Schering Consumer, Animal Health Care Combined Under Direction Of Kohan

Schering-Plough's Consumer Health Care business will be combined with the Animal Health Care division under a new unit called Global Specialty Operations (GSO).

Animal Health Care President Raul Kohan will head the GSO organization, with Consumer Health Care Senior VP James Mackey reporting to him. Kohan will remain head of the animal health division and report to newly installed CEO Fred Hassan. The GSO division will be separate from Schering's Rx business.

The firm has tapped former Pharmacia exec Carrie Cox to revitalize its prescription drug operations and oversee consolidation of the autonomous pharmaceutical units into a single global entity. Cox took over as exec VP and president of the new Global Pharmaceutical Business (GPB) May 15.

In a May 13 ¹ letter to employees, Hassan noted Consumer Health Care "support services will be shared with GPB to avoid building a parallel bureaucracy."

Furthermore, "close cooperation between [Consumer Health Care] and GPB will be mandated to maximize the total value" of the Claritin / Clarinex allergy franchise, Hassan said.

The reorganization is one of the first steps in an "action agenda" announced May 13 to "stabilize and then turn around the corporation." The announcement coincided with Schering's release of dismal first quarter results, including a 19% decline in sales and a 71% drop in net income from the year-ago quarter.

"Our organizational strategy overall is to move from what could be described as a 'holding company' with 'decentralized' business units into a unified global" system with strong management, Hassan said. The changes are part of a long-term turnaround plan for Schering that Hassan outlined in his inaugural address to shareholders (² (Also see "Schering Turnaround Needs 5 Years, CEO Hassan Says; First Step: Buy Time" - Pink Sheet, 28 Apr, 2003.), p. 7).

"While the Rx business will be our core business, consumer health care and animal health care are important associated businesses that will benefit from the basic business and science linkages with the core Rx business," Hassan maintained.

Mackey assumed the Consumer Health Care senior VP role in March, with responsibility for all sales, marketing and research & development for the division, and a particular focus on Claritin as it faces increasing competition in the OTC market. The consumer health division, which includes OTC drugs, foot care products and sun care items sold primarily in the U.S., accounted for about 7.4% of Schering's 2002 revenue.

Mackey joined Schering in 1990 as VP-sales for the consumer health business and transferred in 1999 to Schering Labs, where he served as VP-sales & marketing in the acute coronary syndromes unit and then as senior VP of primary care sales.

Kohan, who likely was chosen to head GSO because the Animal Health Care division is global in scope, has been with Schering for almost 20 years and became president of the animal health division in 1993. The business accounted for roughly 6.7% of Schering's overall sales in 2002.

As part of the restructuring effort, Kohan will join Hassan and Cox on the executive management team "in order to give [the] non-Rx businesses a voice in the top management team." The EMT will "drive the long-term transformation" of Schering-Plough, Hassan wrote in his May 13 letter.

Other executive management team members include: General Counsel Joseph Connors; Schering Research Institute President Cecil Pickett; Senior VP-Human Resources John Ryan; and CFO Jack Wyszomierski.

"Research and development will also begin steps to further globalize operations," the company said. Moves toward globalizing manufacturing will await resolution of "key compliance issues."

Hassan also announced the beginning of the Value Enhancement Initiative to contain and reduce overhead costs and embed long-term, cost-conscious behavior across the company.

"We are launching VEI at this time because we must move swiftly and effectively to improve our sales and earnings performance, both of which have declined dramatically versus the prior year," Hassan wrote.

The initiative includes new business controls to monitor discretionary spending and "dramatically reduce our hiring." Savings also will be achieved through "selective headcount reductions."

Schering noted the cost-cutting actions will not affect manufacturing compliance initiatives. "We will exempt from these new business controls the hiring of people and the allocation of capital in quality, safety, compliance, the field force, technical services and direction production," Hassan's letter states.

As part of the effort to clear the slate, Hassan indicated he is unwilling to be bound by the full-year earnings guidance issued under the watch of his predecessor, Richard Kogan.

In Schering's Q1 earnings release, Hassan said he believes "it is not right to be constrained by business assumptions that support the previously stated earnings guidance" of 75¢ to 85¢ per share issued two months ago. That guidance represented the third downward revision in Schering's forecast since October.

Hassan is expected to provide further details on the organizational changes during Schering's July 23 second quarter conference call.

During the Q1 call, Senior VP-Investor Relations Geraldine Foster noted demand for OTC Claritin, which launched in December 2002, "has continued to be very strong during the current spring allergy season."

The non-sedating antihistamine garnered sales of $125 mil. in its first full quarter on the OTC market and boosted nonprescription drug sales 278% to $155 mil. from sales of $41 mil. last year. However, the drug continues to face increasing pressure from generic loratadine introductions.

Sales of other OTC products, which include Chlor-Trimeton , Drixoral and Coricidin allergy and cold brands, declined in the first quarter due to manufacturing issues, Schering said in its ³ Q1 earnings release.

The firm's foot care product sales decreased 13% in the first quarter to $66 mil. "due to a prior-year trade stock-in for the Lotrimin Ultra launch," the firm said. Ultra launched in early 2002 (⁴ (Also see "Schering Lotrimin Ultra Is “Ultra Powerful. Ultra Easy,” Ads State" - Pink Sheet, 18 Mar, 2002.), p. 15).

The category could get help from the introduction of an ingrown toenail pain relief product under the firm's Dr. Scholl's brand. FDA granted monograph status for sodium sulfide 1% gel following several Schering submissions.

Sun care product sales of $81 mil. in the first quarter were flat versus the year-ago period, Schering reported.