Fred Hassan's Action Agenda turned Schering-Plough's losses into a 2005 profit

By 2003 Schering-Plough was in its worst shape since the 1940s. A May 2002 FDA consent decree over manufacturing-quality failures at its New Jersey and Puerto Rico plants forced $500m of payments and a full revalidation program. In December 2002 Claritin lost marketing exclusivity and moved over the counter, gutting the allergy franchise. The company booked $599m of special charges in 2003 and reported a net loss, and federal investigators were looking into its sales and marketing practices.

In April 2003 the board named Fred Hassan, as chairman and chief executive. His plan, the Action Agenda, aimed to 'stabilize, repair and then turn around' the company. The repairs were unglamorous: cGMP work plans and product revalidation to satisfy the decree, a US salesforce build-up that lifted SG&A, and a voluntary early retirement program. To fund the rebuild without starving the pipeline, the company issued 6% mandatory convertible preferred stock in August 2004 for net proceeds of $1.4bn, and paid $294m in 2004 to settle the Pennsylvania federal investigation.

The growth engine was Zetia, a cholesterol-absorption inhibitor discovered in-house and commercialized with Merck through a joint venture: equity income from that venture rose from $54m in 2003 to $347m in 2004 and $873m in 2005 as Zetia and then Vytorin scaled.

The numbers turned in 2005. Net sales rose 15% to $9,508m, pre-tax income swung from a $168m loss to a $497m profit, and reported net income reached $269m. The 2004 bottom line had been dragged down by a one-off $779m tax expense tied to repatriating foreign earnings, so the pre-tax line is the cleaner read of the operation — and it turned from negative to positive between those two years.

Net sales rose from $8.3bn to $9.5bn in 2005; the bottom line swung from a $947m loss in 2004 to $269m profit; cholesterol JV income reached $873m.

The consent decree capped manufacturing risk and forced the compliance spend; management treated revalidation as a precondition of recovery rather than a distraction.

Zetia gave the company an earnings engine independent of the dying Claritin franchise, and the Merck partnership shared the commercialization cost.

Hassan raised $1.4bn of preferred equity in August 2004 so the salesforce rebuild and repairs were funded by capital, not by starving research.

Clearing the federal sales-and-marketing probe for $294m in 2004 removed a legal overhang that would have priced the stock out of any recovery.

A turnaround can ride one clean growth engine: pair a disciplined cleanup of quality and compliance with a new product that scales fast enough to outrun the fixes it funds.

The recovery consolidated but stayed litigation-prone: 2005 net income carried a $250m charge that built the litigation reserve to $500m, and the cholesterol partnership kept compounding, with equity income nearly tripling between 2003 and 2005. In March 2009 Schering-Plough signed a merger agreement with Merck in which each share would be converted into 0.5767 shares plus $10.50 in cash and the combined company would take the Merck name. The turnaround Hassan started ended in the company's sale at the top of its repair cycle.