Schering AG

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Schering AG

13342 Berlin
Germany
Telephone: +49 (30) 468-1111
Fax: +49 (30) 468-15305
Web site: http://www.schering.de/eng/

Public Company
Incorporated: 1871
Employees: 25,556 (2001)
Sales: EUR 4.84 billion (US$4.31 billion) (2001)
Stock Exchanges: Basel Berlin Bremen Düsseldorf Frankfurt Geneva Hamburg Hanover London Munich New York Stuttgart Zurich
Ticker Symbol: SCH (Germany), SHR (New York)
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Schering AG, the German pharmaceutical company, operates worldwide production facilities for fertility control and hormone therapy, diagnostics and radiopharmaceuticals, dermatology, and specialized therapeutics.

Although the company presently maintains a formidable presence in the United States, this has not always been the case. Schering’s initial U.S. operations fell victim to the turmoil wrought by two world wars. The company’s first U.S. subsidiary was dissolved during World War I. After being reestablished in 1929, it was then seized by the U.S. Alien Property Custodian during World War II. To Schering’s chagrin, the subsidiary was eventually sold to private investors and was severed completely from its parent company. Having no other recourse, the firm occupied itself with rebuilding its virtually decimated facilities at home in Germany. In the years that followed, however, Schering regained its lost markets and expanded to become an impressive competitor around the world in its pharmaceutical specialties.

Schering’s Origins and Early Successes

In 1851, at Berlin’s Chausseestrasse 17, Ernst Schering opened a pharmacy he named Gruene Apotheke. Twenty years later, the founder incorporated the business as a stock company named Chemische Fabrik auf Actien. In December 1889, Schering died at the age of 65, one year before his company began marketing its first specialty product—a medication for gout. In 1901, the company’s operations expanded into the area of electroplating. To facilitate the process of plating decorative metal, Chemische Fabrik manufactured baths and electrolytes. Later, these operations would expand to include the production of complete electroplating equipment as well as chemical compounds and machinery for printed-circuit manufacture.

At the dawn of the twentieth century, the German company also expanded into such diverse areas as industrial and laboratory chemicals. In the 1920s, agrochemicals were added to Chemische Fabrik’s product line, and by the end of the decade the company made its first foray into an area that would become increasingly important in the future—female hormones. In 1937, the company merged with Oberkoks, a mining and chemical company, which resulted in the adoption of the current name, Schering AG.

As Germany entered World War II, Schering was widely recognized as a world leader in innovative chemical production and the scope of its operations. Exploratory work on sulfon-amides, X-ray contrast media, and steroid hormones positioned the company on the cutting-edge of new technologies. Schering’s successful innovations matched their expanding operations, with some 30 foreign subsidiaries worldwide.

Challenges of the World Wars

This expansion, however impressive, was not without setbacks. One of Schering’s oldest subsidiaries, Schering & Glatz, was established in the United States in 1876 to distribute Schering products such as diphtheria medication. Yet during World War I, because it was affiliated with Germany, the operation was dissolved. In 1929 the company reestablished its presence in the United States by creating the Schering Corporation in New York City. This subsidiary specialized in hormone research developments, as company scientists became experts in synthesizing steroid drugs. These products accounted for 75 percent of total sales for the U.S. subsidiary.

While Schering’s expertise would in time lead to the development of birth control products in the 1960s, its coveted knowledge became the target of espionage reports during World War II. Believing Schering research excelled in the area of corticoster-iods, or hormones extracted from the renal cortex, the United States conducted a secret investigation resulting in an accusation that the company used its knowledge to develop highly sophisticated drugs to further the Nazi cause. The United States alleged that pilots under the influence of corticosteriods could perhaps withstand extremely high altitudes enabling them to fly well above antiaircraft flak. As it happened, Schering’s corticosteroid research was not highly developed, and only after the espionage reports did Schering begin intense experimentation in this area.

Charges of military collusion with the Nazi regime aside, nothing could have prepared the company for its losses suffered after World War II. All of the company’s foreign holdings disappeared. In 1942, Leo Crowley, acting as the U.S. Alien Property Custodian, seized assets to all German properties within America’s borders—including Schering. Ten years later, the U.S. Attorney General announced that the company’s U.S. subsidiary was for sale and a group of private investors headed by Merrill Lynch made the purchase to establish Schering Corporation independently from its German parent. The former subsidiary went on to post impressive financial gains with the discovery of two new corticosteriods that became the envy of the drug industry.

Post-World War II Recovery and a Return to the U.S. Market

Following the end of World War II in 1945, Schering AG’s German factories were all but destroyed, and the company had lost valuable patents as well as the rights to its name in all 30 of its subsidiaries. The remaining employees searched the rubble for machine parts and usable wreckage. After a few years of scavenging, the company miraculously released a finished product, yet soon afterward its property was seized in East Germany by the new Communist regime. Nevertheless, in several years Schering succeeded in rebuilding its operations.

