At Schering-Plough, the Pain Only Grows

Schering-Plough's (SGP Quote) problems just got a whole lot tougher to cure.

The ailing drug manufacturer is now the target of a criminal investigation that one Wall Street analyst believes "may very well be broader, deeper and potentially more serious" than any probe that's hit the sector in recent history.

"This is a far more dangerous circumstance than any we've seen" since the '90s, says Fulcrum analyst Neil Sweig, who rates the stock a hold. "This is a great can of worms, if you will, that's been left to [new CEO] Fred Hassan."

Even Schering-Plough clearly expects trouble. When announcing the criminal probe on Friday, the company revealed that it is already bracing for federal charges.

"The company understands that, based on Department of Justice guidelines, receipt of a 'target' letter indicates that the government intends to pursue an indictment and believes it has substantial evidence to support that indictment," Schering-Plough said Friday. Its stock plunged early before recovering to trade fractionally lower.

Dead Letter Office

Schering-Plough received a letter this week stating that a less formal investigation, launched by federal authorities last November, has evolved into a four-pronged criminal probe of the company's marketing and clinical trial practices. Specifically, government authorities believe that Schering-Plough has illegally profited from federally funded programs by compensating health care organizations that use its drugs, by selling drugs for unapproved uses and by submitting false pricing information used by the Medicaid program. Investigators have also accused the company of destroying documents and hindering the probe.

Although the criminal investigation is young -- and Schering-Plough has been invited to respond to the allegations -- Sweig admitted that "one can expect a substantial fine."

It wouldn't be Schering-Plough's first. The company is already in the process of paying off a $500 million fine for manufacturing violations. It also remains under investigation for possible disclosure violations that preceded a sharp decline in the company's stock price last year.