Speeches & Presentations

“New Challenges, New Opportunities: Building a New Kind of Health Care Company”
Fred Hassan
Chairman and Chief Executive Officer
Schering-Plough Corporation

Remarks from the Council of Institutional Investors
Spring 2007 Meeting
Washington, D.C.
March 19, 2007

All of you play an important role in making our capital markets strong and vibrant. These are the markets that have created the high standard of living that Americans enjoy compared to practically every other country in the world. So it's appropriate, I think, that you are the first large group of stakeholders that I have talked to since the announcement of our acquisition of Organon BioSciences just one week ago!

We decided on the title of my remarks many weeks ago, but now it is even more relevant than I had originally thought. The title is: "New Challenges, New Opportunities: Building a New Kind of Health Care Company."

This morning, I would like to begin by giving you my perspective on the broader industry environment. I would also like to share with you what motivated me to take on the Schering-Plough challenge. Without doubt, it was the biggest challenge of my career! And finally, I would like to tell you about what is driving the transformation of our company, including the combination with Organon.

I then look forward to joining you in a Q&A.

First, the industry. With all the visible and very expensive product failures in research, why should investors believe in the research-based pharmaceutical industry? Thereýs a simple, powerful answer to that question.

The reason is that compared to all other industries, ours is the one industry that societies in both wealthy and developing nations need. They need innovative new drugs as their populations strive to live better and live longer.

I'm here to tell you that "B-day" for the baby boomer generation has arrived! The baby boomers are beginning to turn 60. I have, myself, and perhaps so have some of you! A hundred years ago, we would already have been considered old. Now, the insurance companies are starting to worry that their tables are no longer covering the new realities of people living many decades beyond 60.

Just consider one impact of a longer-living population. As life spans begin to stretch into the 90s, we are finding that one in two people over the age of 80 begin to exhibit symptoms of Alzheimer's. One in two! Out of compassion, out of self interest and out of economic interest, we MUST unlock the mystery of Alzheimerýs disease.

Biopharmaceutical companies, including Schering-Plough, are collectively spending billions on this urgent mission. The science is advancing. We can see innovations on the horizon. And yet, we see two monumental challenges. The first challenge is that we see politicians and others attacking new medicines, new cures, as a "cost" to be cut. Yet new medicines truly are our best and most cost-effective investment for improving quality of life in the 21st century. The second challenge is that while biopharmaceutical companies hold out our best hope, the companies themselves need reinventing. Many of their innovation engines are faltering. The R&D models that worked in the past are losing steam.

Those are two of the big challenges that I see. And yet, within those challenges, I see great opportunity to contribute to health, wellness and longevity by inventing and developing new medicines.

That is what has driven me throughout my own life and career: embracing a series of challenges because I see the opportunities.

I was raised in Pakistan. My father was a dedicated civil servant. My mother was a dedicated champion of women's rights. Both of them taught me that life has the most meaning when you follow your dream and when you do work that helps others.

My dream was to make a real difference in people's lives. That's why, after getting my chemical engineering degree from the University of London and an MBA from Harvard, I joined the pharmaceutical industry. I saw that in this industry I could realize my dream.

During 17 years at Sandoz - now Novartis - I discovered I enjoyed being a change agent, and that I had a knack for it. Since then, I have been honored three times to be benchmarked and recruited to handle big challenges and to be a change agent in three different large companies: at Wyeth; at Pharmacia and Upjohn (which then became Pharmacia Corporation); and then Schering-Plough.

Every one of those challenges was a big one. But when I walked into Schering-Plough's Kenilworth, N.J., headquarters on April 20, 2003, I found a situation that was more challenging than anyone had imagined, including me!

Schering-Plough was a deeply wounded company under extreme stress. Some of the issues were already visible, such as the expiration of the CLARITIN patent. This expiry meant the loss of prescription CLARITIN, a product that had earned the company many billions of dollars. There were issues such as the unprecedented consent decree with the FDA, and the federal investigations into sales and marketing practices.

But many more issues emerged as I peeled the onion. I learned that almost all the key products of the company were losing sales. I learned that the company was in negative cash flow, burning nearly $1 billion annually. I learned that the organization was disconnected. I learned that the people were demoralized and disengaged. And I learned that the trust of key stakeholders, such as investors, doctors, regulators and employees, was in negative territory.

Let's fast forward. What do we see today? Over the first three full years after launching our change program, we see a company that has delivered superior performance.

We increased our market cap by almost $10 billion dollars.

We delivered total shareholder return during this period of 41%, the best among our peer group.

And we led our peer group in sales and earnings growth.

