Schering-Plough Corporation

views updated May 21 2018

Schering-Plough Corporation

2000 Galloping Hill Road
Kenilworth, New Jersey 07033-0530
U.S.A.
Telephone: (908) 298-4000
Fax: (908) 298-2429
Web site: http://www.sch-plough.com

Public Company
Incorporated: 197’1
Employees: 28,100
Sales: $9.8 billion (2001)
Stock Exchanges: New York Boston Cincinnati Midwest Pacific Philadelphia
Ticker Symbol: SGP
NAIC: 325412 Pharmaceutical Preparation Manufacturing; 325620 Toilet Preparation Manufacturing; 339113 Surgical Appliance and Supplies Manufacturing; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Schering-Plough Corporation is a major U.S.-based manufacturer of pharmaceuticals. The company’s leading prescription drug is the allergy medication Claritin, with 2001 sales of $3.2 billion. Other allergy and respiratory treatments include Clarinex, the firm’s next-generation allergy treatment, and Nasonex, a nasal spray for allergies with 2001 sales of $524 million. In the area of anti-infective and anticancer products, Schering-Plough makes Intron A, a treatment for hepatitis C with 2001 sales of $1.4 billion; PEG-Intron, a longer-acting form of Intron A; Temodar, used to treat malignant brain cancer; and Remicade, a treatment for Crohn’s disease. Schering-Plough also makes drugs to treat cardiovascular, dermato-logical, and central nervous system disorders. Overall, pharmaceuticals account for about 85 percent of company sales. Generating about 7 percent of sales are the company’s animal health products, which include Nuflor, an antibiotic used to treat bovine respiratory disease. The remaining revenue comes from the sale of consumer products, including Dr. Scholl’s foot-care products, Afrin nasal sprays, and Bain de Soleil and Coppertone sun-care products. On the research side, Schering-Plough is involved in a number of collaborative ventures investigating new drug treatments. Chief among these are partnerships with Merck & Co., Inc. formed in 2000 to develop cholesterol-management and allergy/asthma medications.

History of Schering Corporation

Schering-Plough Corporation was formed in 1971 through the merger of Schering Corporation and Plough, Inc., each with their own long and colorful histories. Schering began in the late 19th century as the U.S. subsidiary of Schering AG, a drug and chemical manufacturer founded in Berlin by Ernst Schering in 1864. In 1894, the company started to export diphtheria medication to the United States, and in 1928 Schering Corporation was incorporated in New York. Until the end of World War II, a sex hormone accounted for up to 75 percent of Schering’s sales.

In 1935, on the eve of World War II, the U.S. government took over the assets of Schering Corporation because of its German ownership, thereby changing the course of the company’s history. Frank Brown, a New Deal lawyer with no previous experience in the pharmaceutical business, was dealt a hand that would bind his future to Schering. Brown’s legal career involved participating in government projects during the 1930s. He joined the Federal Deposit Insurance Corporation (FDIC), a creation of Roosevelt’s New Deal policies, and acted as legal counsel to Leo Crowley. Crowley was appointed the Alien Property Custodian, and Brown was given the job of managing Schering. He immediately filled vacated executive positions with associates from the FDIC. In 1943, Brown was formally appointed president of Schering, and under his direction the company soon proved a financial success.

Brown realized that research and development was the key to success in the pharmaceutical industry. To this end, Brown immediately began the development of a research department and, like many other pharmaceutical companies, conducted searches for those scientists and students on the verge of new discoveries or for noteworthy scientific contributions from medical colleges and universities across the country. Established in 1944, the Schering student competition fund has found many worthy recipients over the years.

Because the postwar years marked a reduced demand for sex hormones, the newly expanded research department could not have found a better moment to discover a new antihistamine. Marketed as a proprietary drug (a drug directly advertised to consumers) under the name Trimeton and marketed also as an ethical drug (a drug advertised to healthcare professionals) under the name Chlor-Trimeton, the antihistamine marked a turning point in the history of the Schering Corporation. By 1951, profits had quadrupled with sales reaching over $15 million.

That same year the U.S. attorney general put the company up for sale. A syndicate headed by Merrill Lynch outbid other prospective buyers, purchasing the company in 1952 and then proceeding to take it public that same year through the sale of $1.7 million of stock. The investors, however, asked Brown to remain on as company president. He accepted the offer and directed Schering to even greater profitability through the discovery of Meticorten and Meticortelone, two new corticosteroids that became the envy of the drug industry.

The discovery of synthetic cortisone dated back to 1949 when Merck & Co., an industry competitor, first made public its historic findings. Although the wonder drug’s discovery rightfully belonged to Merck, the process for synthesizing the drug conflicted with several other patents for producing sex hormones. Schering was the owner of one of these patents, and through a “cross-licensing” agreement the company gained access to information about cortisone production.

Soon after production of cortisone began, Schering and its competitors raced to discover an improved line of the drug that would eliminate some of the side effects associated with the steroid. They all hoped to modify the cortisone molecule to find a more effective drug and, at the same time, eliminate hypertension, edema (water retention), and osteoporosis (a bone disease), all side effects connected with cortisone therapy. Using microorganisms to convert one chemical into another, Schering scientists discovered a drug in 1954 that fit the desired guidelines. Clinical testing of the drug brought excellent results. When Schering was confronted with the prospect of full-scale production, however, the company realized it had no previous experience in manufacturing by fermentation, the process used to make the new drug. So Schering first tried fermentation in a 150-gallon stainless steel container and later in a 1,000-gallon and finally a 22,000-gallon fermenter. This last container used $100,000 worth of cortisone and a few hundred gallons of microorganisms.