Manufacturing such products as lice powder and penicillin, the company soon exhibited signs of revitalization. Interestingly enough, by retaining headquarters in the city of its origin, Schering was the only company with a multinational orientation to remain in Berlin after World War II. In fact, its main headquarters was three blocks from where the Berlin Wall would be erected in 1961 separating East from West Berlin. For security reasons, Schering maintained a second corporate office along with all its business records in Bergkamen—200 miles west of the East German border. Board members who were committed to staying in their home city influenced the company’s decision not to move.

A major step in Schering’s postwar expansion involved pioneering work in the area of birth control. Using their expertise in steroid research, the company introduced the first birth control pill in the European market in 1961. By 1972 the company was responsible for supplying over 50 percent of the world market, excluding the United States, with hormonal contraceptives. Rather than relying on the success of “the Pill,” Schering made a concerted effort to diversify its product line. Out of $383 million in total sales, 65 percent came from a broad spectrum of Pharmaceuticals, including 30 percent from X-ray contrast media and psycho-pharmaceuticals, 12 percent from phyto-pharmaceuticals, 18 percent from specialty industrial chemicals, and 5 percent from electroplating. While the Berlin facilities remained the center of all research, administrative, and some packaging operations, 50 subsidiaries operating throughout Europe, Asia, and Latin America finished and distributed Schering products worldwide.

With a strong financial position and an ambitious vision for research and development, the West German company prepared to make yet another entrance into the coveted U.S. market. Its purchase of a 50 percent interest in New Jersey’s Knoll Pharmaceutical in 1972 was only the beginning for Schering. Between the years 1976 and 1980, five U.S. subsidiaries joined Schering’s holdings—Nepera Chemical, Sherex Chemical, Berlex Laboratories (renamed from Cooper Laboratories), Chemcut, and Nor-Am Agricultural Products. The acquisitions directly corresponded to Schering’s five divisions at the time: Drugs, Industrial Chemicals, Fine Chemicals, Agrochemicals, and Electroplating.

Horst Kramp, an executive board member of the six-man Vorstand at the time, directed Schering’s U.S. operations. The unusual management structure, which did not allow a position for president, placed Kramp on equal footing with his five colleagues. While each Vorstand member held a distinct function, all policies were decided by consensus. Kramp, whose administrative specialties were marketing and sales, joined Schering in 1964 as a domestic sales manager. In the 1960s, he traveled to the United States to work at Nor-Am only later to return to Germany to become the only nonchemist on the Vorstand.

Company Perspectives:

With its innovative products, Schering AG aims for leading positions in specialized markets worldwide. Being a global player enables us to be aware of different market conditions and our customers’ needs, since we are present in many locations: Schering AG has more than 130 subsidiaries worldwide. We are committed to the principle of sustainable, future-oriented development.

Schering Trademark Suit and Slow U.S. Growth in the 1980’s

Although Schering AG eventually bought back many of its former subsidiaries after World War II, one former holding that was never repurchased was Schering Corporation in the United States. As industry observers watched the company’s increasing financial success, the management at Schering AG realized, not without remorse, that its former subsidiary had grown too large to purchase back. Access to the use of the shared trademark in the United States had been an issue of contention between the two Scherings since their separation, and in 1983 their grievances led them to engage in a protracted legal battle. Schering-Plough (formed from the merger between Schering Corporation and a manufacturer of proprietary drugs) contended that Berlex, Schering AG’s pharmaceutical subsidiary in the United States, was infringing on its trademark. The German company asserted, however, that the company namesake stemming from founder Ernst Schering was widely recognized in Europe. To bar its use in the United States, Schering AG argued, would subject the company to unfair competition. The two companies reached an agreement in 1988 whereby Schering AG agreed to operate under the name Berlex in the United States and Canada, giving exclusive rights to the Schering name in the United States, with certain exceptions, to Schering-Plough.

By 1982, while Schering sales grew by 4 percent, the U.S. subsidiaries registered negligible earnings figures. The Vorstand members remained unconcerned, however, citing the time necessary before the companies could turn a profit. The next step was to remove unprofitable operations. Facilities manufacturing such products as adhesive chemicals or sulfuric chemicals were sold. In the meantime, $22.5 million was appropriated for the expansion of U.S. subsidiaries, including the building of new headquarters and research facilities. Similarly, management at Schering was conscientious in the provision and support of research expenditures for the U.S. holdings, investing as much as 14 percent of the company’s gross income.

Sales for Schering’s U.S. subsidiaries exceeded DM 1 billion for the first time in 1984. Worldwide sales first surpassed DM 5 million in the following year, with 82 percent derived from foreign operations. And in 1986, Schering appointed Horst Witzel as its first chairman of the board since the end of World War II. Shortly thereafter the firm sold Nepera, its weak fine chemicals U.S. subsidiary.

