FORM 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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Commission file number 1-6571
SCHERING-PLOUGH
CORPORATION
(Exact name of registrant as
specified in its charter)
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New Jersey
State or other jurisdiction of
incorporation or organization
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22-1918501
(I.R.S. Employer
identification No.)
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2000 Galloping Hill Road, Kenilworth, NJ
(Address of principal
executive offices)
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07033
Zip Code
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Registrants telephone number, including area code:
(908) 298-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated
filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate whether the registrant is a shell company (as defined
in
Rule 12b-2
of the
Act). Yes o No þ
Common Shares Outstanding as of September 30, 2008:
1,626,234,628
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(Unaudited)
(Amounts
in millions, except per share figures)
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Nine Months
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Three Months
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Ended
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Ended September 30,
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September 30,
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2008
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2007
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2008
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2007
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Net sales
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$
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4,576
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$
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2,812
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$
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14,154
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$
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8,965
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Cost of sales
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1,737
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925
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5,782
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2,838
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Selling, general and administrative
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1,660
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1,262
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5,208
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3,833
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Research and development
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893
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669
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2,679
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2,071
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Other expense/(income), net
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(39
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(390
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189
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(451
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Special and acquisition-related charges
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101
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20
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218
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32
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Equity income
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(434
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(506
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(1,444
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(1,483
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)
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Income before income taxes
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658
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832
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1,522
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2,125
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Income tax expense
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69
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82
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207
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272
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Net income
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589
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750
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1,315
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1,853
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Preferred stock dividends
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38
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37
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113
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80
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Net income available to common shareholders
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$
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551
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$
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713
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$
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1,202
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$
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1,773
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Diluted earnings per common share
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$
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0.34
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$
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0.45
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$
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0.74
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$
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1.15
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Basic earnings per common share
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$
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0.34
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$
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0.46
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$
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0.74
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$
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1.17
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Dividends per common share
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$
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0.065
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$
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0.065
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$
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0.195
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$
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0.195
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in millions)
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Nine Months Ended
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September 30,
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2008
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2007
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Operating Activities:
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Net income
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$
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1,315
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$
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1,853
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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1,813
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370
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Accrued share-based compensation
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170
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149
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Special and acquisition-related charges and payments
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115
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(429
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Gain on sale of divested products
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(160
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Purchases of derivative instruments
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(153
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Change in fair value of foreign currency option
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(289
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Payments to U.S. taxing authorities
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(98
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Changes in assets and liabilities:
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Accounts receivable
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(132
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(106
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Inventories
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(135
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(48
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Prepaid expenses and other assets
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(22
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(65
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Accounts payable
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16
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14
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Other liabilities
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(405
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50
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Net cash provided by operating activities
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2,575
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1,248
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Investing Activities:
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Capital expenditures
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(542
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(412
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Dispositions of property and equipment
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33
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Proceeds from divested products, net
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241
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Purchases of short-term investments
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(1,182
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Maturities of short-term investments
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27
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4,254
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Other, net
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(3
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(23
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Net cash (used for)/provided by investing activities
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(244
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2,637
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Financing Activities:
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Payments of long-term debt
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(791
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Cash dividends paid to common shareholders
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(317
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(276
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Cash dividends paid to preferred shareholders
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(113
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(61
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Net change in short-term borrowings
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(207
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(22
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Stock option exercises
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15
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200
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Proceeds from preferred stock issuance, net
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2,438
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Proceeds from common stock issuance, net
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1,536
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Issuance of long-term debt, net
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1,989
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Other, net
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(3
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(16
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Net cash (used for)/provided by financing activities
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(1,416
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5,788
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Effect of exchange rates on cash and cash equivalents
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(35
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27
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Net increase in cash and cash equivalents
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880
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9,700
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Cash and cash equivalents, beginning of period
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2,279
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2,666
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Cash and cash equivalents, end of period
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$
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3,159
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$
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12,366
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except per share figures)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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3,159
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$
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2,279
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Short-term investments
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6
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32
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Accounts receivable, net
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2,920
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2,841
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Inventories
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3,183
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4,073
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Deferred income taxes
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509
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349
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Prepaid expenses and other current assets
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1,192
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1,272
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Total current assets
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10,969
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10,846
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Property, plant and equipment
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10,554
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10,354
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Less accumulated depreciation
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3,661
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3,338
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Property, net
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6,893
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7,016
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Goodwill
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2,870
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2,937
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Other intangible assets, net
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6,416
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7,004
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Other assets
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1,343
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1,353
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Total assets
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$
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28,491
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$
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29,156
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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1,723
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$
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1,762
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Short-term borrowings and current portion of long-term debt
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237
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461
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Income taxes
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463
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617
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Accrued compensation
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1,004
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995
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Other accrued liabilities
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1,989
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2,208
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Total current liabilities
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5,416
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6,043
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Long-term Liabilities:
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Long-term debt, net of current portion
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8,166
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9,019
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Deferred income taxes
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1,633
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1,701
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Other long-term liabilities
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2,157
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2,008
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Total long-term liabilities
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11,956
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12,728
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Commitments and contingent liabilities (Note 17)
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Shareholders Equity:
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2007 Mandatory convertible preferred shares
$1 par value; $250 per share face value; issued: 10 at
September 30, 2008 and December 31, 2007
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2,500
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2,500
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Common shares authorized: 2,400, $.50 par
value; issued: 2,118 at September 30, 2008 and 2,111 at
December 31, 2007
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1,059
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1,055
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Paid-in capital
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4,996
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4,815
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Retained earnings
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8,738
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7,856
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Accumulated other comprehensive loss
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(831
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)
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(534
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)
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Total
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16,462
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15,692
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Less treasury shares: 492 at September 30, 2008 and 490 at
December 31, 2007; at cost
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5,343
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5,307
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Total shareholders equity
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11,119
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10,385
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Total liabilities and shareholders equity
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$
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28,491
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$
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29,156
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
These unaudited Condensed Consolidated Financial Statements of
Schering-Plough Corporation and subsidiaries (Schering-Plough),
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for reporting on
Form 10-Q.
Certain information and disclosures normally included in
financial statements prepared in accordance with
U.S. Generally Accepted Accounting Principles have been
condensed or omitted pursuant to such SEC rules and regulations.
These statements should be read in conjunction with the
accounting policies and notes to the consolidated financial
statements included in Schering-Ploughs 2007
10-K/A.
In the opinion of Schering-Ploughs management, these
financial statements reflect all adjustments necessary for a
fair presentation of the statements of operations, cash flows
and financial position for the interim periods presented.
In November 2007, Schering-Plough acquired Organon BioSciences
N.V. (OBS), a company that discovers, develops and manufactures
human prescription and animal health products. See Note 2,
Acquisition, for additional information.
Impact
of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements. The standard
defines fair value, establishes a framework for measuring fair
value in accordance with U.S. Generally Accepted Accounting
Principles, and expands disclosures about fair value
measurements. The standard codifies the definition of fair value
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the
principle that fair value should be based on the assumptions
market participants would use when pricing the asset or
liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.
For calendar-year companies, the standard became effective
January 1, 2008 (see Note 15, Fair Value
Measurements) except for non-financial items measured on a
non-recurring basis for which it is effective beginning
January 1, 2009. The implementation of this standard did
not have a material impact on Schering-Ploughs financial
statements. Based on Schering-Ploughs current financial
position, the impact of the provisions of this standard that
will be effective January 1, 2009 is not expected to be
material.
In November 2006, the FASB issued Emerging Issues Task Force
(EITF) Issue
No. 06-10,
Accounting for Deferred Compensation and Postretirement
Benefits Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements, which became effective for
calendar-year companies on January 1, 2008. The Task Force
concluded that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement in accordance with
either FASB Statement No. 106 or Accounting Principles
Board (APB) Opinion No. 12 based on the substantive
agreement with the employee. The Task Force also concluded that
an employer should recognize and measure an asset based on the
nature and substance of the collateral assignment split-dollar
life insurance arrangement. The implementation of this standard
did not have a material impact on Schering-Ploughs
financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement
No. 115 (SFAS 159), which permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS 159 also includes an amendment to
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, which applies to all
entities with
available-for-sale
and trading securities. For calendar-year companies, the
standard became effective January 1, 2008. Schering-Plough
chose not to elect the fair value option prescribed
5
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by SFAS 159. As a result, the implementation of this
standard did not have a material impact on
Schering-Ploughs financial statements.
In June 2007, the FASB issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities, which became effective for calendar-year
companies on January 1, 2008. The Task Force concluded that
non-refundable advance payments for goods or services that will
be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
delivered or the services are performed, or when the goods or
services are no longer expected to be provided. The
implementation of this standard did not have a material impact
on Schering-Ploughs financial statements.
In December 2007, the FASB issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements, which is
effective for calendar-year companies beginning January 1,
2009. The Task Force clarified the manner in which costs,
revenues and sharing payments made to, or received by, a partner
in a collaborative arrangement should be presented in the income
statement and set forth certain disclosures that should be
required in the partners financial statements.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In December 2007, the SEC issued Staff Accounting Bulletin (SAB)
No. 110, which permits entities, under certain
circumstances, to continue to use the simplified
method of estimating the expected term of plain
vanilla options as discussed in SAB No. 107 and
in accordance with FASB SFAS No. 123 (Revised 2004),
Share-Based Payment (SFAS 123R). The guidance
in this release became effective January 1, 2008. The
implementation of this standard did not have a material impact
on Schering-Ploughs financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations,
(SFAS 141R). For calendar-year companies, the standard is
applicable to new business combinations occurring on or after
January 1, 2009. SFAS 141R requires an acquiring
entity to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited exceptions. Most significantly, SFAS 141R will
require that acquisition costs generally be expensed as
incurred, certain acquired contingent liabilities be recorded at
fair value, and acquired in-process research and development be
recorded at fair value as an indefinite-lived intangible asset
at the acquisition date. The standard will also impact certain
unresolved matters related to purchase transactions consummated
prior to the effective date of the standard. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51,
which is effective for calendar-year companies beginning
January 1, 2009. The standard establishes new accounting
and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133,
which is effective for calendar-year companies beginning
January 1, 2009. The standard enhances required disclosures
regarding derivatives and hedging activities. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142).
FSP 142-3
is effective for calendar-year companies beginning
January 1, 2009. The requirement for determining useful
lives must be applied prospectively to intangible assets
acquired after the effective date and the disclosure
requirements must be
6
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applied prospectively to all intangible assets recognized as of,
and subsequent to, the effective date. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
This standard identifies the sources of accounting principles
and the framework for selecting the principles to be used in the
preparation of financial statements that are presented in
conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). The standard is
effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In June 2008, the FASB issued FSP EITF
No. 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. The FSP
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and
therefore need to be included in the earnings allocation in
calculating earnings per share under the two-class method
described in SFAS No. 128, Earnings per
Share. The FSP requires companies to treat unvested
share-based payment awards that have non-forfeitable rights to
dividend or dividend equivalents as a separate class of
securities in calculating earnings per share. The FSP is
effective for calendar-year companies beginning January 1,
2009. Schering-Plough is currently assessing the potential
impacts of implementing this standard.
In October 2008, the FASB issued
FSP 157-3
Determining Fair Value of a Financial Asset in a Market
That Is Not Active
(FSP 157-3).
FSP 157-3
clarified the application of SFAS No. 157 in an
inactive market. It demonstrated how the fair value of a
financial asset is determined when the market for that financial
asset is inactive.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of
this standard did not have a material impact on
Schering-Ploughs financial statements.
Schering-Plough acquired Organon BioSciences N.V. (OBS) for a
purchase price of approximately Euro 11 billion in
cash, or approximately $16.1 billion (including legal and
professional fees) on November 19, 2007 (the Acquisition
Date). This acquisition added further diversification of
marketed human prescription products, including two new
therapeutic areas (Womens Health and Central Nervous
System), significant strength in Animal Health products and new
research and development projects. The purchase method of
accounting was used to account for the transaction in accordance
with SFAS No. 141, Business Combinations.
The operating results of OBS are included in
Schering-Ploughs consolidated financial statements for the
period subsequent to the Acquisition Date.
A preliminary allocation of the purchase price of OBS was made
as of the Acquisition Date. This allocation of the purchase
price remains subject to the finalization of
Schering-Ploughs management analysis of the fair value of
the assets acquired and liabilities assumed of OBS as of the
Acquisition Date, primarily related to finalization of tax and
contractual matters. The final allocation is expected to be
completed as soon as practicable, but no later than
12 months after the Acquisition Date. As of
September 30, 2008, revisions in the allocation of the
purchase price have resulted in a net decrease to goodwill of
$6 million as compared to the preliminary allocation as of
the Acquisition Date. This adjustment to the preliminary
purchase price allocation was primarily related to updated
valuations of identifiable intangible assets, property and
inventories as well as updates to acquired liabilities and
deferred taxes. The final allocation of the purchase price may
result in additional adjustments to the recorded amounts of
assets acquired and liabilities assumed and may also result in
adjustments to depreciation, amortization and acquired
in-process research and development. The adjustments arising out
of the finalization of the purchase price allocation will not
impact cash flows. Further revisions to the purchase price
allocation will be made as additional information becomes
available.
7
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchase accounting items of $1.3 billion related to the
amortization of inventory, identifiable intangible assets and
property, plant and equipment are included in depreciation and
amortization in the Statement of Condensed Consolidated Cash
Flows for the nine months ended September 30, 2008.
The updated preliminary purchase price allocation of acquired
identifiable intangible assets, which resulted in a change in
total intangible assets acquired of $46 million, as
compared to the preliminary allocation as of the Acquisition
Date, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Period (years)
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Patents:
|
|
|
|
|
|
|
|
|
Womens Health Contraception
|
|
$
|
1,659
|
|
|
|
11
|
|
Womens Health Fertility
|
|
|
1,013
|
|
|
|
11
|
|
Womens Health Other
|
|
|
440
|
|
|
|
13
|
|
Central Nervous System
|
|
|
527
|
|
|
|
12
|
|
Other Human Prescription Pharmaceuticals
|
|
|
382
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total patents
|
|
$
|
4,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
Animal Health
|
|
$
|
2,608
|
|
|
|
20
|
|
Human Prescription Pharmaceuticals
|
|
|
210
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total trademarks
|
|
$
|
2,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets acquired
|
|
$
|
6,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average life of total acquired intangible assets is
approximately 15 years. The intangible assets have no
significant residual value. There were no acquired intangible
assets that were determined to have an indefinite life.
|
|
3.
|
SPECIAL
AND ACQUISITION-RELATED CHARGES
|
Special and acquisition-related charges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Special and acquisition-related charges
|
|
|
101
|
|
|
|
20
|
|
|
|
218
|
|
|
|
32
|
|
The special and acquisition-related costs for the three and nine
months ended September 30, 2008 included employee
termination costs of $93 million and $177 million,
respectively. The remaining charges related to integration
activities. See Note 4, OBS Integration and
Productivity Transformation Program, for additional
information. During the nine months ended September 30,
2008, Schering-Plough made cash payments of $103 million
for special and acquisition-related activities.
The special and
acquisition-related
charges for the three and nine months ended September 30,
2007 were $20 million and $32 million, respectively,
comprised of acquisition related charges (integration planning)
for the planned OBS acquisition.
8
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
payments
During the nine months ended September 30, 2007,
Schering-Plough made cash payments of $435 million for the
settlement of an investigation by the U.S. Attorneys
Office for the District of Massachusetts involving certain of
Schering-Ploughs sales, marketing and clinical trial
practices and programs (the Massachusetts Investigation), cash
payments of $9 million of employee termination costs
related to the 2006 manufacturing streamlining and
$6 million related to integration planning.
|
|
4.
|
OBS
INTEGRATION AND PRODUCTIVITY TRANSFORMATION PROGRAM
|
As part of the preliminary purchase price allocation of the OBS
acquisition as of the Acquisition Date, Schering-Plough recorded
acquisition-related liabilities of $151 million related to
involuntary termination benefits.
In April 2008, Schering-Plough announced a major new program,
the Productivity Transformation Program (PTP), which includes
the ongoing integration of OBS, and is designed to reduce and
avoid costs, and increase productivity. The targeted savings
envisioned by this program include those resulting from the
previously announced OBS integration synergies.
