Schering Global Pharma President Cox To Tackle Flagging Allergy Sales

The first priority for Schering-Plough's new Global Pharmaceutical President Carrie Cox will be implementing marketing changes for the company's allergy franchise.

Cox, former Pharmacia global pharmaceuticals co-president, joins Schering at a time when sales of some of its premier brands are lagging in the face of increasing competitive pressure.

Newly installed Schering CEO Fred Hassan turned to a familiar face in hiring Cox to revitalize the pharma business and oversee its consolidation into a single, global entity. The two execs have worked together at Sandoz, Wyeth and, most recently, Pharmacia, where Hassan was CEO until completion of the Pfizer merger (¹ , p. 19).

Cox was among numerous top-level Pharmacia execs who were not retained by Pfizer following the closing of the deal April 16. As at Pharmacia, Cox will again report directly to Hassan.

Schering announced the hiring of Cox, a restructuring of the pharma business and other organizational changes to coincide with the company's delayed first quarter report. The moves are the initial steps in Hassan's long-term, turn-around strategy for the company outlined in his inaugural address to shareholders April 22.

However, the changes also carry with them a sense of urgency in light of Schering's anemic first quarter performance, which included a 19% decline in sales and a 71% drop in net income.

The performance of Schering's flagship allergy line is an obvious priority for the company. Clarinex (desloratadine) and Nasonex (mometasone) are both "experiencing intense competition in the U.S. allergy market," Schering said in its first quarter ² earnings release May 13. "The company is beginning to implement new marketing efforts to address market share performance" for both brands.

Worldwide sales of Schering's allergy/respiratory franchise fell 55% to $453 mil. in the first quarter - the first full quarter reflecting the OTC switch of Claritin (loratadine) in November.

Although U.S. Clarinex sales rose 89% to $133 mil., product revenues are well below the $565 mil. in U.S. Claritin sales during the 2002 first quarter.

In comparison, U.S. sales of Aventis' Allegra (fexofenadine) were $343.4 mil., up 2.1%, while Pfizer's Zyrtec (cetirizine) grew 33% to $293 mil. during the same period.

In addition to competition for other Rx allergy remedies, conversion of patients from Claritin to Clarinex was tempered "by the decline in the overall prescription antihistamine market resulting primarily from the launch of OTC Claritin," Schering said. OTC Claritin posted domestic sales of $125 mil.

Nasonex is also suffering this allergy season, with U.S. sales down 66% to $34 mil. Schering attributed the fall to market share declines and trade inventory reductions.

Schering is retooling its marketing approach in its other core franchise, the Intron antiviral/anticancer family. Sales of the products, which include Rebetol (ribavirin) and PEG-Intron (peginterferon alfa-2b), fell 18% to $279 mil. in the U.S. due to inventory workdowns and competition.

"The overall market share of the Intron franchise has been declining" due to competition from Roche's Pegasys (peginterferon alfa-2a) and Copegus (ribavirin), Schering conceded (³ (Also see "Roche Pegasys Has 23% Market Share; Better Luck In Rematch With Intron? " - Pink Sheet, 3 Mar, 2003.), p. 10).

One positive performance during the quarter was Zetia (ezetimibe), launched in November through a partnership with Merck. The cholesterol absorption inhibitor had $41 mil. in U.S. sales during the quarter, although Schering's share of the profits was insignificant due to launch-related marketing expenses.

Zetia is showing "positive prescription trends (500,000 total prescriptions written through March, according to IMS Health) and market share growth," the company said.

"Weekly new Rx share of Zetia for the week ended May 2 was 4.2%," Senior VP-Investor Relations Geraldine Foster said during a May 13 analysts call. Merck reported in April that Zetia held a 3.8% share of new scripts (⁴ (Also see "Merck Singulair Formulary Status Stable; Restricted Use In Subset Of Plans" - Pink Sheet, 28 Apr, 2003.), p. 29).

The Zetia partnership puts Schering's Cox in the unfamiliar position of working closely with Merck. At Pharmacia, Cox' primary focus was on positioning the Cox-2 inhibitor Celebrex against Merck's Vioxx . Her frequent updates to investors questioning the safety profile and performance of Vioxx gave her high visibility within Merck as the face of the competition.

One challenge for Cox at Schering will be her lack of direct experience in most of the company's key therapeutic categories.

However, Schering is retaining the current top marketing execs in the new organizational structure, which should help ease the transition. Rich Zahn and Tom Lauda, the current heads of U.S. and international pharmaceuticals, respectively, will report to Cox.

Cox will also join Hassan on the executive management team, a group that will "drive the long-term transformation" of Schering-Plough, Hassan told employees in a ⁵ May 13 letter.

Other executive management team members include: General Counsel Joseph Connors; Raul Kohan, group head of the new global specialty operations business (consumer and animal care); S-P 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" (see ⁶ (Also see "Schering GMPs Linger: Whistleblower Suit Filed, Consent Decree Extended" - Pink Sheet, 19 May, 2003.) ).

Hassan also announced the beginning of a "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."

However, 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 direct production," Hassan's letter states.

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

"It is not right to be constrained by business assumptions that support the previously stated earnings guidance" of $.75-$.85 per share issued two months ago, Hassan said. That guidance represented the third downward revision in Schering's forecast since October (⁷ (Also see "Schering PEG-Intron Supply Constraints Resolved; Earnings Forecast Cloudy" - Pink Sheet, 10 Mar, 2003.), p. 23).

Schering's new management is also putting investors on notice that dividends could be jeopardized by the reduced cash flow caused by the loss of Rx Claritin.

Cash from operating activities totaled $441 mil. in Q1, down from $509 mil. a year ago. "Much of the cash flow impact of lower earnings was mitigated by the collection of accounts receivable that followed the decline in the Claritin business," the 10-Q says.

However, "cash provided by operating activities in subsequent quarters of 2003 and possibly beyond will not be sufficient to fund working capital, capital expenditures and dividends if these items remain at levels comparable to that in the first quarter."

"However, the company believes that it has adequate internal and external resources, including cash and short-term investments and committed lines of credit...and access to the global capital markets, to meet its financial requirements," the 10-Q states.

The company said it does not expect to repatriate cash from its foreign subsidiaries, which would result in a higher U.S. tax liability. "Instead, management intends to fund the domestic cash flow needs through additional borrowings." In February, the company filed a shelf registration with the Securities & Exchange Commission to issue up to $2 bil. in long-term unsecured debt securities.

Cox' employment contract provides a base annual salary of $900,000, with an annual bonus of 80%-200% of salary. She also received a grant of 100,000 restricted shares and 450,000 options.

Hassan will receive a minimum annual base salary of $1.5 mil., with a 2003 bonus of 125%-200% of base salary. He received a grant of 200,000 restricted shares and 900,000 options.