"Transforming
a Company, Transforming Relationships"
Fred Hassan
Chairman and Chief Executive Officer
Schering-Plough Corporation
Remarks for the 15th Anniversary Pharmaceutical
Strategic Alliances Conference
New York, New York
Sept. 26, 2005
Thank you.
It is a real honor to be here today. I see many
familiar faces - and also many new ones.
It is impressive to see the depth and strength in our industry that
is here today. I especially want to thank Roger Longman for having
me here. I have known Roger for many years. I admire his work. He
is a knowledgeable, thoughtful and balanced observer of our industry.
I am a regular reader of Roger's pieces -- and Roger, I can truly
say, I learn a lot from them!
Today, I would like to share with you some observations
on three topics. First, my experience in transformational change
actions, focusing especially on the transformational change process
that we are driving at Schering-Plough. Second, I would like to
share my brief observations on the rapidly transforming environment
in which we are all operating. Third, and finally, I would like
to talk about the relationship between so-called Big Pharma and
the biotech sector --about how we can transform a good relationship
into an even better and more productive one.
So first, some comments about transformational change and our work-in-progress
at Schering-Plough.
Many of you will know that I have a long and interesting history
in this area. The experience includes my days many years ago at
Sandoz, which is now Novartis. At Wyeth, I was closely involved
with the acquisition and oversight of the company's first biotech
unit, Genetics Institute. Subsequently, I was also involved in the
oversight of Immunex.
In 1997, I took a big career risk. After a global search, I was
asked to become the CEO of what was then Pharmacia & Upjohn
- a trans-Atlantic merger that was failing. I accepted the challenge.
At the time, it was said that only a miracle could save the company.
But we succeeded!
And then we engineered the merger of P&U with Monsanto Searle,
which was another company facing challenges. Once again, we drove
a very complex change and integration process to create Pharmacia
Corporation. Pharmacia emerged as one of the stronger and more successful
companies in our global industry.
Subsequently, after an earlier turndown, I was again approached
by Pfizer for an acquisition. Based on the premium, we agreed to
be acquired. I am by nature someone who builds for the long term.
But we did the right thing for our shareowners, given the premium.
Then, I took another high-risk decision. Instead of becoming vice-chairman
at Pfizer, I decided to accept what has turned out to be the biggest
challenge of my career: my current role as Chairman and CEO of Schering-Plough.
As most of you will recall, at that time Schering-Plough was a
badly injured organization. In fact, many seasoned observers of
our industry believed that Schering-Plough could not be saved. As
one person said to me, "Fred, you have taken on something truly
impossible this time!"
What was unusual about the situation we confronted
was the depth of problems on so many fronts. I'll just summarize
the key challenges.
The company had lost exclusivity on its single
most important growth driver, CLARITIN, with nothing substantial
to replace it.
On top of that, we found that market share and sales were falling
in the other key businesses of hepatitis C and in other areas of
respiratory disease. And we learned that we would also soon lose
an important stream of royalty revenues on another important product
in Europe. Meantime, every major manufacturing plant and other important parts of the product flow chain were under an unprecedented consent decree
by the FDA.
The business disruption was enormous. The costs were enormous.
And that was not all!
We faced legal issues regarding sales and marketing practices from
previous years. Our credibility with customers and other stakeholders
was under stress. Internal morale was damaged. And as I analyzed the
situation, I recognized that we also were confronting a disconnected,
silo-ized company.
In short, the company had fallen into a steep downward performance
spiral reflected in sharply falling sales, driving sharply falling
earnings per share. So the challenge was to execute urgent action
on many fronts.
In the first week of my arrival, we announced our six- to eight-year
Action Agenda for transformational change of the company. First:
stabilize and repair. Then: the turnaround phase, [which was] followed
by the “build the base phase” to begin to drive long-term
high performance. And then the breakout phase. This is the phase
where we will work to drive a step change.
Our goal is not necessarily to become the biggest company in our
industry. Our goal is to transform Schering-Plough into the BEST
company in our peer group.
Over the past two-and-a-half years, our people have been engaged
in truly heroic work to implement the first two phases [of the]
Action Agenda.