The following table summarizes the charges, cash payments and
liabilities related to PTP, which includes the ongoing
integration of OBS, through September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Liabilities(c)
|
|
|
|
Employee
|
|
|
Employee
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
Other Exit
|
|
|
|
Costs(a)
|
|
|
Costs
|
|
|
Costs
|
|
|
|
(Dollars in millions)
|
|
|
Accrued liability at December 31, 2007
|
|
$
|
23
|
(b)
|
|
$
|
151
|
|
|
|
|
|
Charges
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Purchase price allocation items
|
|
|
|
|
|
|
(18
|
)
|
|
|
50
|
|
Cash payments
|
|
|
(65
|
)
|
|
|
(125
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability at September 30, 2008
|
|
$
|
135
|
|
|
$
|
8
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Recorded to special and acquisition-related charges. |
|
(b) |
|
Represents employee termination costs recorded under
SFAS No. 112, Employers Accounting for
Postemployment Benefits, in the fourth quarter of 2007. |
|
(c) |
|
Recorded as part of purchase accounting. Included in
acquisition-related liabilities at September 30, 2008 are
involuntary termination benefits and costs to exit certain
activities of OBS. |
In May 2000, Schering-Plough and Merck & Co., Inc.
(Merck) entered into two separate sets of agreements to jointly
develop and market certain products in the U.S. including
(1) two cholesterol-lowering drugs and (2) an
allergy/asthma drug. In December 2001, the cholesterol
agreements were expanded to include all countries of the world
except Japan. In general, the companies agreed that the
collaborative activities under these agreements would operate in
a virtual joint venture to the maximum degree possible by
relying on the respective infrastructures of the two companies.
These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by
each company.
9
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cholesterol agreements provide for Schering-Plough and Merck
to jointly develop and commercialize ezetimibe in the
cholesterol management field:
i. as a once-daily monotherapy (marketed as ZETIA in the
U.S. and Asia and EZETROL in Europe);
ii. in co-administration with various approved statin
drugs; and
iii. as a fixed-combination tablet of ezetimibe and
simvastatin (Zocor), Mercks cholesterol-modifying
medicine. This combination medication (ezetimibe/simvastatin) is
marketed as VYTORIN in the U.S. and as INEGY in many
international countries.
ZETIA/EZETROL (ezetimibe) and VYTORIN/INEGY (the combination of
ezetimibe/simvastatin) are approved for use in the U.S. and
have been launched in many international markets.
Schering-Plough utilizes the equity method of accounting in
recording its share of activity from the Merck/Schering-Plough
cholesterol joint venture. As such, Schering-Ploughs net
sales do not include the sales of the cholesterol joint venture.
The cholesterol joint venture agreements provide for the sharing
of operating income generated by the cholesterol joint venture
based upon percentages that vary by product, sales level and
country. In the U.S. market, Schering-Plough receives a
greater share of profits on the first $300 million of
annual ZETIA sales. Above $300 million of annual ZETIA
sales, Merck and Schering-Plough generally share profits
equally. Schering-Ploughs allocation of the cholesterol
joint venture income is increased by milestones recognized.
Further, either companys share of the cholesterol joint
ventures income from operations is subject to a reduction
if that company fails to perform a specified minimum number of
physician details in a particular country. The companies agree
annually to the minimum number of physician details by country.
The companies bear the costs of their own general sales forces
and commercial overhead in marketing joint venture products
around the world. In the U.S., Canada and Puerto Rico, the
cholesterol agreements provide for a reimbursement to each
company for physician details that are set on an annual basis,
and in Italy, a contractual amount is included in the profit
sharing calculation that is not reimbursed. In the U.S., Canada
and Puerto Rico this amount is equal to each companys
agreed physician details multiplied by a contractual fixed fee.
Schering-Plough reports these amounts as part of equity income
from the cholesterol joint venture. These amounts do not
represent a reimbursement of specific, incremental and
identifiable costs for Schering-Ploughs detailing of the
cholesterol products in these markets. In addition, these
amounts are not reflective of Schering-Ploughs sales
effort related to the joint venture as Schering-Ploughs
sales force and related costs associated with the joint venture
are generally estimated to be higher.
Costs of the joint venture that the companies contractually
share are a portion of manufacturing costs, specifically
identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as market support, market research, market expansion, a
specialty sales force and physician education programs.
Certain specified research and development expenses are
generally shared equally by Schering-Plough and Merck.
The allergy/asthma agreements provided for the joint development
and marketing by the companies of a once-daily,
fixed-combination tablet containing loratadine/montelukast. On
April 25, 2008, the
Merck/Schering-Plough
joint venture received a not-approvable letter from the FDA for
the proposed fixed combination of loratadine/montelukast. During
the second quarter of 2008 the respiratory joint venture was
terminated in accordance with the agreements. This action has no
impact on the cholesterol joint venture. As a result of the
termination of the respiratory joint venture, Schering- Plough
expects to receive payments totaling $105 million from
Merck which Schering-Plough will recognize during 2008. During
the three and nine months ended September 30, 2008, the
Merck/Schering-Plough joint venture allocated $19 million
and $83 million, respectively, of this amount to
Schering-Plough, which is included in equity income.
10
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unaudited financial information below presents summarized
combined financial information for the Merck/Schering-Plough
cholesterol joint venture for the three and nine months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
1,102
|
|
|
$
|
1,300
|
|
|
$
|
3,487
|
|
|
$
|
3,732
|
|
Cost of sales
|
|
|
41
|
|
|
|
61
|
|
|
|
145
|
|
|
|
162
|
|
Income from operations
|
|
|
777
|
|
|
|
936
|
|
|
|
2,413
|
|
|
|
2,621
|
|
Amounts related to physician details, among other expenses, that
are invoiced by Schering-Plough and Merck in the U.S., Canada
and Puerto Rico are deducted from income from operations of the
cholesterol joint venture.
Schering-Ploughs share of the cholesterol joint
ventures income from operations for the three and nine
months ended September 30, 2008 was $393 million and
$1.3 billion, respectively. For the three and nine months
ended September 30, 2007, Schering-Ploughs share of
the cholesterol joint ventures income from operations were
$454 million and $1.3 billion, respectively. In the
U.S. market, Schering-Plough receives a greater share of
income from operations on the first $300 million of annual
ZETIA sales. As a result, Schering-Ploughs share of the
cholesterol joint ventures income from operations is
generally higher in the first quarter than in subsequent
quarters.
The following information provides a summary of the components
of Schering-Ploughs equity income from the cholesterol
joint venture for the three and nine months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Schering-Ploughs share of income from operations(a)
|
|
$
|
393
|
|
|
$
|
454
|
|
|
$
|
1,288
|
|
|
$
|
1,323
|
|
Contractual amounts for physician details
|
|
|
49
|
|
|
|
58
|
|
|
|
172
|
|
|
|
181
|
|
Elimination of intercompany profit and other, net
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(16
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity income from cholesterol joint venture
|
|
$
|
434
|
|
|
$
|
506
|
|
|
$
|
1,444
|
|
|
$
|
1,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in Schering-Ploughs share of income from
operations is income of $19 million and $83 million,
respectively, for the three and nine months ended
September 30, 2008 related to the termination of the
respiratory joint venture with Merck. |
Equity income from the joint venture excludes any profit arising
from transactions between
Schering-Plough
and the joint venture until such time as there is an underlying
profit realized by the joint venture in a transaction with a
party other than Schering-Plough or Merck.
Due to the virtual nature of the cholesterol joint venture,
Schering-Plough incurs substantial costs, such as selling,
general and administrative costs, that are not reflected in
equity income and are borne by the overall cost structure of
Schering-Plough. These costs are reported on their respective
line items in the Statements of Condensed Consolidated
Operations and are not separately identifiable. The cholesterol
agreements do not provide for any jointly owned facilities and,
as such, products resulting from the joint venture are
manufactured in facilities owned by either Schering-Plough or
Merck.
During 2007, Schering-Plough announced that it had agreed with
Merck to commence development of a single-tablet combination of
ezetimibe and atorvastatin as a treatment for elevated
cholesterol levels.
11
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
See Note 17, Legal, Environmental and Regulatory
Matters, for discussion of the ENHANCE matter.
|
|
6.
|
SHARE-BASED
COMPENSATION
|
Schering-Plough adopted SFAS No. 123 (Revised 2004),
Share-Based Payment (SFAS 123R), effective
January 1, 2006. SFAS 123R requires companies to
recognize compensation expense in an amount equal to the fair
value of all share-based payments granted to employees.
Schering-Plough elected the modified prospective transition
method and therefore adjustments to prior periods were not
required as a result of adopting SFAS 123R. Under this
method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption and to any unrecognized
expense of awards unvested at the date of adoption based on the
grant date fair value.
A summary of the options, deferred stock units and
performance-based deferred stock units granted during the three
and nine months ended September 30, 2008 and 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
Number of Underlying Shares in Thousands
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Stock options
|
|
|
13
|
|
|
$
|
6.58
|
|
|
|
53
|
|
|
$
|
7.50
|
|
|
|
13,597
|
|
|
$
|
5.35
|
|
|
|
10,024
|
|
|
$
|
8.07
|
|
Deferred stock units
|
|
|
64
|
|
|
|
19.79
|
|
|
|
94
|
|
|
|
30.55
|
|
|
|
4,772
|
|
|
|
18.93
|
|
|
|
5,573
|
|
|
|
31.25
|
|
Performance-based deferred stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,064
|
|
|
|
19.35
|
|
|
|
1,397
|
|
|
|
23.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Awards
|
|
|
77
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
19,433
|
|
|
|
|
|
|
|
16,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options become exercisable in equal annual installments over a
three-year period. The deferred stock units generally vest at
the end of a three-year period from the date they were granted.
The performance-based deferred stock units vest at the end of a
three-year performance period if specific pre-established levels
of performance, market conditions and service are met.
The weighted-average assumptions used in the Black-Scholes
option pricing model for the three and nine months ended
September 30, 2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Volatility
|
|
|
37.0
|
%
|
|
|
23.2
|
%
|
|
|
31.4
|
%
|
|
|
24.8
|
%
|
Risk-free interest rate
|
|
|
3.2
|
%
|
|
|
4.6
|
%
|
|
|
2.8
|
%
|
|
|
4.6
|
%
|
Expected term of options (in years)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Total compensation expense related to stock options, deferred
stock units and performance-based deferred stock units for the
three and nine months ended September 30, 2008 was
$52 million and $171 million, respectively. Total
compensation expense related to stock options, deferred stock
units and performance-based deferred stock units for the three
and nine months ended September 30, 2007 was
$62 million and $149 million, respectively.
At September 30, 2008, the total remaining unrecognized
compensation cost related to the performance-based deferred
stock units granted in 2008 amounted to $17 million, which
will be amortized over the weighted-average remaining requisite
service period of 2.25 years. The remaining unrecognized
compensation cost for the performance-based deferred stock units
may vary each reporting period based on changes in the expected
achievement of performance measures.
12
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liability
Plans
In addition, Schering-Plough has two compensation plans that are
classified as liability plans under SFAS 123R.
Schering-Plough recognized income of $5 million and
$26 million, related to these plans for the three and nine
months ended September 30, 2008, respectively. For the
three and nine months ended September 30, 2007,
Schering-Plough recognized expenses of $8 million and
$35 million, respectively.
|
|
7.
|
OTHER
EXPENSE/(INCOME), NET
|
The components of other expense/(income), net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Interest cost incurred
|
|
$
|
140
|
|
|
$
|
49
|
|
|
$
|
428
|
|
|
$
|
134
|
|
Less: amount capitalized on construction
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
136
|
|
|
|
45
|
|
|
|
414
|
|
|
|
120
|
|
Interest income
|
|
|
(19
|
)
|
|
|
(117
|
)
|
|
|
(58
|
)
|
|
|
(283
|
)
|
Foreign exchange losses/(gains)
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
10
|
|
|
|
(6
|
)
|
Gain on sales of assets
|
|
|
(160
|
)
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
Mark-to-market
gain on fair value of foreign currency options
|
|
|
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
(289
|
)
|
Ineffective portion of interest rate swaps
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense/(income), net
|
|
$
|
(39
|
)
|
|
$
|
(390
|
)
|
|
$
|
189
|
|
|
$
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, Schering-Plough completed its previously
announced divestitures of certain Animal Health products as
required by regulatory agencies in the U.S. and Europe in
connection with the acquisition of OBS. As a result of these
divestitures, Schering-Plough recognized a gain of
$160 million ($149 million after tax). In addition,
during the nine months ended September 30, 2008,
Schering-Plough recognized a gain of $17 million
($12 million after tax) on the sale of a manufacturing
site. These gains are included in Gain on sales of assets. Net
cash proceeds from the divested animal health products were
$210 million.
During 2008 and 2007, Schering-Plough participated in health
care refinancing programs adopted by local government fiscal
authorities in a major European market. During the three and
nine months ended September 30, 2008, Schering-Plough
transferred $47 million of its trade accounts receivables
owned by a foreign subsidiary to third-party financial
institutions without recourse. During the three and nine months
ended September 30, 2007, Schering-Plough transferred
$69 million and $164 million of its trade accounts
receivables owned by a foreign subsidiary to third-party
financial institutions without recourse. The transfer of trade
accounts receivable qualified as sales of accounts receivable
under SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. For the three and nine months ended
September 30, 2008 and 2007, the transfer of these trade
accounts receivable did not have a material impact on
Schering-Ploughs Statements of Condensed Consolidated
Operations. Cash flows from these transactions are included in
the change in accounts receivable in operating activities.
In March 2007, as part of an overall risk management strategy
and in consideration of various preliminary financing scenarios
associated with the planned acquisition of OBS, Schering-Plough
purchased a
Euro-denominated
currency option (derivative) for a premium of $130 million.
In September 2007,
Schering-Plough
purchased an additional Euro-denominated currency option for
$3 million. These derivatives did not qualify for hedge
accounting in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended (SFAS 133). Accordingly, the
change in fair value of these
13
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
derivatives was recognized in the Statement of Condensed
Consolidated Operations. During the three and nine months ended
September 30, 2007, Schering-Plough recognized
mark-to-market
gains of $321 million and $289 million, respectively,
on these foreign currency options. These derivative were
short-term (trading) in nature and did not hedge a specific
financing or investing transaction. Accordingly, the cash
impacts of these derivatives were classified as operating cash
flows in the Statement of Condensed Consolidated Cash Flows.
These derivatives were terminated during the fourth quarter of
2007.
During the second quarter of 2007, Schering-Plough executed a
series of interest rate swaps in anticipation of financing the
acquisition of OBS. The objective of the swaps was to hedge
interest rate payments to be made on future issuances of debt.
As such, the swaps were designated as cash flow hedges of future
interest rate payments, and in accordance with SFAS 133,
the effective portion of the gains and losses on the hedges were
reported in other comprehensive income and any ineffective
portion was reported in operations. In connection with the
Euro-denominated debt issuances during the second half of 2007,
portions of the swaps were deemed ineffective during the third
quarter of 2007 and Schering-Plough recognized a $7 million
loss in the Statement of Condensed Consolidated Operations
during the three and nine months ended September 30, 2007.
The effective portion of the swaps of $12 million was
recorded in other comprehensive income and is being recognized
as interest expense over the life of the related debt. The cash
flows related to these interest rate swaps are classified as
operating cash flows in the Statement of Condensed Consolidated
Cash Flows.
Schering-Plough reported a U.S. Net Operating Loss (NOL)
carryforward of approximately $1.8 billion on its 2007 tax
return, which will be available to offset future
U.S. taxable income, in varying amounts, through 2027.
This U.S. NOL carryforward could be materially reduced
after examination of Schering-Ploughs income tax returns
by the Internal Revenue Service (IRS). Schering-Plough continues
to maintain a valuation allowance against its U.S. deferred
tax assets, as management cannot conclude that it is more likely
than not the benefit of the U.S. net deferred tax assets
can be realized.
