Updated from Jan. 21

OKLAHOMA CITY -- In the summer of 2006, Schering-Plough ( SGP) made a bold -- if premature -- call.

During a two-day strategy session, the company's latest proxy statement shows, Schering-Plough declared that its crisis period from recent years had come to an end. The company reached that conclusion shortly after the close of a key trial meant to further strengthen a booming cholesterol-drug franchise that it operates with Merck ( MRK).

Not until last week, nearly a year and a half later, did the results of that trial finally emerge. The study, popularly known as ENHANCE, suggested that Schering-Plough's blockbuster cholesterol-lowering drugs work no better -- and could pose greater risks -- than the far cheaper generic Zocor.

Schering-Plough's shares plummeted 20% in a matter of days as a result. The stock couldn't even manage a rebound on Friday after CEO Fred Hassan announced plans to buy $2 million worth of the hammered shares.

"The media interpretations of the top-line ENHANCE results, and the resulting stock price reaction, have been deeply troubling," Hassan stated. "This investment in Schering-Plough reflects my long-term confidence in the company. ... There are still significant challenges facing Schering-Plough, but I firmly believe this company can be turned around."

By now, Hassan and other Schering-Plough leaders have already collected generous awards for the company's "comeback." Notably, regulatory filings show, Schering-Plough linked much of the "long-term" incentive awards for its recovery to a three-year period ending in 2006.

Certainly, Schering-Plough looked strong enough at the time. Thanks in part to its new cholesterol drugs, Zetia and Vytorin, the company managed to post substantial improvement in virtually every key financial metric -- including sales, earnings and shareholder returns -- since Hassan's arrival in the spring of 2003.

Blockbuster Drugs

At his arrival, Hassan inherited the cholesterol franchise that has brought Schering-Plough so much success.

Back in 2000, the company teamed up with Merck in an effort to develop a next-generation cholesterol drug that could lower the risk of heart attacks.

By late 2002, the two companies had won approval for Zetia and introduced the first new cholesterol drug to hit the market in 15 years. Traditional treatments, known as statins, slow the liver's production of cholesterol to cut the risk of heart attacks. Zetia works by a different mechanism, slowing the body's absorption of cholesterol instead.

By supplementing regular statins with the new drug, experts reasoned, patients could further lower their cholesterol and -- theoretically -- reduce their heart attack risk as well. Thus, faced with hard-to-treat patients, physicians began prescribing Zetia alongside Pfizer's ( PFE) best-selling Lipitor and Merck's Zocor.

They wound up with a new option in 2004, when Schering-Plough and Merck combined Zetia with Zocor -- which was facing patent expiration -- to create Vytorin.

Vytorin's makers had high hopes for their new drug. While they were under no regulatory obligation to do so, they wanted to offer prescribing physicians more scientific evidence to back up the idea that their drug provided big health benefits.

And so came ENHANCE.

A so-called surrogate trial, ENHANCE examined whether Vytorin could reduce plaque build-up in arteries -- often a trigger for heart attacks -- rather than heart attacks themselves. It followed a group of 720 high-risk patients and regularly measured their plaque build-up, using specialized ultrasound techniques, over the course of two years. Evaluation of those scans, totaling some 40,000 in the end, promised at least some hints of the drug's effectiveness while a more comprehensive trial moved forward.

Like Schering-Plough, Merck needed a victory. By late 2004, the company had withdrawn one blockbuster -- the painkiller Vioxx -- due to safety concerns and had started counting the days for another. Zocor, still its best-selling drug at the time, would lose patent protection by mid-2006.

Conveniently, ENHANCE was scheduled to conclude around that time.

Vytorin soon became the leading "switch brand" in the market. More than half of its users abandoned other treatments in favor of the single-pill alternative.

A massive study, known as IMPROVE-IT, should help prove whether patients should have made that change. But results from that 10,000-patient trial will not emerge for years. In contrast, ENHANCE concluded in April of 2006.

Skip Irvine, director of communications for the joint venture, insists that neither company received any clues about ENHANCE until earlier this month. But skeptics, pointing to stock sales by Schering-Plough insiders, have some doubts.

Schering-Plough didn't respond to questions about its insider sales.

In May of 2006, just one month after ENHANCE came to an end, Carrie Cox, president of Schering-Plough's global pharmaceutical business, sold nearly $1 million worth of company stock. Cox would go on to execute even larger sales, clearing more than $5 million on two separate occasions, a year down the road.

