Business Context and Reporting Period
This summary covers the Form 10-Q filed by Schering-Plough Corporation for the quarterly period ended March 31, 2009. The company operates in three segments: Prescription Pharmaceuticals, Animal Health, and Consumer Health Care. A material event during this period was the announcement on March 9, 2009, of a definitive merger agreement with Merck & Co., Inc., expected to close in the fourth quarter of 2009.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $4,393 million | $4,657 million |
| Gross Margin | 68.2% | 54.1% |
| Net Income | $805 million | $314 million |
| Net Income Available to Common Shareholders | $767 million | $276 million |
| Diluted Earnings Per Share | $0.46 | $0.17 |
| Operating Cash Flow | $556 million | $462 million |
| Total Debt | $7.9 billion | $8.2 billion (Dec 2008) |
| Cash and Cash Equivalents | $2,845 million | $2,454 million (Q1 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6% year-over-year, driven by a 10% unfavorable foreign exchange impact and a 17% operational decline in the cholesterol franchise (VYTORIN and ZETIA). Prescription Pharmaceuticals sales fell 5%, while Consumer Health Care sales rose 2%.
- Profitability Surge: Despite lower sales, Net Income increased 156% to $805 million. This was primarily due to a significant reduction in amortization expenses related to the Organon BioSciences (OBS) acquisition ($125 million in Q1 2009 vs. $688 million in Q1 2008) and higher equity income from the Merck/Schering-Plough cholesterol joint venture.
- Expense Reduction: Selling, general and administrative (SG&A) expenses dropped 11% to $1.493 billion, and Research and Development (R&D) expenses fell 9% to $804 million, attributed to the Productivity Transformation Program (PTP) and foreign exchange effects.
- Special Charges: Special, merger, and acquisition-related charges increased to $75 million from $23 million, including $56 million for employee termination costs and $19 million related to the planned Merck merger.
Guidance, Outlook, and Risks
- Guidance: Schering-Plough does not provide numeric guidance. Management expects 2009 U.S. sales of VYTORIN and ZETIA to be lower than 2008, while international sales (excluding FX) should continue to grow. R&D expense is expected to grow in the low-to-mid single-digit range for 2009.
- Merger Outlook: The company anticipates completing the merger with Merck in Q4 2009, subject to regulatory and shareholder approvals. The transaction involves a stock and cash deal.
- Key Risks:
- Cholesterol Franchise: Ongoing litigation and investigations regarding the ENHANCE and SEAS clinical trials pose risks to the sales of VYTORIN and ZETIA.
- Patent Expirations: Several key products face patent expirations or challenges, including TEMODAR (EU), FOLLISTIM/PUREGON (EU), and CLARINEX formulations.
- Regulatory Environment: Increased scrutiny on pricing, marketing practices, and safety reporting by the FDA and other global agencies.
- Merger Uncertainty: Risks associated with the integration process, potential loss of key personnel, and litigation challenging the merger terms.
Investor Verification Checklist
- Verify the status of the Merck merger approval process and any new litigation filed to enjoin the transaction.
- Monitor developments in the ENHANCE and SEAS clinical trial litigation and FDA communications regarding VYTORIN and ZETIA.
- Assess the impact of foreign exchange rates on international sales, which comprised 67% of total revenue.
- Review the progress of the Productivity Transformation Program (PTP) and its effect on future cost structures.
- Track the resolution of the K-DUR antitrust litigation and the outcome of the securities class action settlement hearing scheduled for June 1, 2009.