At September 30, 2008 and December 31, 2007,
Schering-Plough had total unrecognized tax benefits of
$954 million and $859 million, respectively. The
increase primarily relates to additions to tax positions related
to 2008 and prior years.
|
|
9.
|
RETIREMENT
PLANS AND OTHER POST-RETIREMENT BENEFITS
|
Schering-Plough has defined benefit pension plans covering
eligible employees in the U.S. and certain foreign
countries. In addition, Schering-Plough provides post-retirement
medical and life insurance benefits primarily to its eligible
U.S. retirees and their dependents through its
post-retirement benefit plans.
14
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
54
|
|
|
$
|
32
|
|
|
$
|
162
|
|
|
$
|
95
|
|
Interest cost
|
|
|
58
|
|
|
|
32
|
|
|
|
176
|
|
|
|
93
|
|
Expected return on plan assets
|
|
|
(59
|
)
|
|
|
(31
|
)
|
|
|
(178
|
)
|
|
|
(93
|
)
|
Amortization, net
|
|
|
7
|
|
|
|
10
|
|
|
|
20
|
|
|
|
30
|
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
60
|
|
|
$
|
43
|
|
|
$
|
180
|
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of other post-retirement benefits expense were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
21
|
|
|
$
|
15
|
|
Interest cost
|
|
|
10
|
|
|
|
7
|
|
|
|
29
|
|
|
|
21
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Amortization, net
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other post-retirement benefits expense
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
44
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008,
Schering-Plough contributed $57 million and
$153 million, respectively, to its retirement plans. For
the three and nine months ended September 30, 2007,
Schering-Plough contributed $113 million and
$153 million, respectively, to its retirement plans.
Schering-Plough
expects to contribute approximately $62 million to its
retirement plans during the remainder of 2008.
|
|
10.
|
EARNINGS
PER COMMON SHARE
|
The following table reconciles the components of basic and
diluted earnings per common share computations (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars and shares in millions)
|
|
|
EPS Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
551
|
|
|
$
|
713
|
|
|
$
|
1,202
|
|
|
$
|
1,773
|
|
Add: Dilutive 2004 preferred stock dividends
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS numerator
|
|
$
|
551
|
|
|
$
|
731
|
|
|
$
|
1,202
|
|
|
$
|
1,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic EPS
|
|
|
1,626
|
|
|
|
1,542
|
|
|
|
1,624
|
|
|
|
1,511
|
|
Dilutive effect of options and deferred stock units
|
|
|
10
|
|
|
|
27
|
|
|
|
11
|
|
|
|
24
|
|
Dilutive effect of 2004 preferred shares
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for diluted EPS
|
|
|
1,636
|
|
|
|
1,622
|
|
|
|
1,635
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Diluted EPS for the three and nine months ended
September 30, 2008 is calculated based on net income
available to common shareholders of $551 million and
$1.2 billion, respectively, and weighted-average diluted
shares outstanding of 1,636 million and 1,635 million,
respectively. For the three and nine months ended
September 30, 2007, Schering-Ploughs 2004 mandatory
convertible preferred stock was dilutive under accounting rules.
As such, diluted EPS for both periods is calculated based on net
income of $731 million and $1.8 billion, respectively,
and weighted-average diluted shares outstanding of
1,622 million and 1,596 million, respectively.
During the third quarter of 2007, Schering-Ploughs 2004
mandatory convertible preferred stock converted into
65 million common shares. These common shares are included
in the weighted-average shares calculation for the periods after
conversion.
For the three months ended September 30, 2008 and 2007,
54 million and 39 million, respectively, of equivalent
common shares issuable under Schering-Ploughs stock
incentive plans were excluded from the computation of diluted
EPS because their effect would have been antidilutive. For the
nine months ended September 30, 2008 and 2007,
53 million and 36 million, respectively, of equivalent
common shares issuable under Schering-Ploughs stock
incentive plans were excluded from the computation of diluted
EPS because their effect would have been antidilutive.
For the three and nine months ended September 30, 2008,
approximately 91 million common shares obtainable upon
conversion of Schering-Ploughs 2007 mandatory convertible
preferred stock were excluded from the computation of diluted
EPS because their effect would have been antidilutive. For the
three and nine months ended September 30, 2007,
approximately 79 million common shares obtainable upon
conversion of the 2007 preferred stock were excluded from the
computation of diluted EPS because their effect would have been
antidilutive.
|
|
11.
|
COMPREHENSIVE
INCOME/(LOSS)
|
Comprehensive income/(loss) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Net income
|
|
$
|
589
|
|
|
$
|
750
|
|
|
$
|
1,315
|
|
|
$
|
1,853
|
|
Foreign currency translation adjustment
|
|
|
(732
|
)
|
|
|
75
|
|
|
|
(282
|
)
|
|
|
132
|
|
Change in measurement date for pension and other post-retirement
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Mark-to-market
loss on derivative instruments
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
(12
|
)
|
Unrealized gain (loss) on investments available for sale
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
(15
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income/(loss)
|
|
$
|
(153
|
)
|
|
$
|
775
|
|
|
$
|
1,018
|
|
|
$
|
1,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the three and nine months ended
September 30, 2007 includes a
mark-to-market
loss of $47 million and $12 million, respectively,
related to a series of three interest rate swaps. The objective
of the swaps was to hedge the interest rate payments to be made
on future issuances of debt. As such, the swaps were designated
as cash flow hedges of future interest payments, and in
accordance with SFAS 133, the effective portion of the
gains or losses on the hedges were reported in other
comprehensive income and any ineffective portion was reported in
operations within other expense/(income), net. As of
September 30, 2008 and December 31, 2007, there were
no open interest rate swaps.
16
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Finished products
|
|
$
|
1,236
|
|
|
$
|
1,823
|
|
Goods in process
|
|
|
1,588
|
|
|
|
1,729
|
|
Raw materials and supplies
|
|
|
557
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
Total inventories and inventory classified in other non-current
assets
|
|
$
|
3,381
|
|
|
$
|
4,169
|
|
|
|
|
|
|
|
|
|
|
The overall decrease in total inventories was primarily due to
the amortization of the fair value
step-up
recorded as part of the OBS acquisition.
Included in Other assets (non-current) at September 30,
2008 and December 31, 2007 was $198 million and
$96 million, respectively, of inventory not expected to be
sold within one year.
|
|
13.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill was $2,870 million at September 30, 2008,
slightly lower than the $2,937 million at December 31,
2007. The decrease was due to foreign currency translation
adjustments and a $6 million update to the preliminary
purchase price allocation for the OBS acquisition. See
Note 2, Acquisition.
The components of other intangible assets, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Dollars in millions)
|
|
|
Patents and licenses
|
|
$
|
3,894
|
|
|
$
|
334
|
|
|
$
|
3,560
|
|
|
$
|
4,050
|
|
|
$
|
55
|
|
|
$
|
3,995
|
|
Trademarks and other
|
|
|
2,807
|
|
|
|
149
|
|
|
|
2,658
|
|
|
|
2,851
|
|
|
|
67
|
|
|
|
2,784
|
|
Licenses and other
|
|
|
786
|
|
|
|
588
|
|
|
|
198
|
|
|
|
740
|
|
|
|
515
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
7,487
|
|
|
$
|
1,071
|
|
|
$
|
6,416
|
|
|
$
|
7,641
|
|
|
$
|
637
|
|
|
$
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These intangible assets are amortized on the straight-line
method over their respective useful lives. The residual value of
intangible assets is estimated to be zero. Amortization expense
for the three months ended September 30, 2008 and 2007 was
$148 million and $11 million, respectively, and
$439 million and $32 million for the nine months ended
September 30, 2008 and 2007, respectively. Annual
amortization expenses related to these intangible assets for the
years 2009 to 2013 is expected to be approximately
$580 million.
17
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Schering-Ploughs outstanding borrowings at
September 30, 2008 and December 31, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Short-term
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
|
|
|
$
|
149
|
|
Other short-term borrowings and current portion of long-term debt
|
|
|
236
|
|
|
|
310
|
|
Current portion of capital leases
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings and current portion of long-term debt
|
|
$
|
237
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
5.00% senior unsecured Euro-denominated notes due 2010
|
|
$
|
716
|
|
|
$
|
736
|
|
Floating rate Euro-denominated term loan due 2012
|
|
|
859
|
|
|
|
1,619
|
|
5.30% senior unsecured notes due 2013
|
|
|
1,247
|
|
|
|
1,247
|
|
5.375% senior unsecured Euro-denominated notes due 2014
|
|
|
2,144
|
|
|
|
2,205
|
|
6.00% senior unsecured notes due 2017
|
|
|
995
|
|
|
|
995
|
|
6.50% senior unsecured notes due 2033
|
|
|
1,143
|
|
|
|
1,143
|
|
6.55% senior unsecured notes due 2037
|
|
|
994
|
|
|
|
994
|
|
Capital leases
|
|
|
20
|
|
|
|
24
|
|
Other long-term borrowings
|
|
|
48
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings, net of current portion
|
|
$
|
8,166
|
|
|
$
|
9,019
|
|
|
|
|
|
|
|
|
|
|
The decrease in the Floating rate Euro-denominated term loan due
2012 was due to early principal repayments of
Euro 200 million ($310 million) in the second
quarter of 2008 and Euro 300 million
($469 million) in the third quarter of 2008, and the
foreign currency impact. No prepayment penalty was incurred
relating to these principal repayments. Schering-Plough also
paid down its commercial paper outstanding during the third
quarter of 2008. The other changes in outstanding
Euro-denominated borrowings at September 30, 2008 were due
to foreign currency translation on Euro-denominated debt
balances.
18
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
FAIR
VALUE MEASUREMENTS
|
Schering-Ploughs Condensed Consolidated Balance Sheet at
September 30, 2008 includes the following assets and
liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
for Identical
|
|
|
Significant
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
Assets and
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(Dollars in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held for employee compensation
|
|
$
|
133
|
|
|
$
|
133
|
|
|
$
|
|
|
|
$
|
|
|
Other
|
|
|
13
|
|
|
|
5
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
146
|
|
|
$
|
138
|
|
|
$
|
8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contract
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of Schering-Ploughs assets and liabilities
measured at fair value on a recurring basis are measured using
unadjusted quoted prices in active markets for identical items
(Level 1) as inputs, multiplied by the number of units
held at the balance sheet date. As of September 30, 2008,
assets and liabilities with fair values measured using
significant other observable inputs (Level 2) include
measurements using quoted prices for identical items in markets
that are not active and measurements using inputs that are
derived principally from or corroborated by observable market
data.
Schering-Plough has three reportable segments: Human
Prescription Pharmaceuticals, Animal Health and Consumer Health
Care. The segment sales and profit data that follow are
consistent with Schering-Ploughs current management
reporting structure. The Human Prescription Pharmaceuticals
segment discovers, develops, manufactures and markets human
pharmaceutical products. The Animal Health segment discovers,
develops, manufactures and markets animal health products. The
Consumer Health Care segment develops, manufactures and markets
over-the-counter,
foot care and sun care products, primarily in the U.S.
Net
sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Human Prescription Pharmaceuticals
|
|
$
|
3,539
|
|
|
$
|
2,291
|
|
|
$
|
10,798
|
|
|
$
|
7,209
|
|
Animal Health
|
|
|
759
|
|
|
|
248
|
|
|
|
2,299
|
|
|
|
744
|
|
Consumer Health Care
|
|
|
278
|
|
|
|
273
|
|
|
|
1,057
|
|
|
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
4,576
|
|
|
$
|
2,812
|
|
|
$
|
14,154
|
|
|
$
|
8,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the three and nine months ended September 30,
2008 includes the net sales of products from OBS acquired on
November 19, 2007.
19
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Profit
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008(1)
|
|
|
2007
|
|
|
2008(1)
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Human Prescription Pharmaceuticals
|
|
$
|
653
|
|
|
$
|
468
|
|
|
$
|
1,916
|
|
|
$
|
1,606
|
|
Animal Health(2)
|
|
|
222
|
|
|
|
20
|
|
|
|
141
|
|
|
|
66
|
|
Consumer Health Care
|
|
|
75
|
|
|
|
56
|
|
|
|
243
|
|
|
|
264
|
|
Corporate and other(3)
|
|
|
(292
|
)
|
|
|
288
|
|
|
|
(778
|
)
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
658
|
|
|
$
|
832
|
|
|
$
|
1,522
|
|
|
$
|
2,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ended September 30, 2008, the Human
Prescription Pharmaceuticals and the Animal Health
segments profits include expense of $112 million and
$113 million, respectively, related to purchase accounting
items from the OBS transaction. For the nine months ended
September 30, 2008, the Human Prescription Pharmaceuticals
and the Animal Health segments profits include expense of
$715 million and $559 million, respectively, related
to purchase accounting items from the OBS transaction. See
Note 2, Acquisition for additional information. |
|
(2) |
|
For the three and nine months ended September 30, 2008, the
profits of the Animal Health segment includes the gain on sale
of previously announced divestitures of certain Animal Health
products of $160 million. See Note 7, Other
Expense / (Income), net, for additional information. |
|
(3) |
|
For the three and nine months ended September 30, 2008,
Corporate and other included special and
acquisition-related charges of $101 million and
$218 million, respectively, related to the Productivity
Transformation Program, which includes the ongoing integration
of OBS (see Note 4, OBS Integration and Productivity
Transformation Program, for additional information). For
the three and nine months ended September 30, 2007,
$20 million and $32 million, respectively, of
acquisition-related charges (integration planning) for the
planned OBS acquisition is included in Corporate and
other. |
Schering-Ploughs consolidated net sales do not include
sales of VYTORIN and ZETIA, which are managed in the cholesterol
joint venture with Merck, as Schering-Plough accounts for this
joint venture under the equity method of accounting (see
Note 5, Equity Income, for additional
information). The Human Prescription Pharmaceuticals segment
includes equity income from the Merck/Schering-Plough joint
venture.
Corporate and other includes interest income and
expense, foreign exchange gains and losses, currency option
gains, headquarters expenses, special and acquisition-related
charges and other miscellaneous items. The accounting policies
used for segment reporting are the same as those described in
Note 1, Summary of Significant Accounting
Policies, in Schering-Ploughs 2007
10-K/A.
Sales of products comprising 10 percent or more of
Schering-Ploughs U.S. or international sales for the
three and nine months ended September 30, 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
|
Amount
|
|
|
Applicable Sales
|
|
|
Amount
|
|
|
Applicable Sales
|
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASONEX
|
|
$
|
141
|
|
|
|
10
|
|
|
$
|
479
|
|
|
|
11
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMICADE
|
|
|
564
|
|
|
|
17
|
|
|
|
1,627
|
|
|
|
16
|
|
20
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the three and nine months ended September 30, 2008, net
sales outside the U.S. totaled $3.2 billion and
$9.9 billion, respectively. This approximated 70 percent of
consolidated net sales for both periods.
Schering-Plough does not disaggregate assets on a segment basis
for internal management reporting and, therefore, such
information is not presented.
|
|
17.
|
LEGAL,
ENVIRONMENTAL AND REGULATORY MATTERS
|
Background
Schering-Plough is involved in various claims, investigations
and legal proceedings.
Schering-Plough records a liability for contingencies when it is
probable that a liability has been incurred and the amount can
be reasonably estimated. Schering-Plough adjusts its liabilities
for contingencies to reflect the current best estimate of
probable loss or minimum liability, as the case may be. Where no
best estimate is determinable, Schering-Plough records the
minimum amount within the most probable range of its liability.
Expected insurance recoveries have not been considered in
determining the amounts of recorded liabilities for
environmental related matters.
If Schering-Plough believes that a loss contingency is
reasonably possible, rather than probable, or the amount of loss
cannot be estimated, no liability is recorded. However, where a
liability is reasonably possible, disclosure of the loss
contingency is made.
Schering-Plough reviews the status of all claims, investigations
and legal proceedings on an ongoing basis, including related
insurance coverages. From time to time, Schering-Plough may
settle or otherwise resolve these matters on terms and
conditions management believes are in the best interests of
Schering-Plough. Resolution of any or all claims, investigations
and legal proceedings, individually or in the aggregate, could
have a material adverse effect on Schering-Ploughs
consolidated results of operations, cash flows or financial
condition.