Having established a successful manufacturing technique, Schering released Meticorten in 1955 and Meticortelone soon afterwards. Almost unbelievably, sales for the drugs jumped to over $20 million by the end of the year, $1 million more than total sales in 1954. By the end of 1955 sales for these drugs reached a new high of almost $46 million and by 1957 exceeded $80 million.

Other pharmaceutical companies manufacturing steroids immediately attempted to profit from Schering’s success. Lederle, Upjohn, and Merck all developed similar drugs, and soon Schering found itself embroiled in lawsuits over patent and licensing rights. Merck’s product arrived on the market only three months after Schering’ s, but because Schering had spent heavily on advertising it managed to retain a major share of the market. Furthermore, while Schering was forced to arrange licensing agreements with other companies, Brown demanded what other companies regarded as overpriced royalty payments. Although this initiated new litigation, it also allowed Schering profits to remain at an all-time high while agreements were worked out in time-consuming court processes.

In 1957, Schering acquired White Laboratories. During the mid-1960s the company completed a series of important introductions. In 1965, the company debuted Tinactin, an antifungal cream. The following year came the debut of Garamycin, an antibiotic used as a treatment for urinary tract infections and burn victims. This soon became the company’s leading product. Schering introduced Afrin, a decongestant, in 1967.

History of Plough and Merger with Schering

Unrelated to Schering’s historical development, a consumer product company in Memphis, Tennessee, won recognition for its own success story. Abe Plough, founder of Plough, Inc., began his career in marketing in 1908. He borrowed $125 from his father to create a concoction of linseed oil, carbolic acid, and camphor and sold the potion door-to-door from a horse-drawn buggy as a cure for “any ill of man or beast.” Plough’s inventory expanded to include a mysteriously named C-2223. This relief for rheumatics became an immediate success; after four years Plough had sold 150,000 packages.

Company Perspectives

For more than 50 years, our success in the worldwide pharmaceutical marketplace has been driven by our company’s commitment to innovative research, effective marketing and solid financial management. In fact, growth through research is central to our business strategy—our innovation has earned us market leadership positions in many of our key therapy areas.

What Plough later claimed to be his shrewdest purchase occurred in 1915 when he paid $900 for the inventory of a bankrupt drug company. He netted a profit of $34,000 peddling the stock in the back woods where there was still a large demand for oxidine chill tonic. In 1920, he bought the St. Joseph Company of Chattanooga, Tennessee, and began manufacturing children’s aspirin. By the 1950s, Plough realized that the huge sales figures for the popular aspirin was partially due to children taking overdoses of the product. To prevent this from reoccurr-ing Plough ordered childproof caps added to the aspirin at a time when safety regulations were almost nonexistent. He went on to purchase 27 other companies during the course of his lifetime. In addition to being talented at making important acquisitions, he was also very adept at marketing: 25 percent of all income from sales was routinely spent on advertising. The success of radio advertising, in particular, convinced Plough to buy five AM and FM stations (which were later sold). Plough was best known in his own community for his philanthropic contributions. Upon his death in 1984 at age 92, flags throughout Memphis were lowered to half-mast.

Years before his death, however, the unlikely friendship between German-born Willibald Hermann Cozen, chief executive officer of Schering Corporation, and Plough was the antecedent to a company merger. At 17, after graduating from Kaiserin Augusta Gymnasium in Koblenz, Cozen began working for Schering AG, the German parent company. When the U.S. subsidiary of Schering AG was seized by the U.S. government in the 1930s and eventually sold to the public, Cozen became the chief executive officer of the new independent company.

Although the 80-year-old Plough had initiated the merger because he was looking for a successor to run his firm, it was Cozen who actually designed the merger and, as a result, became the chief executive officer of Schering-Plough; Plough served as chairman of the new company until 1976. The merger, which was completed in 1971, combined the comprehensive manufacturing of Schering’s antibiotics, antihistamines, and other pharmaceuticals, and Plough’s household consumer products with names as common as Coppertone, Di-Gel, and Maybelline cosmetics.

1970s: The New Schering-Plough

When the merger of the two companies was finally completed, combined sales reached $500 million in 1971. This marked the fastest sales growth for any merger in the industry. Yet despite an earnings multiple of 46, Cozen, in his typically reserved style, spoke guardedly of continued expansion. The sales for Garamycin reached $90 million by 1972. This income accounted for almost half of both companies’ growth for the period. The large profits, however, ironically concealed an “Achilles’ heel.” Garamycin’s patent, scheduled to expire in 1980, signified the beginning of generic competition and the end of Schering-Plough’s control over the manufacturing of this drug. The sound of competitors’ footsteps could be heard following closely behind; Cozen’s cautious remarks on continued expansion were well founded.

