chief executives, even though Schering-Plough's $26.6 billion in market capitalization makes it a relatively small drug company.
Abella, who advises clients to buy Schering-Plough stock, calls Hassan a "chameleon" who hints the company is for sale while investing in the future by plowing 20 percent of net income -- $1.8 billion last year -- into research and development. The company is investing heavily in the production of biologics, complex biotech medicines to treat cancer and other serious illnesses.
Still, Abella says, "I'm more convinced than ever if he thought it was to his advantage and there was a 40 percent premium to the market, he would sell the company."
The son of the first Pakistani ambassador to India, Hassan left Pakistan in 1970 to enroll at Harvard Business School. After graduation, he headed to Nebraska to take a job at Sandoz, a generic drugmaker.
He went back to Pakistan for Sandoz in the late 1970s -- a dangerous time during the Afghan War -- before making the jump to American Home Products, where he engineered his first "unlikely turnaround" in the early 1990s. As executive vice president, Hassan devised the strategy to defend Premarin, American Home's hormone-replacement therapy, against generic competition.
When Hassan took over Pharmacia & Upjohn in 1997, he cast off several executives and replaced them with stars from American Home Products, now Wyeth. He then merged with Monsanto in 2000 to acquire Celebrex, a move that thrust Pharmacia into the top ranks of the drug industry. He later moved the company from London to Peapack.
Pfizer bought Pharmacia to acquire Celebrex, a Cox-2 inhibitor that turned out to be a bad bet with the withdrawal of Vioxx, another Cox-2, because of safety concerns. But there's no doubt Hassan did right by Pharmacia investors.
"That was a totally different company from this one," Hassan said of Pharmacia. "It was a very robust company with good revenues."
GOING BY THE PLAYBOOK
Schering-Plough was a mess when Hassan arrived in early 2003, the year the company reported a loss of 31 cents per share, down from a $1.34-a-share profit in 2002. The company's top seller, decongestant Claritin, had lost its patent and there were no blockbusters brewing in Schering-Plough's labs.
Complicating matters were investigations of the company by an alphabet of federal agencies. The probes would eventually result in more than $700 million in fines and hundreds of millions of dollars to fix manufacturing problems in New Jersey and Puerto Rico.
"It's hard to think of a government agency Schering-Plough wasn't being investigated by," Deutsche Banc's Ryan said.
At Schering-Plough, Hassan has followed a playbook similar to the one at Pharmacia. He replaced senior management with loyalists, many of them hired away from Pfizer after the Pharmacia merger.
Hassan's team attempted to squeeze as much as possible out of existing products such as Remicade for rheumatoid arthritis. At the same time, they went on a campaign to reduce costs by ordering 1,700 layoffs, slashing perks and cutting the quarterly dividend in half.
"I was not very popular on that day," Hassan said of the day in August 2003 when he announced the first round of cuts.
Still, by all accounts Hassan has managed to foster loyalty by listening to his troops, encouraging openness and new ideas, and delicately dressing down co-workers who have not done their homework. Schering-Plough employs about 6,000 people in New Jersey.
Ultimately, the 2004 deal with Merck to market Vytorin -- a combination of Zetia-Zocor -- provided Schering-Plough with much-needed revenue that may have spared cuts in research spending.
But in some ways, the Vytorin partnership shackles Hassan: The agreement contains a "poison pill" that gives Merck, based in Whitehouse Station, the right to buy Schering-Plough's share of the partnership if the Kenilworth company merges with a larger drugmaker.
"The way the original deal was set up, it was not terribly likely for anybody else to acquire Schering-Plough," said David Katz, president and chief investment officer at Matrix Asset Advisors, a New York City-based fund manager who owns shares in Merck but not Schering-Plough. "Merck was the best and only game in town."
But times have changed. Katz said uncertainty over the Vioxx litigation "makes it tougher for a company to be acquired by Merck for stock."
That means Schering-Plough may be forced to go it alone, chasing growth where it can.
Hassan says that's just fine with him. He says he's currently on the hunt to acquire new products "priced within our risk appetite."
"We're going to do deals as they come along," Hassan said. "We're going to do it because it is financially justified."
George E. Jordan may be reached at gjordan@starledger.com or (973) 392-1801.
FRED HASSAN
Job: Chief executive, Schering-Plough
Age: 60
Residence: Florham Park
Family: wife, Noreen, and three children: Sabrina, 29, Daniel, 24, and Sarah, 16
Hometown: Lahore, Pakistan
Education: Bachelor's of science, chemical engineering, Imperial College of Science, Technology and Medicine, London; MBA, Harvard University
Hobbies: Reading, travel, old movies
Recently read: "Blink: The Power of Thinking Without Thinking" by Malcolm Gladwell and "Conspiracy of Fools: A True Story" by Kurt Eichenwald
Car: Mercedes SUV
Favorite restaurant: L'Allegria, Madison
Quote: "This thing for me is a mission. I could have been doing a lot of other things with my time."