Focusing on Core Competencies in the 1990’s

A year after the resolution of the legal battle between the German and U.S. Scherings in 1988, Dr. Giuseppe Vita was named Schering AG’s new board chairman, with Klaus Pohle as his deputy. Schering created four strategic business units for the pharmaceutical division to enhance its commitment to this area—including Diagnostics, Fertility Control, Oncology and Dermatology, and Cardiovascular and Central Nervous System. By 1991, Schering’s annual sales and profit levels reached new heights at DM 6.36 billion and DM 274 million, respectively.

In an effort to succeed as a niche player focusing on specialized areas within the pharmaceuticals industry, Schering sold its industrial chemicals and natural substances divisions to New York’s Witco Corporation in 1992, and its electroplating division in 1993. These divested operations would have required tremendous levels of investment in order to be competitive globally, and Dr. Vita was confident in his focus on pharmaceuticals, which made up 95 percent of Schering’s profits at the time. As evidence of this renewed pharmaceutical commitment, 1993 also marked the U.S. release of Betaseron (known as Betaferon elsewhere), the world’s first drug to help treat relapsing-remitting multiple sclerosis. Betaseron would eventually yield more than 10 percent of Schering’s annual sales. Schering’s share price hit a new high of DM 1.160, although sales and profits experienced their second straight decline.

Key Dates:

1851:: Ernst Schering opens his pharmacy, Gruene Apotheke, in Berlin.
1871:: Ernst Schering’s operations are incorporated as Chemische Fabrik auf Actien.
1889:: Ernest Schering dies.
1901:: The company’s operations expand into the area of electroplating.
1918:: Schering’s U.S. subsidiaries dissolve due to trading with the Enemy Act.
1929:: The company returns to the United States by founding Schering Corporation in New York.
1932:: The company merges with Oberkoks, a mining and chemical company, and adopts Schering AG as its name.
1942:: The U.S. government takes control of all German properties in the United States, including Schering Corporation.
1945:: Schering begins to rebuild destroyed factories and recover from the loss of patents and naming rights.
1952:: Schering’s U.S. subsidiary is sold to private investors, permanently separating the business from its German parent.
1961:: The first birth control pill is introduced by Schering in the European market.
19702:: The company gradually reenters the U.S. market through targeted acquisitions, such as Knoll Pharmaceutical.
1983:: Legal conflict begins between Schering-Plough and Schering AG over the use of the Schering name in the United States.
1986:: The company appoints Horst Witzel as its first chairman of the board since World War II.
1988:: Schering-Plough is awarded exclusive rights to the Schering name in the United States, with certain exceptions; and Dr. Giuseppe Vita is named the new board chairman.
1993:: The company releases Betaseron in the United States (known as Betaferon), the world’s first drug to treat relapsing-remitting multiple sclerosis.
1999:: The company broadens its pharmaceutical operations to include radiopharmaceuticals by purchasing Diatide Inc., a nuclear medicine specialist firm.
2000:: The New York Stock Exchange lists the company for the first time and five-year sales and net income increase 90 percent and 165 percent, respectively.
2001:: Dr. Vita retires and the board appoints Dr. Hubertus Erlen; and the company launches a new birth control pill, Yasim, in the United States.

Shareholders agreed in 1994 to merge its Agrochemicals division into a new joint venture with Hoechst AG called AgrEvo, of which Schering would hold a 40 percent interest (five years later Hoechst merged the agrochemicals operations with Rhone-Poulenc to form Aventis Crop Science, with Schering controlling 24 percent of the venture). Despite decreases in sales and profitability, Schering was still ranked among the top 20 pharmaceutical companies worldwide in 1994 and was a world leader in agrochemicals.

After a turbulent year in 1995 with a 13 percent earnings drop, in large part due to an X-ray contrast medium recall, Schering soon rebounded and posted one of its most profitable years in 1997 with income of DM 446 million (against DM 6.2 billion in sales). The company achieved this success in part due to currency rates at the time combined with cost reduction in its acquisitions and strong sales of female health products. And amid rumors of a possible takeover by Roche Holdings AG, Schering’s share price increased more than 3 percent.

Strategic Acquisitions Fuel Profitability in the New Century

In 1999, Schering decided to broaden its pharmaceutical operations to include radiopharmaceuticals in an effort to boost sales, so the company purchased Diatide Inc., a New Hampshire nuclear medicine specialist. Schering acquired 60 percent of Oris/Cis Bio in the following year to augment its diagnostics/radiopharmaceutical position even further, and two years later Schering exercised an option to purchase the remaining 40 percent of the firm.