Except for the matters discussed in the remainder of this Note,
the recorded liabilities for contingencies at September 30,
2008, and the related expenses incurred during the three and
nine months ended September 30, 2008, were not material. In
the opinion of management, based on the advice of legal counsel,
the ultimate outcome of these matters, except matters discussed
in the remainder of this Note, will not have a material impact
on Schering-Ploughs consolidated results of operations,
cash flows or financial condition.
ENHANCE
Matter
In early 2008, the Merck / Schering-Plough cholesterol
joint venture announced the results of the ENHANCE (Effect of
Combination Ezetimibe and High-Dose Simvastatin vs. Simvastatin
Alone on the Atherosclerotic Process in Patients with
Heterozygous Familial Hypercholesterolemia) clinical trial.
Schering-Plough encountered a challenge affecting sales of ZETIA
and VYTORIN when the results of the ENHANCE trial, as well as
the length of time that expired between the last patient having
an ultrasound image taken for the trial through the final
analysis and the unblinding of data, became the subjects of
intense scrutiny and varying interpretations in the media.
Schering-Plough, the joint venture
and/or its
joint venture partner, Merck, have received a number of
governmental inquiries and have been the subject of a number of
investigations with respect to the timing and disclosures
relating to the ENHANCE clinical trial, the trial results, and
in some cases sales of stock by the companies officers
prior to release of the results of the ENHANCE clinical trial.
Since mid-January 2008, Schering-Plough has become aware of or
been served with litigation relating to such matters.
21
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Schering-Plough is cooperating fully with the various
investigations and responding to the requests for information,
and Schering-Plough intends to vigorously defend the lawsuits
that have been filed relating to these matters.
Earlier this year, after the initial release of ENHANCE data,
the FDA stated that it would review the results of the trial. As
of the date of filing of this
10-Q, the
results of this review have not been issued.
Please refer to Legal Proceedings in Item 3 in
Schering-Ploughs 2007
10-K/A and
Part II, Item 1, Legal Proceedings, in
this 10-Q
for additional information. Also see Part II, OTHER
INFORMATION, Recent Cholesterol Clinical Trials, for
information about another clinical trial relating to VYTORIN,
SEAS.
AWP
Litigation and Investigations
Schering-Plough continues to respond to existing and new
litigation by certain states and private payors and
investigations by the Department of Health and Human Services,
the Department of Justice and several states into industry and
Schering-Plough practices regarding average wholesale price
(AWP). Schering-Plough is cooperating with these investigations.
These litigations and investigations relate to whether the AWP
used by pharmaceutical companies for certain drugs improperly
exceeds the average prices paid by providers and, as a
consequence, results in unlawful inflation of certain
reimbursements for drugs by state programs and private payors
that are based on AWP. The complaints allege violations of
federal and state law, including fraud, Medicaid fraud and
consumer protection violations, among other claims. In the
majority of cases, the plaintiffs are seeking class
certifications. In some cases, classes have been certified. The
outcome of these litigations and investigations could include
substantial damages, the imposition of substantial fines,
penalties and injunctive or administrative remedies.
Securities
and Class Action Litigation
Federal
Securities Litigation
Following Schering-Ploughs announcement that the FDA had
been conducting inspections of Schering-Ploughs
manufacturing facilities in New Jersey and Puerto Rico and had
issued reports citing deficiencies concerning compliance with
current Good Manufacturing Practices, several lawsuits were
filed against Schering-Plough and certain named officers. These
lawsuits allege that the defendants violated the federal
securities law by allegedly failing to disclose material
information and making material misstatements. Specifically,
they allege that Schering-Plough failed to disclose an alleged
serious risk that a new drug application for CLARINEX would be
delayed as a result of these manufacturing issues, and they
allege that Schering-Plough failed to disclose the alleged depth
and severity of its manufacturing issues. These complaints were
consolidated into one action in the U.S. District Court for
the District of New Jersey, and a consolidated amended complaint
was filed on October 11, 2001, purporting to represent a
class of shareholders who purchased shares of Schering-Plough
stock from May 9, 2000 through February 15, 2001. The
complaint seeks compensatory damages on behalf of the class. The
Court certified the shareholder class on October 10, 2003.
Notice of pendency of the class action was sent to members of
that class in July 2007. Discovery has been completed, and
motions for summary judgment have been briefed and are pending.
ERISA
Litigation
On March 31, 2003, Schering-Plough was served with a
putative class action complaint filed in the U.S. District
Court in New Jersey alleging that Schering-Plough, retired
Chairman, CEO and President Richard Jay Kogan,
Schering-Ploughs Employee Savings Plan (Plan)
administrator, several current and former directors, and certain
former corporate officers breached their fiduciary obligations
to certain participants in the Plan. The complaint seeks damages
in the amount of losses allegedly suffered by the Plan. The
complaint
22
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
was dismissed on June 29, 2004. The plaintiffs appealed. On
August 19, 2005 the U.S. Court of Appeals for the
Third Circuit reversed the dismissal by the District Court and
the matter has been remanded back to the District Court for
further proceedings.
K-DUR
Antitrust Litigation
Schering-Plough had settled patent litigation with Upsher-Smith,
Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle) relating to
generic versions of K-DUR, Schering-Ploughs long-acting
potassium chloride product supplement used by cardiac patients,
for which Lederle and Upsher Smith had filed Abbreviated New
Drug Applications. Following the commencement of an FTC
administrative proceeding alleging anti-competitive effects from
those settlements (which has been resolved in
Schering-Ploughs favor), alleged class action suits were
filed in federal and state courts on behalf of direct and
indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle. These suits claim violations of
federal and state antitrust laws, as well as other state
statutory and common law causes of action. These suits seek
unspecified damages. Discovery has been completed.
Third
Party Payor Actions
Several purported class action litigations have been filed
following the announcement of the settlement of the
Massachusetts Investigation. Plaintiffs in these actions seek
damages on behalf of third-party payors resulting from the
allegations of off-label promotion and improper payments to
physicians that were at issue in the Massachusetts Investigation.
Tax
Matters
In October 2001, IRS auditors asserted that two interest rate
swaps that Schering-Plough entered into with an unrelated party
should be recharacterized as loans from affiliated companies,
resulting in additional tax liability for the 1991 and 1992 tax
years. In September 2004, Schering-Plough made payments to the
IRS in the amount of $194 million for income tax and
$279 million for interest. Schering-Plough filed refund
claims for the tax and interest with the IRS in December 2004.
Following the IRSs denial of Schering-Ploughs claims
for a refund, Schering-Plough filed suit in May 2005 in the
U.S. District Court for the District of New Jersey for
refund of the full amount of the tax and interest. This refund
litigation has been tried in Newark District Court and a
decision has not yet been rendered. Schering-Ploughs tax
reserves were adequate to cover the above-mentioned payments.
Pending
Administrative Obligations
In connection with the settlement of an investigation with the
U.S. Department of Justice and the
U.S. Attorneys Office for the Eastern District of
Pennsylvania, Schering-Plough entered into a five-year corporate
integrity agreement (CIA). The CIA was amended in August of 2006
in connection with the settlement of the Massachusetts
Investigation, commencing a new five-year term. Failure to
comply with the obligations under the CIA could result in
financial penalties.
Other
Matters
Product
Liability
Beginning in May of 2007, a number of complaints were filed in
various jurisdictions asserting claims against Organon USA,
Inc., Organon Pharmaceuticals USA, Inc., Organon International
(Organon), and Schering-Plough Corporation arising from
Organons marketing and sale of NUVARING, a combined
hormonal contraceptive vaginal ring. The plaintiffs contend that
Organon and Schering-Plough failed to adequately warn of the
alleged increased risk of venous thromboembolism (VTE) posed by
NUVARING,
23
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and/or
downplayed the risk of VTE. The plaintiffs seek damages for
injuries allegedly sustained from their product use, including
some alleged deaths, heart attacks and strokes. The majority of
the cases are currently pending in a federal Multidistrict
litigation venued in Missouri and in New Jersey state court .
Other cases are pending in Wisconsin, New York and Georgia.
French
Matter
Based on a complaint to the French competition authority from a
competitor in France and pursuant to a court order, the French
competition authority has obtained documents from a French
subsidiary of Schering-Plough relating to SUBUTEX, one of the
products that the subsidiary markets and sells. Any resolution
of this matter adverse to the French subsidiary could result in
the imposition of civil fines and injunctive or administrative
remedies. On July 17, 2007, the Juge des Libertés et
de la Détention ordered the annulment of the search and
seizure on procedural grounds. On July 19, 2007, the French
authority appealed the order to the French Supreme Court.
In April 2007, the competitor also requested interim relief, a
portion of which was granted by the French competition authority
in December 2007. The interim relief required
Schering-Ploughs French subsidiary to publish in two
specialized newspapers information including that the generic
has the same quantitative and qualitative composition and the
same pharmaceutical form as, and is substitutable for, SUBUTEX.
In February 2008, the Paris Court of Appeal confirmed the
decision of the French competition authority.
Environmental
Schering-Plough has responsibilities for environmental cleanup
under various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. At several Superfund sites (or
equivalent sites under state law), Schering-Plough is alleged to
be a potentially responsible party (PRP). Schering-Plough
believes that it is remote at this time that there is any
material liability in relation to such sites. Schering-Plough
estimates its obligations for cleanup costs for Superfund sites
based on information obtained from the federal Environmental
Protection Agency (EPA), an equivalent state agency
and/or
studies prepared by independent engineers, and on the probable
costs to be paid by other PRPs. Schering-Plough records a
liability for environmental assessments
and/or
cleanup when it is probable that a loss has been incurred and
the amount can be reasonably estimated.
24
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Schering-Plough
Corporation
We have reviewed the accompanying condensed consolidated balance
sheet of Schering-Plough Corporation and subsidiaries (the
Company) as of September 30, 2008, and the
related statements of condensed consolidated operations for the
three and nine-month periods ended September 30, 2008 and
2007, and the statements of condensed consolidated cash flows
for the nine-month periods ended September 30, 2008 and
2007. These interim financial statements are the responsibility
of the Companys management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of the Company as of
December 31, 2007, and the related statements of
consolidated operations, shareholders equity, and cash
flows for the year then ended (not presented herein); and in our
report dated February 29, 2008, we expressed an unqualified
opinion on those consolidated financial statements and included
an explanatory paragraph regarding the Companys adoption
of Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised 2004), Share-Based
Payment, SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, and Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of
December 31, 2007 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 28, 2008
25
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|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
EXECUTIVE
OVERVIEW
Overview
of Schering-Plough
Schering-Plough is an innovation-driven science-centered global
health care company. Schering-Plough discovers, develops and
manufactures pharmaceuticals for three customer
markets human prescription, animal health and
consumer. While most of the research and development activity is
directed toward human prescription products, there are important
applications of this central research and development platform
into the animal health products and the consumer health care
products. Schering-Plough also accesses external innovation via
partnering, in-licensing and acquisition for all three customer
markets.
Strategy
Focused on Science
In 2003, soon after Fred Hassan was elected as Chairman of the
Board and Chief Executive Officer of Schering-Plough
Corporation, he initiated a
six-to-eight
year strategic plan, called the Action Agenda. A key component
of the Action Agenda is applying science to meet unmet medical
needs. A core strategy of Schering-Plough is to invest
substantial funds in scientific research with the goal of
creating therapies and treatments that address important unmet
medical needs and also have commercial value. Consistent with
this core strategy, Schering-Plough is increasing its investment
in research and development. Schering-Plough has been successful
in advancing the pipeline and has several late-stage projects
that will require sizable resources to complete. As
Schering-Plough continues to develop the later-phase pipeline
compounds (e.g., golimumab, sugammadex in the U.S., thrombin
receptor antagonist, vicriviroc, boceprevir and asenapine), it
anticipates higher spending on clinical trial activities.
Schering-Ploughs progressing early pipeline includes drug
candidates across a wide range of therapeutic areas.
Another key component of the Action Agenda is the focus on
building long-term value for shareholders and for the patients
who rely upon Schering-Ploughs drugs. This longer-term
focus includes concurrent emphasis on growing sales, disciplined
cost controls and investing in research and development for the
future.
Early on, Hassan and the new management team that he recruited
applied the Action Agenda to stabilizing, repairing and turning
around Schering-Plough after Schering-Plough encountered
challenges earlier this decade under a prior management team.
Currently, Schering-Plough continues work in the fourth of five
phases of the Action Agenda. During the fourth, or Build the
Base phase, Schering-Plough continues to focus on its strategy
of value creation across a broad front. Over the past four
years, sales of Schering-Plough pharmaceutical products across
an array of therapeutic areas showed strong growth compared to
prior periods and other pharmaceutical companies.
Schering-Ploughs pharmaceutical sales and marketing
activities expanded geographically, including into Brazil, China
and Russia. This geographic diversity adds to growth and makes
performance less sensitive to any one geographic area. The
strategic Organon BioSciences N.V. (OBS) acquisition was closed
in November 2007 and significant integration activities
continue. The OBS acquisition added further diversification of
marketed products, including two new therapeutic areas
(Womens Health and Central Nervous System); key pipeline
projects; significant strength in the Animal Health products and
pipeline; and significant talent, including in key research and
development functions.
As part of the Action Agenda, Schering-Plough continues to work
to enhance infrastructure, upgrade processes and systems and
strengthen talent. While these efforts are being implemented on
a companywide basis, Schering-Plough is focusing especially on
research and development to support Schering-Ploughs
science-based business.
The pharmaceutical industry is under increasing political and
regulatory pressure, particularly in the United States and
Schering-Plough and the Merck/Schering-Plough cholesterol joint
venture have encountered specific challenges during 2008, as
explained in more detail in Part II, OTHER INFORMATION,
Recent Cholesterol Clinical Trials.
26
The strength Schering-Plough built during the earlier phases of
the Action Agenda, including the diversified group of products,
customer segments, and geographic areas, as well as its highly
experienced executive team, will be helpful in weathering
current and future challenges, including those relating to the
Merck/Schering-Plough cholesterol joint venture.
Regarding challenges related to the recent cholesterol clinical
trials, Schering-Ploughs strategy is centered on
emphasizing the science around high LDL cholesterol (low-density
lipoprotein, often known as bad cholesterol), which
medical experts and health advisory groups have long recognized
as a significant cardiovascular risk factor and recommended
increasingly aggressive treatment of high cholesterol for
certain patients. Lowering LDL cholesterol, along with a healthy
diet and lifestyle changes, remains the cornerstone of lipid
treatment for patients at risk for heart disease. Clinical
studies have demonstrated that VYTORIN lowers patients LDL
cholesterol more than rosuvastatin, atorvastatin and simvastatin
at the doses studied and was able to get more patients to the
LDL cholesterol goals identified by the National Cholesterol
Education Program, Adult Treatment Panel III (ATP
III) guidelines. The ENHANCE and Simvastatin and Ezetimibe
in Aortic Stenosis (SEAS) clinical trials also demonstrated
superior LDL cholesterol lowering with VYTORIN compared to
simvastatin (ENHANCE) and placebo (SEAS). See
Outlook for the current perspective on the effects
of these challenges on Schering-Ploughs business.
In April 2008, Schering-Plough announced the Productivity
Transformation Program (PTP). The goal of this program, which
includes the ongoing integration of OBS, is to create a leaner,
stronger company to support Schering-Ploughs goal of
building long-term high performance despite the current
challenging pharmaceutical industry environment and the
particular challenges facing Schering-Plough. This program
targets savings of $1.5 billion on an annualized basis by
2012 and is designed to reduce and avoid costs, while increasing
productivity. Of the total targeted savings, approximately
$1.25 billion are anticipated to be accomplished by the end
of 2010 with the balance achieved by 2012. The targeted savings
envisioned by this program include those resulting from the
previously announced OBS integration synergies. Beyond this
program, Schering-Plough anticipates investing in new high
priority clinical trials, the pursuit of strategic
opportunities, including product launches and anticipates
natural cost growth. Approximately 3,000 positions have been
eliminated through September 30, 2008.
