FRED HASSAN is known in the pharmaceutical industry as a turnaround specialist. But the chief executive of Schering-Plough Corp. is uncomfortable with that reputation. "I'm not by nature a hit-and-run kind of person," he says, alluding to the slash-and-burn tactics often associated with corporate turnarounds. "I like to build things."
At Schering-Plough, Mr. Hassan has employed a methodical, eye-on-the-long-term approach to reviving the Kenilworth, N.J., drug maker. When he took the company's helm three years ago, he said his turnaround plan would take six to eight years to complete -- an eternity by the standards of today's fickle shareholders.
The jury is still out on whether Mr. Hassan's go-it-slow strategy is what's best for the company, but there are some encouraging signs: Schering-Plough has posted a profit in five of the past six quarters. Last week, it reported second-quarter net income of $259 million, compared with a $48 million loss last year, sending its shares up more than 6%. A closer look at Schering-Plough under Mr. Hassan shows the complexities of breathing new life into a troubled pharmaceutical company.
Schering-Plough was a mess when its board recruited Mr. Hassan from Pharmacia Corp. in April 2003. The company's blockbuster allergy pill Claritin had just lost patent protection, and the drug's $3 billion in annual sales were fast evaporating. The Food and Drug Administration was forcing the company to revamp its factories under a consent degree. The company was under an investigation (later settled) by the U.S. Securities and Exchange Commission over meetings former CEO Richard Jay Kogan held with selected investors. And to top it all off, the government was investigating Schering-Plough for allegedly defrauding Medicaid. (It subsequently pleaded guilty, agreeing to pay $346 million in fines and damages.)
As Claritin sales plummeted, Mr. Hassan faced an impending cash crunch. Rather than cut research and development spending and lay off scientists, he says he went against the advice of his executives and cut the dividend. The move violated something of a taboo: In the cash-rich drug industry, shareholders had come to expect sizable quarterly payouts. Schering-Plough had raised its dividend 18 times since 1986.
In another unusual move, Mr. Hassan changed the way the company's salesmen were paid. Under the old compensation system, Schering-Plough's small army of drug representatives earned 40% of their annual income in bonus and 60% in salary -- about the industry norm. Mr. Hassan reduced the bonus portion to a maximum of 25%, effectively limiting how much money drug reps could earn. Unhappy with the change, many reps defected to competitors.
At the sales force's annual meeting, Mr. Hassan surprised those who remained by telling them, "If you ever have to choose between doing what's right and making a sale, walk away from the sale." The audience stood up and applauded, Mr. Hassan and others who attended the meeting say.
A former industry executive who used to manage drug representatives at a big European pharmaceutical company says Mr. Hassan's approach is Utopian. "I think he's going to get a lot of people who are going to stay in their pajamas until noon."
Mr. Hassan is unmoved by such criticism. "We've lost a few salespeople who might be much better off selling computers than medicine to doctors," he says, "and, frankly, good luck to them."
Mr. Hassan, who is 60 years old, was born in Pakistan. His father was the country's first ambassador to India following the 1971 war between the two nations. After attending university in London and working for a fertilizer plant in Pakistan, the younger Mr. Hassan went to Harvard Business School. Upon graduating in 1972, he joined Swiss drug maker Sandoz Pharmaceuticals, now part of Novartis AG, and has worked in the industry since.
As a top executive at Wyeth in the 1990s and later as CEO of Pharmacia, he acquired a reputation as a turnaround specialist. He relocated Pharmacia, the product of a bungled 1995 merger between a U.S. company and a Swedish company, to New Jersey and engineered Pharmacia's merger with Monsanto Co. to gain control of the blockbuster arthritis drug Celebrex. He later spun off Monsanto's agricultural business and sold Pharmacia to Pfizer Inc.
Although Mr. Hassan's approach at Schering-Plough has been notably unhurried, he hasn't hesitated to take decisive action to cut costs. Not long after his arrival, he sold two of the company's four corporate jets, closed down the executive dining room, scrapped bonuses for all managers, including himself, and suspended the company's profit-sharing program for the first time in 47 years.
He also eliminated 3,100 jobs, many through early retirements, and replaced the company's top six executives. Aligning his financial interests with those of shareholders, he invested $4.7 million of his own money in Schering-Plough shares.
After a loss of nearly $1 billion in 2004, Schering-Plough is on track to report its second consecutive year of profits. However, Mr. Hassan still has major issues to address. Some industry analysts think he should have made deeper cuts. "The company never adjusted its expenses to reflect the loss of prescription Claritin," says Michael Krensavage, an analyst with Raymond James & Associates. "Expenses need to come down."
Moreover, Schering-Plough has to share the profit from its two best-selling products, cholesterol drugs Zetia and Vytorin, with Merck & Co. The relationship between the two companies has been strained since Merck disclosed in December that it is developing two compounds to raise HDL, or good cholesterol, that are likely to compete with Zetia and Vytorin if they make it to market.
The cholesterol joint venture also makes Schering-Plough an unattractive takeover target for other pharmaceutical companies because its terms include a clause giving Merck the right to buy Schering-Plough out of the venture if Schering-Plough gets acquired.
Most worrisome is Schering-Plough's weak research pipeline (extensive Drug Pipeline database at www.chartsbank.com/PipelineList.aspx ) Like other pharmaceutical companies, it has struggled to come up with new drugs to replace big sellers like Claritin that have come off patent.
Mr. Hassan has partially made up for that with deft marketing. After Schering-Plough scientists improved the unpleasant scent and sensations of an eight-year-old allergy spray called Nasonex, Mr. Hassan launched a promotional blitz for the product that has paid off handsomely. Sales of Nasonex rose 21% to $242 million in the second quarter.
In his annual letter to shareholders in March, Mr. Hassan boasted of a "strong early development pipeline," citing promising compounds for hepatitis C, AIDS and coronary disease. But such early-stage compounds often fail in later stages of human testing.
In a recent interview, Mr. Hassan acknowledged that Schering-Plough's pipeline lacked compounds in late-stage human testing. "It's fair to say we have a late-stage pipeline gap," he said.
To plug that gap, Schering-Plough could acquire a smaller pharmaceutical or biotech company or enter into licensing arrangements with partners. But, true to form, Mr. Hassan says, "We don't want to rush into something. We're going to take our time."
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