Schering-Plough

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Schering-Plough

One Giralda Farms
Madison, New Jersey 07940
U.S.A.
(201) 5772000

Public Company
Incorporated:
July 28, 1970
Employees: 23,800
Sales: $2.399 billion
Market Value: $5.901 billion
Stock Index: New York

Frank Brown, Schering Corporations first U.S. chief executive officer, at one time rejected a deal with Revlon to market certain Schering pharmaceuticals as high-volume items. This would have meant high-profile marketing through television advertisement. Browns successful but conservative business style, however, did not make him receptive to the combination of drug and cosmetic advertisement and marketing. Interestingly enough, it is this very combination of drugs and consumer products that has contributed to the longevity of the company.

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 Scherings antibiotics, antihistamines, and other ethical drugs, and Ploughs household consumer products with names as common as Coppertone and Di-Gel. While Schering-Plough is not generally recognized at the present time as a heavyweight in the pharmaceutical industry, it has 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% of Scherings sales. The event of the war, however, changed the course of the companys 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.

Browns legal career involved participating in government projects during the 1930s. He joined the Federal Deposit Insurance Corporation, a creation of Roosevelts New Deal policies, and acted as legal counsel to Leo Crowley. During the war the United States seized 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.

Brown realized that research and development was the key to a companys success in the industry. To this end Brown immediately began the development of a research department and, like many other pharmaceutical companies, conducted talent searches for those scientists and students on the verge of new discoveries or 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.

At a time when the post-war 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 only 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 Meticorten 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. Yet while the wonder drugs 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. But when Schering was confronted with the prospect of fullscale 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 1000 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 Scherings success. Lederle, Upjohn, and Merck all developed similar drugs, and soon Schering found itself embroiled in lawsuits over patent and licensing rights. Mercks product arrived on the market only three months after Scherings, 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.

Unrelated to Scherings 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. Ploughs 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.

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 childrens 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% of all income from sales was routinely spent on advertising. And the success of radio advertising, in particular, convinced Plough to buy five AM and FM stations. In Ploughs own community he is best remembered 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 in an Achilles heel. Garamycins patent, scheduled to expire in 1980, signified the beginning of generic competition and the end of Schering-Ploughs control over the manufacturing of this drug. The sound of competitors footsteps could be heard following closely behind; Cozens cautious remarks on continued expansion were well founded.

In 1974 reduced sales for Garamycin already effected company profit margins. In 1975 the return on equity dropped from 31% to 27% and stock dropped 10% 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 to try and solve the Garamycin conundrum. Schering-Plough has 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% of all profits, or $220 million, was generated solely from Garamycin. Cozens ineffective attempt to establish company profitability on the sales of a variety of drugs rather than a single product became Bennets 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. And finally, in order to bolster consumer product sales, Schering-Plough purchased Scholl, Inc. (a well established footcare company) for $30 million.

Unfortunately, all these maneuvers had only a limited effect on the company. Since doctors had already perfected methods for controlling Garamycins side effects, they actually preferred to wait for generic and therefore cheaper versions of the drug rather than switch to Netro-mycin. 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.

Of all the 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% of the mascara market and 24% of the eye shadow market. Estimated sales for 1980 jumped to $150 million from $75 million in 1976.

On May 28, 1980, the day the patent on Garamycin expired, Schering-Plough executives appeared unperturbed. In fact, stock on that day jumped from 391/2 to 45. Not only was Netromycin on the market, but 80% 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% equity stake in a Swiss genetic engineering company called Biogen. Schering-Ploughs 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 resides.

Even with all this fanfare, biotechnology proved considerably less spectacular than originally hoped. Intron A, an alpha-2 interferon released in Ireland, is a useful treatment only for a rare form of cancer called hairy-celled leukemia rather than against more common tumors of the breast or lung it was originally expected to treat. And although R.P. Luciano, vice-president of Schering-Plough, cured his own cold with an interferon nasal spray, side effects such as nasal stuffiness and bloody mucus were generally commonplace.

While 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 U.S. On June 4, 1986, the Federal Drug Administration approved Schering-Ploughs Intron A and Hoffmann-La Roches Rofeon = A for the U.S. market. Projected market sales for the interferon is $200 million in the U.S. and $150 million in Europe. More conservative estimates project only $50 million a year sales worldwide.

While interferon has yet to make a significant mark in Schering-Ploughs history, the company continues to enjoy a comfortable profit margin. A conservative fiscal policy is the basis of the companys success. Even if breakthrough technologies are not forthcoming in the near future, the $616 million in cash left over from the Garamycin profits in 1982, the lack of long term debts, and the high credit rating promise to keep Schering-Plough financially sound for years to come.

Principal Subsidiaries

Schering Corp.; Artra Cosmetics, Inc.; Schering Antibiotic Corp.; Plough Export, Inc.; Plough Trading Corp.; Schering Realty Corp.; Schering Pharmaceutical Corp.; Schering Export Corp.; White Laboratories, Inc.; The Emko Company; Plough Inc.; Plough Sales Corp.; Plough Advertising Corp.; Maybelline Co.; Maybelline Sales Corp.; Plough Broadcasting Co., Inc.; Coppertone Corp.; Schering Industries, Inc.; Schering Transamerica Corp.; Plough Laboratories, Inc.; Sheroid, Inc.; Schering Biochem Corp.; Manati Holdings Corp.; Burns-Biotec Laboratories Inc.; Wesley-Jessen, Inc.; Scholl, Inc.; Schering-Plough Investments, Ltd. Schering-Plough also has subsidiaries in the following countries: Australia, Brazil, Canada, Chile, India, Luxembourg, New Zealand, Puerto Rico, South Africa, Switzerland and the United Kingdom.