Schering-Plough Corporation - Company Profile, Information, Business Description, History, Background Information on Schering-Plough Corporation

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History of Schering-Plough Corporation

Schering-Plough Corporation is one of the leading manufacturers of pharmaceuticals in the United States. With such successful prescription drugs as Garamycin and Claritin and such popular health and beauty brands as Coppertone and Dr. Scholl's, the company holds strong positions in both the consumer market and the health care professional market.

In 1971 Abe Plough, the founder and marketing genius behind Plough, Inc., a proprietary drug and consumer product company, approved of a merger between his company and the Schering Corporation. The 80-year-old man, with a colorful entrepreneurial history, was looking for a successor to run his firm. A solution was found in his unlikely friendship with Willibald Hermann Cozen, the German-born chief executive officer of Schering.

It was Cozen who actually designed the merger and, as a result, became the chief executive officer of Schering-Plough. The merger combined the comprehensive manufacturing of Schering's antibiotics, antihistamines, and other pharmaceuticals, and Plough's household consumer products with names as common as Coppertone and Di-Gel. With this diverse product line, Schering-Plough enjoyed steady growth and comfortable profit margins throughout its history.

Long before the merger, the Schering Corporation began as a drug manufacturer in Berlin. In 1894 the company started to export diphtheria medication to the United States, and an American branch of the German company opened in New York in 1929. Until the end of World War II, a sex hormone accounted for up to 75 percent of Schering's sales. The war, however, changed the course of the company's history forever. Frank Brown, a New Deal lawyer with no previous experience in the pharmaceutical business, was dealt a hand that would bind his future to Schering.

Brown's legal career involved participating in government projects during the 1930s. He joined the Federal Deposit Insurance Corporation, a creation of Roosevelt's New Deal policies, and acted as legal counsel to Leo Crowley. During the war the United States seized the assets of all German-owned businesses operating within the country. Leo Crowley was appointed the Alien Property Custodian, and Brown was given the job of managing the Schering Company. He immediately filled vacated executive positions with associates from the FDIC. In 1943 Brown was formally appointed president of Schering, and under his direction the company soon proved a financial success.

Brown realized that research and development was the key to success in the pharmaceutical industry. To this end, Brown immediately began the development of a research department and, like many other pharmaceutical companies, conducted searches for those scientists and students on the verge of new discoveries or for noteworthy scientific contributions from medical colleges and universities across the country. Established in 1944, the Schering student competition fund has found many worthy recipients over the years.

Because the postwar years marked a reduced demand for sex hormones, the newly expanded research department could not have found a better moment to discover a new antihistamine. Marketed as a proprietary drug (a drug directly advertised to consumers) under the name Trimeton and marketed also as an ethical drug (a drug advertised to health care professionals) under the name Chlor-Trimeton, the antihistamine marked a turning point in the history of the Schering Corporation. By 1951, profits had quadrupled with sales reaching over $15 million.

That same year the U.S. attorney general put the company up for sale. A syndicate headed by Merrill Lynch outbid other prospective buyers and proceeded to sell $1.7 million of stock to the public. However, the investors asked Brown to remain on as company president. He accepted the offer and directed Schering to even greater profitability through the discovery of Meticorten and Meticortelone, two new corticosteroids that became the envy of the drug industry.

The discovery of synthetic cortisone dates back to 1949 when Merck & Co., an industry competitor, first made public its historic findings. Although the wonder drug's discovery rightfully belonged to Merck, the process for synthesizing the drug conflicted with several other patents for producing sex hormones. Schering was the owner of one of these patents, and through a "cross-licensing" agreement the company gained access to information about cortisone production.