Key Dates

1864-Late 1800s:: Ernst Schering founds Schering AG as a Berlin-based drug and chemical manufacturer and eventually founds a U.S. subsidiary to which his company begins exporting pharmaceuticals.
1908:: Abe Plough begins his career of marketing consumer products by selling a concoction of linseed oil, carbolic acid, and camphor as an “antiseptic healing oil.”
1918:: Plough incorporates his business as Plough Chemical Co., later known as Plough, Inc.
1920:: Plough acquires Chattanooga, Tennessee-based St. Joseph Company, maker of children’s aspirin.
1928:: Schering Corporation is incorporated in New York.
1935:: The U.S. government takes over the assets of Schering Corporation because of its German ownership.
Mid-1940s:: Schering establishes a research department and develops a new antihistamine marketed to consumers as Trimeton and as a prescription drug called Chlor-Trimeton.
1950s:: Plough adds childproof caps to its children’s aspirin products at a time when safety regulations are almost nonexistent.
1952:: A syndicate headed by Merrill Lynch purchases Schering from the government and takes the company public.
1955:: Schering introduces a new corticosteroid called Meticorten, soon followed by Meticortelone.
1965:: Schering introduces Tinactin, an antifungal cream.
1966:: Schering introduces Garamycin, an antibiotic used as a treatment for urinary tract infections and burn victims; it will soon become the company’s leading product.
1967:: Schering introduces the decongestant Afrin.
1971:: Schering and Plough merge to form Schering-Plough Corporation, combining Schering’s antibiotics, antihistamines, and other pharmaceuticals with Plough’s household consumer products such as Coppertone, Di-Gel, and Maybelline cosmetics.
1979:: Scholl, Inc., maker of Dr. Scholl’s foot-care products, is acquired.
1980:: Patent for the company’s top product, Garamycin, expires; Wesley-Jensen Inc., maker of vision care products and contact lenses, is acquired.
1982:: Drive into biotechnology includes the acquisition of DNAX Research Institute, based in Palo Alto, California.
1986:: Schering-Plough’s Intron A interferon receives approval from the U.S. Food and Drug Administration (FDA); Key Pharmaceuticals, a maker of allergy, asthma, and cardiovascular drugs, is acquired.
1993:: The company introduces Claritin, a nonsedating antihistamine, which quickly achieves blockbuster sales and becomes the firm’s number one product.
1995:: The firm’s contact lens business is sold to Bain Capital.
1997:: The animal health division of Mallinckrodt Inc. is acquired for $405 million.
2000:: Company enters into a partnership with Merck & Co. to develop cholesterol-management and allergy/asthma medications; the company recalls 59 million asthma inhalers after finding that some of the devices contain little or none of the active ingredient.
2001:: The company announces that Clarinex, a next-generation allergy treatment, has been approved by the FDA but that the FDA will likely fine the company as much as $500 million because of protracted manufacturing problems.

In 1974, reduced sales for Garamycin already affected company profit margins. In 1975, the return on equity dropped from 31 to 27 percent and the stock dropped 10 percent from the previous year. Schering-Plough endured the ensuing decline in profits and increased funding for research and development. In 1974, several newly released drugs accounted for $100 million in sales. The following year Schering-Plough introduced Lotrimin AF, an antifungal product, and Vanceril, an antiasthma medicine, debuted in 1976. Similarly, Maybelline introduced a new line of makeup in 1974. The “Fresh and Lovely” cosmetic product line promised to catapult Maybelline into a competitive full-line makeup company.

These moves, however, were not remedies for the ailing profit margin. In 1979, Richard J. Bennet took over as chief executive officer and continued the efforts to solve the Gara-mycin conundrum. Schering-Plough had historically been a conservative company with no major debts, maintaining an asset-to-liability ratio of 2.2 to 1 and a $350 million cash excess after seven acquisitions. Yet Schering-Plough continued to look like a “one-product” company because of its heavy reliance on Garamycin sales.

In 1979, 40 percent of all profits, or $220 million, was generated solely from Garamycin. Cozen’s ineffective attempt to establish company profitability on the sales of a variety of drugs rather than a single product became Bennet’s new challenge. Under his management the company released Netromycin, an antibiotic more potent that Garamycin but with fewer side effects. To ensure continued sales of Garamycin when the patent expiration date arrived, the company announced a discount plan to entice former customers into future contracts. Meanwhile, large sums of money continued to pour into the research facilities in the hope of discovering new drugs. Finally, in order to bolster consumer product sales, Schering-Plough purchased Scholl, Inc., the well-established maker of Dr. Scholl’s foot-care products, for $30 million. Also acquired that year were the animal health business of Burns-Biotec and Kirby Pharmaceuticals Ltd. The company entered a new sector in 1980 with the acquisition of Wesley-Jensen Inc., maker of vision care products and contact lenses.

Unfortunately, these maneuvers had only a limited effect on the company. Because doctors had already perfected methods for controlling Garamycin’s side effects, they actually preferred to wait for generic and therefore cheaper versions of the drug rather than switch to Netromycin. Similarly, despite $75 million a year spent on research and development, no new discoveries were announced. Furthermore, while Scholl, Inc., had yearly revenues of $250 million and earnings of $12 million, its profits had barely kept pace with inflation since 1973.

1980s: Focusing Strongly on Healthcare

Next to all of these disappointments, however, one consumer product did exhibit strong signs of financial success. Maybelline, once known as a manufacturer of “me-too” or imitation products, matured into an aggressive full-line cosmetic company. Bennet claimed in 1980 that Maybelline held 34 percent of the mascara market and 24 percent of the eyeshadow market. Estimated sales for 1980 jumped to $150 million from $75 million in 1976. But after Robert P. Luciano was appointed CEO in 1982, he refocused the company on health care, and Maybelline cosmetics and a household products group were eventually sold.

On May 28, 1980, the day the patent on Garamycin expired, Schering-Plough executives appeared unperturbed. In fact, stock on that day jumped from $39 to $45 a share. Not only was Netromycin on the market, but 80 percent of the hospitals who were previous customers of Garamycin had signed up for the deferred discount plan. More importantly, however, Schering-Plough had paid $12 million for a 14 percent equity stake in a Swiss genetic engineering company called Biogen. Schering-Plough’s interest in the company was significant because it provided them with worldwide rights to the synthesis of human leukocyte interferons using recombinant DNA. The possibilities for using interferon, a chemical produced naturally in the body to fight viruses, were immense. It was hoped that the synthetic drug could be used to treat anything from cancer to the common cold. Moreover, gene-splicing promised to be highly cost-effective; this new method, on the cutting-edge of biotechnology, could produce the same amount of purer proteins in a week than old methods could in a year. Here was the long-awaited breakthrough.

By 1985, in an uncharacteristic move, Schering-Plough had made a more expensive investment in biotechnology than any of its competitors. Expenditures surpassed $100 million. In 1982, Schering-Plough, having reached an agreement to spend $31.5 million over ten years, formed a partnership with West Berlin politicians to establish a research institute on genetic engineering in Berlin. At the same time, plans were announced to build a fermentation and purification plant in Ireland to market the first commercial interferon. Schering-Plough also purchased another biotech firm in Palo Alto, California, called DNAX Research Institute.