Conventional analysis would say that this transformation was the result of good strategies: strong cost control, strong cash management, good marketing and other textbook concepts.

It is true that the transformation of Schering-Plough reflects all those things. But it did not happen just because of those things. What has delivered the transformation and what continues to deliver the performance is a relentless focus on what I call organizational health.

What is organizational health? Organizational health is the engagement, convergence and winning spirit of the people: the people who are the company, from the top management team right through to the workers on the frontlines in the labs, in the plants and to those who work with our customers.

Unfortunately, most performance metrics in corporate America do not hold management accountable for organizational health to the level it should be. And unfortunately, balance sheets don't reflect it either in the assets or liabilities columns.

But, organizational health is critically important. When there is trust in management, trust in each other and passion for its work, a smaller team can dramatically outperform a much larger team that lacks these qualities.

That is why, out of all my priorities when I arrived at Schering-Plough, my highest priority was organizational health. Not long after my arrival, we took a snapshot of the state of organizational health at Schering-Plough. The best experts are your own people.

We had a respected company in this kind of work, International Survey Research (ISR) survey a representative sample of our people on such topics as trust in management, alignment around strategy and faith in the company. ISR has benchmarked data from hundreds of global companies spanning some 30 years. In 2003, Schering-Plough ranked near the bottom of those benchmarks across the board. All of our company attributes scored negative.

In 2006, we commissioned ISR to do another survey of our people. The transformation in organizational health was remarkable across every category. This was a dramatic endorsement of our strength by the most knowledgeable judges of all: our own people. We are benchmarking much stronger than our pharmaceutical peer group. And we are entering the small club of high-performance companies among all global industries. When ISR's Jack Stanek reviewed this data with me, he told me that this may be the most astonishing positive change in so little time that he had ever seen in a global company!

You will be asking: How have we driven this transformation in organizational health? And, how does it translate into high performance for the long term?

The most important factor in organizational health is the tone at the top. It must be led by the CEO. Within two days after we began at Schering-Plough, I held a global town hall meeting. We showed all our people, around the world, that we had to be honest with each other, to accept that we needed to change and that we had a road map for change. I presented to them the same five-phase Action Agenda for the six-to-eight-year journey that we are following today: Stabilize, Repair, Turnaround, and now Build the Base, with Breakout still ahead.

By giving everyone a framework, we gave everyone hope and confidence for the future. Then I quickly sent the signal that we were all in this together. We had to take tough steps. One critical step was to cancel bonuses for 2003. To attract me into this high-risk CEO assignment, the Board of Directors had agreed in writing to pay me a bonus for that year. My bonus could have amounted to $2 million! I made it clear that in canceling bonuses, it included my own. We also cancelled annual salary increases and profit sharing for everyone, including the new management team.

Also from day one, I made it clear that our goal was long-term high performance delivered by a high-performance culture. We began with a fresh vision: a vision of Earning Trust. Our people bought into what we were doing because they saw clearly that earning the trust of each other, and then earning the trust of our stakeholders, was how we could create a new success model in our industry.

We also built a new way of operating. It is based on six behaviors that we expected everyone in the company to model. Those six behaviors, what we call our Leader Behaviors, have become the new DNA of Schering-Plough. Let me list them for you:

1. Shared accountability and transparency

2. Cross-functional teamwork and collaboration

3. Listening and learning

4. Benchmark and continuously improve

5. Coaching and developing others

6. Business integrity

You can see that these behaviors are the essence of earning trust. They are also the key to success in our increasingly complex industry. We have made modeling these behaviors a requirement for earning bonuses and incentives. Our people around the world have embraced this mindset.

I said at the beginning of my remarks that the pharmaceutical industry must reinvent and revitalize itself. This is important to the success of our industry, and it is vital to our higher mission in society.

Let me give you just a few examples of how we are doing that at Schering-Plough. Four years ago, Schering-Plough was virtually unknown in the cardiovascular world. Today, we have transformed our company into one of the very few global leaders in this huge category of medical need. With VYTORIN and ZETIA, we are revolutionizing the treatment of high cholesterol.

We also have a very promising new drug in development for preventing life-threatening blood clots: our thrombin receptor antagonist compound. Experts believe this drug could revolutionize treatment of patients who have previously had heart attacks or strokes. In a very short time, we have built Schering-Plough into a science leader in this field!

Let me give you another example. We have been breaking down the conventional silos between R&D and commercial teams, and other silos that can kill innovation. We installed a new process and a new mindset that we call Customer-Centered Product Flow (CCPF).

