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No. of Recommendations: 1
Here's the beginning of my analysis of Schering's Current Situation: What do you say?

Sell Basis Discussion:

1. Strike 1: FDA issues come to light for the first time in 2001
Thu 2/15/2001:
Schering-Plough (SGP) 48.32 -0.70 halted: SGP is warning for Q1; sees EPS 15% lower than year-ago $0.42, current estimate is $0.48.

Schering-Plough (SGP) 48.32 -0.70 halted: -- Update -- The company said the U.S. Food and Drug Administration (FDA) has been conducting inspections of the company's manufacturing facilities in New Jersey and Puerto Rico, and has issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices (GMPs), primarily relating to production processes, controls and procedures; see press release.

From the (Rulemaker) Fool: 3/5/01:
"Pharmaceutical giant Schering-Plough's (NYSE: SGP) shares dropped about 20% to around $38 after the Food and Drug Administration (FDA) found quality-control problems at the drug maker's manufacturing facilities in New Jersey and Puerto Rico. The company's shares are down almost 30% for the year.

Schering-Plough warned it would miss earnings by a wide margin in the first quarter, and there's no question 2001 earnings will be affected. The company was forced to idle production lines at the plants to fix the problems. As a result, Schering plans to spend millions this year upgrading the facilities.

Unfortunately the bad news doesn't stop there. The FDA has refused to approve Clarinex for marketing in the U.S. until Schering-Plough irons out its production problems. Clarinex is the follow-on drug to Claritin, the world's best-selling allergy medicine. Delays in launching Clarinex have investors worried Schering-Plough won't have time to transition Claritin users to Clarinex before Claritin comes off patent next year.

These are serious issues. In addition, Schering-Plough faces shareholder lawsuits and could end up paying FDA fines for the quality issues. A report from an independent pharmaceutical consulting company that was leaked to a public advocacy group makes it clear Schering-Plough's problems -- which reportedly include lack of quality control, an improperly designed manufacturing system, and high staff turnover -- won't get fixed overnight.

Still, I don't view the bad press as bad news for the company, mainly because it puts the heat on the drug maker to get the problems corrected quickly. Richard Kogan, chief executive, has made it clear he's responsible for taking corrective action, and the company will spend $50 million this year to improve the situation."

From Schering's 10-Q: 3/13/01:
On February 15, 2001, the Company stated in a press release that the FDA has been conducting inspections of the Company's manufacturing facilities in New Jersey and Puerto Rico and has issued reports citing deficiencies concerning compliance with current GMPs, primarily relating to production processes, controls and procedures. The Company further noted in the press release that the process and control issues led to reduced sales of certain products in the U.S. marketplace with the result that first quarter and full year 2001 sales and earnings will be lower than expected. The next day, February 16, 2001, a lawsuit was filed in the United States District Court for the District of New Jersey against the Company and certain named officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the same tenor followed, and others may be filed. The plaintiffs in the suits filed as of March 9, 2001 (the last day prior to printing this report) purport to represent classes of shareholders who purchased shares of Company stock between July 25, 2000 and February 15, 2001, the date of the press release. The litigation is in the very early stages. The Company believes that it has substantial defenses and intends to defend the suits vigorously.

From time to time, the Company has received Warning Letters from the FDA pertaining to various manufacturing issues. Among these, the Company has received a Warning Letter from the FDA relating specifically to manufacturing issues identified during FDA inspections of the Company's aerosol products (PROVENTIL, including other albuterol products, and VANCERIL) manufacturing facilities in New Jersey. The Company is implementing remedial actions at these facilities. The Company has met with the FDA on several occasions to apprise the agency of the scope and status of these activities. The Company cannot predict whether its remedial actions will resolve the FDA's concerns, whether the FDA will take any further action, or the effect of this matter on the Company's operations.
In February 2001, the Company reported that manufacturing process and control issues have led to reduced sales of certain products in the U.S. marketplace, with the result that first quarter and full-year 2001 sales and earnings will be lower than expected. The extent of this impact will depend upon the timing and nature of a resolution of the manufacturing issues. The Company said that the FDA has been conducting inspections of the Company's manufacturing facilities in New Jersey and Puerto Rico, and has issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices (GMPs), primarily relating to production processes, controls and procedures. The FDA has advised the Company that GMP deficiencies cited in facility inspection reports must be resolved prior to granting approval of the Company's pending New Drug Application (NDA) for CLARINEX (desloratadine) Tablets. Among the issues affecting the Company's ability to manufacture and ship certain pharmaceutical products has been the temporary interruption of some production lines to install system upgrades and further enhance compliance, and other technical production and equipment qualification issues. As part of its effort to improve manufacturing and quality-control functions, the Company has committed to spend more than $50 million in new equipment, process and system improvements. In addition, the Company has increased the number of personnel dedicated to quality control and compliance. While the Company has taken extensive measures intended to enhance its manufacturing processes and controls, the Company notes that the FDA's inspection reports and its own internal reviews indicate that improvements are required.