To build up its Japanese presence, Schering purchased therapeutics specialist Mitsui Pharmaceuticals in 2000. But perhaps the firm’s most public achievement of that year was that the New York Stock Exchange listed Schering AG for the first time. The new listing on the NYSE improved Schering’s ability to attract top professionals to its U.S. subsidiaries through stock options, and provided Schering with added flexibility through the ability to utilize stock when making acquisitions.

Heading into the 21stcentury, Schering enjoyed strong sales and profit levels, which increased more than 20 percent in 2000 to EUR 4.49 billion and EUR 336 million, respectively. In fact, between 1995 and 2000, Schering’s sales climbed 90 percent, and net income increased by an impressive 165 percent. Having exceeded the performance goals of Schering’s five-year plan a year ahead of schedule, Dr. Vita set his sights on boosting sales to EUR 5.5 billion by 2006, with significant expansion in Japan and especially in the United States, where he aimed to increase sales from 21 percent of Schering’s sales in 1999 to 30 percent by 2006.

Six new products were launched by Schering in the U.S. in 2001 through Berlex Laboratories, whose sales force was expanded as part of Schering’s comprehensive marketing and public relations push that also included becoming a corporate sponsor for WNYC-FM, New York City’s National Public Radio station. The newly released products in the United States included the new birth control pill Yasmin, introduced in Germany during the previous year. Yasmin helps reduce water retention, weight gain, and skin problems that have affected users of the traditional pill.

Dr. Vita retired as Schering’s chairman in 2001, and the board appointed Dr. Hubertus Erlen, formerly head of manufacturing, as its new chairman. Schering and Aventis agreed to sell Aventis Crop Science to Bayer AG, marking Schering’s return to its origin as a pharmaceuticals company exclusively. Despite the difficult economic climate of 2001, Schering reached record levels for the sixth consecutive year with net income up 24 percent to EUR 418 million (US $372 million) and sales 10 percent higher to EUR 4.8 billion (US $4.3 billion).

The Fertility Control and Hormone Therapy division experienced the most growth, with the introduction of Yasmin in more European countries as well as in the United States. In the specialized therapeutics area, sales of multiple sclerosis drug Betaferon increased 15 percent, making it Schering’s top-selling product. With help from U.S. growth, in the company’s Diagnostics and Radiopharmaceuticals division, Schering continued to be the worldwide market leader in contrast media for magnetic resonance imaging (MRI). Dermatology remained Schering’s smallest area, and the company admitted to a poor launch of Levulan in the U.S. in 2001, while highlighting the successful U.S. introduction and significant potential of Finevin.

In 2002, Schering decided to pursue additional investment in external opportunities to further enhance core pharmaceutical specialties. In January, Schering reached a deal to obtain a 10 percent interest in MorphoSys to jointly develop diagnostic tests and antibody drugs. And to support Schering’s interest in developing products to fight cardiovascular disease, in March the company announced plans to purchase the remaining 88 percent interest in Collateral, a California firm developing pharmaceuticals to fight heart disease through gene therapy. Further expanding U.S. biotechnology operations, in May, Schering purchased Leukine, a cancer drug by Immunex. At Schering’s 2002 annual press conference, Dr. Erlen explained that future acquisitions were unlikely in the female healthcare and diagnostics fields due to Schering’s global position and products, but purchases were more probable in the areas of specialized therapeutics and dermatology. And according to a March report by Goldman Sachs, large pharmaceutical companies were expected to continue the strategy of acquiring biotech companies in order to gain the rights to innovative new products—enhancing their product lines dramatically while earning a higher return than if they invested from the start.

Despite this trend, Schering retained its impressive commitment to innovation and research, with nearly 20 percent of sales invested in research and development in 2001. Important research areas highlighted by Dr. Erlen in 2002 included male hormones (to combat testosterone deficiency) and oncology, in addition to new products utilizing drospierenone, the principal ingredient behind the hormonal contraceptive Yasmin.

Schering AG’s meticulous, well-planned reappearance and expansion in the United States and its focus on global market leadership in pharmaceutical niches, reflect a detailed program of long-term planning that has left executives optimistic about the company’s growth potential.

Principal Subsidiaries

Asche AG, Germany; Berlex Canada; Berlex USA; CIS bio international, France; EnTec, Germany; Jenapharm, Germany; Leiras, Finland; Medrad, USA; Nihon Schering, Japan; Schering Argentina; Schering, Austria; Schering Brazil; Schering Colombia; Schering Czech Republic; Schering Finland; Schering GmbH und Co. Produktions KG, Germany; Schering Health Care, UK; Schering Hungary; Schering Italy; Schering Mexi-cana; Schering Netherlands; Schering Poland; Schering Portugal; Schering Russia; Schering Scandinavia, Sweden; Schering Spain; Schering Switzerland; Schering Turkey; Schering Venezuela.