Business Context and Reporting Period
This Form 10-Q covers Schering-Plough Corporation for the quarterly and nine-month periods ended September 30, 1996. The company operates primarily in pharmaceuticals, health care products, and animal health. As of the reporting date, there were 369,379,595 common shares outstanding.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30) | 1996 ($ Millions) | 1995 ($ Millions) |
|---|---|---|
| Sales | 4,241.5 | 3,813.5 |
| Net Income | 935.4 | 647.2 |
| Income from Continuing Operations | 935.4 | 813.6 |
| Earnings Per Share (Total) | $2.54 | $1.74 |
| Operating Cash Flow | 1,030.0 | 995.8 |
| Cash and Cash Equivalents (End of Period) | 437.2 | 336.7 |
| Short-term Borrowings & Current Debt | 562.3 | 841.3 |
| Long-term Debt | 42.0 | 87.1 |
| Research & Development Expense | 522.8 | 475.1 |
Margins (Nine Months 1996): Income before taxes represented 29.2% of sales (up from 28.3% in 1995). Cost of sales decreased to 19.0% of sales. The effective tax rate was 24.5%.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated sales increased 11% ($428.0 million) for the nine months. Excluding foreign currency effects, sales grew 12%.
- Profitability: Net income rose 45% compared to the prior year, driven by a 15% increase in income from continuing operations and the absence of significant discontinued operation losses recorded in 1995.
- Product Performance:
- Pharmaceuticals: Domestic ethical sales rose 24%. Respiratory products grew 25% (driven by CLARITIN), and cardiovascular products rose 30% (driven by IMDUR and K-DUR). Anti-infective/anticancer sales grew 32% (driven by INTRON-A and CEDAX).
- Declines: PROVENTIL sales declined due to generic competition. Health care products (OTC) sales fell 19% due to private-label competition.
- Debt Reduction: The company reduced short-term borrowings by $180.0 million and repaid $140.3 million of long-term debt during the period.
Guidance, Outlook, and Risks
- Outlook: Management anticipates total R&D expenses to approximate $720 million for the full year 1996. The company expects continued negative effects on PROVENTIL sales due to generic competition.
- Share Repurchases: In September 1996, the Board authorized an additional $500 million share repurchase program. As of September 30, this program was approximately 5% complete.
- Risks and Contingencies:
- Legal: The company is a defendant in over 150 antitrust actions. A federal class action settlement of $22.1 million (payable over three years) was approved, though appeals are pending. Management believes other claims are without merit.
- Regulatory: Pricing pressures from managed care and government-mandated cost containment programs in international markets pose risks to future operations.
Investor Verification Checklist
- Verify the status of the $22.1 million antitrust settlement and the outcome of pending appeals in the Seventh Circuit Court of Appeals.
- Monitor the impact of generic competition on PROVENTIL sales and the performance of the Warrick Pharmaceuticals generic inhaler.
- Track the execution of the new $500 million share repurchase program authorized in September 1996.
- Assess the sustainability of the 12% organic sales growth given the competitive pricing environment in managed care and international markets.
- Confirm the projected full-year R&D spend of $720 million against actual quarterly burn rates.