And -- despite the challenges -- we are beginning to see the results
of this effort. For three consecutive quarters, we have now registered
sales growth after many, many quarters of decline. We have also
registered two quarters of earnings growth, before special items.
So, we are right on track with our Action Agenda -- and we keep
moving forward.
It would take me the rest of the morning to itemize the important
change actions we implemented virtually simultaneously. So, let
me just summarize what has been accomplished in the past two-and-a-half
years:
We have been embedding quality, compliance and business integrity
from the ground up. Our reputation with our stakeholders is improving.
We have made strong, steady progress on our consent decree. This
has involved thousands of validation actions and hundreds of millions
of dollars of investment. We still have tough work remaining, but
we are more than 80% complete. Our people have executed superbly,
and our supply chain is steadily strengthening. Many of our brands
are now growing, and we are seeing progress in country operations
around the world.
Very importantly: We are beginning to win here
in the U.S. -- our must-win market.
The big engine of our U.S. growth is the success of our innovative
treatments for cholesterol, VYTORIN and ZETIA. This is a franchise
that we share with Merck. We placed a big, contrarian bet on investing
heavily in advance of the VYTORIN launch -- and then executing with
excellence. We are now seeing success. Recently, VYTORIN moved past
one of our biggest competitors to be among the top three cholesterol
treatments in the U.S.
We have achieved significant cost savings and reinvested for growth.
This was not a popular move with some analysts, who wanted to see
quick short-term fixes to the bottom line. But I can tell you from
a lot of experience: You do not slash your way to long-term earnings
growth!
We are re-investing in our business and in our science. In R&D,
we are re-investing in our development organization. And we have
re-invested in OTHER critical areas.
We have strengthened our financial situation. This required some
tough calls. Many of you will recall that in the early months of
our efforts, we slashed our dividend. This upset a lot of people
at the time, but today it is clear that it was the right thing to
do.
We are implementing global processes and systems. The most important
is Customer-Centered Product Flow -- CCPF for short. CCPF drives
collaboration between R&D, our commercial people and our supply
chain. It is transforming our ability to bring innovative molecules
from the labs to the patient. We are making product flow a focus
of excellence.
And we are proud that we are now delivering an impressive run of
first-cycle approvals at the FDA. This includes the approval of
VYTORIN -- our cholesterol blockbuster.
Very importantly: We have built new, positive energy and a high-performance
way of working across our organization.
In my experience, organizational charts are not so important in
our complex environment. “Command and control” is no
longer viable. This is why we have implemented an unusual way of
working at the New Schering-Plough.
Our new way of working is based on attitude and on six specific
Leader Behaviors, including Cross-functional Teamwork, Transparency
and Shared Accountability, and Listening and Learning. We make these
behaviors part of performance evaluations for all of our people
worldwide.
This transformation of the way of working within the company is
perhaps THE pivotal factor in our success. It is making us more
efficient. It is driving executional excellence.
We are also focusing this attitude-and-behavior approach externally.
It is at the center of our actions to build a special excellence
in partnership and alliance building.
Collaboration, Shared Accountability, Transparency, Listening and
Learning. We see these same behaviors that we are embedding on the
inside as the core of how our new company approaches external partnerships
and alliances.
An example of this: our strategic, long-term alliance we have forged
with Bayer here in the U.S. Through this alliance, we have strengthened
the array of infectious disease treatments and other products that
we provide to doctors and other companies, and Bayer benefits from
our customer relationships and other strengths. It is a win-win
relationship.
Finally, through WHAT we are doing and HOW we are doing it, we
are making progress toward a vision we set out on Day One for our
people: the vision of earning trust, every day.
We are earning trust inside the company. And we are earning trust
outside -- with our customers and our other stakeholders.
Now,let me shift for a few moments to my perspective on our environment.
I will be brief, because I know other speakers will address this
also. Here are just a few points that stand out for me.
