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When drugmaker Schering-Plough Corp. (SGP
) announced on Nov. 13 that Chairman and CEO Richard J. Kogan would retire by April, many Wall Streeters figured that Schering's days as an independent company were numbered. Staggering from the one-two punch of repeated run-ins with the Food & Drug Administration over its weak manufacturing practices, along with the expected decline of its blockbuster allergy medicine Claritin, Schering's stock has been hammered. Moreover, as a midsize player with little financial muscle in a rapidly consolidating industry, the drugmaker is on the wrong side of the "eat or be eaten" equation.
But Schering investors may have to wait a long time for a suitor to bail them out. The company's drug pipeline is among the thinnest in the industry, and its most promising new product, a cholesterol-lowering drug called Zetia, is tied up in a marketing partnership with Merck & Co. (MRK
) If Schering decides to sell to one of its giant rivals, Merck has the right to buy out Schering's stake in the Zetia venture--seriously diminishing Schering's appeal to any would-be buyer other than Merck. And the betting is that Merck, which has a well-known aversion to mergers, is unlikely to pursue a Schering buyout right now.
The upshot: Whoever is recruited to take over from Kogan will have to sort out the company's problems if Schering is to recover or become a more tempting takeover target. Among possible candidates, say analysts: former Warner-Lambert Co. CEO Lodewijk J.R. de Vink, who spent nearly 20 years in Schering-Plough's international operations, and Pharmacia Corp. (PHA
) Chairman and CEO Fred Hassan, whose future role at Pfizer Inc. (PFE
), which is buying Pharmacia, is unclear. The winner faces a daunting task. Says an industry investment banker: "This is a crippled company."
So crippled, in fact, that it's easy to forget that Schering was an industry darling in the 1990s. Thanks to Kogan's marketing savvy, the company created a major brand in the allergy medicine Claritin. But while Kogan was busy delivering 15%-plus earnings growth on the back of Claritin, he underinvested in Schering's infrastructure. The neglect particularly affected some aging plants, analysts say.
The resulting manufacturing headaches have hurt Schering's plans to protect its No. 1 franchise. The company had hoped to build sales of Clarinex, a spin-off of Claritin. But the production lapses held up the FDA's Clarinex approval for a year, until December, 2001. So Clarinex hasn't yet become entrenched in the market and remains only a modest seller, while Claritin's sales are expected to plummet next year as cheap, over-the-counter versions launch. That's why SG Cowen Securities Corp. analyst Stephen M. Scala expects Schering's revenues to slide 4% in 2003, to $10.1 billion, as net income falls 37%, to $1.5 billion. Investors are bailing out, too: From a high of 59 in December, 2000, the stock now trades around 22.
That means Schering's new CEO will be under intense pressure to move quickly. After satisfying the FDA that manufacturing is up to par, the biggest challenge will be turning Zetia into a big earner. Analysts figure that if it's a big hit, Merck may reconsider its merger aversion. That may be the best outcome Schering investors can hope for. By Amy Barrett in Philadelphia