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Schering A.G. Business Information, Profile, and History

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Postfach 650311 1000 Berlin 65
Germany

History of Schering A.G.

Schering AG, the West German chemical and pharmaceutical company, operates worldwide production facilities for agrichemicals, fine chemicals, electroplating, industrial chemicals, and ethical drugs. Although, at the present time, the company maintains a formidable presence in the United States, this was not always the case. Schering's initial U.S. operations fell victim to the vicissitudes wrought by two world wars. The company's first U.S. subsidiary was dissolved during World War I and after being re-established in 1929 was then seized by the Alien Property Custodian during World War II. To Schering's chagrin, the subsidiary was eventually sold to private investors and severed completely from its parent company. Having no other recourse, the West German firm occupied itself with rebuilding its virtually decimated facilities at home. In the years that followed, however, Schering has regained its lost markets and has expanded to become a worldwide industry leader.

In 1851 on Chaussee Strasse 21, now located in East Berlin, Ernst Schering opened his pharmacy called Gruene Apotheke. Twenty years later the founder incorporated the business as a stock company. The first specialty product to emerge from Chemische Fabrik auf Actien was a medication for gout. In 1902 the company's operations expanded into the area of electroplating. To facilitate the process of plating decorative metal, Chemische Fabrik manufactured baths and electrolytes. Later these operations would expand to include the production of complete electroplating equipment as well as chemical compounds and machinery for printed-circuit manufacture.

At the turn of the century the German company also expanded into such diverse areas as industrial and laboratory chemicals. In the 1920's agrichemicals were added to Chemische Fabrik's product line and by the end of the decade the company made its first foray into an area that would become increasingly important in the future, namely, female sex hormones. A 1937 merger with a coke and chemical company resulted in the adoption of the current name, Schering AG.

As Germany entered World War II, Schering was widely recognized as a world leader in innovative chemical production and the extent of its operations. Exploratory work on sulfonamides and X-ray contrast media, as well as steroid hormones, positioned the company on the cutting-edge of new technologies. Schering's successful innovations matched their expanding operations; some 30 foreign subsidiaries operated worldwide.

This expansion, however impressive, experienced some setbacks. One of Schering's oldest subsidiaries, Schering & Glatz, was established in the United States in 1876 to distribute Schering products such as diphtheria medication. Yet during World War I, because it was affiliated with Germany, the operation was dissolved. By 1929 the company had reestablished its presence in the U.S. and created the Schering Corporation in New York City. This subsidiary specialized in recent developments in hormone research as company scientists became experts in synthesizing steroid drugs. These products accounted for 75% of total sales for the U.S. subsidiary.

Their expertise eventually led to the development of anti-conceptional products in the 1960's. During World War II, however, their coveted knowledge became the object of espionage reports. Believing Schering research excelled in the area of corticosteriods, or hormones extracted from the renal cortex, a secret investigation conducted by the U.S. government led to the accusation that the company used this knowledge to develop highly sophisticated drugs to further the Nazi cause. Pilots under the alleged influence of a corticosteriods were said to withstand extremely high altitudes which enabled them to fly well above the anti-aircraft flak.

As it happened, corticosteroids was one area where Schering research was not highly developed, and only after the espionage reports made their accusation did Schering begin intense experimentation in this area. Charges of military collusion with the Nazi regime aside, nothing could have prepared the company for its losses suffered after World War II. All of the company's foreign holdings disappeared. In the United States Leo Crowley, acting as the Alien Property Custodian, seized assets to all German properties, including Schering's, within its borders. Almost ten years later, the Attorney General annnounced that the company's U.S. subsidiary was for sale and a group of private investors headed by Merrill Lynch made the purchase. Schering Corporation, as a completely independent business in the U.S. went on to post impressive financial gains with the discovery of two new corticosteriods that became the envy of the drug industry.

As if this were not enough, Schering AG also lost valuable patents as well as the rights to its name in all 30 of its subsidiaries. The Schering factories in Germany were all but destroyed. The remaining employees searched the rubble for machine parts and usable wreckage. After three years of scavenging the company miraculously released a finished product, yet soon afterwards their property was seized in East Germany by the new Communist regime. Nevertheless, in several years Schering succeeded in rebuilding its operations and eventually bought back many of its former subsidiaries.