FRED HASSAN'S SCORECARD
Three years ago, on his second day on the job as chief executive of Schering-Plough, Fred Hassan described his plans for launching the beleaguered drugmaker into a "breakout" stage of growth and profitability in five to seven years. Here's how he's doing at the midway point:
Goal: Fix manufacturing problems.
Background: In 2002, Schering-Plough paid a $500 million fine and agreed to tighter Food and Drug Administration monitoring of plants in New Jersey and Puerto Rico through 2007.
Outcome: The company met the FDA requirements to correct the violations in January, a year before deadline.
Goal: End federal investigations.
Background: When Hassan arrived, investigations by several agencies -- the Securities and Exchange Commission, Department of Justice, Department of Health and Human Services inspector general -- were already under way. They covered everything from manufacturing issues to alleged off-label promotions to unethical marketing practices.
Outcome: Schering-Plough paid $294 million two years ago to settle a probe by the U.S. Attorney's Office in Massachusetts into off-label promotions. The FDA consent decree led the U.S. Attorney's Office in Newark to end its probe with no criminal charges. But investigations by the SEC and Health and Human Services, and another probe by the Justice Department, are pending.
Goal: Cut expenses.
Background: Sales and profits went into decline following the loss of the patent for Claritin in 2002.
Outcome: In 2003 and early 2004, Schering-Plough eliminated 1,700 jobs through layoffs and voluntary retirement; killed bonuses; closed the executive dining room; sold the company jet and cut the dividend to 5 1/2 cents per share from 17 cents. But in mid-2004, the drugmaker began to expand its sales force -- eventually, the company added nearly 1,000 sales reps -- to pump up sales of Vytorin. During Hassan's three years, the company's selling, general and administrative expenses have grown 25 percent to $4.4 billion; during the same period, Schering-Plough returned to profitability.
Goal: Launch new products.
Background: Schering-Plough's late-stage drug development pipeline is all but empty, as the company's most promising drug candidates are still years away from the market.
Outcome: The company has invested 20 percent of net sales into research and development, mostly into biologics -- complex compounds that include today's most promising cancer drugs. Last year, the company spent $1.8 billion on research and development. It also has publicly stated plans to acquire new products by buying smaller companies or, as in the case of Vytorin, signing co-development agreements.
Goal: Build morale.
Background: The earnings collapse in 2003 and the alphabet of federal agencies investigating the company took their toll on managers and their charges.
Outcome: Hassan took a hands-on approach to running the company. He hired 12 of the company's top 30 executives and his down-to-earth manner has won praise from rank-and-file staff.
© 2006 The Star Ledger
© 2006 NJ.com All Rights Reserved.
Schering-Plough's Hassan hits obstacles as he tries to rejuvenate company
Sunday, March 12, 2006
BY GEORGE E. JORDAN
Star-Ledger Staff
When Fred Hassan took the helm at Schering-Plough, many investors hoped he would do for the troubled drugmaker what he had done for his previous employer, Pharmacia: Dress it up for a sale.
He quickly won praise inside the company and out for restoring calm and focus to a business rocked by huge losses and a record fine by the Food and Drug Administration to settle manufacturing problems.
But three years after Hassan sold Pharmacia to Pfizer for $53 billion and moved down the road to Schering-Plough, he faces a number of obstacles to a repeat performance.
One issue is a co-marketing agreement Schering-Plough has with Merck for the cholesterol-lowering drug Vytorin. While the deal has boosted revenue, it could complicate any effort to sell Schering-Plough, since either partner has the right to buy out the other's share in the event a merger.
Then there's the turnaround itself.
When Schering-Plough's board hired him in April 2003, Hassan immediately announced a multi-step plan to turn the Kenilworth-based company around in five to seven years. But in a recent interview, Hassan acknowledged he won't meet his deadline, mainly because it's taking longer than expected to rejuvenate the company's research pipeline. In company news releases, the time frame has quietly slipped to "six to eight years."
"Things are on track with the action agenda," said Hassan, a Pakistani-born chemical engineer whose Urdu accent gives his speech a singsong cadence. "My goal here is to build the business. The idea is not to do a quick fix and make a quick exit."
He has pleaded with investors to remain patient, and will probably ask for more time at the company's annual shareholder meeting this spring.
AGAINST THE CLOCK
Wall Street has generally looked favorably on Hassan's turnaround efforts, though it's not clear how much longer they'll give him the benefit of the doubt.