Although Schering-Plough was the first to market a commercial Interferon, patent problems with competitors gave Hoffmann-La Roche rights to market alpha interferons in the United States. On June 4, 1986, the U.S. Food and Drug Administration (FDA) approved Schering-Plough’s Intron A and Hoffmann-La Roche’s Rofeon-A for the U.S. market. Projected market sales for the interferon were $200 million in the United States and $150 million in Europe. By 1994, Intron A had sales of $426 million. With continued expansion in the United States and other international markets, Intron soon grew to be the market leader worldwide. The company continued its study in the field of biotechnology, spending about one-quarter of its research dollars in this area.

In the meantime, Schering-Plough completed additional acquisitions in the late 1980s. In 1986, Key Pharmaceuticals, Inc., a maker of allergy, asthma, and cardiovascular drugs, was acquired. Two years later, Schering-Plough acquired the Cooper Companies’ U.S. contact lens solutions business as well as the rights to sell Aquaflex contact lenses in the United States and Japan. Then in 1989 the German animal health business of Byk Gulden was purchased.

The Claritin Decade

In the 1990s, Schering-Plough’s largest and fastest-growing therapeutic category was in the area of asthma and allergy. Led by new product introductions, worldwide sales rose 24 percent in 1994 to approximately $1.46 billion. The most successful of these new drugs was Claritin (loratadine), a once-a-day, nonsedating antihistamine. Introduced in April 1993, Claritin was the third nonsedating antihistamine to reach the U.S. market. Despite its late arrival, in its first year on the market, Claritin had sales of nearly $200 million. It then captured the number one position in new prescriptions for plain antihistamines in less than a year and a half on the U.S. market, making it the largest single product for the company. Along with the November 1994 U.S. marketing clearance of Claritin-D, a twice-daily formulation combining the decongestant pseudoephedrine, the company expected to capture a significant share of the antihistamine/decongestant market.

Also in the 1990s, a fear of skin cancer and a depleting ozone layer turned sun care from a cosmetic segment to a healthcare one. With the introduction of Coppertone Kids and Shade UVAGuard, Schering-Plough proved to be a leader in the sun-care market. It heavily promoted Shade UVAGuard, the sunscreen positioned as a drug that protected against year-round UVA and UVB rays, both of which cause skin cancer. Schering was also one of the first companies to market sunless tanning and sport products. The year 1994 marked the 50th anniversary of the Coppertone brand, and, during that year, the company helped launch a national UV (ultraviolet) Index in a joint pilot program with the U.S. Environmental Protection Agency and the National Weather Service to help educate consumers about the importance of proper sun protection. With its broad product lines, Schering-Plough captured major shares in important segments of the entire sun care market, and, in the fast-growing children’s market, the company had a 60 percent share with its Coppertone Kids and Water Babies products.

An aging population, the popularity of self-medication, and active lifestyles were other trends that helped boost sales in Schering-Plough’s foot-care division and build its position as North America’s leading foot-care company. Schering-Plough’s brands led in every segment of the market and, according to Drug Topics in 1995, Dr. Scholl’s had a 72 percent share of the insole/insert category, an 86 percent share of the corn/callus/bunion category, and a 46 percent share of the odor/wetness/grooming category. The company, however, met increased competition from in-store and private-label brands during this time.

Continuing to concentrate more of its attention on pharmaceutical products, Schering-Plough sold off its contact lens business to Bain Capital, Inc. in 1995 for $47.5 million. At the beginning of 1996, Richard J. Kogan succeeded Luciano as CEO. Luciano remained chairman until November 1998, when Kogan took on that position as well. Kogan had served as president and COO since 1986. Also in 1996, Schering-Plough acquired San Diego-based Canji, Inc., a gene therapy firm, for $54.5 million in stock. The following year the company substantially bolstered its animal health unit with the acquisition of the animal health division of Mallinckrodt Inc. for $405 million. Schering-Plough gained Mallinckrodt’s lines of antiparasitic drugs and growth-enhancing products for cattle along with that firm’s more extensive global distribution network. The newly enlarged animal health unit had annual revenues of about $650 million. In another extension of one of the company’s nonpharmaceutical lines, Schering-Plough purchased from Pfizer Inc. the rights to sell Bain de Soleil sun-care products in the United States, Puerto Rico, and certain other markets.

On the pharmaceutical side, Schering-Plough in 1997 introduced Nasonex, a once-daily nasal spray for allergies that by 2000 achieved sales of $415 million. In 1998, the FDA approved a new drug regimen called Rebetron for the treatment of Hepatitis C. Rebetron was developed in partnership with ICN Pharmaceuticals, Inc. and was a combination of Schering-Plough’s Intron A and ICN’s Ribavirin. The company also purchased the marketing rights to several drugs in 1998, including Remicade, which had been developed by Centocor, Inc. for the treatment of Crohn’s disease. During 1999, the FDA granted approval to Schering-Plough’s Temodar for treating two serious types of malignant brain cancer.

The New Millennium: Life After Claritin?

With the possible exception of Intron A, which through its various uses was generating $1.4 billion in annual revenues by 2000, none of these new products came close to approaching the blockbuster sales of the Claritin family of products. Worldwide sales of Claritin reached $3 billion in 2000, representing 36 percent of Schering-Plough’s pharmaceutical revenues and nearly 31 percent of overall revenues. Part of the reason for the huge sales was the aggressive marketing campaign that had been mounted for the drug, a campaign that took full advantage of the loosening of FDA regulations relating to the advertising of prescription drugs. Claritin, in fact, was the most heavily advertised prescription drug in the United States in the late 1990s. Schering-Plough spent $322 million pitching Claritin to consumers in 1998 and 1999.

