Whether it’s reduced earnings forecasts, insufficient cash flow for capital expenditures and dividends, hefty fines ($500 million) or the 68% cut in its dividend, the dreary news keeps coming…and coming. It is no wonder that the shares are trading just above their six-year low, and this is after the 2003 rally. The first question investors must have is whether Fred is dead before he’s had a chance to do anything meaningful (from a share price perspective): will he, and investors, have the patience for a turnaround that will take anywhere from three to five years? The second question is, Are there any more skeletons still rattling around the closet, and if so, does Fred know where they are? This is a company that does not need another "oops" announcement, even though it seems unlikely the stock price can drop any further from more bad news (sometimes a mistaken assumption).

The company is embarking upon a five-point action plan, the first step of which is to stabilize regulatory and legal issues, which we assume also means dealing with lapses at its manufacturing plants. This is to be followed by the task of "repairing the corporate culture," which we take the liberty to interpret as "changing" the company culture—never an easy task, especially when bonuses and profit-sharing have been eliminated for the year. These first two steps, management has stated, are expected to take between 18 and 24 months to complete, which is a lifetime from an investor’s perspective.

But between the dividend cut and various cost management changes, SGP should be saving up to $900 million annually in cash flow, certainly not chump change for a company that has seen profits from a $3 billion blockbuster drug virtually evaporate overnight. The key, however, will be what happens with its other products, and right now the future is not so cheery.

With the demise of Claritin, the company’s largest-selling product is now a combination therapy against the hepatitis C virus, which includes the Intron A Injection and Peg-Intron Powder for Injection, a longer-acting form of Intron A. Second quarter revenues from this product, however, declined by 14% to $569 million from the year-ago quarter, primarily because of competition from Roche Holding AG (NASDAQ: RHHB), which launched a rival therapy in January in the U.S. at a substantial price discount to SGP’s product, which basically had until this year a U.S. monopoly.

Roche’s product, known as Pegasys, has become popular not just because it is cheaper, but also because it comes in a pre-mixed single vial, which is drawn by a syringe and injected weekly. This compares to Peg-Intron, which requires two syringes and two vials in a process that combines a powder and a liquid, the dose of which must be adjusted for body weight. SGP is trying to get approval of a pen-like device that could be used for injections without the need to mix vials, but it is unclear when this will be approved and whether it will be too little too late.

The company has other prescription drugs, with second quarter revenue increases ranging from 17% to 74%, three of which should have annual global revenues in excess of $500 million each. But they are dwarfs in comparison with Intron and Claritin’s former revenue base. And if you exclude the OTC Claritin from SGP’s consumer health products group, revenues there declined in the second quarter by almost 10% from a year ago, which means that products such as Dr. Scholl’s and its Clear Away (for wart removal) are not exactly in a growth mode.

The future, it appears, is resting on the success of Zetia, a novel cholesterol absorption inhibitor that was launched late last year in the U.S. and several international markets and is being co-marketed with Merck (NYSE: MCK). Global sales in the second quarter were $123 million, most of which was in the U.S., and more than 1.8 million prescriptions have been filled since last November. SGP’s reported revenue in the second quarter from Zetia was just $30 million. The drug is expected to reach sales of at least $1.0 billion annually, and perhaps a multiple of that. But pinning one’s hopes, and future, on one drug can be perilous, as was clearly shown with the fallout from Claritin.

So, what is Fred to do? SGP can try to develop new drugs, but that takes too much time, something he does not have. The company can try to buy drugs in development or partner with the companies that own them, but the competition for those deals has heated up in the past year as other pharmaceutical companies are also suffering from patent expirations, and they have become increasingly expensive as well. Besides, why would someone want to partner with SGP given its current weakened position? In addition, after being forced to cut its dividend significantly to conserve cash, the company is not exactly in the position to go on an acquisition spree, even for products in development, which take a lot of money to bring to market.

Acutely aware that free advice may not be worth the paper it is written on, it seems that the best thing the new management can do is ready SGP for a sale—at least, it’s the best thing for shareholders, who have been badly bruised. The first step would be to sell the animal health care products division, which excluding foreign exchange fluctuations posted a 9% decline in second quarter revenues to $171 million and seems to be going nowhere. Next to go would be the consumer health care products group, which with the OTC Claritin had second quarter revenues of $240 million. With combined annual revenues of $1.6 billion, these two groups could go for up to $2.0 billion, or possibly more, depending on their stand-alone profitability.

With a more focused pharmaceutical strategy, and cash to either pay down debt or hunt for product acquisitions, SGP would become a more attractive acquisition candidate or, alternatively, management could try to grow the company again, especially if Zetia takes off and if SGP’s hepatitis therapy can regain its luster in the market. The problem may be that there are too many "ifs" involved for many shareholders, especially since Fred says it is necessary to "reinvent and rebuild the machine" to make SGP a "single, integrated global pharmaceutical company," a prospect that is several years away. Even at $16 per share, SGP’s PE ratio is more than double that of its peer group, based on 2004 estimated earnings. Management has a long way to go before that ratio gets closer to SGP’s healthier competitors, and it may take more than removing a few warts to do it.