The company has no 2006 earnings guidance, the stock price has been essentially flat since 2003, and earnings per share last year were a paltry 12 cents. And there's no telling when it will restore the quarterly dividend slashed in 2003 to 5 1/2 cents per share, from 17 cents.
On Friday, Prudential Financial analyst Timothy Anderson issued a report saying that while the drugmaker's pipeline is improving, Schering-Plough "desperately needs to get its hands on more products." Anderson suggested Hassan's best bet would be to buy a smaller drugmaker such as Kos Pharmaceuticals of Cranbury.
If Hassan's latest timetable is correct, he may not be around to see the final results of his plan. At 60, he's five years away from mandatory retirement.
"It's enough time to make a difference. Maybe not enough time to count the numbers, but the time to get that research engine going and do good," he said.
Most Wall Street analysts remain in his corner -- for now. After all, the rest of Big Pharma is suffering from the same drug development issues plaguing Schering-Plough. And while shares of Pfizer, Merck and Bristol-Myers Squibb are below where they were three years ago, Schering-Plough's stock is modestly higher.
"While Schering-Plough still has its work cut out for it, it has come along way since he (Hassan) arrived," Deutsche Bank analyst Barbara Ryan said. "At the end of the day, Schering-Plough has to have an exit strategy. Either they turn it around and it's going to be a growth company from here, or it's going to be sold.
"Which way it's going to go is still an open question."
THE 'CHAMELEON'
If Hassan knows the answer, he wouldn't say in two recent interviews. He is known to keep his cards close to the vest -- and to play a bad hand very well.
"There is no doubt about it -- that's why they (investors) are willing to give him the time," said Frank Abella, chief executive of IPG Investment Partners Group in Plainfield, who manages a fund that owns restricted shares of Schering-Plough.
Hassan's $14.9 million in compensation last year made him one of the pharmaceutical industry's highest-paid chief executives, even though Schering-Plough's $26.6 billion in market capitalization makes it a relatively small drug company.
Abella, who advises clients to buy Schering-Plough stock, calls Hassan a "chameleon" who hints the company is for sale while investing in the future by plowing 20 percent of net income -- $1.8 billion last year -- into research and development. The company is investing heavily in the production of biologics, complex biotech medicines to treat cancer and other serious illnesses.
Still, Abella says, "I'm more convinced than ever if he thought it was to his advantage and there was a 40 percent premium to the market, he would sell the company."
The son of the first Pakistani ambassador to India, Hassan left Pakistan in 1970 to enroll at Harvard Business School. After graduation, he headed to Nebraska to take a job at Sandoz, a generic drugmaker.
He went back to Pakistan for Sandoz in the late 1970s -- a dangerous time during the Afghan War -- before making the jump to American Home Products, where he engineered his first "unlikely turnaround" in the early 1990s. As executive vice president, Hassan devised the strategy to defend Premarin, American Home's hormone-replacement therapy, against generic competition.
When Hassan took over Pharmacia & Upjohn in 1997, he cast off several executives and replaced them with stars from American Home Products, now Wyeth. He then merged with Monsanto in 2000 to acquire Celebrex, a move that thrust Pharmacia into the top ranks of the drug industry. He later moved the company from London to Peapack.
Pfizer bought Pharmacia to acquire Celebrex, a Cox-2 inhibitor that turned out to be a bad bet with the withdrawal of Vioxx, another Cox-2, because of safety concerns. But there's no doubt Hassan did right by Pharmacia investors.
"That was a totally different company from this one," Hassan said of Pharmacia. "It was a very robust company with good revenues."
GOING BY THE PLAYBOOK
Schering-Plough was a mess when Hassan arrived in early 2003, the year the company reported a loss of 31 cents per share, down from a $1.34-a-share profit in 2002. The company's top seller, decongestant Claritin, had lost its patent and there were no blockbusters brewing in Schering-Plough's labs.
Complicating matters were investigations of the company by an alphabet of federal agencies. The probes would eventually result in more than $700 million in fines and hundreds of millions of dollars to fix manufacturing problems in New Jersey and Puerto Rico.
"It's hard to think of a government agency Schering-Plough wasn't being investigated by," Deutsche Banc's Ryan said.
At Schering-Plough, Hassan has followed a playbook similar to the one at Pharmacia. He replaced senior management with loyalists, many of them hired away from Pfizer after the Pharmacia merger.
Hassan's team attempted to squeeze as much as possible out of existing products such as Remicade for rheumatoid arthritis. At the same time, they went on a campaign to reduce costs by ordering 1,700 layoffs, slashing perks and cutting the quarterly dividend in half.
"I was not very popular on that day," Hassan said of the day in August 2003 when he announced the first round of cuts.
Still, by all accounts Hassan has managed to foster loyalty by listening to his troops, encouraging openness and new ideas, and delicately dressing down co-workers who have not done their homework. Schering-Plough employs about 6,000 people in New Jersey.
