TCS Daily

A Message From the Market

By Daniel Clifton - July 30, 2004 12:00 AM

On July 16, the New York Times reported pharmaceutical company Schering-Plough will plead guilty to criminal charges for cheating the federal Medicaid program. Additionally, the paper reported the company will agree to pay $350 million in fines.

At first blush the news appeared to be part of a new round of corporate wrongdoing. It came shortly after Ken Lay was indicted for his role in the Enron debacle and Martha Stewart was sentenced to prison.

Yet, the stock market responded positively to the Schering-Plough news, and this should put to rest any fears of investors in this being another corporate scandal. Closure of the company's legal problems appears to mark a turning point for the company. Under the leadership of turnaround specialist Fred Hassan, the company may be headed for a return to profitable growth as early as next year.

The company's stock increased 2 percent immediately following the news of a possible settlement and the stock continued to increase even as the S&P 500 Index was declining last week. It is apparent that final closure of past mistakes and new leadership in the company are working to boost confidence in the previously shaken stock of the pharmaceutical giant.

Schering-Plough, under the former chairman and chief executive Richard Kogan, incurred a number of legal problems which significantly reduced the confidence of company shareholders. The company was cited by the Food and Drug Administration (FDA) for violating product manufacturing regulations and by the Securities and Exchange Commission (SEC) for meeting with investors on confidential stock information. These cases have been settled with large fines, and Kogan retired last year.

The legal problems did not end with just these cases. The current settlement being discussed centers on an investigation into whether the company paid physicians to prescribe medicines produced by Schering-Plough and whether the company cheated the Medicare program by quoting higher wholesale prices. For the 1990 Medicaid law, the federal government requires drug manufactures to offer their lowest price to Medicaid, but many companies have extended a section of the law allowing lower prices to be given to hospitals and managed care organizations and instead given these benefits to private providers. Schering-Plough is suspected of offering grants to private health care providers without offering the grants to Medicaid, thus charging a higher price to the government.

The run-up in the company's stock is a recognition that the settlement of these long-standing issues will remove the final cloud of uncertainty hanging over the company's head and finally allow Schering-Plough's new Chairman and Chief Executive Officer Hassan to do what he does best -- turn the company into profit maximizing enterprise while restoring the company's integrity and ensuring regulatory compliance.

Hassan joined Schering-Plough in April 2003 following his successful turnaround of the pharmaceutical company Pharmacia. Upon Pharmacia being sold to Pfizer, Hassan became the best-suited candidate to tackle the enormous problems facing Schering-Plough.

This time, however, he inherited a far more complex task than he was facing at Pharmacia.

In addition to the legal issues facing the company, Schering-Plough was facing a poor financial outlook and key patents were expiring, thus cutting into company revenues. He immediately went to work by first stabilizing the situation and then repairing the damage.

As such, Hassan assumed responsibility for the activities that happened before he became CEO and then put into place the necessary changes to ensure future problems did not occur. Hassan settled with the SEC over the improper trading issues and paid a fine of $1 million while working closely with the FDA to correct the manufacturing issues the company was hit with two years ago. In addition, he is now recruiting top level executives to help guide the company, cutting costs, and boosting the sales department to generate more revenue.

The Hassan strategy appears to be working. The company's base business is stabilizing and the Hassan turnaround plan has been endorsed by a number of Wall Street analysts. The company's first joint venture with Merck produced a drug called Zetia, which is a possible $1 billion venture. And just recently, the FDA approved another cholesterol-lowering drug developed by the two companies. Called Vytorin, the medicine combines two types of cholesterol lowering drugs, which should make the product an immediate success as it hits pharmacy shelves in the next few weeks.

All this good news has Barbara Ryan, managing director of Deutsche Bank and an expert on pharmaceutical stocks, setting a price target of $25 on Schering-Plough stock, far above the current $19 price. Clearly, the stock has room to grow as the Hassan turnaround plan comes to fruition.

With the legal issues fading and a strong turnaround plan in place, investors should not fret when the final terms of the settlement are released. The company has made the hard decisions over the past year and it is only a matter of time before profitability is restored. Patience is the key here, but Fred Hassan appears to be well on his way to another legendary turnaround.

Daniel Clifton is executive director of American Shareholders Association. He can be reached at


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