Schering-Plough Corporation — Form 10-Q Summary
Entity note: The supplied filing is Schering-Plough Corporation’s 10-Q, not a Merck & Co. 10-Q. It reports the quarter ended June 30, 2009, and discusses the proposed merger with Merck. Financial amounts below are in U.S. dollars.
Business context and reporting period
Schering-Plough operates in prescription pharmaceuticals, animal health and consumer health care. The filing presents unaudited results for the second quarter and first six months of 2009, compared with the corresponding 2008 periods. Its cholesterol products VYTORIN and ZETIA are sold through a Merck joint venture; their sales are not included in Schering-Plough net sales, and its share of joint-venture earnings is reported as equity income.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $4.647 billion | $4.921 billion | $9.040 billion | $9.577 billion |
| Net income | $671 million | $462 million | $1.476 billion | $775 million |
| Net income available to common shareholders | $633 million | $424 million | $1.401 billion | $700 million |
| Diluted EPS | $0.38 | $0.26 | $0.85 | $0.43 |
| Gross margin | 65.1% | 61.2% | 66.6% | 57.8% |
| Operating cash flow | Not separately provided for the quarter | $1.582 billion | $1.384 billion |
Q2 sales declined 6% year over year; the filing attributes this to 4% operational growth offset by a 10% unfavorable foreign-exchange impact. Six-month sales also declined 6%, with an estimated 10% unfavorable currency impact. International sales represented approximately 68% of sales in both periods. Q2 equity income from the cholesterol joint venture was $370 million, down from $493 million; six-month equity income was $770 million, down from $1.010 billion.
Q2 SG&A expense was $1.626 billion, down 13%; R&D was $863 million, down 5%. For the six months, SG&A was $3.119 billion, down 12%, and R&D was $1.667 billion, down 7%. Gross margin comparisons benefited from substantially lower acquisition-accounting charges than in 2008.
At June 30, 2009, cash and cash equivalents were $2.989 billion and short-term investments were $1.411 billion. Total debt was approximately $8.2 billion and reported net debt was approximately $3.8 billion. Current assets were $12.676 billion and current liabilities $5.194 billion. Six-month investing cash outflow was $1.721 billion, primarily reflecting net short-term investment purchases and $333 million of capital expenditures; financing cash outflow was $292 million. The common dividend was $0.065 per share for the quarter.
Material changes versus prior period
- Net income available to common shareholders and diluted EPS increased in both comparison periods, while reported sales fell 6% in each period.
- Animal Health sales fell 17% in Q2 and 15% for the six months; Prescription Pharmaceuticals sales fell 3% and 4%, respectively. REMICADE and NASONEX grew modestly, while several products declined.
- Combined global VYTORIN and ZETIA sales fell 8% in Q2 and 15% for the first six months. U.S. franchise sales were down 10% and 21%, respectively; U.S. prescription share declined from 10.1% at December 2008 to 8.6% in June 2009.
- Operating cash flow increased $198 million for the six-month period, primarily due to timing of payments for other liabilities. Cash and cash equivalents fell $384 million from year-end, while short-term investments rose to $1.411 billion from $5 million.
- The 2008 comparative tax expense was revised: it decreased, and net income and common earnings increased by $26 million for Q2 and $49 million for the six months. The reported comparisons reflect this revision.
Outlook, commentary and risks
- Schering-Plough provided no numeric earnings guidance. It expected full-year 2009 U.S. VYTORIN and ZETIA sales to be below 2008; international sales, excluding foreign exchange, were expected to grow. Full-year R&D expense was expected to grow in the low-to-mid single digits excluding currency effects.
- The Productivity Transformation Program targeted $1.5 billion in annualized savings by 2012, with approximately $1.25 billion expected by the end of 2010. Management said it was on track. Six-month 2009 special, merger and acquisition-related charges totaled $104 million, including $74 million of employee termination costs and $30 million of planned-merger costs.
- The proposed Merck combination would provide Schering-Plough shareholders 0.5767 Merck shares and $10.50 cash per Schering-Plough share. The companies expected completion in Q4 2009, subject to shareholder, regulatory and other closing approvals.
- Centocor initiated arbitration over whether the proposed merger permits it to terminate Schering-Plough’s rights to distribute and commercialize REMICADE and golimumab in certain territories. The proceeding was expected to take 9–12 months and could continue after merger closing.
- Key risks include weaker cholesterol-franchise performance and ongoing ENHANCE-related litigation and investigations; pricing and reimbursement pressure; foreign-exchange exposure; patent expirations and generic competition; regulatory, manufacturing and product-safety matters; and merger execution and approval risks. A multistate cholesterol-joint-venture settlement required reimbursement of $5.4 million in investigative costs, payable by the joint venture, with no further payment required under that settlement.
Most important facts for investors to verify
- Confirm the reporting entity: this is Schering-Plough’s filing, despite the request metadata identifying Merck & Co.
- Review the drivers and sustainability of higher reported earnings, including acquisition-accounting effects, tax items, and the decline in cholesterol joint-venture income.
- Track VYTORIN and ZETIA sales, U.S. prescription share, and the results and legal consequences of related clinical-trial matters.
- Monitor merger approvals and closing progress, plus the outcome of Centocor’s arbitration over product commercialization rights.
- Assess liquidity, net debt, planned pension contributions of approximately $420 million for the remainder of 2009, and progress toward the productivity savings target.