Schering-Plough's ( SGP) 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.
In the meantime, Schering-Plough's business is withering. Last month -- just weeks after Hassan took over as the "savior" CEO -- Schering reported a 71% dive in first-quarter earnings as new generics wiped out nearly all domestic sales of the company's blockbuster drug Claritin. Even the company's backup star, a drug used to treat hepatitis C, lost some ground to new competition. Hassan, known for his rescue work at Pharmacia, has pledged to turn the company around. But Sweig and even Hassan himself admit that recovery could take years. "We think this turnaround will take much longer than some people recognize -- if it is achievable. And that's a big 'if,'" Sweig said. "But the new CEO deserves his chance." The company, heavily dependent on Claritin sales for years, is now struggling to find new ways to replace its vanishing business. Going forward, the company hopes to focus on a half-dozen drugs -- rather than just one -- for its growth. But it currently has few new drugs in its pipeline. So for now, Hassan must try to grow profits with short-term fixes such as cost-cutting and layoffs.
But they also warmly embraced Hassan and eagerly threw their faith behind him. "I do like challenges, and I also like adventure," Hassan told investors, according to press coverage of the meeting. "And I see both of them here at Schering-Plough. We can turn it around."