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Schering-Plough slashes costs in wake of Vytorin criticism
KENILWORTH, N.J.—In a hastily announced conference call to investors last week, Schering-Plough Corp. announced it will cut expenses by $1.5 billion to recover losses sparked by negative clinical trial data on its cholesterol drug Vytorin.
Schering-Plough's stock plummeted 26 percent on March 31 and even further to a record low of $13.83 on April 2 after doctors told attendees of the American College of Cardiology meeting late last month that Vytorin failed in its mission to reduce the risk of heart disease.
The company, based here, will reduce headcount by 10 percent worldwide, consolidate more than 60 manufacturing plants and make 80 percent of the $1.5 billion spending cuts by the end of 2010, with the rest by 2012, CEO Fred Hassan said in the April 2 conference call.
Headquarters costs, including sales and marketing, will be targeted first, and manufacturing changes will come later to prevent disruptions in supplies and products, Hassan said.
"We are taking the tough actions that are needed to respond to a tough situation," Hassan told investors. "We are determined to control our own destiny. We will be executing this cost saving, productivity-enhancing program with care and prudence. We will not engage in across-the-board cost cutting. We will avoid unwise, short-term actions. We will be focused on the same goal that has driven our company over the past nearly five years of my tenure as CEO: driving high performance for the long term."
Schering-Plough previously announced $500 million in reductions following its purchase of biopharmaceutical firm Organon BioSciences NV in November for $14.4 billion.
Hassan attributed the company's cost-cutting measures not just to the sudden market confusion surrounding Vytorin, but also to "dramatically intensifying pressures on the pharmaceutical industry, especially new pressures in the United States."
"The reality is that we face today a new political and overall environment in the U.S. that is increasingly discouraging pharmaceutical innovation," he said. "We need to improve the environment for pharmaceutical innovation in the U.S. because patients need new treatments for unmet medical needs such as Alzheimer's disease, heart disease and cancer. Our country needs to foster the innovation-based pharmaceutical industry, because our biomedical research is still preeminent compared to other countries."
Schering-Plough's Vytorin troubles have "been a case study of the impact of the hard new realities," Hassan said. In 2004, Schering-Plough began clinical trials for Vytorin/Zetia, a joint venture with Merck & Co. One of those trials, known as the Ezetimibe and Simvastatin in Hypercholesterolemia Enhances Atherosclerosis Regression (ENHANCE) trial, examined the drug's effectiveness in reversing the atherosclerotic thickening of the carotid artery in patients with high cholesterol.
After analyzing the trial's highly anticipated results, a panel five top cardiologists told doctors attending the American College of Cardiology meeting March 30 to go back to older, well-proven treatments for high cholesterol because the ENHANCE trial showed Vytorin was no more effective than Zocor, an inexpensive generic drug.
The panel recommended that doctors prescribe statin-based drugs first rather than Vytorin/Zetia. Both lower levels of LDL (bad) cholesterol, but only statins have been shown to reduce heart attacks and deaths. Studies are under way to show whether Zetia can do the same. The complete results are published in the New England Journal of Medicine.
But the Vytorin troubles do not end there. The drug is also under fire by Congress, which for months has been investigating whether Schering-Plough and Merck may have known long ago that research showed Vytorin was no more effective than Zocor, but withheld it to pump up sales.
Spokesman for both companies say they are cooperating fully with the inquiry. Schering-Plough told Senate leaders it did not deliberately delay the results to boost sales, while Merck said the companies' executives did not know the ENHANCE study's results until January and difficulties interpreting the complex data caused the delay.
"This confusion, in the absence of an open and balanced scientific discussion of this clinical trial, have caused an unwarranted concern among millions of patients who need to get to their cholesterol goals," Hassan said.
The company's stock has slowly rebounded since its cost-cutting program was announced. On Monday, shares rose 64 cents to close at $16.76. The stock is still down 50 percent from its 52-week high of $33.81, reached nearly one year ago.
Some analysts downgraded their ratings for Schering-Plough. Standard & Poor's Ratings Services put long-term ratings for Schering-Plough on credit watch, with negative implications, but left Merck's ratings unchanged because it has a more diverse line of medicines.
WBB Securities Ltd. analyst Steve Brozak told CNN Money the Vytorin criticism "is the last thing that Schering and Merck need, especially in a political year."
"This can become brutal," Brozak told CNN Money. "I do not know what company, at what price, would want to acquire these companies, given how little they have in their pipelines ... and given how much scrutiny they will receive."
For the most part, however, analysts have looked favorably upon Schering-Plough's plan. Natixis Bleichroeder Inc.'s Jon LeCroy said in a research note that investors should look beyond the ENHANCE results. With 13 potential product launches through 2011, Schering-Plough has the best pipeline in the industry, as well as the fastest earnings growth and least exposure to patent expirations, LeCroy said.
"We think investors are overreacting and note that Schering-Plough still offers tremendous value," he wrote.