Results
and Highlights for the three and nine months ended
September 30, 2008:
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|
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|
|
Schering-Ploughs net sales for the three months ended
September 30, 2008 were $4.6 billion, an increase of
$1.8 billion, or 63 percent, as compared to the three
months ended September 30, 2007. This increase in net sales
was primarily due to the contribution of the products from OBS
during 2008. Net income available to common shareholders for the
three months ended September 30, 2008 was
$551 million, as compared to $713 million in the three
months ended September 30, 2007. The decrease in Net income
available to common shareholders was primarily due to the impact
of purchase accounting items from the OBS acquisition and
increased interest expense as a result of the issuance of debt
in the second half of 2007. These amounts were partially offset
by the impacts of a gain on currency options in the 2007 period
and a gain on the divestitures of certain Animal Health products
in the 2008 period.
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|
Schering-Ploughs net sales for the nine months ended
September 30, 2008 were $14.2 billion, an increase of
$5.2 billion, or 58 percent, as compared to the nine
months ended September 30, 2007. The increase was primarily
due to the contribution of the products from OBS during 2008.
Net income available to common shareholders for the nine months
ended September 30, 2008 was $1.2 billion, as compared
to $1.8 billion in the nine months ended September 30,
2007. The decrease in Net income available to common
shareholders was primarily due to the impact of purchase
accounting items from the OBS acquisition and increased interest
expense as a result of the issuance of debt in the second half
of 2007. These amounts were partially offset by the impacts of a
gain on currency options in the 2007 period and a gain on the
divestitures of certain Animal Health products in the 2008
period.
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For the three and nine months ended September 30, 2008,
sales of Human Prescription Pharmaceuticals in the U.S.,
excluding sales from OBS, increased 1 percent and decreased
3 percent, respectively.
|
27
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|
For the three and nine months ended September 30, 2008, net
sales outside the U.S. totaled $3.2 billion and
$9.9 billion, respectively. This approximated
70 percent of consolidated net sales for both periods.
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Increased sales in the nine months ended September 30,
2008, of pharmaceutical products such as REMICADE and TEMODAR as
well as increased sales in the Animal Health segment contributed
favorably to Schering-Ploughs overall operating results.
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Global combined net sales of Schering-Ploughs cholesterol
franchise products, VYTORIN and ZETIA, decreased 6 percent
during the first nine months of 2008 as compared to the first
nine months of 2007. Combined net sales of the products VYTORIN
and ZETIA in the U.S. decreased 20 percent during the
first nine months of 2008 as compared to the first nine months
of 2007.
|
Strategic
Alliances
As is typical in the pharmaceutical industry, Schering-Plough
licenses manufacturing, marketing
and/or
distribution rights to certain products to others, and also
manufactures, markets
and/or
distributes products owned by others pursuant to licensing and
joint venture arrangements. Any time that third parties are
involved, there are additional factors relating to the third
party and outside the control of Schering-Plough that may create
positive or negative impacts on Schering-Plough. VYTORIN, ZETIA
and REMICADE are subject to such arrangements and are key to
Schering-Ploughs current business and financial
performance.
In addition, any potential strategic alternatives may be
impacted by the change of control provisions in those
arrangements, which could result in VYTORIN and ZETIA being
acquired by Merck or REMICADE reverting back to Centocor. The
change in control provision relating to VYTORIN and ZETIA is
included in the contract with Merck, filed as Exhibit 10(r)
to Schering-Ploughs 2007
10-K/A, and
the change of control provision relating to REMICADE is
contained in the contract with Centocor, filed as
Exhibit 10(v) to Schering-Ploughs 2007
10-K/A.
Cholesterol
Franchise
Schering-Ploughs cholesterol franchise products, VYTORIN
and ZETIA, are managed through a joint venture between
Schering-Plough and Merck for the treatment of elevated
cholesterol levels in all markets outside Japan. ZETIA is
Schering-Ploughs novel cholesterol absorption inhibitor.
VYTORIN is the combination of ZETIA and Zocor (simvastatin), a
statin medication developed by Merck. The financial commitment
to compete in the cholesterol-reduction market is shared with
Merck, and profits from the sales of VYTORIN and ZETIA are also
shared with Merck. The operating results of the joint venture
with Merck are recorded using the equity method of accounting.
The cholesterol-reduction market is the single largest
pharmaceutical category in the world. VYTORIN and ZETIA are
competing in this market. Global total combined sales of VYTORIN
and ZETIA for the three and nine months ended September 30,
2008, decreased 13 percent and 6 percent,
respectively, as compared to the three and nine months ended
September 30, 2007. During the three and nine months ended
September 30, 2008, total combined sales of VYTORIN and
ZETIA in the U.S. declined 29 percent and
20 percent, respectively, as compared to the three and nine
months ended September 30, 2007. During the three and nine
months ended September 30, 2008, total combined sales of
VYTORIN and ZETIA outside the U.S. increased
37 percent and 40 percent, respectively, as compared
to the three and nine months ended September 30, 2007. As
of September 2008, total combined prescription share for VYTORIN
and ZETIA in the U.S. was down approximately six market
share points versus December 2007 from 16.9 percent to
10.9 percent. Media reaction to the release of the results
of the ENHANCE clinical trial in early 2008 led some
commentators to call for the use of other products, rather than
VYTORIN and ZETIA. Continued reductions in the sales
and/or
market share of Schering-Ploughs cholesterol franchise
would have a significant impact on Schering-Ploughs
consolidated results of operations and cash flows. In the past,
Schering-Ploughs profitability has been largely dependent
upon the performance of the cholesterol franchise; while
performance of the cholesterol franchise is still material to
Schering-Plough, as the product diversity has become stronger
(through the OBS acquisition as well as development of other
Schering-Plough products) the dependence on the cholesterol
franchise is lessening.
28
Japan is not included in the joint venture with Merck. In the
Japanese market, Bayer Healthcare is co-marketing
Schering-Ploughs cholesterol-absorption inhibitor, ZETIA,
which was approved in Japan in April 2007 as a monotherapy and
co-administered with a statin for use in patients with
hypercholesterolemia, familial hypercholesterolemia or
homozygous sitosterolemia. ZETIA was launched in Japan during
June 2007. Schering-Ploughs sales of ZETIA in Japan under
the co-marketing agreement with Bayer Healthcare are recognized
in net sales and included in Other Pharmaceuticals.
License
Arrangements with Centocor
REMICADE is prescribed for the treatment of inflammatory
diseases such as rheumatoid arthritis, early rheumatoid
arthritis, psoriatic arthritis, Crohns disease, ankylosing
spondylitis, plaque psoriasis and ulcerative colitis. REMICADE
is Schering-Ploughs second largest marketed pharmaceutical
product line (after the cholesterol franchise). REMICADE is
licensed from and manufactured by Centocor, Inc., a
Johnson & Johnson company. During 2005,
Schering-Plough exercised an option under its contract with
Centocor for license rights to develop and commercialize
golimumab, a fully human monoclonal antibody which has been
filed for approval in Europe. Schering-Plough has exclusive
marketing rights to both products outside the U.S., Japan and
certain Asian markets. In December 2007, Schering-Plough and
Centocor revised their distribution agreement regarding the
development, commercialization and distribution of both REMICADE
and golimumab, extending Schering-Ploughs rights to
exclusively market REMICADE to match the duration of
Schering-Ploughs exclusive marketing rights for golimumab.
Effective upon regulatory approval of golimumab in the EU,
Schering-Ploughs marketing rights for both products will
now extend for 15 years after the first commercial sale of
golimumab within the EU. Centocor will receive a progressively
increased share of profits on Schering-Ploughs
distribution of both products in the Schering-Plough marketing
territory between 2010 and 2014, and the share of profits will
remain fixed thereafter for the remainder of the term. The
changes to the duration of REMICADE marketing rights and the
profit sharing arrangement for the products are all conditioned
on approval of golimumab being granted prior to
September 1, 2014. Schering-Plough may independently
develop and market golimumab for a Crohns disease
indication in its territories, with an option for Centocor to
participate. In addition, Schering-Plough and Centocor agreed to
utilize an autoinjector device in the commercialization of
golimumab and further agreed to share its development costs.
Manufacturing,
Sales and Marketing
Schering-Plough supports commercialized products with
manufacturing, sales and marketing efforts. Schering-Plough is
also moving forward with additional investments to enhance its
infrastructure and business, including capital expenditures for
the drug development process (where products are moved from the
drug discovery pipeline to markets), information technology
systems, and post-marketing studies and monitoring.
Schering-Plough continually reviews the business, including
manufacturing operations, to identify actions that will enhance
long-term competitiveness. However, Schering-Ploughs
manufacturing cost base is relatively fixed, and actions to
significantly reduce Schering-Ploughs manufacturing
infrastructure, including specific reviews of
Schering-Ploughs manufacturing operations that will be
made as part of PTP involve complex issues. As a result,
shifting products between manufacturing plants can take many
years due to construction and regulatory requirements, including
revalidation and registration requirements. Future events and
decisions may lead to asset impairments or related costs.
Regulatory
and Competitive Environment
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. Regulatory
compliance is complex and costly, impacting the timing needed to
bring new drugs to market and to market drugs for new
indications.
Schering-Plough engages in clinical trial research in many
countries around the world. Research activities must comply with
stringent regulatory standards and are subject to inspection by
the U.S., the EU, and local country regulatory authorities.
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. Clinical
trials
29
and post-marketing surveillance of certain marketed drugs of
competitors within the industry have raised safety concerns that
have led to recalls, withdrawals or adverse labeling of marketed
products.
A number of intermediaries are involved between drug
manufacturers, such as Schering-Plough, and patients who use the
drugs. These intermediaries impact the patients ability,
and their prescribers ability, to choose and pay for a
particular drug. These intermediaries include health care
providers, such as hospitals and clinics; payors and their
representatives, such as employers, insurers, managed care
organizations and governments; and others in the supply chain,
such as pharmacists and wholesalers. Further, in the U.S., many
of Schering-Ploughs pharmaceutical products are subject to
increasingly competitive pricing as certain of the
intermediaries (including managed care groups, institutions and
government agencies) seek price discounts. In most international
markets, Schering-Plough operates in an environment of
government-mandated cost-containment programs. Also, the
pricing, sales and marketing programs and arrangements, and
related business practices of Schering-Plough and other
participants in the health care industry are under continued
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities.
The market for pharmaceutical products is competitive.
Schering-Ploughs operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, loss of patent protection due to
challenges by competitors, competitive combination products, new
products of competitors, new information from clinical trials of
marketed products or post-marketing surveillance and generic
competition as Schering-Ploughs products mature.
OBS
Acquisition
On November 19, 2007, Schering-Plough acquired OBS for a
purchase price of approximately Euro 11 billion in
cash, or approximately $16.1 billion.
Commencing from the acquisition date, OBS assets acquired
and liabilities assumed, as well as the results of OBS
operations, are included in Schering-Ploughs consolidated
financial statements.
The impact of purchase accounting, based on a preliminary
valuation, resulted in the following non-cash pre-tax items
during the three and nine months ended September 30, 2008:
|
|
|
|
|
Amortization of inventory adjusted to fair value, which totaled
approximately $1.1 billion, will be charged to cost of
sales over an approximate one-year period from the acquisition
date ($78 million and $840 million for the three and
nine months ended September 30, 2008, respectively).
|
|
|
|
Amortization of acquired intangible assets adjusted to fair
value, which totaled $6.8 billion will be amortized over a
weighted-average life of 15 years to cost of sales
($136 million and $407 million for the three and nine
months ended September 30, 2008, respectively).
|
|
|
|
Incremental depreciation relating to the adjustment in fair
value on property, plant and equipment of approximately
$900 million that will be depreciated over the lives of the
applicable plant and equipment primarily to cost of sales
($11 million and $27 million for the three and nine
months ended September 30, 2008, respectively).
|
DISCUSSION
OF OPERATING RESULTS
The results of operations for the three and nine months ended
September 30, 2008 discussed below, unless otherwise noted,
include sales of products and expenses from OBS as well as
certain non-cash items relating to purchase accounting
associated with the OBS acquisition.
Net
Sales
A significant portion of net sales is made to major
pharmaceutical and health care product distributors and major
retail chains in the U.S. Consequently, net sales and
quarterly growth comparisons may be affected by fluctuations in
the buying patterns of major distributors, retail chains and
other trade buyers. These fluctuations may result from
seasonality; pricing; wholesaler, retail and trade buying
decisions; changes in overall demand factors or other factors.
In addition to these fluctuations, sales of many pharmaceutical
30
products in the U.S. are subject to increased pricing
pressure from managed care groups, institutions, government
agencies, and other groups seeking discounts. Schering-Plough
and other pharmaceutical manufacturers in the U.S. market
are also required to provide statutorily defined rebates to
various government agencies in order to participate in the
Medicaid program, veterans health care programs and other
government-funded programs. The Medicare Prescription Drug
Improvement and Modernization Act of 2003 contains a
prescription drug benefit for individuals who are eligible for
Medicare and has resulted in increased use of generics and
increased purchasing power of those negotiating on behalf of
Medicare recipients. In most international markets,
Schering-Plough operates in an environment where governments
have mandated cost-containment programs, placed restrictions on
physician prescription levels and patient reimbursements,
emphasized greater use of generic drugs and enacted
across-the-board
price cuts as methods to control costs.
Consolidated Net sales for the three months ended
September 30, 2008 totaled $4.6 billion, an increase
of $1.8 billion or 63 percent compared with the same
period in 2007, including an estimated impact of 6 percent
from foreign exchange on stand-alone Schering-Plough net sales.
For the nine months ended September 30, 2008, consolidated
Net sales totaled $14.2 billion, an increase of
$5.2 billion or 58 percent as compared to the same
period in 2007, including an estimated impact of 7 percent
from foreign exchange on stand-alone Schering-Plough net sales.
The impact of currency is more pronounced on products and
businesses that are concentrated in Europe.
Consolidated Net sales for the three and nine months ended
September 30, 2008 included $1.4 billion and
$4.2 billion of net sales of products from OBS. The
increase in net sales also reflects the growth in sales volumes
of human prescription pharmaceutical products such as REMICADE
and TEMODAR as well as Animal Health and Consumer Health Care
products.
For the three and nine months ended September 30, 2008, Net
sales outside the U.S. totaled $3.2 billion and
$9.9 billion, respectively. Net sales outside the
U.S. approximated 70 percent of consolidated net sales
for both periods.
31
Net sales for the three and nine months ended September 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
PRESCRIPTION PHARMACEUTICALS
|
|
$
|
3,539
|
|
|
$
|
2,291
|
|
|
|
54
|
%
|
|
$
|
10,798
|
|
|
$
|
7,209
|
|
|
|
50
|
%
|
REMICADE
|
|
|
564
|
|
|
|
426
|
|
|
|
32
|
%
|
|
|
1,627
|
|
|
|
1,193
|
|
|
|
36
|
%
|
TEMODAR
|
|
|
273
|
|
|
|
215
|
|
|
|
27
|
%
|
|
|
760
|
|
|
|
627
|
|
|
|
21
|
%
|
NASONEX
|
|
|
258
|
|
|
|
242
|
|
|
|
6
|
%
|
|
|
876
|
|
|
|
821
|
|
|
|
7
|
%
|
PEGINTRON
|
|
|
235
|
|
|
|
221
|
|
|
|
6
|
%
|
|
|
689
|
|
|
|
672
|
|
|
|
3
|
%
|
CLARINEX/AERIUS
|
|
|
176
|
|
|
|
171
|
|
|
|
3
|
%
|
|
|
630
|
|
|
|
625
|
|
|
|
1
|
%
|
FOLLISTIM/PUREGON
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
NUVARING
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
CLARITIN Rx
|
|
|
87
|
|
|
|
83
|
|
|
|
5
|
%
|
|
|
326
|
|
|
|
297
|
|
|
|
10
|
%
|
INTEGRILIN
|
|
|
84
|
|
|
|
78
|
|
|
|
7
|
%
|
|
|
236
|
|
|
|
241
|
|
|
|
(2
|
%)
|
CAELYX
|
|
|
80
|
|
|
|
64
|
|
|
|
24
|
%
|
|
|
232
|
|
|
|
191
|
|
|
|
22
|
%
|
ZEMURON
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
AVELOX
|
|
|
65
|
|
|
|
78
|
|
|
|
(17
|
%)
|
|
|
274
|
|
|
|
269
|
|
|
|
2
|
%
|
REBETOL
|
|
|
63
|
|
|
|
60
|
|
|
|
5
|
%
|
|
|
193
|
|
|
|
206
|
|
|
|
(6
|
%)
|
REMERON
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
Other Pharmaceuticals
|
|
|
1,261
|
|
|
|
653
|
|
|
|
93
|
%
|
|
|
3,783
|
|
|
|
2,067
|
|
|
|
83
|
%
|
ANIMAL HEALTH
|
|
|
759
|
|
|
|
248
|
|
|
|
206
|
%
|
|
|
2,299
|
|
|
|
744
|
|
|
|
209
|
%
|
CONSUMER HEALTH CARE
|
|
|
278
|
|
|
|
273
|
|
|
|
2
|
%
|
|
|
1,057
|
|
|
|
1,012
|
|
|
|
4
|
%
|
OTC
|
|
|
160
|
|
|
|
162
|
|
|
|
(1
|
%)
|
|
|
550
|
|
|
|
521
|
|
|
|
6
|
%
|
OTC CLARITIN
|
|
|
92
|
|
|
|
104
|
|
|
|
(11
|
%)
|
|
|
350
|
|
|
|
368
|
|
|
|
(5
|
%)
|
MIRALAX
|
|
|
31
|
|
|
|
16
|
|
|
|
90
|
%
|
|
|
85
|
|
|
|
30
|
|
|
|
N/M
|
|
Other OTC
|
|
|
37
|
|
|
|
42
|
|
|
|
(11
|
%)
|
|
|
115
|
|
|
|
123
|
|
|
|
(7
|
%)
|
Foot Care
|
|
|
96
|
|
|
|
92
|
|
|
|
5
|
%
|
|
|
286
|
|
|
|
272
|
|
|
|
5
|
%
|
Sun Care
|
|
|
22
|
|
|
|
19
|
|
|
|
11
|
%
|
|
|
221
|
|
|
|
219
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED NET SALES
|
|
$
|
4,576
|
|
|
$
|
2,812
|
|
|
|
63
|
%
|
|
$
|
14,154
|
|
|
$
|
8,965
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not a meaningful percentage.