With Claritin generating so great a percentage of Schering-Plough’s revenues and with the main patent on Claritin set to expire at the end of 2002, the company was faced with a near repeat of the situation it had faced in the late 1970s when the expiration of the patent on Garamycin was approaching. Schering-Plough took a multifaceted approach to the looming prospect of cheap generic competition to its by far top-selling drug. In May 2000, the company entered into a partnership with Merck to develop two new drug combinations. One would combine Claritin with Merck’s asthma drug Singulair in the hope of creating a highly effective asthma and allergy medication. Because Singular’s patent was slated to last until 2010, the patent for the combined drug would extend to that year as well. Likewise, the two companies also began investigating a combination of Merck’s cholesterol-reducing Zocor with ezetimibe (brand name Zetia), an experimental compound developed by Schering-Plough that interferes with the body’s ability to absorb dietary cholesterol. Merck was facing the expiration of Zocor’s patent in 2005, but ezetimibe’s patent would not expire until 2015.

Schering-Plough also launched an intense lobbying campaign to get the U.S. Congress to extend Claritin’s patent. The company argued that because the FDA approval process for Claritin had been so lengthy—lasting nearly six and a half years—the patent on the drug should be extended. These lobbying efforts failed. At the same time, Schering-Plough was attempting to get FDA approval for its next-generation allergy medication, desloratadine, which was to be marketed under the brand name Clarinex. This drug was closely related chemically to Claritin, and among scientists there was some debate about whether there was a marked difference between the two drugs. In any case, Schering-Plough was relying on getting Clarinex approved quickly enough so that it had adequate time to switch patients from Claritin to the new drug before the Claritin generics began flooding the market.

Unfortunately, Schering-Plough was beset by difficulties at its drug manufacturing plants in New Jersey and Puerto Rico, and these troubles delayed the approval of Clarinex. In late 1999 and 2000, the company was forced to recall 59 million asthma inhalers after finding that some of the devices, which were potentially life-saving, contained little or none of the active ingredient. After the facilities failed further inspections, the FDA in February 2001 told the company that Clarinex would not be approved until the manufacturing problems were resolved. Following the uncovering of additional problems at the plants in June 2001, the company’s president, Raul E. Cesan, who had been in charge of the manufacturing operations since 1994, was forced to resign. In a further blow, the consumer advocacy group Public Citizen in August 2001 called for a criminal investigation of the company, alleging that 17 deaths were associated with the use of faulty Schering-Plough asthma inhalers. Class-action lawsuits were soon filed related to the defective products and to allegations that the company had failed to alert shareholders to these problems (the company’s stock fell substantially during this period).

In April 2001, meantime, Schering-Plough was hit with another lawsuit, this one brought by the Federal Trade Commission (FTC) against the company and two generic drugmakers. In this antitrust suit, the FTC alleged that patent settlements involving Schering-Plough’s K-Dur potassium chloride supplement included illegal payments that were made to delay the introduction of generic versions of the drug. The company also faced criticism for its marketing of Rebetron, in which the two-drug combination was sold for about $18,000 for the full year of treatment that was needed. Some patients wanted to take one of the drugs in combination with a drug produced by another company, but Schering-Plough refused to unbundle the drugs, contending that for safety reasons the drugs should only be taken together.

To solve its manufacturing problems, Schering-Plough spent $60 million on plant improvements and the hiring of 500 new employees, many of whom worked in quality control. Finally, in December 2001, the FDA granted approval to Clarinex but at the price of a fine of as much as $500 million for the protracted manufacturing problems at Schering-Plough plants. The company immediately began selling the new drug, but it now had only one year to work at switching patients from Claritin to Clarinex. Further complicating the situation was a petition to the FDA from WellPoint Health Networks Inc. of Thousand Oaks, California, which wanted Claritin and two other popular allergy medications, Allegra and Zyrtec, switched to over-the-counter (OTC) status, a move that would save money for WellPoint and other insurers while costing drugmakers and consumers with prescription drug coverage. After this petition won preliminary FDA approval in 2001, divisions of Johnson & Johnson and American Home Products Corporation filed registrations with the FDA for OTC versions of Claritin. This led Schering-Plough in February 2002 to file separate lawsuits against the two companies to block the OTC versions. At the same time, Schering-Plough was also involved in lawsuits with about 18 companies over generic versions of Claritin. Even if these suits proved unsuccessful, they were likely to delay the introduction of generic and OTC versions of Claritin, thereby buying Schering-Plough some more time.

Schering-Plough clearly faced an uncertain future. The success of Clarinex was by no means assured, and the only other new drug approved in 2001 was PEG-Intron, which was a longer-lasting form of Intron A and which was also used in the treatment of hepatitis C. In late stage development were Zetia, the cholesterol medication being developed with Merck; Asmanex, a next-generation asthma inhaler; and Noxafil (posaconazole), an antifungal designed for patients with HIV or cancer whose immune systems are compromised. None of these were likely to be the blockbuster needed to succeed Claritin, and this left Schering-Plough vulnerable to a takeover, with Merck being a prime candidate given the two companies’ status as drug development partners.

Principal Subsidiaries

The Bain de Soleil Company; Canji, Inc.; The Coppertone Corporation; DNAX Research Institute of Molecular & Cellular Biology, Inc.; Dr. Scholl’s Foot Comfort Shops, Inc.; Key Pharmaceuticals, Inc.; Schering Corporation; Schering-Plough Products, Inc.; Schering-Plough Veterinary Corporation; Warrick Pharmaceuticals Corporation; White Laboratories, Inc.; Schering-Plough Compania Limitada (Chile); Schering-Plough S.A. (France); Schering-Plough Sante Animale (France); Schering-Plough Veterinaire (France); Schering-Plough S.p.A. (Italy); Schering-Plough S.A. de C.V. (Mexico); Schering-Plough Farma Lda. (Portugal); Schering-Plough S.A. (Spain); Schering-Plough Holdings Ltd. (U.K.); Schering-Plough Limited (U.K.); Schering-Plough C.A. (Venezuela).

