Schering's CEO, a Failed Trial and $16 Million

Forbes’ Matthew Herper and Michael Maiello have just jumped on a subject we alluded to — perhaps too obliquely — a few weeks back in discussing the eye-popping $30 million Schering-Plough CEO Fred Hassan pulled down in 2007. Not only did Schering post a $1.5 billion loss that year, it also sat on negative clinical-trial results that eventually crushed sales of its cholesterol drugs Vytorin and Zetia when the data finally emerged this past January.

The point Forbes raises is a pretty simple one: Exactly why did Hassan deserve $13 million in cash bonuses in 2006 and 2007, given that outside heart specialists believed data from the trial — dubbed Enhance — was going to be released in Nov. 2006 or March 2007?

From the Forbes report:

Schering justifies the payouts to executives by saying that it needs to retain top leadership talent…. But [Hassan's] legacy is as much at stake as his pocketbook. For three decades he has defined himself as a transformer and re-builder of companies and strong advocate of ethical sales practices. When he came to Schering the company was awash in scandal. He made Schering’s stated mission to “earn trust every day” and presided over a huge surge in the company’s value.

Those gains vanished because of the controversy over the delayed Vytorin study, ENHANCE….

“It would seem to me that given Hassan’s reputation for open-mindedness in terms of compensation, that if there were some doubts about whether he should receive a bonus, he would be more likely than others to voluntarily forfeit it,” says Hodgson. “There are not many CEOs I’d say that about, but he would be one of them.”

Schering denies the study could have been ready in 2006, when Hassan received $9 million of the cash bonuses, and argues that Forbes’ analysis of the potential hits to Schering’s earnings, revenues and market cap are therefore based on “false premises.”

Schering may have a point about the $9 million from 2006, as even the academic who oversaw Enhance doubts the study would have been ready that year. Still, that leaves $4 million in 2007 bonus in question.

In an unusual step, however, one Schering official has lashed out publicly at the Forbes story. Susan Ellen Wolf, the company’s VP for corporate governance, left obviously canned comments at the magazine’s Web site and several blogs that discussed the piece, decrying its “innuendo” as “unfair” and singing Hassan’s praises as “a CEO who has taken a series of some of the biggest challenges in the world of business.”

In the off chance that Wolf chooses to grace us with her presence here, I’d like to ask if she could reply to two questions Ed Silverman raised over at Pharmalot that, to the best of my knowledge, she hasn’t yet addressed. To wit:

 The guys at Forbes wrote that Kastelein believes that, if he had full control of the study, the results could have been released in March 2007, although you only mention 2006. Can you please clarify?

Also, I’m curious to know why the May 1 options grant wasn’t priced higher. This topic was already addressed on Pharmalot but you didn’t respond to it then and you whizzed right by it in your reply this morning. Can you address that now? Here’s the link to our previous post…

http://www.pharmalot.com/2008/05/fred-hassan-in-graceland-lots-of-cheap-options/

That second question involves a May 1 grant of 836,000 options to Hassan at a price of $18.85 — a surprisingly low strike price given that Schering has publicly complained that its share price has been artificially depressed by the fuss over the Enhance trial. In fact, those options are already in the money, so where’s the incentive here?