Schering-Plough Corp. (SGP)

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Schering's Buy of Organon Had to Happen

04/09/08 - 03:42 PM EDT
OKLAHOMA CITY -- The strategy behind Schering-Plough's (SGP - Cramer's Take - Stockpickr) pricey acquisition of Organon is starting to add up.

When news of the $14.4 billion deal broke a year ago, Schering-Plough seemed to be doing just fine on its own. Thanks to brisk sales of Vytorin and Zetia, two blockbuster cholesterol-lowering drugs it co-marketed with Merck (MRK - Cramer's Take - Stockpickr), Schering-Plough boasted one of the fastest growth rates in the industry.

By purchasing Organon, a European drug maker viewed as a laggard by some, Schering-Plough appeared to be taking unnecessary risks.

Besides, Schering-Plough still had some unfinished business: Years earlier, the company had set out to prove that Vytorin -- a combination of Zetia and Zocor -- worked better than Zocor alone. The company had already established that Vytorin dramatically lowered cholesterol, but it hoped to show that the drug reduced the plaque that leads to actual heart attacks as well.

ENHANCE, the first clinical trial designed to offer this proof, had formally ended in April 2006. Schering-Plough originally planned to release the study's results at a conference that fall but missed that deadline -- and two others that followed. Ultimately, the devastating results -- indicating that Vytorin reduces plaque no more than Zocor alone -- would remain unknown for almost two full years.

In the meantime, Schering-Plough kept reassuring investors. "We are in the process of working on the data and making good progress, but we want to do it the right way," CEO Fred Hassan explained on a January 2007 conference call. "We're in no rush to get a marketing thing out of this."

Instead, Schering-Plough rushed forward six weeks later with the surprising news of the Organon takeover instead. In the process, the company effectively changed the subject.

Meanwhile, wooed by an estimated $200 million worth of advertisements, consumers went on to buy a record $5 billion worth of Vytorin and stand-alone Zetia that year. Schering-Plough, which splits the proceeds with larger Merck, relied on those two drugs for roughly half its annual profit.

Buying Organon, which offered several established drugs and five more in late-stage trials, promised Schering-Plough a broader product base. But Schering-Plough paid a high price -- surpassing half its current market value -- for that diversity. It also settled for a target that had just been shunned by one of its larger peers.

Skeptics questioned the deal's wisdom from the start. Since the formal release last month of the ENHANCE results -- which indicated that Vytorin reduces plaque no more than Zocor alone -- some have started to dwell on the timing of that deal as well.

Schering-Plough failed to answer questions about whether ENHANCE had influenced its decision to buy Organon. The company stuck with information provided in its formal press releases instead.

Early this year, however, Schering-Plough issued a handy outline that traces the evolution of ENHANCE. That timeline offers an inside view of the challenges that Schering-Plough faced as it purchased Organon and set out to reshape the company.

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