Principal Operating Units

Schering-Plough International; Schering-Plough HealthCare Products; Schering-Plough Animal Health; Schering-Plough Pharmaceuticals; Schering-Plough Research Institute; Schering Laboratories.

Principal Competitors

Merck & Co., Inc.; Pfizer Inc.; GlaxoSmithKline plc; Bayer AG; Novartis AG; Aventis; Bristol-Myers Squibb Company; Roche Group; Abbott Laboratories; AstraZeneca PLC; American Home Products Corporation.

Schering-Plough Corporation

views updated May 09 2018

Schering-Plough Corporation

One Giralda Farms
Madison, New Jersey 07940-1000
U.S.A.
(201) 822-7000
Fax: (201) 822-7048

Public Company
Incorporated: 1970
Employees: 21,200
Sales: $4.65 billion
Stock Exchanges: New York
SICs: 2834 Pharmaceutical Preparations

Schering-Plough Corporation is one of the leading manufacturers of pharmaceuticals in the United States. With such successful prescription drugs as Garamycin and Claritin and such popular health and beauty brands as Coppertone and Dr. Scholl’s, the company holds strong positions in both the consumer market and the health care professional market.

In 1971 Abe Plough, the founder and marketing genius behind Plough, Inc., a proprietary drug and consumer product company, approved of a merger between his company and the Schering Corporation. The 80-year-old man, with a colorful entrepreneurial history, was looking for a successor to run his firm. A solution was found in his unlikely friendship with Willibald Hermann Cozen, the German-born chief executive officer of Schering.

It was Cozen who actually designed the merger and, as a result, became the chief executive officer of Schering-Plough. The merger combined the comprehensive manufacturing of Schering’s antibiotics, antihistamines, and other pharmaceuticals, and Plough’s household consumer products with names as common as Coppertone and Di-Gel. With this diverse product line, Schering-Plough enjoyed steady growth and comfortable profit margins throughout its history.

Long before the merger, the Schering Corporation began as a drug manufacturer in Berlin. In 1894 the company started to export diphtheria medication to the United States, and an American branch of the German company opened in New York in 1929. Until the end of World War II, a sex hormone accounted for up to 75 percent of Schering’s sales. The war, however, changed the course of the company’s history forever. Frank Brown, a New Deal lawyer with no previous experience in the pharmaceutical business, was dealt a hand that would bind his future to Schering.

Brown’s legal career involved participating in government projects during the 1930s. He joined the Federal Deposit Insurance Corporation, a creation of Roosevelt’s New Deal policies, and acted as legal counsel to Leo Crowley. During the war the United States seized the assets of all German-owned businesses operating within the country. Leo Crowley was appointed the Alien Property Custodian, and Brown was given the job of managing the Schering Company. He immediately filled vacated executive positions with associates from the FDIC. In 1943 Brown was formally appointed president of Schering, and under his direction the company soon proved a financial success.

Because the postwar years marked a reduced demand for sex hormones, the newly expanded research department could not have found a better moment to discover a new antihistamine. Marketed as a proprietary drug (a drug directly advertised to consumers) under the name Trimeton and marketed also as an ethical drug (a drug advertised to health care professionals) under the name Chlor-Trimeton, the antihistamine marked a turning point in the history of the Schering Corporation. By 1951, profits had quadrupled with sales reaching over $15 million.

That same year the U.S. attorney general put the company up for sale. A syndicate headed by Merrill Lynch outbid other prospective buyers and proceeded to sell $1.7 million of stock to the public. However, the investors asked Brown to remain on as company president. He accepted the offer and directed Schering to even greater profitability through the discovery of Meti-corten and Meticortelone, two new corticosteroids that became the envy of the drug industry.

The discovery of synthetic cortisone dates back to 1949 when Merck & Co., an industry competitor, first made public its historic findings. Although the wonder drug’s discovery rightfully belonged to Merck, the process for synthesizing the drug conflicted with several other patents for producing sex hormones. Schering was the owner of one of these patents, and through a “cross-licensing” agreement the company gained access to information about cortisone production.

Soon after production of cortisone began, Schering and its competitors raced to discover an improved line of the drug that would eliminate some of the side effects associated with the steroid. They all hoped to modify the cortisone molecule to find a more effective drug and, at the same time, eliminate hypertension, edema (water retention), and osteoporosis (a bone disease), all side effects connected with cortisone therapy. Using microorganisms to convert one chemical into another, Schering scientists discovered a drug in 1954 that fit the desired guidelines. Clinical testing of the drug brought excellent results. However, when Schering was confronted with the prospect of full-scale production, the company realized it had no previous experience in manufacturing by fermentation, the process used to make the new drug. So Schering first tried fermentation in a 150-gallon stainless steel container and later in a 1,000-gallon and finally a 22,000-gallon fermenter. This last container used $100,000 worth of cortisone and a few hundred gallons of microorganisms.

Having established a successful manufacturing technique, Schering released Meticorten in 1955 and Meticortelone soon afterwards. Almost unbelievably, sales for the drugs jumped to over $20 million by the end of the year, $ 1 million more than total sales in 1954. By the end of 1955 sales for these drugs reached a new high of almost $46 million and by 1957 exceeded $80 million.