Ultimately, the 2004 deal with Merck to market Vytorin -- a combination of Zetia-Zocor -- provided Schering-Plough with much-needed revenue that may have spared cuts in research spending.
But in some ways, the Vytorin partnership shackles Hassan: The agreement contains a "poison pill" that gives Merck, based in Whitehouse Station, the right to buy Schering-Plough's share of the partnership if the Kenilworth company merges with a larger drugmaker.
"The way the original deal was set up, it was not terribly likely for anybody else to acquire Schering-Plough," said David Katz, president and chief investment officer at Matrix Asset Advisors, a New York City-based fund manager who owns shares in Merck but not Schering-Plough. "Merck was the best and only game in town."
But times have changed. Katz said uncertainty over the Vioxx litigation "makes it tougher for a company to be acquired by Merck for stock."
That means Schering-Plough may be forced to go it alone, chasing growth where it can.
Hassan says that's just fine with him. He says he's currently on the hunt to acquire new products "priced within our risk appetite."
"We're going to do deals as they come along," Hassan said. "We're going to do it because it is financially justified."
George E. Jordan may be reached at gjordan@starledger.com or (973) 392-1801.
FRED HASSAN
Job: Chief executive, Schering-Plough
Age: 60
Residence: Florham Park
Family: wife, Noreen, and three children: Sabrina, 29, Daniel, 24, and Sarah, 16
Hometown: Lahore, Pakistan
Education: Bachelor's of science, chemical engineering, Imperial College of Science, Technology and Medicine, London; MBA, Harvard University
Hobbies: Reading, travel, old movies
Recently read: "Blink: The Power of Thinking Without Thinking" by Malcolm Gladwell and "Conspiracy of Fools: A True Story" by Kurt Eichenwald
Car: Mercedes SUV
Favorite restaurant: L'Allegria, Madison
Quote: "This thing for me is a mission. I could have been doing a lot of other things with my time."
FRED HASSAN'S SCORECARD
Three years ago, on his second day on the job as chief executive of Schering-Plough, Fred Hassan described his plans for launching the beleaguered drugmaker into a "breakout" stage of growth and profitability in five to seven years. Here's how he's doing at the midway point:
Goal: Fix manufacturing problems.
Background: In 2002, Schering-Plough paid a $500 million fine and agreed to tighter Food and Drug Administration monitoring of plants in New Jersey and Puerto Rico through 2007.
Outcome: The company met the FDA requirements to correct the violations in January, a year before deadline.
Goal: End federal investigations.
Background: When Hassan arrived, investigations by several agencies -- the Securities and Exchange Commission, Department of Justice, Department of Health and Human Services inspector general -- were already under way. They covered everything from manufacturing issues to alleged off-label promotions to unethical marketing practices.
Outcome: Schering-Plough paid $294 million two years ago to settle a probe by the U.S. Attorney's Office in Massachusetts into off-label promotions. The FDA consent decree led the U.S. Attorney's Office in Newark to end its probe with no criminal charges. But investigations by the SEC and Health and Human Services, and another probe by the Justice Department, are pending.
Goal: Cut expenses.
Background: Sales and profits went into decline following the loss of the patent for Claritin in 2002.
Outcome: In 2003 and early 2004, Schering-Plough eliminated 1,700 jobs through layoffs and voluntary retirement; killed bonuses; closed the executive dining room; sold the company jet and cut the dividend to 5 1/2 cents per share from 17 cents. But in mid-2004, the drugmaker began to expand its sales force -- eventually, the company added nearly 1,000 sales reps -- to pump up sales of Vytorin. During Hassan's three years, the company's selling, general and administrative expenses have grown 25 percent to $4.4 billion; during the same period, Schering-Plough returned to profitability.
Goal: Launch new products.
Background: Schering-Plough's late-stage drug development pipeline is all but empty, as the company's most promising drug candidates are still years away from the market.
Outcome: The company has invested 20 percent of net sales into research and development, mostly into biologics -- complex compounds that include today's most promising cancer drugs. Last year, the company spent $1.8 billion on research and development. It also has publicly stated plans to acquire new products by buying smaller companies or, as in the case of Vytorin, signing co-development agreements.
Goal: Build morale.
Background: The earnings collapse in 2003 and the alphabet of federal agencies investigating the company took their toll on managers and their charges.
Outcome: Hassan took a hands-on approach to running the company. He hired 12 of the company's top 30 executives and his down-to-earth manner has won praise from rank-and-file staff.
© 2006 The Star Ledger
© 2006 NJ.com All Rights Reserved.
posted by Jones Lang LaSalle NJ News Blog at 12:11 PM
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