Schering Compliance Team Will Report To CEO Following COO Resignation

Schering-Plough's compliance team for resolving FDA's Good Manufacturing Practices concerns with the company will report directly to CEO Richard Kogan following the resignation of President & Chief Operating Officer Raul Cesan.

Less than 24 hours after Cesan's resignation, Kogan prefaced his remarks during the company's annual analysts meeting June 28 by underscoring his commitment to resolving FDA's concerns with the firm's manufacturing units.

"Right now, this is my number one priority and the FDA is my number one customer," he said.

Cesan's resignation is effective July 15. He was the point person addressing FDA's unease on manufacturing and compliance issues.

Cesan oversaw three compliance tracks at Schering: the Worldwide Quality Operations unit, headed by Senior VP-Worldwide Quality Richard Bowles, PhD; the Corporate Project Management Taskforce, headed by former Warner-Lambert exec Louise Kaufman; and Technical Operations, headed by Senior VP Steven Chellevold.

During the analysts meeting, Kogan declined to elaborate on Schering's terse June 27 press release announcing Cesan's departure. "My remarks about Raul's contributions to the organization" in the press release "are straightforward, clear, and that's all we are going to say about that subject," he said.

Schering-Plough's June 27 statement describes Cesan's decision to resign as voluntary, but draws a connection to the GMP difficulties.

"We understand his decision and respect it," Kogan said in the release. "His many accomplishments are not overshadowed by the company's current challenges."

Cesan, 53, has been with the company since 1977, and took over as president and COO in November 1998 after heading the firm's pharmaceuticals division.

His resignation comes less than a week after Schering announced FDA had issued new inspection reports for the company's manufacturing facilities in Kenilworth and Union, N.J., and Las Piedras and Manati, Puerto Rico that cited persistent deficiencies related to manufacturing practices (¹ (Also see "Schering-Plough Afrin, Lotrimin GMP Shortcomings Cited In FDA-483 Report" - Pink Sheet, 25 Jun, 2001.)).

In recent manufacturing consent agreements, FDA has emphasized the internal management structure overseeing compliance operations and the need for accountability at the senior management level.

For example, in an October Wyeth-Ayerst consent agreement, Wyeth Pharmaceuticals President Bernard Poussot signed the agreement individually and on behalf of the company.

The timing of Cesan's resignation ensured FDA's GMP compliance concerns with Schering were the central focus of the firm's annual analysts meeting.

Kogan warned it will take time to rectify the manufacturing problems. "If you are looking for a quick resolution, you need to understand that these issues...must be addressed deliberately and methodically."

The topics selected for the business review may be another indication Schering expects the U.S. GMP compliance issues to linger. Presentations focused on the company's developmental Rx cholesterol-lowering agent ezetimibe, prospects for its hepatitis franchise in Japan and the performance of Claritin successor Clarinex in Germany.

Kogan only briefly touched on issues specific to the firm's non-Rx businesses, noting consumer products and animal health make up about 15% of total sales.

The company's trade inventory position in the U.S. is "relatively normal" and Schering currently is shipping all major products, Kogan noted.

The CEO acknowledged the firm potentially is facing further enforcement action. "If the FDA is not satisfied with the corrective actions we have taken or proposed, you know the powers of the FDA and the serious actions it can take," he said.

He declined to elaborate on the different enforcement actions the agency would consider. "The best thing for me to tell you is to look back over the past few years, and look at other companies who have had problems," Kogan said. "FDA has taken different kinds of actions with different types of companies depending on their view of the company's compliance status."

FDA typically seeks a court-approved consent decree for repeated compliance problems. In recent cases, like with Wyeth, the agreement has included a fine.

The agency also has referred criminal prosecutions in cases such as Warner-Lambert's Puerto Rico GMP compliance problems in the early 1990s. Warner-Lambert pleaded guilty and paid a $10 mil. criminal fine, significantly smaller than the civil settlements paid by Abbott and Wyeth in more recent cases. Charges also were brought against a Warner-Lambert quality control executive: he was acquitted on three counts.

Kogan declined to elaborate on the nature of the company's discussions with FDA and the timing of any resolution, either generally or in relation to specific products (² see chart below).

In describing Schering's plans to upgrade its manufacturing capacity, Kogan highlighted the firm's overseas expansion efforts. Schering will use a portion of its projected $750 mil. capital expenditure budget for 2001 to "construct a state-of-the-art manufacturing plant in Singapore, and expand and upgrade our biotechnology plant in Ireland and improve existing facilities," Kogan said.

Schering's comments about expanding overseas suggest one potential silver lining to the FDA GMP issues: an opportunity to shift more of its production to overseas tax havens.

The company's discussion of FDA's concerns has focused on inspections in Puerto Rico and New Jersey: the company said in February that the Irish plant was not affected, although it was the subject of a warning letter from the agency in 1998.

Kogan highlighted the scale of Schering's capital investment program to illustrate the company's commitment to upgrading manufacturing. However, the $750 mil. spending estimate for 2001 is slightly below the $763 mil. Schering spent on capital improvements in 2000.

"To address manufacturing issues we have already spent more than $60 mil. on quality-related and validation projects, mainly in New Jersey and Puerto Rico, and have committed significant additional funds," Kogan reported.

One option Schering is not considering, the chief exec said, is outsourcing manufacturing altogether. "We are not going to outsource manufacturing. We have a very competent manufacturing staff," he said.

Kogan noted, "GMP issues have affected product shipments, sales and earnings, approval of Clarinex and even our share repurchase program."

Preempting questions about the possible OTC switch of the non-sedating antihistamine, Kogan said, "we believe Claritin should remain a prescription product. We think this is the best setting for the patient and the health care system."

Schering opted to suspend its stock repurchase plan in February, "believing it would be prudent to stop until these issues are clarified," Kogan said. The $1.5 bil. program "was 36% complete at the time and we will get back into the market when we think it is appropriate."

The uncertainty over the company's discussions with FDA on the compliance issues also has held Schering back from offering financial guidance.

"Customarily at this time I would offer earnings guidance for the year," Kogan said. "But we have had more than the usual number of variables, so for now and for the rest of 2001 we will be taking a quarter-by-quarter approach providing periodic updates."

The company offered advance guidance on the second quarter two days before the end of the period. "We expect to report EPS of 43[cents], which is flat compared with 43[cents] a year ago," Kogan said. The estimate is slightly above Wall Street's expectations.

Kogan urged analysts to take the long-term view when judging its recent performance.

"We've done several magnificent things, in addition to providing one of the best returns to shareholders... [compared to] any company in our peers and certainly better than the S&P 500," he said. "So yes, we've done a good job in managing ourselves financially. Part of that is our stock repurchase program."

"We have not done what other companies have done: slash positions in mergers....In fact, [we] added to employment in our company and provided more jobs to people...more professional jobs to people creating new and improved therapies," he said.