Did Fred Hassan use smoke-and-mirrors to “turn around” both Pharmacia and Schering-Plough?

Schering-Plough’s CEO Fred Hassan has two years left to retirement as he faces the most serious challenge to his personal legacy: One failed trial, two Congressional investigations, subpoenas from the New York State Attorney General, a separate investigation by the Connecticut Attorney General, an SEC investigation, and a brutal 40% drop in Schering-Plough stock price from its peak.

Until a few weeks ago Hassan was God's gift to the pharmaceutical industry (according to Forbes). But was it all just a mirage--a skillfully played con-game?

In this article BrandweekNRX will take you behind the glossy numbers and show you what really happened during Hassan’s tenure as CEO of two major drug companies and how he managed to fool almost everyone into thinking he had created successful turn-arounds.

Hassan built his stellar reputation during his first CEO job, heading up Pharmacia. He straightened out a messy Pharmacia and UpJohn merger, moved company headquarters from London to New Jersey, and acquired Monsanto which gave him the two blockbusters Celebrex and Bextra.

In spite of all this activity, from May 1997 when Fred became CEO, to April 2003, Pharmacia stock increased by only 18%, and if it hadn’t been for Pfizer’s offer to buy Pharmacia in 2002, stock would have actually been way down. New York Times wrote that Pfizer’s offer to buy Pharmacia “represents a 38 percent premium over Pharmacia's stock price of $32.59.”

And that’s not all--there is also evidence that a significant part of Pharmacia sales were based upon selling drugs to its wholesalers ahead of demand, “stuffing the channels,” resulting in revenue of $500 million from such sales

Pfizer’s 2004 annual report states, “We completed the harmonization of Pharmacia’s trade-inventory practices in 2003, however, such harmonization of trade-inventory practices with those of legacy Pfizer negatively impacted revenues by approximately $500 million in 2003.”

Associated Press wrote that “When Pfizer bought Pharmacia, Pharmacia had products sitting on wholesaler’s shelves for an average of 2.2 months. Pfizer’s products, which include Viagra and Lipitor, sit on wholesalers’ shelves for an average of 0.8 months.”

Pfizer’s reversal of $500 million inventory has some uncanny resemblance to what happened at Bristol-Myers Squibb:

Bristol-Myers sold excessive amounts of pharmaceutical products to its wholesalers ahead of demand, improperly recognizing revenue from $1.5 billion of such sales to its two largest wholesalers.

When Bristol-Myers got caught the company was forced by SEC to pay $150 million dollars in fines. Timothy L. Warren, Associate Regional Director of the SEC's Midwest Regional Office, stated, “For two years Bristol-Myers deceived the market into believing that it was meeting its financial projections and market expectations, when, in fact, the company was making its numbers primarily through channel-stuffing and manipulative accounting devices.”

Ken Banta, a strategic adviser to Hassan, defends Hassan and claims that Pharmacia's wholesaler activities were no different than the rest of the drug industry. “The way which inventory levels were controlled were recognized as inline with the industry and that was recognized by Pfizer at the time they acquired Pharmacia,” Banta said. “Pharmacia was recognized as having very strong financial controls, compliance systems, and management teams.”

But if this "recognized channel stuffing” hadn’t taken place, Pharmacia’s past sales increases would have been 11 percentage units lower and the stock would have suffered accordingly.

The WSJ wrote on July 15, 2002 (the day of Pfizer’s take-over announcement), “In Pharmacia, Pfizer is acquiring a relatively strong drug company, with four drugs that have $1 billion-plus sales or potential sales. That could give Pfizer, with eight drugs already at those sales levels, an even dozen blockbusters.”

This is what Hassan had told Wall Street, but was it really true?

Here’s what happened to Pharmacia’s top five franchises:

Sales of Top Pharmacia
Products (millions)	2002	2007	% Change
CELEBREX/BEXTRA	3,520	2,290	-35%
XALATAN	928	1,604	73%
DETROL	757	1,190	57%
CAMPTOSAR	574	969	69%
GENOTROPIN	551	843	53%
TOTAL	6,330	6,896	9%

Most of Pharmacia’s blockbuster products did well, but overall performance was severely hampered due to the Vioxx/Bextra/Celebrex debacle, with growth of less than 2% per year. This is hardly a performance that would have had Wall Street cheering.

So what about those new billion dollar products?

Inspra was going to become Pharmacia’s biggest new blockbuster: “Inspra sales are predicted to be $400 million in 2004, between $750million and $760 million in 2005 and $1 billion in 2006” wrote Amanda Lopez-Darriba, Pharmaceutical Report Analyst.

And what happened?

Inspra, sales were around $40 million in 2006, no number has been found for 2007.

It is likely that if Fred Hassan had not been pushed out from Pharmacia in 2003, he would have been covered with tar and feathers today.

Instead Hassan joined Schering-Plough with impeccable timing in April 2003, when that company was hitting rock bottom and had literally no way to go but up. Schering-Plough sales dropped from $10.2 billion in 2002 to $8.3 billion in 2003 and stayed there in 2004 due to the patent expiration of the $3 billion allergy pill Claritin.