Mycroft's take in March '01:
This is my personal opinion and not that of the Fool. I owned SGP for almost a decade and never found any improprieties by its management. I found them to be very honest and open with shareholders. Why would that pattern change now? I did a lot of research on the company in the old days and am quite confident that everything will turn out ok. But then again this is just my opinion and I am not on the inside.

Good Luck,

2. Strike 2: FDA announces a criminal Probe into SGP
From the Wall Street Journal: Friday 5/17/02:
“As for Schering-Plough, the Kenilworth, N.J., drug maker has been beset by manufacturing problems in Puerto Rico, and seemed on the verge of resolving them to the satisfaction of the FDA. In a statement released after the close of trading Wednesday, Schering-Plough said the criminal investigation "is not related to ongoing negotiations with FDA for a consent decree to resolve manufacturing compliance issues at the company's New Jersey and Puerto Rico plants." The company said it is "optimistic that an agreement on the consent decree will be reached shortly."

Company spokesman William O'Donnell said Schering-Plough didn't know definitively which products were under criminal investigation or whether the probe involved the same plant in Puerto Rico that the FDA last year complained was failing to manufacture drugs properly. The investigation is in its very early stages, he said.

Schering-Plough disclosed news of the criminal probe in two sentences in its routine quarterly financial report Wednesday.

The lack of information set investors' minds racing. "The suggestion of a criminal probe raises the seriousness of what's transpiring," said Kris Jenner, a portfolio manager at T. Rowe Price. "We're operating in a vacuum. We don't have enough information." Dr. Jenner added, though, that he didn't believe the share price could fall much further.

Barbara Ryan, an analyst with Deutsche Banc Alex. Brown, worried that Schering-Plough may be forced to halt production of some important drugs at the targeted plant, including Clarinex and ribaviran, which are manufactured in Puerto Rico. "If we wipe these products out, Schering-Plough's earnings per share could drop to $1 next year" from $1.58 last year, she said.

After insisting for years that Schering-Plough had resolved the FDA's many safety concerns, the company announced in February of last year that the FDA was still unhappy with quality control at one plant in Puerto Rico and two in New Jersey and was investigating a fourth facility, also in Puerto Rico.

The company also said last year that the FDA had delayed approving Clarinex, its successor drug to allergy medicine Claritin, until certain manufacturing problems were resolved. When the FDA approved Clarinex in December, it appeared that the two sides might be close to resolving the longtime disputes. Schering-Plough took a $500 million charge in the fourth quarter to pay a potential FDA fine, which would be one of the largest penalties ever paid the agency. Schering-Plough had also predicted reduced earnings last year as sales of drugs most affected by the manufacturing problems, including some inhaled asthma products, fell.”

Strike 3: Did Schering violate Reg FD?
2 takes on the issue:

Take 1: Briefing. Com: 04-Oct-02

Schering-Plough (SGP) 16.57 -1.07: Schering-Plough provided an earnings update late last night that was chock full of disappointment. While that may have come as a surprise to retail investors, has its suspicions as to whether it was really a surprise to the institutional community. Frankly, there is little need to state our case for having those suspicions as the action in SGP's stock this week does that for us.

Prior to lowering its earnings projections for Q3, Q4, FY02, and FY03, SGP's stock plummeted 17.3% on extremely heavy volume. To wit: volume in the past three sessions has averaged 22.1 mln shares-- a sharp increase from the 3-month average daily volume of 5.76 mln shares.

On our In Play page on Wednesday, pointed out that SGP was hitting a new 52-wk low for the second day in a row and that Reuters was reporting that fund managers were blaming the weakness on the possibility that the company's Q3 earnings estimates were too high. Suffice it to say, SGP confirmed those suspicions when it said it expected Q3 EPS in the range of $0.28-0.29 (Multex consensus $0.35).

It is also remarkable that the pace of selling activity quickened this week ahead of a meeting SGP held with analysts on Thursday morning. Now, let us state for the record that we're not accusing SGP of violating Reg FD, but in hindsight, the manner in which its stock traded was certainly consistent with the theory that the information was leaked.

Take 2: Morningstar Analyst Todd Lebor (formally of the Fool)
Schering-Plough Should Rebound
by Todd N. Lebor | 10-04-02 | 08:44 AM
We still like Schering-Plough SGP despite its so-called earnings warning Thursday. In fact, the 25% drop the shares have endured in the past week makes the company even more appealing. While we will be lowering our revenue projections and fair value estimate given lower expectations of Clarinex sales, the stock still remains significantly below our estimate of its worth. Schering-Plough faces 12-18 months of rough sledding as Claritin moves to the over-the-counter market, but we see a rebound two to three years out and think long-term investors will be rewarded for their patience. With no debt and the hepatitis C treatment franchise to hold it over, Schering-Plough should be fine.

Phil Fisher points:

* Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
* Does the company have management of unquestionable integrity?

Valuation: at 11.8x Forward earnings, an almost 7% earnings yield, 2.8x sales, and 12x cash flow, for a pharma, well that feels cheap. If new management came in, things would flip pretty strongly IMHO.


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