Soon after production of cortisone began, Schering and its competitors raced to discover an improved line of the drug that would eliminate some of the side effects associated with the steroid. They all hoped to modify the cortisone molecule to find a more effective drug and, at the same time, eliminate hypertension, edema (water retention), and osteoporosis (a bone disease), all side effects connected with cortisone therapy. Using microorganisms to convert one chemical into another, Schering scientists discovered a drug in 1954 that fit the desired guidelines. Clinical testing of the drug brought excellent results. However, when Schering was confronted with the prospect of full-scale production, the company realized it had no previous experience in manufacturing by fermentation, the process used to make the new drug. So Schering first tried fermentation in a 150-gallon stainless steel container and later in a 1,000-gallon and finally a 22,000-gallon fermenter. This last container used $100,000 worth of cortisone and a few hundred gallons of microorganisms.

Having established a successful manufacturing technique, Schering released Meticorten in 1955 and Meticortelone soon afterwards. Almost unbelievably, sales for the drugs jumped to over $20 million by the end of the year, $1 million more than total sales in 1954. By the end of 1955 sales for these drugs reached a new high of almost $46 million and by 1957 exceeded $80 million.

Other pharmaceutical companies manufacturing steroids immediately attempted to profit from Schering's success. Lederle, Upjohn, and Merck all developed similar drugs, and soon Schering found itself embroiled in lawsuits over patent and licensing rights. Merck's product arrived on the market only three months after Schering's, but because Schering had spent heavily on advertising it managed to retain a major share of the market. Furthermore, while Schering was forced to arrange licensing agreements with other companies, Brown demanded what other companies regarded as overpriced royalty payments. Although this initiated new litigation, it also allowed Schering profits to remain at an all-time high while agreements were worked out in time-consuming court processes.

Unrelated to Schering's historical development, a consumer product company in Memphis, Tennessee, won recognition for its own success story. Abe Plough, founder of Plough, Inc., began his career in marketing in 1908. He borrowed $125 from his father to create a concoction of linseed oil, carbolic acid, and camphor and sold the potion door-to-door from a horse-drawn buggy as a cure for "any ill of man or beast." Plough's inventory expanded to include a mysteriously named C-2223. This relief for rheumatics became an immediate success; after four years Plough had sold 150,000 packages.

What he later claimed to be his shrewdest purchase occurred in 1915: Plough paid $900 for the inventory of a bankrupt drug company. He netted a profit of $34,000 peddling the stock in the back woods where there was still a large demand for oxidine chill tonic. In 1920 he bought the St. Joseph Company of Chattanooga, Tennessee, and began manufacturing children's aspirin. By the 1950s Plough realized that the huge sales figures for the popular aspirin was partially due to children taking overdoses of the product. To prevent this from reoccurring Plough ordered child-proof caps added to the aspirin at a time when safety regulations were almost nonexistent. He went on to purchase 27 other companies during the course of his lifetime. In addition to being talented at making important acquisitions, he was also very adept at marketing: 25 percent of all income from sales was routinely spent on advertising. The success of radio advertising, in particular, convinced Plough to buy five AM and FM stations. Plough was best known in his own community for his philanthropic contributions. Upon his death in 1984 at age 92, flags throughout Memphis were lowered to half-mast.

Years before his death, however, the unlikely friendship between Willibald Hermann Cozen, chief executive officer of Schering in 1966, and Abe Plough was the antecedent to a company merger. At 17, after graduating from Kaiserin Augusta Gymnasium in Koblenz, Cozen began working for Schering A.G., the German parent company. When the U.S. company was seized during World War II and eventually sold to the public, Cozen became the chief executive officer of the new independent company.

When the merger of the two companies was finally completed, combined sales reached $500 million in 1971. This marked the fastest sales growth for any merger in the industry. Yet despite an earnings multiple of 46, Cozen, in his typically reserved style, spoke guardedly of continued expansion. The sales for Garamycin, an antibiotic introduced in 1966 as a treatment for urinary tract infections and burn victims, reached $90 million by 1972. This income accounted for almost half of both companies' growth for the period. The large profits, however, ironically concealed an "Achilles' heel." Garamycin's patent, scheduled to expire in 1980, signified the beginning of generic competition and the end of Schering-Plough's control over the manufacturing of this drug. The sound of competitors footsteps could be heard following closely behind; Cozen's cautious remarks on continued expansion were well founded.

