Schering-Plough interim Chairman Richard Osborne is likely to be wary of mergers as a turnaround strategy for the company.

Osborne, the former CEO of the mining and smelting company ASARCO and Schering's longest serving outside director, was named chairman Nov. 13.

His primary mission will be to lead the board's search for a successor to CEO Richard Kogan, who will retire in April or upon the selection of a new chief exec. Osborne is replacing Kogan as chairman immediately "to facilitate a smooth transition," Schering said.

The CEO search, however, inevitably will involve larger questions about Schering's strategic direction.

Osborne's 13-year tenure as head of ASARCO ended with a four-party merger fight that may make the new Schering chairman unlikely to view a merger as an easy answer for the firm.

Declining copper prices led ASARCO to post a loss in Osborne's final year as CEO and initiate a turnaround program. Shortly after he retired in April 1999 (but while he was still on the board of directors), ASARCO announced a merger of equals with Cyprus Amax.

However, two other firms - Phelps Dodge and Gruppo Mexico - then announced hostile bids. After initially resisting the competing offers, ASARCO agreed to terms with Phelps Dodge before finally accepting a sweetened offer from Gruppo Mexico. ASARCO is now a wholly owned subsidiary of Gruppo Mexico operating under new management.

Schering is a perennial subject of merger speculation, but, since the 1971 Plough merger, has remained steadfastly independent.

The company's difficulties with good manufacturing practices compliance over the past two years and the looming Rx Claritin patent expiration have made questions about its strategic direction more pressing.

Schering's joint venture agreement with Merck for cholesterol agent Zetia gives the company a measure of protection from hostile bids. However, in the event of a takeover, Merck has the right to buy out the joint venture and thereby remove one of Schering's more attractive assets.

Another aspect of Osborne's tenure at ASARCO may have relevance to Schering's current strategic position.

Late in his term as CEO, Osborne oversaw negotiations over an extensive settlement between ASARCO and the Environmental Protection Agency.

The settlement covered claims lodged by several states and EPA. The federal agency called it a "landmark" conclusion due to its breadth and inclusion of a commitment by ASARCO to spend at least $50 mil. on environmental clean-up.

Schering is facing an extensive period of negotiations to resolve multiple investigations of its manufacturing, marketing, pricing and investor relations practices.

The most recent developments are: (1) the initiation of a Securities & Exchange Commission inquiry into Schering's Oct. 3 earnings warning, which was preceded by closed-door investor meetings and an abrupt decline in Schering's share price; and (2) the disclosure of two grand jury subpoenas served by the Boston U.S. Attorney's Office covering a broad range of marketing practices.

Kogan's handling of the earnings warning appears to have been the event that precipitated his departure; the disclosure was followed by vocal declarations of a loss of confidence by investors and analysts.

Schering presumably will be placing a high priority on repairing its image with investors in the CEO search.

Under Kogan, Schering had a reputation for being tight-lipped in public investor presentations. The firm does not take questions on its quarterly investor calls, and Kogan seldom strayed from carefully prepared public statements when he did field analyst questions.

A more difficult challenge for the incoming CEO may be navigating the diverse and extensive investigations of Schering's business practices.

S-P holds the dubious distinction among pharma companies of having the longest list of disclosures under the "legal items" section of its SEC filings.

Schering is operating under a GMP consent decree with FDA signed in May; Kogan is a signatory to the decree both as a representative of the company and "in his individual capacity" (¹ Also see "Schering NDAs Not Subject To Extra Scrutiny Under FDA Consent Decree" - Pink Sheet, 27 May, 2002., p. 12).

The incoming CEO likely will be expected to take similar individual responsibility for GMP compliance.

In addition to managing the consent decree, the CEO will have to address an ongoing criminal investigation into GMP issues, as well as several civil and criminal reviews of the firm's pricing and marketing practices.

The two Boston subpoenas address promotional practices for the firm's interferon brands Intron A and Rebetron . Schering disclosed the investigation in a Nov. 12 10-Q filing.

The filing also refers to the ongoing Justice Department investigation into whether Schering and Wyeth colluded to lower the commission rate paid to one of the firms' consumer products brokers (² 'The Tan Sheet' Aug. 19, 2002, In Brief).

Schering says it is "fully cooperating" with the investigation and notes the inquiry is "at an early stage and thus it is not possible to predict its outcome."

Kogan's departure ends a long tradition of orderly management succession within Schering.

Kogan was recruited to Schering in 1982 by former CEO Robert Luciano. He joined the company as exec VP-pharmaceuticals from Ciba-Geigy, where he was president of the U.S. pharma division.

Kogan was elevated to president and chief operating officer in 1986. He held those positions for a decade, until he succeeded Luciano as CEO in 1996 and then as chairman in 1998.

Kogan's heir apparent, former President and Chief Operating Officer Raul Cesan, resigned abruptly in mid-2001 during the GMP compliance negotiations with FDA (³ Also see "Schering Compliance Team Will Report To CEO Following COO Resignation" - Pink Sheet, 2 July, 2001., p. 6).

Kogan oversaw the launch of Claritin in 1993 and its emergence as one of industry's strongest brands. During his tenure as CEO, Schering's sales have increased from $5.1 bil. (1995) to $9.8 bil. (2001). Net earnings increased from $887 mil. to a peak of $2.4 bil. in 2000 and $1.9 bil. last year.

In his final months, Kogan is likely to oversee the end of Claritin as an Rx brand; FDA's deadline for action on the OTC switch application for loratadine is Nov. 8. S-P predicts in its 10-Q that generic versions of loratadine could hit the market "as early as Dec. 20."

Schering has retained the Russell Reynolds search firm to assist in finding Kogan's successor.

Schering’s Rocky Succession: Former Mining Exec To Head CEO Search

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