Schering's abysmal manufacturing standards led to a consent decree and $500 million fine from the FDA; the largest in FDA history. In August 2006 Schering-Plough cleared up the remaining mess by agreeing to pay $435 million to resolve criminal charges and civil liabilities in connection with illegal sales and marketing programs for several drugs.

Hassan also didn’t waste any time cleaning house. He replaced almost all of Schering's executives with his own managers, most of them from Pharmacia.

At the time he took over Schering-Plough’s stock price hovered around $18 and peaked at $20 in June 2003. The stock didn’t stay consistently above $20 until after July 2006, and then rocketed to $33 in May 2007. At that time Schering President Carrie Cox dumped $28 million of her stock options, and several others among Hassan’s direct reports also sold large amounts of stock. From an investment point of view this was a brilliant decision; almost as if they could look into the future.

In November 2007 a media firestorm erupted after the companies said they were changing the primary endpoints for the Vytorin trial. This is a move generally considered a violation of scientific protocol and it triggered complaints from cardiologists and eventually resulted in two Congressional inquiries.

Senator Grassley also wrote to the SEC: “What disturbs me is that, according to news reports, while the Companies failed to release the ENHANCE trial results, several executives at Schering-Plough sold stock. This sequence of events raises serious questions about whether executives at the Companies sold stock because they knew that the results of ENHANCE were negative which in turn would negatively affect stock value. Please take whatever action you deem appropriate in this matter.”

Already before the perfect storm descended on Hassan, Schering-Plough insiders claim Hassan had started to change. “We have two Town Hall meetings every year. Recently, he’s been stumbling on the words; he hasn’t had his act together. Hassan has been tired, not just lately but during the past year.”

Friday last week, Schering-Plough stock was back under $18, meaning everything Fred had tried to do to pump the Schering-Plough stock since 2003 had been for naught. Compared to the S&P500 the entire period was a disaster:

As if all this wasn’t enough, the New York Attorney General Andrew Cuomo this weekend announced that he has launched an investigation into Merck and Schering-Plough Corp.'s handling of the controversial Vytorin study. Mr. Cuomo served the companies with subpoenas as part of a probe into whether the companies “deliberately concealed” negative results from the Enhance study, his office said in a news release on Saturday, January 26.

And today Connecticut Attorney General Richard Blumenthal announced that he is also investigating the companies: "We are investigating whether state funds were spent on false assurances about the safety and effectiveness of these drugs," Mr. Blumenthal said, referring to Vytorin and its sister, Zetia, which Merck and Schering co-market in a joint venture.

“What's very important to us is our integrity, our reputation and the robustness of what we do,” Hassan told to Forbes. “It's not the actual trial. This thing runs on trust, and we'd like to say Schering-Plough is a very improved company since 2003.”

Those words may come back to haunt Fred Hassan. Hassan briefly got pulled into the Genotropin illegal marketing scandal which resulted in Pfizer paying a $35 million criminal fine. In January of 2000, Hassan received a letter from William Abelove, a medical doctor who specialized in “anti-aging” therapies. According to Brandweek, Abelove told Hassan he was seeking a “strategic alliance” with Pharmacia for “the marketing of growth hormone injections” through his business, the Renaissance Longevity Center chain of clinics in Southern Florida. The letter was stamped “Received” by Hassan's office on Jan. 14, and in the margin was scribbled, “Pl. follow up.” The handwriting was signed “FH.” On May 1 of that year, Abelove signed a $50,000 contract as a consultant to Pharmacia on the “adult growth hormone market.”

This type of marketing later led to Pharmacia pleading guilty to illegal promotion of Genotropin and Pfizer paying the $35 million fine.

Hassan, of course, gets lots of mail, and can’t be held accountable for every scribble he makes. He can be held accountable, however, for the personnel decisions he makes.

In spite of being fully aware of the Genotropin situation, due to an internal Pharmacia investigation in 2002, Hassan promoted Sean McNicholas to Senior Vice President for Vytorin. McNicholas had been the Vice President of Genotropin in 2000, which is when Pfizer admitted the illegal acts had been started.

In summary, the only reason shareholders have to be happy with Hassan is that he was lucky enough to be bought out by Pfizer. Without that deal, he would have delivered zero share price growth during his time as CEO for Pharmacia and for Schering-Plough.

Hassan insist that Schering didn't mean to do anything wrong, and he doesn't know exactly what went wrong. “I'm quite sure nobody had bad intentions,” Hassan told Forbes.

Comments

[WK]

This is quite a tale of hubris...thanks for telling it. Suggestion: connect more of the dots by going back to the Redux fiasco which coincided with both Cox and Hassan's senior mgmt tenure at AHP.

Also, what became of yesterday's coverage of the letter to your superior from a SGP lawyer? Intimidation is unsavory when efforts are seeking to uncover a pattern of conflicts of interests.

[NJR]

On top of all this it does appear that the Organon purchase was an attempt to cover the anticipated losses that would occur (and did) with the release of the Enhance data. Connecting the dots would also lead one to surmise that if the data was released earlier, the losses would have happened earlier, preventing Schering-Plough from making an acceptable bid for Organon to be dragged into this mess.

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