In 1974 reduced sales for Garamycin already affected company profit margins. In 1975 the return on equity dropped from 31 to 27 percent and stock dropped ten percent from the previous year. Schering-Plough endured the ensuing decline in profits and increased funding for research and development. In 1974 several newly released drugs accounted for $100 million in sales. Similarly, Maybelline cosmetics, a Plough subsidiary, introduced a new line of makeup. The "Fresh and Lovely" cosmetic product line promised to catapult Maybelline into a competitive full-line makeup company.

These moves, however, were not remedies for the ailing profit margin. In 1979 Richard J. Bennet took over as chief executive officer and continued the efforts to solve the Garamycin conundrum. Schering-Plough had historically been a conservative company with no major debts, maintaining an asset-to-liability ratio of 2.2 to 1 and a $350 million cash excess after seven acquisitions. Yet Schering-Plough continued to look like a "one product" company because of its heavy reliance on Garamycin sales.

In 1979, 40 percent of all profits, or $220 million, was generated solely from Garamycin. Cozen's ineffective attempt to establish company profitability on the sales of a variety of drugs rather than a single product became Bennet's new challenge. Under his management the company released Netromycin, an antibiotic more potent that Garamycin but with fewer side effects. To ensure continued sales of Garamycin when the patent expiration date arrived, the company announced a discount plan to entice former customers into future contracts. Meanwhile, large sums of money continued to pour into the research facilities in the hope of discovering new drugs. Finally, in order to bolster consumer product sales, Schering-Plough purchased Scholl, Inc., (a well established footcare company) for $30 million.

Unfortunately, these maneuvers had only a limited effect on the company. Because doctors had already perfected methods for controlling Garamycin's side effects, they actually preferred to wait for generic and therefore cheaper versions of the drug rather than switch to Netromycin. Similarly, despite $75 million a year spent on research and development, no new discoveries were announced. Furthermore, while Scholl, Inc., had yearly revenues of $250 million and earnings of $12 million, its profits had barely kept pace with inflation since 1973.

Next to all of these disappointments, however, one consumer product did exhibit strong signs of financial success. Maybelline, once known as a manufacturer of "me-too" or imitation products, matured into an aggressive full-line cosmetic company. Bennet claimed in 1980 that Maybelline held 34 percent of the mascara market and 24 percent of the eyeshadow market. Estimated sales for 1980 jumped to $150 million from $75 million in 1976. But after Robert P. Luciano was appointed CEO in 1982, he refocused the company on health care, and Maybelline cosmetics and a household products group were sold.

On May 28, 1980, the day the patent on Garamycin expired, Schering-Plough executives appeared unperturbed. In fact, stock on that day jumped from 39 1/8 to 45. Not only was Netromycin on the market, but 80 percent of the hospitals who were previous customers of Garamycin had signed up for the deferred discount plan. More importantly, however, Schering-Plough had paid $12 million for a 14 percent equity stake in a Swiss genetic engineering company called Biogen. Schering-Plough's interest in the company was significant because it provided them with worldwide rights to the synthesis of human leukocyte interferons using recombinant DNA. The possibilities for using the interferon, a chemical produced naturally in the body to fight viruses, were immense. It was hoped that the synthetic drug could be used to treat anything from cancer to the common cold. Moreover, gene-splicing promised to be highly cost-effective; this new method, on the cutting-edge of biotechnology, could produce the same amount of purer proteins in a week than old methods could in a year. Here was the long-awaited breakthrough.

By 1985, in an uncharacteristic move, Schering-Plough had made a more expensive investment in biotechnology than any of its competitors. Expenditures surpassed $100 million. In 1982 Schering-Plough, having reached an agreement to spend $31.5 million over 10 years, formed a partnership with West Berlin politicians to establish a research institute on genetic engineering in Berlin. At the same time, plans were announced to build a fermentation and purification plant in Ireland to market the first commercial interferon. Schering-Plough also purchased another biotech firm in Palo Alto, California, called DNAX Research Institute. Clearly, Schering-Plough announced to the world where the future of its company resided.