What he later claimed to be his shrewdest purchase occurred in 1915: Plough paid $900 for the inventory of a bankrupt drug company. He netted a profit of $34,000 peddling the stock in the back woods where there was still a large demand for oxidine chill tonic. In 1920 he bought the St. Joseph Company of Chattanooga, Tennessee, and began manufacturing children’s aspirin. By the 1950s Plough realized that the huge sales figures for the popular aspirin was partially due to children taking overdoses of the product. To prevent this from reoccurring Plough ordered child-proof caps added to the aspirin at a time when safety regulations were almost nonexistent. He went on to purchase 27 other companies during the course of his lifetime. In addition to being talented at making important acquisitions, he was also very adept at marketing: 25 percent of all income from sales was routinely spent on advertising. The success of radio advertising, in particular, convinced Plough to buy five AM and FM stations. Plough was best known in his own community for his philanthropic contributions. Upon his death in 1984 at age 92, flags throughout Memphis were lowered to half-mast.

Years before his death, however, the unlikely friendship between Willibald Hermann Cozen, chief executive officer of Schering in 1966, and Abe Plough was the antecedent to a company merger. At 17, after graduating from Kaiserin Augusta Gymnasium in Koblenz, Cozen began working for Schering A.G., the German parent company. When the U.S. company was seized during World War II and eventually sold to the public, Cozen became the chief executive officer of the new independent company.

When the merger of the two companies was finally completed, combined sales reached $500 million in 1971. This marked the fastest sales growth for any merger in the industry. Yet despite an earnings multiple of 46, Cozen, in his typically reserved style, spoke guardedly of continued expansion. The sales for Garamycin, an antibiotic introduced in 1966 as a treatment for urinary tract infections and burn victims, reached $90 million by 1972. This income accounted for almost half of both companies’ growth for the period. The large profits, however, ironically concealed an “Achilles’ heel.” Garamycin’s patent, scheduled to expire in 1980, signified the beginning of generic competition and the end of Schering-Plough’s control over the manufacturing of this drug. The sound of competitors footsteps could be heard following closely behind; Cozen’s cautious remarks on continued expansion were well founded.

In 1974 reduced sales for Garamycin already affected company profit margins. In 1975 the return on equity dropped from 31 to 27 percent and stock dropped ten percent from the previous year. Schering-Plough endured the ensuing decline in profits and increased funding for research and development. In 1974 several newly released drugs accounted for $100 million in sales. Similarly, Maybelline cosmetics, a Plough subsidiary, introduced a new line of makeup. The “Fresh and Lovely” cosmetic product line promised to catapult Maybelline into a competitive full-line makeup company.

These moves, however, were not remedies for the ailing profit margin. In 1979 Richard J. Bennet took over as chief executive officer and continued the efforts to solve the Garamycin conundrum. Schering-Plough had historically been a conservative company with no major debts, maintaining an asset-to-liability ratio of 2.2 to 1 and a $350 million cash excess after seven acquisitions. Yet Schering-Plough continued to look like a “one product” company because of its heavy reliance on Garamycin sales.

In 1979, 40 percent of all profits, or $220 million, was generated solely from Garamycin. Cozen’s ineffective attempt to establish company profitability on the sales of a variety of drugs rather than a single product became Bennet’s new challenge. Under his management the company released Netromycin, an antibiotic more potent that Garamycin but with fewer side effects. To ensure continued sales of Garamycin when the patent expiration date arrived, the company announced a discount plan to entice former customers into future contracts. Meanwhile, large sums of money continued to pour into the research facilities in the hope of discovering new drugs. Finally, in order to bolster consumer product sales, Schering-Plough purchased Scholl, Inc., (a well established footcare company) for $30 million.

On May 28, 1980, the day the patent on Garamycin expired, Schering-Plough executives appeared unperturbed. In fact, stock on that day jumped from 39 Vs to 45. Not only was Netromycin on the market, but 80 percent of the hospitals who were previous customers of Garamycin had signed up for the deferred discount plan. More importantly, however, Schering-Plough had paid $12 million for a 14 percent equity stake in a Swiss genetic engineering company called Biogen. Schering-Plough’s interest in the company was significant because it provided them with worldwide rights to the synthesis of human leukocyte interferons using recombinant DNA. The possibilities for using the interferon, a chemical produced naturally in the body to fight viruses, were immense. It was hoped that the synthetic drug could be used to treat anything from cancer to the common cold. Moreover, gene-splicing promised to be highly cost-effective; this new method, on the cutting-edge of biotechnology, could produce the same amount of purer proteins in a week than old methods could in a year. Here was the long-awaited breakthrough.

By 1985, in an uncharacteristic move, Schering-Plough had made a more expensive investment in biotechnology than any of its competitors. Expenditures surpassed $100 million. In 1982 Schering-Plough, having reached an agreement to spend $31.5 million over 10 years, formed a partnership with West Berlin politicians to establish a research institute on genetic engineering in Berlin. At the same time, plans were announced to build a fermentation and purification plant in Ireland to market the first commercial interferon. Schering-Plough also purchased another biotech firm in Palo Alto, California, called DNAX Research Institute. Clearly, Schering-Plough announced to the world where the future of its company resided.

Although Schering-Plough was the first to market a commercial Interferon, patent problems with competitors gave Hoffmann-La Roche rights to market alpha interferons in the United States. On June 4, 1986, the Federal Drug Administration approved Schering-Plough’s Intron A and Hoffmann-La Roche’s Rofeon = A for the U.S. market. Projected market sales for the interferon were $200 million in the United States and $150 million in Europe. By 1994, Intron A had sales of $426 million. Intron A’s sales expanded in the United States and other international markets and grew to be the market leader worldwide. The company continued its study in the field of biotechnology, spending about one-quarter of their research dollars in this area. In 1995, the company expected to invest a total of nearly $650 million on research and development. According to Schering-Plough’s 1994 annual report, “Biomedical innovation is truly the only viable, long-term solution for cost-effective quality care.”