First: The overall intensity of challenges in our industry environment
will continue to rise -- on a VERY steep curve. One example from
the business dimension. The cost of moving a molecule from early
discovery into patients is rising at a scary pace -- up from some
$600 million a few years ago to over $1 billion dollars today. And
simultaneously, governments and payors worldwide are making us their
prime price-control target as health budgets swell.
The new Medicare drug benefit is an essential move to help seniors
in the U.S. But it is uncharted territory -- and there is a risk
that this new benefit may ultimately become “price controls”
under another guise.
So, worldwide: It is truly the big squeeze!
Just one example of the intensifying challenge on a societal dimension.
The recent dramatic shift to a preoccupation with the safety of
medicines has distorted the essential equilibrium that must be struck
between efficacy and safety. This imbalance is driving increased
costs and risks for our industry. And it does not help the patients
-- the patients who are waiting for new medicines.
Another observation: Despite what I just said, I remain optimistic
about the longer term future. Why? Because of three converging factors.
The first factor: The wave of aging baby boomers will demand access
to new and better treatments. We will see a renaissance of focus
on efficacy.
The second factor: At the same time, the extent of unmet medical
need is vast. Today, we have only answered a relatively small portion
of that need in critical areas such as cardiovascular disease, cancer
and infectious disease.
And the third factor: We are at last seeing early signs of breakthroughs
from the new sciences, the new technologies of the past decade or
two. So, we will have tools and pathways to crack the tougher challenges
-- and begin to respond to that big unmet need.
And that leads to my next overall observation: I believe that after
many false dawns, we are now entering a new phase in medical history:
the age of Biopharma.
This phase will be characterized by an increasing intersection
and increasing fusion of biologic- and chemistry-based innovation.
It will ALSO be characterized by increasing interaction, increasing
interlinkage, of biotech organizations and conventional “big
pharma” organizations.
In a few years, biologics may equal the number of chemistry-based
new medications coming on the market.
This new importance of biologics will have many implications. Just
as an example: When we think about intellectual property protection,
it is interesting that biologicals are MUCH harder to copy than
chemistry-based treatments!
However, unlike some other people in our industry, I do NOT believe
that biologics will eclipse smaller molecules. There will continue
to be a balance. We may find that we see a renaissance of chemistry
not far down the road.
Likewise, unlike some other people in our industry, I do NOT believe
that primary care will be displaced by specialty care. I believe
there will be a balance, mainly because the needs of patients and
their providers are not answered by business theories.
Medical needs are answered by medical innovation. And medical innovation
is, by nature, serendipitous. Medical innovations will continue
to be discovered to address diseases affecting relatively smaller
populations. Medical innovations will also continue to be discovered
for diseases affecting large populations. Thus, we can expect to
see that specialty care will grow, but also that primary care innovations
will continue to emerge!
For all these reasons, the biotech companies and the big pharma
companies will be riding more and more on the same tracks to similar
destinations. It is clear that one result of this new environment
will be that big pharma companies intensify their focus on in-house
biotech capabilities.
At Schering-Plough, we happen to have a long history of biotech
innovation with interferon, currently with our PEG-INTRON treatment
for hepatitis C. And as part of our transformation process, we recently
created a new Biopharma unit on the West Coast – Biopharma,.
meaning an integration of biotech capabilities within our “bigger
pharma” R&D structure.
We may also see some acceleration of big pharma companies acquiring
biotechs to create this same kind of in-house capability.
But that will not be the main story. The main story will be an
accelerating pace of interactions between big pharma and independent
biotech companies.
The result of this interaction will be to move promising biotech
compounds from the “hot house”of the biotech company
into the development and global commercialization organization of
the big pharma companies. This interaction will take a variety of
forms, including partnerships, alliances and in-licensing actions.
We will continue to have an array of global, 'big pharma companies
over the next decades -- and their ranks will swell. Their excellence
will center in science innovation.
We will also continue to have an array of global big pharma companies.
They will of course be their own.
One thing that will distinguish these companies from biotechs will,
of course, be their continuing chemistry-based innovation work.
But what will be of special importance to biotechs will be big pharma
excellence in three areas: in global development, in global supply
chain and in global commercialization.
