Business Context and Reporting Period
This Form 10-Q covers Schering-Plough Corporation for the quarterly and six-month periods ended June 30, 1998. The company operates in the pharmaceutical, animal health, and health care products sectors. As of June 30, 1998, there were 734 million common shares outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1998 | Six Months Ended June 30, 1998 |
|---|---|---|
| Sales | $2,124 million | $4,032 million |
| Net Income | $455 million | $905 million |
| Diluted EPS | $0.61 | $1.22 |
| Operating Cash Flow (6mo) | $841 million | |
| Cash and Equivalents | $707 million (as of June 30, 1998) | |
| Short-term Debt | $316 million | |
| Long-term Debt | $46 million | |
| Income Before Tax Margin | 28.4% | 29.7% |
Material Changes vs. Prior Period
- Sales Growth: Consolidated sales increased 23% year-over-year for both the quarter and the six-month period. Organic growth (excluding foreign currency and the Mallinckrodt acquisition) was 16%.
- Profitability: Net income rose 22% for the quarter and 21% for the six-month period. Basic EPS increased 22% to $0.62 for the quarter and 21% to $1.23 for the six months.
- Acquisition Impact: The June 1997 acquisition of Mallinckrodt's animal health business contributed $121 million in quarterly sales and $212 million in six-month sales, driving a 234% increase in animal health sales.
- Product Performance: CLARITIN sales were $687 million for the quarter and $1,124 million for the six months. Conversely, domestic anti-infective and anticancer sales dropped 22% in the quarter due to lower INTRON A sales following heavy first-quarter trade buying.
- Expense Ratios: Cost of sales as a percentage of sales increased to 19.9% (from 19.2% prior year) due to lower-margin Mallinckrodt products. R&D spending rose 25% to 12.3% of sales.
Guidance, Outlook, Risks, and Unusual Items
- Shareholder Returns: The Board increased the quarterly dividend by 16% to $0.22 per share. The company repurchased $85 million of common shares in the first half of 1998 under a $1 billion authorization program (approx. 9% complete).
- Legal Proceedings: The company is involved in over 160 antitrust actions regarding alleged price-fixing. A federal class action was settled for $22 million over three years. Several state cases were settled in May 1998 for non-material amounts. An FTC investigation into price-fixing remains ongoing.
- Year 2000 Compliance: The company is implementing computer system modifications to address the Year 2000 issue, with an estimated total cost of $50 million, expected to be substantially completed by the end of 1998.
- Risks: Management cites risks related to government-mandated cost containment, generic competition, patent disputes, and regulatory approval delays. The filing states that the effect of future health care initiatives on operations cannot be reasonably estimated.
Investor Verification Checklist
- Verify the sustainability of CLARITIN sales growth given the high concentration of revenue in this single brand.
- Monitor the status of the ongoing FTC investigation and remaining antitrust litigation for potential future liabilities.
- Assess the impact of the Mallinckrodt acquisition on long-term margin profiles, as it has currently lowered the overall cost of sales ratio.
- Confirm the timeline and cost containment of the Year 2000 compliance project.
- Review the progress of the $1 billion share repurchase program and its impact on future earnings per share.