In the 1990s, Schering-Plough’s largest and fastest-growing therapeutic category was in the area of asthma and allergy. Led by new product introductions, worldwide sales rose 24 percent in 1994 to approximately $1.46 billion. The most successful of these new drugs was Claritin (loratadine), a once-a-day, nonsedating antihistamine. Introduced in April 1993, Claritin was the third non-sedating antihistamine to reach the U.S. market. Despite its late arrival, in its first year on the market, Claritin had sales of nearly $200 million. It then captured the number one position in new prescriptions for plain antihistamines in less than a year and a half on the U.S. market, making it the largest single product for the company. Along with the November 1994 U.S. marketing clearance of Claritin-D, a twice-daily formulation combining the decongestant pseudoephedrine, the company expected to capture a significant share of the antihistamine/decongestant market.

Also in the 1990s, a fear of skin cancer and a depleting ozone layer turned sun care from a cosmetic segment to a health care one. With the introduction of Coppertone Kids and Shade UVAGuard, Schering-Plough proved to be a leader in the sun care market. It heavily promoted Shade UVAGuard, the sunscreen positioned as a drug that protects against year-round UVA and UVB rays, both of which cause skin cancer. Schering was also one of the first companies to market sunless tanning and sport products. 1994 marked the 50th anniversary of the Coppertone brand, and, during that year, the company helped launch a national UV (ultraviolet) Index in a joint pilot program with the U.S. Environmental Protection Agency and the National Weather Service to help educate consumers about the importance of proper sun protection. With its broad product lines, Schering-Plough captured major shares in important segments of the entire sun care market, and, in the fast-growing children’s market, the company had a 60 percent share with its Coppertone Kids and Water Babies products.

An aging population, the popularity of self-medication, and active lifestyles were other trends that helped boost sales in Schering-Plough’s foot care division and built its position as North America’s leading foot care company. Schering-Plough’s brands lead in every segment of the market, and, according to Drug Topics in 1995, Dr. Scholl’s had a 72 percent share of the insole/insert category, an 86 percent share of the corn/callus/bunion category, and a 46 percent share of the odor/wetness/grooming category. The company, however, met increased competition from in-store and private label brands during this time.

Schering-Plough’s efforts to be an environmentally responsible company received major recognition in 1994. After volunteering to participate in a pilot public-private partnership with the state of New Jersey to reinvent the state’s environmental regulations, Schering Plough received New Jersey’s and the nation’s very first comprehensive, facility wide environmental permit for its Kenilworth, New Jersey, facility. The one permit, which is unique in the United States, replaced more than 60 individual permits that regulated air emissions, waste water discharges, and solid waste management. Schering-Plough management found that the new permit increased the facility’s operational flexibility and they expected to save about $300,000 annually in administrative, waste disposal, and raw materials costs. This strategy was hoped to be adopted by other states as the government challenged companies to accept greater responsibility and accountability for environmental programs.

According to a 1993 article in Financial World, Schering-Plough was generally thought to be a second-tier pharmaceutical company with uninspiring research, but with some winning products, and therefore a likely takeover product in the late 1980s. Since then, the company has turned in a remarkable 20 percent growth in per-share earnings. Analysts predicted that Schering-Plough shares would grow 2.5 times as fast as any other top U.S.-based drug company over the next few years. With the continued development of successful products like Garamycin and Claritin and supported by the popularity of household names like Cop-pertone and Dr. Scholl’s, Schering-Plough should keep pace with the rapidly changing field of Pharmaceuticals and remain a strong presence in the marketplace.

Principal Subsidiaries

Schering Corp.; Artra Cosmetics, Inc.; Schering Antibiotic Corp.; Plough Export, Inc.; Plough Trading Corp.; Schering Realty Corp.; Schering del Cribe, Inc.; Schering Pharmaceutical Corp.; Schering Export Corp.; White Laboratories, Inc.; The Emko Company; Plough Inc.; Plough Sales Corp.; Plough Advertising Corp.; Plough Broadcasting Co., Inc.; Coppertone Corp.; Schering Industries, Inc.; Schering Transamerica Corp.; Plough Laboratories, Inc.; Sheroid, Inc.; Schering Biochem Corp.; Manatí Holdings Corp.; Burns-Biotec Laboratories Inc.; Wesley-Jessen, Inc.; Scholl, Inc.; Schering-Plough Investments, Ltd.; Essex Comercio, Importação e Participações Ltda (Brazil); C.E. Fulford Limited (U.K.); Industria Química e Farmaceutica Schering, S.A. (Brazil); Plough (New Zealand) Ltd.; Schering Corp. (Puerto Rico); P.T. Essex Indonesia (90%); Scherico Ltd. (Switzerland); Schering Corp. Ltd. (Canada); Schering Corp. Centroamerica, S.A. (Panama); Schering Industrial Development Corp. (Puerto Rico); Schering Overseas, Ltd. (Bermuda); Galenacos, S.A. (Luxembourg); Scholl-Plough (S.A.) Pty. Ltd.; Plough de Mexico, S.A de C.V. (50%); Scherag (Pty.) Ltd. (South Africa); Scholl (Brazil) Comercio & Industria Ltd. (Brazil); Plough (Canada) Ltd.; Plough (Australia) Pty. Ltd.; Industria Química Plough (Chile) Ltda.; Plough Portuguesa Químico Farmaceutica Lda. (Portugal; 50%); Pharmaco, Inc.; Coppertone (Japan; 50%); Plough Nederland B.V.; C.E. Fulford (India) Private Ltd.; White Laboratories of Canada Ltd.; Essex Laboratories (New Zealand); Laboratorio Procampo Ltda. (Brazil); Plough Produtos Farma-ceuticies e Cosmeticies Limitada (Brazil).