In my view, these areas of development excellence, supply chain
excellence and commercialization excellence should generally continue
to be a special strength of big pharma. This is because these areas
demand enormous, multibillion dollar investments --enormous investments
in infrastructure, in people and in processes on a global basis.
I believe that for most biotech companies, making the investments
needed to compete effectively in these areas poses huge resource
hurdles.
Also, by seeking to build in these areas of big
pharma strength, there is a high risk that a biotech company would
distract its people from doing what they do best: creating new molecules
to improve health.
Finally, this morning, let me outline what I believe are some of
the key pragmatic actions that both biotech companies and big pharma
companies should take. These are actions that I believe would further
transform what is already a generally strong and positive relationship.
Let me start with some considerations for biotech companies to
increase the relevance you can have to big pharma partners.
First: Take the time to fully understand the pipeline and the product
flow needs of potential big pharma partners, and map your strengths
to those needs. Really do the homework.
Second: Recognize that people really do make the difference --
all the more so, in very big companies! Identify and develop personal
champions within the big pharma partner. Champions who have the
strength and the trust within that organization to get you the best
hearing. Champions who will ALSO help you navigate the big company
maze!
Third: Focus intensively on evolving and adapting your proposition
to what you learn about the opportunity at the big pharma partner.
Spend more time on personal interactions and learning - and less
time creating presentations and slide decks.
Fourth: Aim to listen and learn from every interaction with the
big pharma partner. In this way, even if the current deal does not
succeed, you are seen as a savvy and preferred biotech partner for
future projects.
Finally, suggestion number five: Bear in mind that big pharma companies
also have strengths in science and innovation. You do good work
- and so do they. By conveying a sense of mutual respect, there
will be mutual benefit. So, those are five suggestions for enhanced
partnering strength on the part of biotech organizations.
Now, let me close by talking about what big pharma needs to do
better to further improve the value of partnerships with biotech
companies. I'll put this in the form of five questions that you,
the biotech partner, deserve to ask.
Question number one: Does my potential big pharma partner have
a passion for my project? Specifically, do the CEO and the head
of R&D have a personal commitment to it? This is more important
than the dollars on the table, because this is the single most important
factor in turning that molecule into a medicine.
Question number two: Does this big pharma company have know-how
that I can learn from, and will it share this with me in a transparent,
collaborative fashion? In other words, will I take away value from
this relationship, even if the specific project does not complete?
Question number three: Will this big pharma partner work collaboratively,
be transparent about processes and decision making, and treat us
right?
Question number four: If we do have a hit, does the big pharma
partner have the resources to deliver on the promise of this specific
molecule in terms of development excellence and supply chain excellence?
And Question number five: If we have a hit, does this partner have
the customer franchise and the sales and marketing touch to make
the most of this product?
In my view, a biotech partner should demand to hear “yes”
to ALL five of these questions!
Let me summarize and conclude. In short, maximizing the biotech
and big pharma relationship comes down to something I talked about
earlier: attitudes and behavior.
We will further transform, further enhance, this relationship by
working hard on partnering attitudes and partnering behavior.
Partnering attitudes and behavior on the part of the biotech organizations.
And partnering attitudes and behavior on the part of the big pharma
organizations.
This is how we will continue to earn trust with each other.
And this is how we - together - will create important
new treatments of the future.
This is how we - together - will continue to deliver
better health to the patients who are waiting.
Thank you.
DISCLOSURE NOTICE: This speech and the prepared materials for this
speech contain certain “forward-looking statements”
within the meaning of the Securities Litigation Reform Act of 1995,
including the company’s strategy and the strength and potential
of Schering-Plough. Forward-looking statements relate to expectations
or forecasts of future events. Schering-Plough does not assume the
obligation to update any forward-looking statement. Many factors
could cause actual results to differ from Schering-Plough’s
forward-looking statements, including market forces, economic factors,
product availability, current and future branded, generic or over-the-counter
competition and the regulatory process, among other uncertainties.
For further details and a discussion of risks and uncertainties
that may affect forward- looking statements, see the company's Securities
and Exchange Commission filings, including the company's second
quarter 2005 10-Q.
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