Although Schering-Plough was the first to market a commercial Interferon, patent problems with competitors gave Hoffmann-La Roche rights to market alpha interferons in the United States. On June 4, 1986, the Federal Drug Administration approved Schering-Plough's Intron A and Hoffmann-La Roche's Rofeon=A for the U.S. market. Projected market sales for the interferon were $200 million in the United States and $150 million in Europe. By 1994, Intron A had sales of $426 million. Intron A's sales expanded in the United States and other international markets and grew to be the market leader worldwide. The company continued its study in the field of biotechnology, spending about one-quarter of their research dollars in this area. In 1995, the company expected to invest a total of nearly $650 million on research and development. According to Schering-Plough's 1994 annual report, "Biomedical innovation is truly the only viable, long-term solution for cost-effective quality care."

In the 1990s, Schering-Plough's largest and fastest-growing therapeutic category was in the area of asthma and allergy. Led by new product introductions, worldwide sales rose 24 percent in 1994 to approximately $1.46 billion. The most successful of these new drugs was Claritin (loratadine), a once-a-day, non-sedating antihistamine. Introduced in April 1993, Claritin was the third non-sedating antihistamine to reach the U.S. market. Despite its late arrival, in its first year on the market, Claritin had sales of nearly $200 million. It then captured the number one position in new prescriptions for plain antihistamines in less than a year and a half on the U.S. market, making it the largest single product for the company. Along with the November 1994 U.S. marketing clearance of Claritin-D, a twice-daily formulation combining the decongestant pseudoephedrine, the company expected to capture a significant share of the antihistamine/decongestant market.

Also in the 1990s, a fear of skin cancer and a depleting ozone layer turned sun care from a cosmetic segment to a health care one. With the introduction of Coppertone Kids and Shade UVAGuard, Schering-Plough proved to be a leader in the sun care market. It heavily promoted Shade UVAGuard, the sunscreen positioned as a drug that protects against year-round UVA and UVB rays, both of which cause skin cancer. Schering was also one of the first companies to market sunless tanning and sport products. 1994 marked the 50th anniversary of the Coppertone brand, and, during that year, the company helped launch a national UV (ultraviolet) Index in a joint pilot program with the U.S. Environmental Protection Agency and the National Weather Service to help educate consumers about the importance of proper sun protection. With its broad product lines, Schering-Plough captured major shares in important segments of the entire sun care market, and, in the fast-growing children's market, the company had a 60 percent share with its Coppertone Kids and Water Babies products.

An aging population, the popularity of self-medication, and active lifestyles were other trends that helped boost sales in Schering-Plough's foot care division and built its position as North America's leading foot care company. Schering-Plough's brands lead in every segment of the market, and, according to Drug Topics in 1995, Dr. Scholl's had a 72 percent share of the insole/insert category, an 86 percent share of the corn/callus/bunion category, and a 46 percent share of the odor/wetness/grooming category. The company, however, met increased competition from in-store and private label brands during this time.

Schering-Plough's efforts to be an environmentally responsible company received major recognition in 1994. After volunteering to participate in a pilot public-private partnership with the state of New Jersey to reinvent the state's environmental regulations, Schering Plough received New Jersey's and the nation's very first comprehensive, facilitywide environmental permit for its Kenilworth, New Jersey, facility. The one permit, which is unique in the United States, replaced more than 60 individual permits that regulated air emissions, waste water discharges, and solid waste management. Schering-Plough management found that the new permit increased the facility's operational flexibility and they expected to save about $300,000 annually in administrative, waste disposal, and raw materials costs. This strategy was hoped to be adopted by other states as the government challenged companies to accept greater responsibility and accountability for environmental programs.

