|BUSINESSWEEK ONLINE : MARCH 29, 1999 ISSUE|
Q&A with Schering-Plough's Richard Kogan
''I will never be satisfied with our research pipeline''
Richard Jay Kogan heads drugmaker Schering-Plough, the top pharmaceutical company on the BW 50 list. Schering's strong performance was driven largely by the success of one product: the blockbuster allergy medicine Claritin. Thanks to a $185 million consumer ad budget, known as direct to consumer (DTC) advertising, Claritin is arguably the best known brand in the business.
One of Kogan's major strengths is a keen grasp of numbers, having received his undergraduate degree from the City College of the City University of New York in economics and statistics. He has an MBA in management science from New York University. Kogan recently spoke with BW's Philadelphia Bureau Chief Amy Barrett about what has made Schering such a strong performer and whether the drugmaker can go it alone in a consolidating industry. Here are excerpts from their conversation.
Q: What is behind the strong financial performance over the past three years?
A: We are a very focused organization. I think the organization is flexible, pragmatic, it reacts quickly, looks at opportunities quickly. As an example: We licensed Vasomax, which is an agent for erectile dysfunction, long before Viagra became a household name. We saw something, we were competing with other companies to license it, and we moved quickly.
Q: How do you spot those opportunities?
A: We stay close to our markets and what is going on in research. We are a pretty decentralized organization. We have results-oriented managements. Compensation is closely linked to performance. Another characteristic is we do look ahead and try to prepare for market changes.
Q: Can you give an example?
A: When managed care came to loom on the horizon over a decade ago, we asked ourselves how we could partner with managed care, work with managed care. We began to recognize that these, in fact, would be important customers. We formed a business unit that would deal with managed care and develop disease management systems to help managed care control costs. We did that ahead of most pharmaceutical companies.
Q: I've heard a lot about your company being financially astute?
A: We do maintain rigorous controls over costs. And we have a consistency of management here. [Longtime Schering executive Raul Cesan is now president and chief operating officer and being groomed for the top job.] We have a very favorable tax rate because of how we structure our businesses, including plants in Ireland and Singapore. Our tax rate was 24.5% in 1998. We have increased our dividend 15 times. We have made a number of share repurchases and are in the process of one currently.
Also, we really look at our costs in a very focused way. We established a group two years ago that had the target to reduce costs by $100 million. It is well on the way to surpassing that and now has raised the bar to $150 million. That is looking at our vendors on a worldwide basis. We are rigorous.
One of the things that has helped us is we have a strategy of focusing on core businesses. We don't pursue fads in the marketplace or in our research effort. In R&D, we've attracted and organized an outstanding group of researchers focused on developing new products that fill real medical needs. We've also provided our R&D group with first-rate facilities, such as in genomics and combinatorial chemistry.
Q: Any examples of fads you've steered clear of?
A: PBMs [pharmacy benefit managers, such as the one Lilly just sold off] could be an example.
Q: Your R&D is relatively small compared with that of giants like Merck and Pfizer.
A: We spent over $1 billion last year. This year will be up 15%. We have never turned down a research project on the basis of a lack of funds. We've always found the wherewithal to do what we want to do.
Q: But isn't scale becoming more of an issue in this industry?
A: There is a scale issue, but we are way above what is needed. We are very focused -- wherever we are competing in research. We are focused on respiratory and inflammatory diseases, oncology and anti-infectives, central nervous system area, and very focused in cardiovascular.
We've also been very active in licensing products and technology. We are very active. I will never be satisfied with our research pipeline. I will always want more or better quality.
Q: Why do you think the decade of the 1990s has been such a productive period with so many blockbuster drugs?
A: Part of the reason is that the basic science is producing products to treat certain diseases that haven't been treated or curable before. And part of it is a recognition that these pharmaceutical products are a cost-effective way to treat diseases. You have to look at total medical costs. You can't just look at one part of it. If you use our drugs for asthma the way we suggest you use them, you will reduce your overall treatment costs for asthma. It is the technology that is giving us drugs we couldn't develop before, and it is the understanding of the cost effectiveness of pharmaceuticals that is creating these blockbuster drugs.
Q: How do you manage the trade-off between investing in R&D and marketing?
A: I don't see it as a conflict between investing in marketing or investing in research or development. R&D is clearly what drives our business -- there is no room for me-too drugs. Our success is based on integrating good marketing and good research.
Q: How do you make decisions on what projects to invest in and which projects to cut?
A: I chair the product review board, which reviews all major research projects. That is done on a monthly basis. It is done in an atmosphere of openness so that everyone has access to the same data. We look at a number of issues -- most important is medical need, technical feasibility, patentability. Because if we are going to undertake a major investment that could take 10 years and which has a relatively low probability of success, as all research does, we've got to have the patent protection to recoup the cost of that investment as well as the cost of products that aren't successful. And we'll test our decisions, going outside to academics and clinicians and have them review our decisons.
Q: The criticism I've heard is that there are no obvious blockbusters in the pipeline.
A: We should not risk running our organization on the anticipation that we are going to have a blockbuster drug. It doesn't mean we won't seek them. But we can't run our organization in that fashion. We have significant drugs in the pipeline -- Vasomax for ED [erectile dysfunction]. In Phase III testing, we have a new antibiotic. There is going to be tremendous use for Intron A with the new approvals in the U.S. and Europe for hepatitis C, which is a major problem. We have a new antifungal, a cholesterol absorption inhibitor. We have a number of major products in the pipeline. There will never be enough for my purposes.
Q: I've heard Schering mentioned as a consolidation play at some point?
A: We don't have the need to do that. We've done well, we've got a very solid management team. We have a powerful balance sheet, excellent marketing forces around the world. And we have a solid product pipeline. Shareholders seem to be satisfied. Opportunities come along, and we'll always look at opportunities. But right now, we think we are on track to do what we've done in the past.
Q: You've spent a lot on consumer ads for Claritin. How important is branding?
A: We spent a lot on DTC because we thought we had an outstanding product here. We view allergies as a serious disease and often unfortunately leading to other serious diseases such as asthma. There were a lot of people who weren't treating their allergies. So we saw a way to inform people about this outstanding product. The reason for Claritin's success is that it is an outstanding product. We have five different formulations, which makes it more convenient for different types of people. This product is particularly well suited to DTC. There are other places where it may be less appropriate to have a DTC campaign. Brands [help] recapture some of that research [investment].
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