Sales of Human Prescription Pharmaceuticals for the three months
ended September 30, 2008, totaled $3.5 billion, a
$1.2 billion or 54 percent increase as compared to the
three months ended September 30, 2007. Included in the
three months ended September 30, 2008 was $896 million
of net sales related to the sales of the prescription
pharmaceutical products from OBS. Excluding sales of
prescription pharmaceutical products from OBS, net sales of
Human Prescription Pharmaceuticals increased 1 percent in
the U.S. for the three months ended September 30, 2008.
Sales of Human Prescription Pharmaceuticals for the nine months
ended September 30, 2008 totaled $10.8 billion, a
$3.6 billion or 50 percent increase as compared to the
nine months ended September 30, 2007. Included in the nine
month sales amounts in 2008 was $2.7 billion of net sales
related to the prescription pharmaceutical sales of OBS.
Excluding sales of OBS prescription pharmaceuticals, net sales
of Human Prescription Pharmaceuticals decreased 3 percent
in the U.S in the nine months ended September 30, 2008.
International net sales of REMICADE, for the treatment of
immune-mediated inflammatory disorders such as rheumatoid
arthritis, early rheumatoid arthritis, ankylosing spondylitis,
psoriatic arthritis, plaque psoriasis, Crohns disease,
pediatric Crohns disease and ulcerative colitis, were up
$138 million or 32 percent to $564 million for
the three months ended September 30, 2008 and
$434 million or 36 percent to $1.6 billion
32
for the first nine months of 2008, driven by continued market
growth, expanded penetration and a favorable impact from foreign
exchange. Competitive products for the indications referred to
above were introduced during 2007 and 2008.
Global net sales of TEMODAR Capsules, a treatment for certain
types of brain tumors, increased $58 million or
27 percent to $273 million in the third quarter of
2008 due to higher sales in all geographic regions and
$133 million or 21 percent to $760 million for
the first nine months of 2008. TEMODAR will lose patent
exclusivity in the EU in 2009.
Global net sales of NASONEX Nasal Spray, an inhaled nasal
corticosteroid for allergies, rose $16 million or
6 percent to $258 million in the third quarter of 2008
and $55 million or 7 percent to $876 million for
the first nine months of 2008, due to increased sales in
international markets, partially offset by a decline in sales in
the United States. Competitive products were introduced in 2007
and 2008.
Global net sales of PEGINTRON, for treating hepatitis C,
increased 6 percent to $235 million in the third
quarter of 2008 primarily due to the favorable impact of foreign
exchange. For the first nine months of 2008, PEGINTRON increased
3 percent to $689 million due to higher sales in
international markets including a favorable impact from foreign
exchange, tempered by lower sales in Japan and the U.S.
Global net sales of CLARINEX (marketed as AERIUS in many
countries outside the U.S.), a non-sedating antihistamine for
the treatment of seasonal outdoor allergies and year-round
indoor allergies, increased 3 percent to $176 million
in the third quarter of 2008 and increased 1 percent to
$630 million for the first nine months of 2008 due to
increased sales in international markets including a favorable
impact of foreign exchange, partially offset by a decline in
sales in the United States
Global net sales of FOLLISTIM/PUREGON, a recombinant
follicle-stimulating hormone for treating infertility, were
$142 million in the third quarter of 2008 and
$450 million for the nine months ended September 30,
2008. FOLLISTIM/PUREGON was obtained as part of the OBS
acquisition. FOLLISTIM/PUREGON will lose patent exclusivity in
the EU in 2009.
Global net sales of NUVARING, a contraception product, were
$118 million for the three months ended September 30,
2008 and $330 million for the nine months ended
September 30, 2008. NUVARING was obtained as part of the
OBS acquisition.
International net sales of prescription CLARITIN increased
5 percent to $87 million in the third quarter of 2008
and increased 10 percent to $326 million for the first
nine months of 2008, primarily as a result of favorable foreign
exchange.
Global net sales of INTEGRILIN Injection, a glycoprotein
platelet aggregation inhibitor for the treatment of patients
with acute coronary syndrome, which is sold primarily in the
U.S. by Schering-Plough, increased 7 percent to
$84 million for the three months ended September 30,
2008. Global net sales of INTEGRILIN decreased 2 percent to
$236 million for the first nine months of 2008 due to a
decrease in U.S. market size.
International net sales of CAELYX, for the treatment of ovarian
cancer, metastatic breast cancer and Kaposis sarcoma,
increased 24 percent to $80 million in the third
quarter of 2008 and 22 percent to $232 million for the
first nine months of 2008, primarily due to higher sales across
Europe.
Global net sales of ZEMURON, a muscle relaxant used in surgical
procedures, were $72 million in the third quarter of 2008
and $202 million in the first nine months of 2008. ZEMURON
was obtained as part of the OBS acquisition. ZEMURON lost patent
exclusivity in the U.S. in October 2008 and will lose
patent exclusivity in the EU in 2009.
Net sales of AVELOX, a fluoroquinolone antibiotic for the
treatment of certain respiratory and skin infections, sold
primarily in the U.S. by Schering-Plough as a result of its
license agreement with Bayer, decreased 17 percent to
$65 million in the third quarter of 2008 reflecting a
decline in the U.S. respiratory tract infection market. Net
sales of AVELOX for the first nine months of 2008 increased
2 percent to $274 million primarily as a result of
increased market share tempered by an overall market decline.
Global net sales of REBETOL Capsules, for use in combination
with PEGINTRON or INTRON A for treating hepatitis C,
increased 5 percent to $63 million in the third
quarter of 2008. Sales decreased 6 percent to
$193 million in the first nine months of 2008 due to lower
sales in Japan.
33
Global net sales of REMERON, an antidepressant, were
$61 million in the third quarter of 2008 and
$190 million in the first nine months of 2008. REMERON was
obtained as part of the OBS acquisition.
Other pharmaceutical net sales include a large number of lower
sales volume prescription pharmaceutical products and included
approximately $500 million and approximately
$1.5 billion of net sales of the human health segment of
OBS for the third quarter and the first nine months of 2008,
respectively. Several of these products are sold in limited
markets outside the U.S., and many are multiple source products
no longer protected by patents. These products include
treatments for respiratory, cardiovascular, dermatological,
infectious, oncological and other diseases.
Global net sales of Animal Health products increased
206 percent in the third quarter of 2008 to
$759 million and 209 percent to $2.3 billion for
the first nine months of 2008. Included in global Animal Health
net sales was $503 million and $1.5 billion from the
animal health segment of OBS for the third quarter and the first
nine months of 2008, respectively. Sales for the three and nine
months ended September 30, 2008 benefited from growth in
all geographic regions. In Europe, Schering-Plough launched a
vaccine for bluetongue disease (Bovilis BTV8) in 2008, and has
seen increasing market penetration. Bluetongue disease is a
devastating disease of cattle and sheep caused by a virus which
was first identified in Northern Europe in 2006. Schering-Plough
has also had a successful recent launch of NORVAX Compact PD, a
patented fish vaccine. The Animal Health segment also benefited
from foreign exchange. The Animal Health segments sales
growth rate is impacted by intense competition and frequent
introductions of generic products. In September 2008,
Schering-Plough completed the previously announced divestitures
of certain animal health products in connection with conditions
set forth by the European Commission as part of the acquisition
of Intervet. Net sales of the previously announced divested
products were not material.
Global net sales of Consumer Health Care products, which include
OTC, foot care and sun care products, increased 2 percent
to $278 million in the third quarter of 2008. The increase
in the third quarter of 2008 was mainly due to higher sales of
MiraLAX, which was launched in February 2007 as the first
Rx-to-OTC
switch in the laxative category in more than 30 years,
partially offset by lower sales of OTC CLARITIN. Global net
sales of Consumer Health Care products for the first nine months
of 2008 increased 4 percent to $1.1 billion. This
growth was primarily due to sales of MiraLAX and foot care
products partially offset by lower sales of OTC CLARITIN. OTC
CLARITIN will continue to face competition from a
cetirizine-based allergy product and other store brands. Future
sales in the Consumer Health Care segment are difficult to
predict because the consumer health care market is highly
competitive, with heavy advertising to consumers and frequent
competitive product introductions.
34
Costs,
Expenses and Equity Income
A summary of costs, expenses and equity income for the three and
nine months ended September 30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
%
|
|
|
(Dollars in millions)
|
|
|
%
|
|
|
Gross margin
|
|
|
62.0
|
%
|
|
|
67.1
|
%
|
|
|
(5.1
|
%)
|
|
|
59.1
|
%
|
|
|
68.3
|
%
|
|
|
(9.2
|
%)
|
Selling, general and administrative (SG&A)
|
|
$
|
1,660
|
|
|
$
|
1,262
|
|
|
|
32
|
%
|
|
$
|
5,208
|
|
|
$
|
3,833
|
|
|
|
36
|
%
|
Research and development (R&D)
|
|
|
893
|
|
|
|
669
|
|
|
|
33
|
%
|
|
|
2,679
|
|
|
|
2,071
|
|
|
|
29
|
%
|
Other expense/(income), net
|
|
|
(39
|
)
|
|
|
(390
|
)
|
|
|
N/M
|
|
|
|
189
|
|
|
|
(451
|
)
|
|
|
N/M
|
|
Special and acquisition related charges
|
|
|
101
|
|
|
|
20
|
|
|
|
N/M
|
|
|
|
218
|
|
|
|
32
|
|
|
|
N/M
|
|
Equity income from cholesterol joint venture
|
|
|
(434
|
)
|
|
|
(506
|
)
|
|
|
(14
|
%)
|
|
|
(1,444
|
)
|
|
|
(1,483
|
)
|
|
|
(3
|
%)
|
N/M Not a meaningful percentage.
Substantially all the sales of cholesterol products are not
included in Schering-Ploughs net sales. The results of
these sales are reflected in equity income from cholesterol
joint venture. In addition, due to the virtual nature of the
joint venture, Schering-Plough incurs substantial selling,
general and administrative expenses that are not captured in
equity income but are included in Schering-Ploughs
Statements of Consolidated Operations. As a result,
Schering-Ploughs gross margin, and ratios of SG&A
expenses and R&D expenses as a percentage of net sales do
not reflect the benefit of the impact of the joint
ventures operating results.
Gross
margin
Gross margin decreased to 62.0 percent in the third quarter
of 2008 and 59.1 percent for the first nine months of 2008
as compared to 67.1 percent and 68.3 percent for the
third quarter and first nine months of 2007, respectively. Gross
margin for the three and nine months ended September 30,
2008 was unfavorably impacted by $221 million and
$1.3 billion, respectively, of purchase accounting items
included in cost of sales. These purchase accounting items
resulted from the amortization of fair values of certain assets
acquired as part of the OBS acquisition.
Selling,
general and administrative
Selling, general and administrative expenses (SG&A) were
$1.7 billion in the third quarter of 2008 and
$5.2 billion in the first nine months of 2008, up
32 percent and 36 percent, respectively, versus both
prior year periods. These increases in SG&A are primarily
due to the inclusion of expenses from OBS and the impact of
foreign exchange partially offset by PTP savings.
Research
and development
Research and development (R&D) spending increased
33 percent to $893 million in the third quarter of
2008 and 29 percent to $2.7 billion in the first nine
months of 2008. R&D spending in the third quarter and first
nine months of 2007 included $20 million and
$176 million, respectively, related to upfront payments
made for licensing transactions. The increase in R&D
spending as compared to 2007 reflects increased spending as a
result of the OBS acquisition as well as higher spending for
clinical trials and related activities and investments to build
greater breadth and capacity to support the continued expansion
of Schering-Ploughs pipeline. Changes in R&D spending
from period to period also reflect the timing of
Schering-Ploughs funding of both internal research efforts
and research collaborations with various partners to discover
and develop a steady flow of innovative products.
35
To maximize its chances for the successful development of new
products, Schering-Plough began a Development Excellence
initiative in 2005 to build talent and critical mass, create a
uniform level of excellence and deliver on high-priority
programs within R&D. In 2006, Schering-Plough began a
Global Clinical Harmonization Program to maximize and globalize
the quality of clinical trial execution, pharmacovigilance and
regulatory processes. Beginning in 2007, certain aspects of the
Global Clinical Harmonization Program have been implemented and
are being integrated into the processes of OBS.
Other
expense/(income), net
Schering-Plough had $39 million of other income, net, for
the three months ended September 30, 2008 and
$189 million of other expense, net, for the nine months
ended September 30, 2008, as compared to $390 million
and $451 million of other income, net, for the three and
nine months ended September 30, 2007, respectively.
Interest expense was higher for the three and nine months ended
September 30, 2008 due to the issuance of new debt in
connection with the acquisition of OBS in the second half of
2007. Other income, net, for the three months ended
September 30, 2008 includes $160 million
($149 million after tax) of gain on sale of the previously
announced divestitures of certain Animal Health products as
required by regulatory agencies in U.S. and Europe in
connection with the acquisition of OBS. In addition, during the
nine months ended September 30, 2008, Schering-Plough
recognized a gain of $17 million ($12 million after
tax) on the sale of a manufacturing site. Other income, net, for
the third quarter and first nine months of 2007 included
mark-to-market
gains on foreign currency options of $321 million and
$289 million.
Special
and acquisition-related charges
Special and acquisition-related charges relate to PTP activities
which include the ongoing integration of the OBS business.
Special and acquisition-related charges for the three and nine
months ended September 30, 2008 were $101 million and
$218 million, respectively. The costs for the three and
nine months ended September 30, 2008 included
$93 million and $177 million, respectively, of
employee termination costs. The remaining charges related to
integration activities. For the three and nine months ended
September 30, 2007, special and acquisition-related charges
were $20 million and $32 million, respectively.
