Monday, March 31, 2008

Fred Hassan's credibility: Zilch.

Today Schering-Plough lost 25% of its value. This means that in one year Schering-Plough stock has dropped from a high of $33.81 to $14.29.

SGP would have to more than double in value to recoup that dramatic one-year loss.

That's a disaster for Fred Hassan, Schering-Plough’s CEO and beloved pharma turn-around expert.

Not only has he lost personal stock options that could have been valued in the range of $100 million, he has also lost his credibility.

Some observers feel that Hassan's staunch defense of Vytorin and Schering-Plough's aggressive sales tactics, such as the "49-Plan" is what made the opinion leaders speak out so strongly yesterday at the ACC against Vytorin and Zetia.

Hass666Fred Hassan now faces two Congressional investigations, subpoenas from the New York State Attorney General, a separate investigation by the Connecticut Attorney General, and an SEC investigation.

Until a few months 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?

Question Authority takes 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?

Many of Pharmacia’s blockbuster products did well, but overall performance was severely hampered due to the Vioxx/Bextra/Celebrex debacle, with the top 5 products delivering 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.

But Inspra failed; 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.”

Today, Schering-Plough is back under $15, at the same level as in 1995.

“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.”

But can Hassan be trusted?

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 past shareholders have to be happy with Hassan is that he was lucky enough to have Pharmacia bought out by Pfizer. Without that deal, he would have delivered zero share price growth during his time as CEO for Pharmacia. As for Schering-Plough, his time with that company has been a disaster.

Fred Hassan, having tried to hype Vytorin in spite of scientific evidence to the contrary, has finally lost the stock market's trust.

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