CCPF puts the customer at the center of the action. Our mantra is cross-functional collaboration, transparency and accountability. We believe that R&D should not just be a division of the company. R&D must be treated as the central engine for product renewal in an industry where product lives are usually defined by six to 13 years of exclusivity.

Due to the long-term nature of the work, it will take some time to see all the benefits of our transformation through CCPF. But we are seeing some remarkable achievements already.

I'll tell you about just one. Before my arrival, Schering-Plough had spent many years unsuccessfully attempting to gain FDA approval for an innovative new treatment for asthma: ASMANEX. It is a great innovation. But, there were technical issues that needed answers and many years of frustration. With CCPF, we kicked down the silos. We got the scientists talking directly to their marketing colleagues. We focused everyone on getting the job done with shared accountability.

The results were very impressive. We won approval for ASMANEX, and we launched the product in August 2005. With passion, courage and tenacity, our people got this new medicine to the patients who needed it.

This is the mindset and the process that we are applying to important compounds in our pipeline today.

Let me mention another example of this new model for our industry: business integrity. Many of you know that when I arrived at Schering-Plough, we were under tremendous pressure on the subject of business behavior, particularly with sales and marketing practices in the U.S. We resolved most of those issues, and we signed a Corporate Integrity Agreement with the U.S. Inspector General. This agreement spelled out required improvements in the company's practices.

I am proud to say that we went far beyond the requirements of that agreement. Today, we are a leader in our industry in this area. For example, our global head of compliance is now a member of the top management team reporting directly to the CEO and also directly to the Board. We believe this is an example of good governance that you don't see in the checklists!

It always goes back to organizational health. Rules and regulations and training are fine and important. But the people have to believe in them and have to believe in what we as a company together are intent on accomplishing.

Robust organizational health is the cornerstone of good governance, and I believe good governance drives robust organizational health.

Today we are seeing a lot of checklists. It is certainly important to have basic hygiene, but checklists have their limits. Governance cannot be "one size fits all," because business models are so different.

Each different business model needs a governance model that is in tune with it. This is where board responsibility and management responsibility come in. You achieve it by walking the talk, beginning with setting the tone at the top and cascading it outward. This includes you, our investors, whose expectations are absolutely critical.

Innovation by its nature requires a patient and nurturing environment. Within that environment, a pharmaceutical company can deliver rewarding shareholder value for the long term. Take away that environment, and we will see value reduction. It is in the long-term interest of investors, patients and society to sustain that innovation-friendly environment.

We could not have accomplished any of our successes without the trust and patience that we received from our investors, including many of you in this room. We honored that trust by producing good results!

We also honored that trust by announcing four new governance actions this past December:

1.We eliminated the poison pill.

2. We eliminated supermajority voting.

3. We added a majority voting standard -- in the charter rather than just as a resignation policy -- for election of directors.

4. We accelerated the elimination of our classified board.

The OBS Combination and Our Future

Finally, a few words about our planned combination with Organon BioSciences. We had been looking very carefully at many, many different potential deals over the past several years, and we had been evaluating Organon for many, many months.

What we saw was a unique opportunity to create a combination with another high-quality, innovation-driven pharmaceutical company. Organon has strength in both existing human prescription products and the pipeline. It has strong biologic capabilities that add to our strengths. And we also get a strong animal health business that complements our own.

Organon BioSciences is a company that has a remarkable complementary fit with Schering-Plough. We saw value for the short term and for the long term. The day we close, we add some $5 billion to our top-line sales, and we greatly increase our late-stage R&D pipeline. But the real upside is in the enormous potential to create and capture so much more value for the long term. That is why when we saw a window of opportunity, we seized it.

Now we are getting to work on closing the deal and formulating plans for integrating the two companies. At the center of all of our actions will be an intense focus on organizational health. We will be listening to the people at Organon in order to learn, and then we will lead as a combined team.

As some of you know, I bring special expertise in making trans-Atlantic combinations work and in creating long-term value in combining large global companies. My top management team is also one of the strongest I have seen in driving positive transformational change.

Fueling the Innovation Engine

In closing, let me come back to where I began this morning.

Our industry must reinvent itself to keep growing and to fuel the innovation engine.

At Schering-Plough, we are building that new kind of pharmaceutical company. A new kind of health care company that will be doing great things. Great things for innovation. Great things for patients. Great things for our customers. And, great things for our investors.

The statements made in this speech may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about Schering-Plough's business and prospects. Actual results may differ from these forward-looking statements. Schering-Plough does not assume the obligation to update any forward-looking statements. For further details about risks and uncertainties that may affect forward-looking statements, see Schering-Plough’s SEC filings, including Part I, Item 1A. Risk Factors, in the Company's 2006 10-K.

Brochure on the Combination