The following table summarizes the charges, cash payments and
liabilities related to employee termination costs through
September 30, 2008, excluding purchase accounting items:
|
|
|
|
|
|
|
Employee
|
|
|
|
Termination
|
|
|
|
Costs(a)
|
|
|
|
(Dollars in millions)
|
|
|
Accrued liability at December 31, 2007
|
|
$
|
23
|
(b)
|
Charges
|
|
|
177
|
|
Cash payments
|
|
|
(65
|
)
|
|
|
|
|
|
Accrued liability at September 30, 2008
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
(a) |
|
Recorded to special and acquisition-related charges. |
|
(b) |
|
Represents employee termination costs recorded under
SFAS No. 112, Employers Accounting for
Postemployment Benefits, in the fourth quarter of 2007. |
Equity
income
Sales of the Merck/Schering-Plough cholesterol joint venture for
the three and nine months ended September 30, 2008 totaled
$1.1 billion and $3.5 billion, respectively, as
compared to $1.3 billion and $3.7 billion for the
three and nine months September 30, 2007.
The companies bear the costs of their own general sales forces
and commercial overhead in marketing joint venture products
around the world. In the U.S., Canada and Puerto Rico, the
cholesterol agreements provide for a reimbursement to each
company for physician details that are set on an annual basis,
and in Italy, a contractual amount is included in the profit
sharing calculation that is not reimbursed. In the U.S.,
36
Canada and Puerto Rico, this amount is equal to each
companys agreed physician details multiplied by a
contractual fixed fee. Schering-Plough reports these amounts as
part of equity income from the cholesterol joint venture. These
amounts do not represent a reimbursement of specific,
incremental and identifiable costs for Schering- Ploughs
detailing of the cholesterol products in these markets. In
addition, these amounts are not reflective of
Schering-Ploughs sales effort related to the joint
venture, as Schering-Ploughs sales force and related costs
associated with the joint venture are generally estimated to be
higher.
Costs of the joint venture that the companies contractually
share are a portion of manufacturing costs, specifically
identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as market support, market research, market expansion, a
specialty sales force and physician education programs.
Certain specified research and development expenses are
generally shared equally by Schering-Plough and Merck.
The allergy/asthma agreements provided for the joint development
and marketing by the companies of a once-daily,
fixed-combination tablet containing loratadine/montelukast. On
April 25, 2008, the Merck/Schering-Plough joint venture
received a not-approvable letter from the FDA for the proposed
fixed combination of loratadine/montelukast. During the second
quarter of 2008 the respiratory joint venture was terminated in
accordance with the agreements. This action has no impact on the
cholesterol joint venture. As a result of the termination of the
respiratory joint venture, Schering- Plough expects to receive
payments totaling $105 million from Merck which
Schering-Plough will recognize during 2008. During the three and
nine months ended September 30, 2008, the
Merck/Schering-Plough joint venture allocated $19 million
and $83 million, respectively, of this amount to
Schering-Plough, which is included in equity income.
Equity income from the Merck/Schering-Plough cholesterol joint
venture totaled $434 million and $1.4 billion for the
three and nine months ended September 30, 2008,
respectively, as compared to $506 million and
$1.5 billion for the three and nine months ended
September 30, 2007, respectively. The decrease in 2008
equity income amounts compared to 2007 reflects sales declines
of VYTORIN and ZETIA in the U.S. partially offset by sales
growth internationally.
It should be noted that Schering-Plough incurs substantial
selling, general and administrative and other costs, which are
not reflected in equity income from the cholesterol joint
venture and instead are included in the overall cost structure
of Schering-Plough.
Provision
for Income Taxes
Tax expense was $69 million and $207 million for the
three and nine months ended September 30, 2008,
respectively. Tax expense was $82 million and
$272 million for the three and nine months ended
September 30, 2007, respectively. The tax provision for the
three and nine months ended September 30, 2008 included tax
benefits of $54 million and $192 million,
respectively, primarily related to the amortization of fair
values of certain assets acquired as part of the OBS
acquisition. The income tax expense primarily relates to foreign
taxes and does not include any benefit related to
U.S. operating losses.
Schering-Plough reported a U.S. Net Operating Loss (NOL)
carryforward of approximately $1.8 billion on its 2007 tax
return, which will be available to offset future
U.S. taxable income, in varying amounts, through 2027. This
U.S. NOL carryforward could be materially reduced after
examination of Schering-Ploughs income tax returns by the
Internal Revenue Service (IRS). Schering-Plough continues to
maintain a valuation allowance against its U.S. deferred
tax assets, as management cannot conclude that it is more likely
than not the benefit of the U.S. net deferred tax assets
can be realized.
37
LIQUIDITY
AND FINANCIAL RESOURCES
Discussion
of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in
|
|
|
|
millions)
|
|
|
Cash flow provided by operating activities
|
|
$
|
2,575
|
|
|
$
|
1,248
|
|
Cash flow (used for)/provided by investing activities
|
|
|
(244
|
)
|
|
|
2,637
|
|
Cash flow (used for)/provided by financing activities
|
|
|
(1,416
|
)
|
|
|
5,788
|
|
Operating
Activities
In the first nine months of 2008, operating activities provided
$2.6 billion of cash, compared with net cash provided by
operations of $1.2 billion in the first nine months of
2007. The increase is primarily due to the absence of special
and acquisition-related payments associated with the settlement
of the Massachusetts Investigation in 2007 and the purchase of a
currency option related to the acquisition of OBS. The increase
also reflects the inclusion of the OBS business.
Investing
Activities
Net cash used for investing activities during the first nine
months of 2008 was $244 million and primarily relates to
capital expenditures of $542 million partially offset by
the proceeds from divested products of $241 million. Net
cash provided by investing activities for the first nine months
of 2007 was $2.6 billion and included a net reduction of
short-term investments partially offset by capital expenditures.
Financing
Activities
Net cash used for financing activities was $1.4 billion for
the first nine months of 2008, compared to $5.8 billion of
cash provided by financing activities for the same period in
2007. Uses of cash for financing activities for the nine months
ended September 30, 2008 included the pay down of
Euro-denominated long-term debt of Euro 500 million
($779 million), payment of dividends on common and
preferred shares of $430 million and pay down of commercial
paper and other short-term debt outstanding of
$207 million. Net cash provided by financing activities for
the nine months ended September 30, 2007 included net
proceeds on the issuance of common and preferred shares of
approximately $1.5 billion and $2.4 billion,
respectively, and net proceeds of approximately
$2.0 billion on the issuance of long-term debt.
Other
Discussion of Cash Flows
At September 30, 2008, Schering-Plough had net debt (total
debt less cash, cash equivalents and short-term investments) of
approximately $5.2 billion. Cash generated from operations
and available cash and short-term investments are expected to
provide Schering-Plough with the ability to fund cash needs for
the intermediate term.
In July 2007, Schering-Plough made a cash payment of
$98 million for tax and interest due in connection with an
examination by the IRS of Schering-Ploughs
1997-2002
federal income tax returns.
Borrowings
and Credit Facilities
At September 30, 2008 and December 31, 2007,
short-term borrowings and current portion of long-term debt
totaled $237 million and $461 million, respectively.
There was no outstanding commercial paper at September 30,
2008 as Schering-Plough paid down its entire $149 million
in outstanding commercial paper during the three months ended
September 30, 2008.
Total debt at September 30, 2008 was $8.4 billion,
lower than the total debt balance at December 31, 2007 of
$9.5 billion. Total debt includes Euro-denominated notes
and a Euro-denominated term loan. The
38
reduction in the total debt balance primarily related to the pay
down in the Euro-denominated term loan and the pay down of
commercial paper. Early principal repayments of
Euro 200 million ($310 million) in the second
quarter of 2008 and Euro 300 million
($469 million) in the third quarter of 2008 resulted in a
decrease in the Floating rate Euro-denominated term loan due
2012. There was no prepayment penalty associated with these
principal payments. In addition, Schering-Plough paid down its
outstanding commercial paper of $149 million.
Schering-Plough has a $2.0 billion credit facility with a
syndicate of banks available for general corporate purposes.
This facility has a floating interest rate, matures in August
2012 and is used primarily to support Schering-Ploughs
commercial paper borrowings. As of September 30, 2008, no
borrowings were outstanding under this facility.
Schering-Ploughs current unsecured senior credit ratings
and ratings review status are as follows:
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Credit Ratings
|
|
Long-Term
|
|
|
Short-Term
|
|
|
Long-Term Review Status
|
|
Moodys Investors Service
|
|
|
Baa1
|
|
|
|
P-2
|
|
|
Negative Outlook
|
Standard and Poors
|
|
|
A-
|
|
|
|
A-2
|
|
|
Stable
|
Fitch Ratings
|
|
|
BBB+
|
|
|
|
F-2
|
|
|
Stable
|
During the three months ended September 30, 2008, Standard
and Poors and Fitch Ratings changed their Long Term Review
Status on Schering-Ploughs credit ratings from Negative
Watch to Stable.
Schering-Plough paid down its entire commercial paper borrowings
of $149 million during the three months ended
September 30, 2008. From a cash perspective,
Schering-Plough remains invested in highly-liquid and
highly-rated securities. Further, Schering-Plough is not relying
on commercial paper to fund current liquidity needs. Prior to
the recent credit crisis, Schering-Plough reduced its exposure
to commercial paper and currently has no outstanding commercial
paper. Schering-Plough remains focused on the credit markets and
continues to closely monitor the broader financial and economic
situation. Schering-Plough believes the ability of commercial
paper issuers, such as Schering-Plough, with one or more
short-term credit ratings of
P-2 from
Moodys,
A-2 from
S&P
and/or F-2
from Fitch to issue or rollover outstanding commercial paper
can, at times, be less than that of companies with higher
short-term credit ratings. Further, the total amount of
commercial paper capacity available to these issuers, such as
Schering-Plough, is typically less than that of higher-rated
companies. In addition, Schering-Ploughs ability to issue
commercial paper in the future is dependent on capital market
conditions at that time. Schering-Ploughs sizable lines of
credit with commercial banks as well as cash and short-term
investments held by U.S. and international subsidiaries
serve as alternative sources of liquidity.
Contractual
Obligations
Schering-Ploughs contractual obligations as of
December 31, 2007 were included in tabular format in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of the 2007
10-K/A.
Payments due by period for interest payment obligations on
Schering-Ploughs debt as of December 31, 2007 are as
follows: less than one year, $550 million; one to three
years, $1.0 billion; three to five years,
$924 million; more than five years, $3.8 billion.
Potential milestone payments of $2.3 billion were not
included in the contractual obligations table as they are
contingent on the achievement of various research and
development (approximately $600 million), regulatory
approval (approximately $700 million) or sales-based
(approximately $1.0 billion) milestones. Research,
development and regulatory milestones depend upon future
clinical developments as well as regulatory agency actions which
may never occur. Sales-based milestones are contingent on
generating levels of sales of current or future products that
have not yet been achieved.
39
REGULATORY
AND COMPETITIVE ENVIRONMENT IN WHICH SCHERING-PLOUGH
OPERATES
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. The regulations
to which Schering-Plough is subject are described in more detail
in Part I, Item I, Business, of
Schering-Ploughs 2007
10-K/A.
Regulatory compliance is complex, as regulatory standards
(including Good Clinical Practices, Good Laboratory Practices
and Good Manufacturing Practices) vary by jurisdiction and are
constantly evolving. Regulatory compliance is also costly.
Regulatory compliance also impacts the timing needed to bring
new drugs to market and to market drugs for new indications.
Further, failure to comply with regulations can result in delays
in the approval of drugs, seizure or recall of drugs, suspension
or revocation of the authority necessary for the production and
sale of drugs, fines and other civil or criminal sanctions.
Regulatory compliance, and the cost of compliance failures, can
have a material impact on Schering-Ploughs results of
operations, its cash flows or financial condition.
Much is still unknown about the science of human health and with
every drug there are benefits and risks. Societal and government
pressures are constantly shifting between the demand for
innovation to meet urgent unmet medical needs and adversity to
risk. These pressures impact the regulatory environment and the
market for Schering-Ploughs products.
Regulatory
Compliance and Pharmacovigilance
Regulatory
Inspections
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. The
requirements differ from jurisdiction to jurisdiction, but all
include requirements for reporting adverse events that occur
while a patient is using a particular drug in order to alert the
drugs manufacturer and the governmental agency to
potential problems.
During 2003, pharmacovigilance inspections by officials of the
British and French medicines agencies conducted at the request
of the European Medicines Agency (EMEA) cited serious
deficiencies in reporting processes. Schering-Plough has
continued to work on its long-term action plan to rectify the
deficiencies and has provided regular updates to the EMEA.
During the fourth quarter of 2005, local UK and EMEA regulatory
authorities conducted a
follow-up
inspection to assess Schering-Ploughs implementation of
its action plan. In the first quarter of 2006, these authorities
also inspected the
U.S.-based
components of Schering-Ploughs pharmacovigilance system.
The inspectors acknowledged that progress had been made since
2003, but also continued to note significant concerns with the
quality systems supporting Schering-Ploughs
pharmacovigilance processes. Similarly, in a
follow-up
inspection of Schering-Ploughs clinical trial practices in
the UK, inspectors identified issues with respect to
Schering-Ploughs management of clinical trials and related
pharmacovigilance practices.
In February 2006, Schering-Plough began the Global Clinical
Harmonization Program for building clinical excellence (in trial
design, execution and tracking), which will strengthen
Schering-Ploughs scientific and compliance rigor on a
global basis. In 2007, certain aspects of the Global Clinical
Harmonization Program were implemented, and work is continuing
in 2008 and is expected to continue for several years. In
addition, during the fourth quarter of 2007, the local UK
regulatory authority conducted a
follow-up
inspection which confirmed that the corrective actions committed
to by Schering-Plough following the 2006 inspection of
Schering-Ploughs UK-based clinical trial operations had in
fact been completed. In early January 2008, the local UK
regulatory authority returned for a
follow-up
inspection of Schering-Ploughs UK pharmacovigilance
operations. This inspection likewise confirmed that a number of
corrective actions had been completed since the last inspection
and noted the number of actions Schering-Plough had taken as set
forth in Schering-Ploughs periodic updates to the EMEA and
noted a limited number of observations that Schering-Plough is
addressing. Schering-Plough intends to continue upgrading
skills, processes and systems in clinical practices and
pharmacovigilance. Schering- Plough remains committed to
accomplish this work and to invest significant resources in this
area.
40
Schering-Plough does not know what action, if any, the EMEA or
national authorities will take in response to the inspections.
Possible actions include further inspections, demands for
improvements in reporting systems, criminal sanctions against
Schering- Plough
and/or
responsible individuals and changes in the conditions of
marketing authorizations for Schering-Ploughs products.
Regulatory
Compliance and Post-Marketing Surveillance
Schering-Plough engages in clinical trial research in many
countries around the world. These clinical trial research
activities must comply with stringent regulatory standards and
are subject to inspection by U.S., EU and local country
regulatory authorities. Failure to comply with current Good
Clinical Practices or other applicable laws or regulations can
result in delays in approval of clinical trials, suspension of
ongoing clinical trials, delays in approval of marketing
authorizations, criminal sanctions against Schering-Plough
and/or
responsible individuals, and changes in the conditions of
marketing authorizations for Schering-Ploughs products.
Clinical trials and post-marketing surveillance of certain
marketed drugs of competitors within the industry have raised
safety concerns that have led to recalls, withdrawals or adverse
labeling of marketed products. In addition, these situations
have raised concerns among some prescribers and patients
relating to the safety and efficacy of pharmaceutical products
in general. For the past several years, these occurrences have
increased. Recently the intense media attention to the results
of the ENHANCE clinical trial led to some concerns among
patients and prescribers about ZETIA and VYTORIN (see discussion
under Strategy-Focused on Science in the Executive
Overview).
Following this wave of product withdrawals by other companies
and other significant safety issues, health authorities such as
the FDA, the EMEA and the PMDA have continued to increase their
focus on safety when assessing the benefit/risk balance of
drugs. Some health authorities appear to have become more
cautious when making decisions about approvability of new
products or indications and are re-reviewing select products
that are already marketed, adding further to the uncertainties
in the regulatory processes. There is also greater regulatory
scrutiny, especially in the U.S., on advertising and promotion
and in particular
direct-to-consumer
advertising.
Similarly, major health authorities, including the FDA, EMEA and
PMDA, have also increased collaboration amongst themselves,
especially with regard to the evaluation of safety and
benefit/risk information. Media attention has also increased. In
the current environment, a health authority regulatory action in
one market, such as a safety labeling change, may have
regulatory, prescribing and marketing implications in other
markets to an extent not previously seen.