One former holding that was never repurchased was Schering Corporation in the U.S. As industry observers watched the newly formed company increase its financial success, the management at Schering AG realized, not without remorse, that its former subsidiary had grown too large to purchase back. Access to the use of the shared trademark in the U.S. remained an issue of contention between the two Scherings; in 1983 their grievances, as yet unresolved, led them to engage in a protracted legal battle. Berlex, Schering AG's pharmaceutical subsidiary in the U.S., allegedly infringed on Schering-Plough's (the company formed from the merger between Schering Corporation and a manufacturer of proprietary drugs) trademark. The German company contends, however, that the company namesake which stems from founder Ernst Schering is widely recognized in Europe. Barring its use in the U.S., as Schering AG states, subjects the company to unfair competition. Although litigation affords public scrutiny of the West German company's role in World War II (including the admission that two executives were Nazi party members), Schering AG denies it ever produced war materials.

These difficulties notwithstanding, Schering AG proceeded with its program of reconstruction. Manufacturing such products as lice powder and penicillin, the company soon exhibited signs of revitalization. Interestingly enough, by retaining headquarters in the city of its origins, Schering was the only company with a multinational orientation to remain in Berlin after World War II. Board members committed to staying in their home city influenced the company's decision not to move. Main headquarters presently stand three blocks from the wall that separates East from West Berlin. For security reasons Schering maintains a second corporate office, along with all its business records, in Bergkamen--200 miles west of the East German border.

A major step in Schering's postwar expansion involved pioneering work in anti-conceptional products. Using their expertise in steroid research, the company introduced the first birth-control pill on the European market in 1961. By 1972 the company was responsible for supplying over 50% of the world market, excluding the U.S., with hormonal contraceptives. The success of the "Pill," however, represented only one segment of Schering's diversified product line. Of the $383 million in total sales, 65% came from a broad spectrum of pharmaceuticals, including 30% from X-ray contrast media and psycho-pharmaceuticals, 12% from phyto-pharmaceuticals, 18% from specialty industrial chemicals, and 5% from electroplating. While the Berlin facilities remained the center of all research, administrative, and some packaging operations, fifty subsidiaries operating throughout Europe, Asia and Latin America finished and distributed Schering products worldwide.

One area of company pride involved the emphasis placed on quality research. Expenditures increased to 11.2% of sales and one of every 10 employees worked on research and development. With such an impressive performance record, the West German company prepared to make yet another entrance into the coveted U.S. market. By purchasing a 50% interest in Knoll Pharmaceutical, a New Jersey firm, Schering was just beginning. Between the years 1976 and 1980, five U.S. subsidiaries joined Schering's holdings. The companies purchased included Nepera Chemical, Sherex Chemical, Berlex Laboratories (renamed from Cooper Laboratories), Chemcut and Nor-Am Agricultural Products. The acquisitions directly corresponded to Schering's five divisions: a unit for drugs, industrial chemicals, fine chemicals, agrichemicals, and electroplating.

Horst Kramp, a 51 year old executive board member of the six-man Vorstand, directed Schering's U.S. operations. The unusual management structure, which did not allow a position for president, placed Kramp on equal footing with his five colleagues. While each Vorstand member holds a distinct function, all policies, dating back to the 1950's, were decided on by consensus. Kramp, whose administrative abilities includes marketing and sales, joined Schering in 1964 as a domestic sales manager. In the 1960's he traveled to the U.S. to work at Nor-Am only later to return to Germany and become the only nonchemist on the Vorstand.

By 1982, while Schering sales grew by 4%, the U.S. subsidiaries registered negligible earnings figures. The Vorstand members remained unconcerned, citing the time necessary before the companies could turn a profit. An effort to remove unprofitable operations became the next step. Facilities manufacturing such products as adhesive chemicals or sulfuric chemicals were sold. In the meantime, $22.5 million was appropriated for the expansion of the U.S. subsidiaries, including the building of new headquarters and research facilities. Similarly, management at Schering has been conscientious in the provision and support of research expenditures for the U.S. holdings, investing as much as 14% of the company's gross income.

The West German company's meticulous and well-planned reappearance in the U.S. reflects a detailed program of long-term planning. Executives remain laconic about predicting future success; unlike many U.S. companies Schering AG rejects the usefulness of short-term profit goals. One subsidiary, however, with decidedly ambitious goals is Berlex. Its president and chief executive officer, Robert E. Ivy, has hopes that the subsidiary will become one of the top competing pharmaceutical companies in the United States.

Principal Subsidiaries: ASAG Inc., USA; Berlinmed Ltda, Brazil; Industrias Farmaceuticas Alemanas, S.A.; Productos Quimicas Naturales, S.A., Mexico; Berlimed (Pty.) UC Ltd., So. Africa; FBC Holdings (Pty.) Ltd. Chloorkop, So. Africa; Asche AG, Germany; CHEBAG Beteiligungs-AG, Germany; Chemiewerk, Curtius Verwaltungs Gesellschaft mbH, Germany; Germapharm GmbH, Germany; REWO Chemische Werke GmbH, Germany; Scherax Arzneimittel GmbH, Germany.

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