According to a 1993 article in Financial World, Schering-Plough was generally thought to be a second-tier pharmaceutical company with uninspiring research, but with some winning products, and therefore a likely takeover product in the late 1980s. Since then, the company has turned in a remarkable 20 percent growth in per-share earnings. Analysts predicted that Schering-Plough shares would grow 2.5 times as fast as any other top U.S.-based drug company over the next few years. With the continued development of successful products like Garamycin and Claritin and supported by the popularity of household names like Coppertone and Dr. Scholl's, Schering-Plough should keep pace with the rapidly changing field of pharmaceuticals and remain a strong presence in the marketplace.

Principal Subsidiaries: Schering Corp.; Artra Cosmetics, Inc.; Schering Antibiotic Corp.; Plough Export, Inc.; Plough Trading Corp.; Schering Realty Corp.; Schering del Cribe, Inc.; Schering Pharmaceutical Corp.; Schering Export Corp.; White Laboratories, Inc.; The Emko Company; Plough Inc.; Plough Sales Corp.; Plough Advertising Corp.; Plough Broadcasting Co., Inc.; Coppertone Corp.; Schering Industries, Inc.; Schering Transamerica Corp.; Plough Laboratories, Inc.; Sheroid, Inc.; Schering Biochem Corp.; Manati Holdings Corp.; Burns-Biotec Laboratories Inc.; Wesley-Jessen, Inc.; Scholl, Inc.; Schering-Plough Investments, Ltd.; Essex Comercio, Importacao e Participacoes Ltda (Brazil); C.E. Fulford Limited (U.K.); Industria Quimica e Farmaceutica Schering, S.A. (Brazil); Plough (New Zealand) Ltd.; Schering Corp. (Puerto Rico); P.T. Essex Indonesia (90%); Scherico Ltd. (Switzerland); Schering Corp. Ltd. (Canada); Schering Corp. Centroamerica, S.A. (Panama); Schering Industrial Development Corp. (Puerto Rico); Schering Overseas, Ltd. (Bermuda); Galenacos, S.A. (Luxembourg); Scholl-Plough (S.A.) Pty. Ltd.; Plough de Mexico, S.A de C.V. (50%); Scherag (Pty.) Ltd. (South Africa); Scholl (Brazil) Comercio & Industria Ltd. (Brazil); Plough (Canada) Ltd.; Plough (Australia) Pty. Ltd.; Industria Quimica Plough (Chile) Ltda.; Plough Portuguesa Quimico Farmaceutica Lda. (Portugal; 50%); Pharmaco, Inc.; Coppertone (Japan; 50%); Plough Nederland B.V.; C.E. Fulford (India) Private Ltd.; White Laboratories of Canada Ltd.; Essex Laboratories (New Zealand); Laboratorio Procampo Ltda. (Brazil); Plough Produtos Farmaceuticies e Cosmeticies Limitada (Brazil).

Additional Details

Further Reference

"Schering-Plough Banking on R&D," Chemical Marketing Reporter, July 11, 1994, pp. 7 (2)."Step Up to Better Foot Care Sales," Drug Topics, March 20, 1995, pp. 68 (2)."Touted Schering-Plough Feels the 'Clinton Effect,"' Chemical Marketing Reporter, February 22, 1993, pp. 8 (2).Hunter, Kris, "Staff Cutbacks Begin at Schering-Plough," Memphis Business Journal, October 17, 1994, pp. 1 (2).Kogan, Richard J., "With Change Comes Opportunity," Chemical Week, April 26, 1995, p. 48.Nayyar, Seema, "Coppertone Adapts to a Changing World," Brandweek, February 22, 1993, p. 28.Palmer, Jay, "Say Yes to Drugs? How Schering-Plough Aims to Survive Hillary Clinton," Barron's, October 4, 1993, p. 14.Shaffer, Marjorie, "Schering-Plough: Against the Tide," Financial World, June 22, 1993, pp. 16 (2).Starr, Cynthia, "Schering's Claritin Promises Quick Onset, No Sedation," Drug Topics, June 7, 1993, pp. 22 (2).Waldholz, Michael, "Luciano to Quit Schering Post as Firm's CEO," The Wall Street Journal, April 26, 1995, p. B7.

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