Meanwhile, Schering-Plough's top executive had secured $2 million in a stock sale of his own. Hassan pocketed that money at the end of 2006, even as the company wrapped up a banner year that ensured tremendous bonuses.

Industry Setbacks

Still, 2006 brought a blow to the industry as a whole.

Late that year, Pfizer pulled the plug on a new cholesterol treatment of its own. That drug, meant to complement Lipitor, was designed to increase "good" HDL cholesterol and lower the risk of heart attacks. But it led to unexpected deaths, raising questions about next-generation cholesterol drugs overall.

After that setback, Wall Street experts began to raise questions about ENHANCE on a regular basis.

"I must admit, I'm a bit concerned about this trial because you've set up an admittedly medically important endpoint but a challenging design and endpoint" all the same, Cowen analyst Steve Scala said during Schering-Plough's fourth-quarter conference call in January of 2007. " AstraZeneca's ( AZN) METEOR trial of Crestor, I believe, will report at around the same time, and its endpoint is likely much more achievable.

"So from a marketing standpoint, how would you deal with a situation where METEOR is successful but ENHANCE is not?"

Schering-Plough responded in a manner that would soon become routine. The company emphasized the complex nature of the specialized trial -- focused outside the mainstream population -- and warned that the results would take some time.

"We're in no rush to get a marketing thing out of this," Hassan assured.

Unlike Schering-Plough, The New York Times has since noted, AstraZeneca took just 10 months to report favorable results from its cholesterol drug trial.

Mounting Concerns

Meanwhile, quarter after quarter, analysts kept asking Schering-Plough about ENHANCE. In response, Schering-Plough began downplaying the significance of that trial -- insisting that the value of lower LDL had already been proven -- and directing attention to the ongoing IMPROVE-IT instead.

Finally, in mid-December, Congress began demanding answers as well. And as the new year began, Schering-Plough found itself peppered with ENHANCE-related questions at a presentation hosted by Morgan Stanley.

In fact, that "CEO Unplugged" conference, with its question-and-answer format, brought ENHANCE to the forefront like never before.

"So let me just cut to the chase," Morgan Stanley analyst Jami Rubin began in one address. "What's the organization thinking embarking on this study and putting such an important franchise at risk given that you didn't have to do the study?

"But now you own the study, and it's yours, and you've got to continue to protect what is obviously the most important franchise" for the company.

Schering-Plough responded in familiar fashion, downplaying the significance of ENHANCE and emphasizing the importance of available science supporting the value of low LDL. But that time around, at least, some company executives may have known of the trial's shortcomings.

Bombshell Results

On Jan. 14, Schering-Plough and Merck formally announced the bleak results of ENHANCE. However, a Schering-Plough spokesman told The New York Times that the company had actually learned about the results two weeks earlier.

If true, Schering-Plough would have discovered the truth the very day that its top executive kicked off Morgan Stanley's CEO Unplugged conference.

For its part, Schering-Plough insists that Hassan remained in the dark until Jan. 10. Still, in an interview with TheStreet.com on Friday, Irvine said that both Schering-Plough and Merck received ENHANCE's results over a two-week period beginning in early January. Still, he added, the companies have yet to fully digest the results and determine exactly what the outcomes mean.

In an interview with TheStreet.com, Irvine confirmed that the two companies received ENHANCE's results over a two-week period beginning in early January. But even now, he said, the companies have yet to fully digest the results and determine exactly what the outcomes mean.

"Obviously, we would have preferred a favorable result," Irvine says. "We set a very high hurdle for ourselves, no doubt about it. But we think this study was asking a very important scientific question. And from that perspective, it was a worthwhile study for us to undertake."

Schering-Plough has always known about the high stakes involved. For 12 straight quarters, the company has managed to generate double-digit growth in adjusted sales. Strip out the contribution from its cholesterol franchise, however, and those double-digit gains fade away.

While its sales growth would still look healthy -- hitting 9% in the latest quarter -- it would lack the same punch.

To be fair, some experts feel, Schering-Plough and Merck could still enjoy brisk sales of their popular cholesterol drugs despite the recent trial results. Meanwhile, the companies themselves made clear long ago -- just after ENHANCE drew to a close -- that they will go to great lengths to ensure that ongoing success.

"Vytorin and Zetia are critical to the future of Merck (and) critical to the future of Schering-Plough as well," Merck CEO Richard Clark stressed back in June of 2006. "So we will do everything we must to maximize both of those products."

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