Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1995, for Schering-Plough Corporation. The company operates primarily in pharmaceutical and health care products. As of the period end, there were 186,036,690 common shares outstanding. On April 4, 1995, the Board authorized a 2-for-1 stock split to be distributed on June 9, 1995; financial figures in this report are presented on a pre-split basis.
Key Financial Metrics
| Metric | Q1 1995 | Q1 1994 |
|---|---|---|
| Sales | $1,244.3 million | $1,161.6 million |
| Net Income | $278.6 million | $253.2 million |
| Earnings Per Share (EPS) | $1.50 | $1.31 |
| Operating Cash Flow | $99.8 million | $142.2 million |
| Cash and Equivalents (End of Period) | $126.2 million | $110.6 million |
| Total Debt (Short-term + Long-term) | $1,006.3 million | $968.1 million |
| Income Tax Rate | 24.0% | 24.0% |
Margins: Income before taxes represented 29.5% of sales in Q1 1995, up from 28.7% in Q1 1994. Cost of sales as a percentage of sales declined to 19.9% from 21.3%.
Material Changes vs. Prior Period
- Sales Growth: Consolidated sales increased 7% ($82.7 million) year-over-year. Excluding foreign currency effects, sales rose 4%.
- Profitability: Net income increased 10% to $278.6 million. EPS rose 15% to $1.50.
- Product Performance:
- Domestic: Prescription pharmaceutical sales advanced 16%, driven by a 34% rise in respiratory products (CLARITIN) and growth in anti-infectives/anticancer products.
- International: Pharmaceutical sales increased 2% excluding currency impacts. Respiratory sales rose 18%, while anti-infective/anticancer sales fell 10% due to INTRON A shortfalls in Japan.
- Health Care: Sales declined 8% due to timing of shipments and reduced female health product sales.
- Vision Care: Wesley-Jessen sales declined 30% due to weak contact lens sales.
- Cash Flow: Operating cash flow decreased to $99.8 million from $142.2 million, primarily due to a larger use of cash for accounts receivable ($135.6 million vs. $90.2 million).
Guidance, Outlook, and Risks
- Outlook: Management anticipates total R&D expenses to approximate $650 million for 1995. The company is exploring strategic alternatives for its vision care business, expecting a decision in 1995.
- Dividends and Buybacks: The quarterly dividend was increased 14% to $0.58 per share. A $500 million share repurchase program was completed in February 1995.
- Risks and Contingencies:
- Regulatory Environment: Domestic managed care and international government-mandated cost containment programs pose pricing pressures. Future health care reform impacts cannot be reasonably estimated.
- Legal Proceedings: The company is a defendant in over 145 antitrust actions alleging price discrimination. Additionally, an appeal is pending regarding a $63.6 million product liability judgment (THEO-DUR), though management believes insurance covers amounts in excess of $3 million.
- Competition: Generic entries are expected for PROVENTIL, which will negatively affect sales and profitability.
Investor Verification Checklist
- Verify the impact of the 2-for-1 stock split on post-split EPS and share count (proforma EPS is $0.75).
- Monitor the resolution of the 145+ antitrust actions and the THEO-DUR appeal for potential liability exposure.
- Assess the strategic decision regarding the Wesley-Jessen vision care business given the 30% sales decline.
- Track the timing of generic competition for PROVENTIL and its effect on respiratory product margins.
- Review the effectiveness of cost containment programs in maintaining the improved cost of sales ratio (19.9%).