More — on Metaphors — from Cafepharma Conversations. . . .

UPDATED: 05.10.08 AM — Someone has been searching this blog for my earlier responses to readers at, here, so let me provide convenient links to each one:

Here’s the seminal one — it provides a thumbnail of almost all of what I think has gone hay-wire with ENHANCE results, over at Schering-Plough.

This is a follow-up, to another question there.

End, Public Service Update.


I’ve enjoyed a few very good conversations (and endured a few, not so), over at, of late. In response to my concerns about Mr. Hassan’s outsized pay, and his near-nadir-touching option-grant [see the comments to that one, BTW — great comment from a mid-level putative insider!], one or two commenters remarked about the strength of Schering’s pipeline. While I might be less impressed than they are, with the strength of Schering’s pipeline of products-to-come, I decided to assume, arguendo, that all were worth funding, and funding fully. What one quickly notices, then, is that Schering will start to run out of cash-flow to cover all those expenses, and to a lesser extent, to service the debt (and preferred stock redemption payments) it incurred to acquire Organon in 2007 — so, let’s take a look:

Originally Posted by Anonymous:

This man is definitely paid well…… Freddie gave us the best phase III research pipleline in the entire industry. this alone is worth a ton to SP employees and shareholders. I bet ANYONE in the whole big pharma would love to trade places with us. This man may be rich, but boy, he delivers. Pay him even more if he gets us a couple of billion more in value. Hey, who else has this potential as SP. jealousy is a bad emotion buddy….can’t think of any other motive……

And then came someone else’s reply, to the above:

It is great to have a pipeline. And nobody argues that SP has a great one. The question is, will it be approved after the debacle of Vytorin/Zetia. A pipeline is like Barack Obama, great in theory, but worthless with out the end result. . . .

Then I wandered by:

Unfortunately, I see it as even more difficult than that metaphor would have it — the Vytorin Joint Venture was to be the cash-flow-lubricant in the Schering-Plough engine, one that would fund the all those otherwise staggering expenses to bring that “fine” pipeline to market (and, to a lesser extent, to service the debt taken on, to buy Organon last year).

So, like an engine running out of oil, the gears are starting to grind — metal to metal — and that dwindling cash flow is like the lubricant, leaking out of a now-ever-widening crack in the engine-block. Soon things are really going to get illiquid — and friction will build, and build, and build — until Schering throws a rod.

[To be clear, here, Schering will be able to go back to the capital markets — it will just be very, very expensive when it does so. That is a problem.]

Sorry to wax so graphic, but the vast free cash-flow of the Vytorin Joint Venture — now going missing, day by day — is Schering’s Number One longer-term issue.

I am deeply sorry [for all those to be displaced by these facts] — but it is the truth — based on my experience, from where I sit.

The conversation is ongoing, but I won’t be able to answer anything until much later, as I am off-the-grid until late this afternoon. I do want to highlight the following comment, from a mid-level insider at Schering-Plough, left in my comment box, last night — on the topic of the near-nadir-touching 2008 option grant (at $18.85) for CEO Fred Hassan, and the Top Six, while, apparently, mid-level management’s 2008 option grants (awarded about four months earlier) were at $22.50 or so. That means the mid-level will have to pull, and pull hard, on the corporate oars, just to stay above the water-line (mid-management won’t see any benefit until the stock goes north of $22.50), while the very top of the house will benefit from any rise above the $18.85 level. How can that state-of-affairs make sense? Take a look:

. . . .Wouldn’t it have been more reasonable to make this grant the the price the employees stock options were granted at in mid-January, round about $22.50? It is a slap in the face to the rank and file that will be charged with bringing the share price back to enrich Fast Freddy to the tune of roughly $3M before we have the opportunity to make a plug nickel. Ethics? Where? Freddy Boy, please, where have you hidden the ethics?

If the above is accurate — it is going to be very hard to defend at the Annual Shareholders’ Meeting, in Tennessee, next week. Okay — I have to bounce, and bounce, right now.

[I will be attending the funeral of the man who gave me my start in the law. . . . a mentor and early-guide — though one I’ve not stayed in as closely in-touch with, as I might have wished, over these many long years — so, back later. But do call your mentors this weekend — they would almost certainly love to hear from you — and know what you are doing with yourself. Know that (as I just learned, again) one day, you may just find the line. . . . has fallen silent.]

Keep it spinnin’ in good karma.

2 responses to “More — on Metaphors — from Cafepharma Conversations. . . .

  1. On the point about CEO Hassan ADDING “billions” of value, above:

    See, actually — Mr. Hassan has destroyed about $20 billion of shareholder value, just since last summer 2007.

    $31 minus $18.85 equals $12.15 of stock price decline. . . .

    times 1.637 billion shares outstanding — Yep:

    $19.997 billion in common equity GONE –poof! — even more, if we include some $1 billion in the destroyed 6% preferred (issued at $250 in August 2007, now trading around $180) — those values have evaporated.


  2. Condor, to clarify my earlier post:

    I seemed to have transposed a number, but on Jan 22, FH granted the employees of SP 1000 options at the days close of $20.26. Although that tempers the gap a little. we nonetheless will be enriching FH into the millions before we make a cent. Realistically, does HE need this money more than most of the rest of it do? As a member of the field sales force, this mountain will be climbed with the management team on our backs!!! They really need to re-think their plans for compensating us for correcting their missteps (I think that is an extremely kind and conservative characterization of our present situation!!!).

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s