Some health authorities, such as the PMDA in Japan, have
publicly acknowledged a significant backlog in workload due to
resource constraints within their agency. This backlog has
caused long regulatory review times for new indications and
products and has added to the uncertainty in predicting approval
timelines in these markets. While the PMDA has committed to
correcting the backlog and has made some progress over the last
year, it is expected to continue for the foreseeable future.
These and other uncertainties inherent in government regulatory
approval processes, including, among other things, delays in
approval of new products, formulations or indications, may also
affect Schering-Ploughs operations. The effect of
regulatory approval processes on operations cannot be predicted.
Schering-Plough has nevertheless achieved a significant number
of important regulatory approvals since 2004, including
approvals for VYTORIN, Sugammadex (in Europe), NOXAFIL, CLARINEX
D-24, CLARINEX REDITABS, CLARINEX D-12, SUBOXONE and new
indications for TEMODAR and NASONEX. Other significant approvals
since 2004 include ASMANEX DPI (Dry Powder for Inhalation) in
the U.S., PEGINTRON, ZETIA, TEMODAR, ESMERON/ESLAX, NASONEX and
GANIREST in Japan, and new indications for REMICADE.
Schering-Plough also has a number of significant regulatory
submissions filed in major markets awaiting approval.
Schering-Ploughs personnel have regular, open dialogue
with the FDA and other regulators and review product labels and
other materials on a regular basis and as new information
becomes known.
41
Pricing
Pressures
As described more specifically in Note 17, Legal,
Environmental and Regulatory Matters, under Item 1,
Financial Statements, the pricing, sales and
marketing programs and arrangements, and related business
practices of Schering-Plough and other participants in the
health care industry are under increasing scrutiny from federal
and state regulatory, investigative, prosecutorial and
administrative entities. These entities include the Department
of Justice and its U.S. Attorneys Offices, the Office
of Inspector General of the Department of Health and Human
Services, the FDA, the Federal Trade Commission (FTC) and
various state Attorneys General offices. Many of the
health care laws under which certain of these governmental
entities operate, including the federal and state anti-kickback
statutes and statutory and common law false claims laws, have
been construed broadly by the courts and permit the government
entities to exercise significant discretion. In the event that
any of those governmental entities believes that wrongdoing has
occurred, one or more of them could institute civil or criminal
proceedings, which, if instituted and resolved unfavorably,
could subject Schering-Plough to substantial fines, penalties
and injunctive or administrative remedies, including exclusion
from government reimbursement programs. Schering-Plough also
cannot predict whether any investigations will affect its
marketing practices or sales. Any such result could have a
material adverse impact on Schering-Ploughs results of
operations, cash flows, financial condition, or its business.
In the U.S., many of Schering-Ploughs pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
groups seek price discounts. In the U.S. market,
Schering-Plough and other pharmaceutical manufacturers are
required to provide statutorily defined rebates to various
government agencies in order to participate in Medicaid, the
veterans health care program and other government-funded
programs. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 contains a prescription drug benefit
for individuals who are eligible for Medicare and has resulted
in increased use of generics and increased purchasing power of
those negotiating on behalf of Medicare recipients.
In most international markets, Schering-Plough operates in an
environment of government mandated cost-containment programs.
Several governments have placed restrictions on physician
prescription levels and patient reimbursements; emphasized
greater use of generic drugs; and enacted
across-the-board
price cuts as methods to control costs.
Since Schering-Plough is unable to predict the final form and
timing of any future domestic or international governmental or
other health care initiatives, including the passage of laws
permitting the importation of pharmaceuticals into the U.S.,
their effect on operations and cash flows cannot be reasonably
estimated. Similarly, the effect on operations and cash flows of
decisions of government entities, managed care groups and other
groups concerning formularies and pharmaceutical reimbursement
policies cannot be reasonably estimated.
Competition
The market for pharmaceutical products is competitive.
Schering-Ploughs operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, competitive combination
products, new products of competitors, new information from
clinical trials of marketed products or post-marketing
surveillance and generic competition as Schering-Ploughs
products mature. In addition, patent positions are increasingly
being challenged by competitors, and the outcome can be highly
uncertain. An adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products. The effect on operations of competitive
factors and patent disputes cannot be predicted.
OUTLOOK
Schering-Plough does not provide numeric guidance. However, the
following outlook may be helpful to readers in assessing future
prospects.
See Part II, OTHER INFORMATION, Recent Cholesterol
Clinical Trials. Given the current uncertainties in the
cholesterol markets, it remains difficult to predict the
long-term performance of the cholesterol
42
franchise. Currently, Schering-Plough anticipates that net sales
by the Merck/Schering-Plough cholesterol joint venture of
VYTORIN and ZETIA in the U.S. will decline on a
year-over-year
basis in the fourth quarter of 2008. Further, wholesalers,
retail chains and other trade buyers in the U.S. have
changed their buying patterns to reduce their inventory levels,
and may make further changes, that may also impact future sales.
Based on the expectation of lower U.S. sales from the
Merck/Schering-Plough cholesterol joint venture, Schering-Plough
expects that equity income will be lower in the fourth quarter
of 2008 than it was in each of the first three quarters of 2008.
Schering-Plough expects R&D spending to be higher in the
fourth quarter of 2008 than it was in the third quarter of 2008.
The risks set forth in Part II, Item 1A, Risk
Factors, of this
10-Q could
cause actual results to differ materially from the expectation
provided in this section.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Refer to Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
in Schering-Ploughs 2007
10-K/A for
disclosures regarding Schering-Ploughs critical accounting
policies and estimates.
Schering-Ploughs rebate accruals for federal and state
governmental programs, including Medicaid and Medicare
Part D, at September 30, 2008 and 2007 were
$130 million and $115 million, respectively.
Commercial discounts, returns and other rebate accruals at
September 30, 2008 and 2007 were $419 million and
$366 million, respectively. These accruals are established
in the period that the related revenue was recognized, resulting
in a reduction to sales and the establishment of liabilities,
which are included in total current liabilities, or in the case
of returns and other receivable adjustments, an allowance
provided against accounts receivable.
The following summarizes the activity in the accounts related to
accrued rebates, sales returns and discounts for the nine months
ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Accrued rebates/returns/discounts, beginning of period
|
|
$
|
526
|
|
|
$
|
486
|
|
|
|
|
|
|
|
|
|
|
Provision for rebates
|
|
|
566
|
|
|
|
440
|
|
Adjustment to prior-year estimates
|
|
|
(7
|
)
|
|
|
(19
|
)
|
Payments
|
|
|
(544
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Provision for returns
|
|
|
112
|
|
|
|
121
|
|
Purchase-accounting adjustments(1)
|
|
|
(9
|
)
|
|
|
|
|
Adjustment to prior-year estimates
|
|
|
(4
|
)
|
|
|
(24
|
)
|
Returns
|
|
|
(91
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Provision for discounts
|
|
|
665
|
|
|
|
534
|
|
Adjustment to prior-year estimates
|
|
|
(6
|
)
|
|
|
|
|
Discounts granted
|
|
|
(659
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Accrued rebates/returns/discounts, end of period
|
|
$
|
549
|
|
|
$
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the nine months ended September 30, 2008,
purchase-accounting adjustments include $9 million related
to the reversal of return reserves recorded as part of the
purchase accounting for OBS. This reversal was recorded as a
reduction to goodwill. |
In formulating and recording the above accruals, management
utilizes assumptions and estimates that include historical
experience, wholesaler data, the projection of market
conditions, the estimated lag time between sale and payment of a
rebate, utilization estimates, and forecasted product demand
amounts.
43
As part of its review of these accruals, management performs a
sensitivity analysis that considers differing assumptions, which
are most subject to judgment in its rebate accrual calculation.
Based upon Schering-Ploughs sensitivity analysis,
reasonably possible changes to assumptions related to rebate
accruals could favorably or unfavorably impact 2008 net
sales and income before income taxes in an annual amount of
$19 million.
DISCLOSURE
NOTICE
Cautionary
Statements Under the Private Securities Litigation Reform Act of
1995
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this report, as
well as other written reports and oral statements made from time
to time by Schering-Plough, may contain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements do not
relate strictly to historical or current facts and are based on
current expectations or forecasts of future events. You can
identify these forward-looking statements by their use of words
such as anticipate, believe,
could, estimate, expect,
forecast, project, intend,
plan, potential, will, and
similar words and terms. In particular, forward-looking
statements include statements relating to Schering-Ploughs
plans; its strategies; timing and level of savings achieved from
the Productivity Transformation Program, including the ongoing
integration of OBS; prospective products or product approvals;
actions to enhance clinical, research and development,
manufacturing and post-marketing systems; the potential of
products and trending in therapeutic markets, including the
cholesterol market; patent and other intellectual property
protection; future performance or results of current and
anticipated products; research and development programs and
anticipated spending; estimates of rebates, discounts and
returns; and the outcome of contingencies such as litigation and
investigations.
Any or all forward-looking statements here or in other
publications may turn out to be wrong. There are no guarantees
about Schering-Ploughs financial and operational
performance or the performance of Schering-Ploughs stock.
Schering-Plough does not assume the obligation to update any
forward-looking statement. Many factors could cause actual
results to differ materially from Schering-Ploughs
forward-looking statements. These factors include inaccurate
assumptions and a broad variety of other risks and
uncertainties, including some that are known and some that are
not. Although it is not possible to predict or identify all such
factors, we refer you to Part II, Item 1A, Risk
Factors, of this
10-Q for
identification of important factors with respect to risks and
uncertainties.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Schering-Plough is exposed to market risk primarily from changes
in foreign currency exchange rates and, to a lesser extent, from
interest rates and equity prices. The impact of currency is more
pronounced on products and businesses that are concentrated in
Europe.
Refer to Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
in Schering-Ploughs 2007
10-K/A for
further discussion of market risks.
|
|
Item 4.
|
Controls
and Procedures
|
Management, including the chief executive officer and the chief
financial officer, has evaluated Schering-Ploughs
disclosure controls and procedures as of the end of the
quarterly period covered by this
10-Q and has
concluded that Schering-Ploughs disclosure controls and
procedures are effective. They also concluded that there were no
changes in Schering-Ploughs internal control over
financial reporting that occurred during Schering-Ploughs
most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, Schering-Ploughs
internal control over financial reporting. Schering-Plough is
replacing and
44
upgrading a number of information systems, and commencing in the
first quarter of 2008, integrating the Organon BioSciences N.V.
human and animal health businesses. The overall integration
process will be ongoing for several years.
PART II.
OTHER INFORMATION
Recent
Cholesterol Clinical Trials
SEAS Clinical Trial. On July 21, 2008,
preliminary results of the Merck/Schering-Plough cholesterol
joint ventures SEAS (Simvastatin and Ezetimibe in Aortic
Stenosis) clinical trial, in which VYTORIN was studied for a new
potential use, its effect on patients with aortic stenosis, and
no evidence of cardiovascular disease, were released to the
public. The results showed that, although VYTORIN reduced
LDL-cholesterol by an average of 61% compared to placebo; there
was no significant difference between VYTORIN and placebo on the
primary endpoint which was a combination of the occurrence of
aortic valve replacement surgery and major cardiovascular
events. Currently, valve replacement surgery is the treatment of
choice for aortic stenosis. However, the results did show
VYTORIN was significantly more effective than placebo in
reducing the incidence of atherosclerotic events. In addition,
although VYTORIN was generally well tolerated by patients in the
clinical trial, there was an imbalance in the occurrence of
cancer between the treatment and placebo arms, with a higher
incidence and a higher number of cancer deaths in the VYTORIN
arm.
Because the cancer data from the SEAS clinical trial involve
only 158 patients, the higher cancer incidence may be a
result of chance and not attributable to VYTORIN. Accordingly,
to better understand the possible implications of these
unexpected cancer data, the University of Oxford Clinical Trial
Service Unit and Epidemiological Studies Unit (CTSU) performed
an independent analysis of the combined cancer results from two
other, ongoing studies involving VYTORIN. The SHARP (Study of
Heart and Renal Protection) clinical trial, is a randomized,
placebo-controlled trial of VYTORIN in 9,400 patients with
chronic kidney disease. The other clinical trial, IMPROVE-IT
(Examining Outcomes in Subjects With Acute Coronary Syndrome:
Vytorin (Ezetimibe/Simvastatin) vs Simvastatin), is a
randomized, double-blind trial of VYTORIN compared to
simvastatin alone in patients with acute coronary disease.
Currently, there are more than 12,000 patients enrolled in
the IMPROVE-IT clinical trial, with a total planned enrollment
of up to 18,000. The SEAS clinical trial, by contrast, included
1,873 patients. CTSU worked independently of
Schering-Plough, Merck and the Merck/Schering-Plough cholesterol
joint venture to perform the analysis.
CTSU found that in the SHARP and IMPROVE-IT clinical trials,
there was not the cancer imbalance observed in the SEAS clinical
trial. Cancers in the SHARP and IMPROVE-IT clinical trials were
distributed equally across all treatment arms and showed no
clustering of any cancer type. The cancers observed in the SEAS
clinical trial were also not clustered, that is they were
distributed across all major organ systems. Also, the incidence
of cancers was consistent with the rates that would be expected
based upon data from Scandinavian age-adjusted cancer
registries. Further, there was no
year-by-year
increase in cancer rates as would be expected where a compound
increases cancer risk. Having reviewed all of the available
data, the CTSU concluded that the SEAS, SHARP, and IMPROVE-IT
clinical trials do not provide credible evidence of any
adverse effect on cancer. Schering-Plough believes the
cancer finding in SEAS is likely to be an anomaly that, taken in
light of all the available data, does not support an association
with VYTORIN. Schering-Plough, through the Merck/Schering-Plough
cholesterol joint venture, is committed to working with
regulatory agencies to further evaluate the available data and
interpretations of those data; however, Schering-Plough does not
believe that changes in the clinical use of VYTORIN are
warranted.
See Part II, Item 1, Legal Proceedings
below regarding the ENHANCE clinical trial.
|
|
Item 1.
|
Legal
Proceedings
|
Material pending legal proceedings involving Schering-Plough are
described in Part I, Item 3, Legal
Proceedings, of the 2007
10-K/A. The
following discussion is limited to material developments to
previously reported proceedings and new material legal
proceedings, which Schering-Plough, or any of its subsidiaries,
became a party during the quarter ended September 30, 2008,
or subsequent thereto, but before the filing of
45
this report. This section should be read in conjunction with
Part I, Item 3, Legal Proceedings in the
2007 10-K/A.
ENHANCE
Matter
Background. The Merck/Schering-Plough
cholesterol joint venture markets ZETIA and VYTORIN (a
combination of Mercks Zocor (simvastatin) and
Schering-Ploughs Zetia (ezetimibe)).
The Merck/Schering-Plough cholesterol joint ventures
ENHANCE (Effect of Combination Ezetimibe and High-Dose
Simvastatin vs. Simvastatin Alone on the Atherosclerotic Process
in Patients with Heterozygous Familial Hypercholesterolemia)
clinical trial was a surrogate endpoint trial, conducted in
720 patients with Heterozygous Familial
Hypercholesterolemia, a rare condition that affects
approximately 0.2% of the population. The primary endpoint was
the mean change in the intima-media thickness measured at three
sites in the carotid arteries (the right and left common
carotid, internal carotid and carotid bulb) between patients
treated with ezetimibe/simvastatin 10/80 mg versus patients
treated with simvastatin 80 mg alone over a two-year
period. There was no statistically significant difference
between the treatment groups for the primary endpoint or for
each of the components of the primary endpoint, including the
common carotid artery. Key secondary imaging endpoints also
showed no statistical difference between treatment groups.
Technical difficulties consumed a long time period after the
last patient was scanned in April 2006 until December 31,
2007, when data from ultrasound images were first unblinded to
scientists of the
Merck/Schering-Plough
cholesterol joint venture. After analysis of the results, the
summary findings were released by the joint venture on
January 14, 2008 and full results were released later in
the first quarter 2008. There has been significant media
attention to the length of time between the last patient having
an ultrasound taken for the trial through the final analysis and
the unblinding of the data, and to the trial results. In
addition, these issues have been raised in private lawsuits
against Schering-Plough, as well as in investigations that are
ongoing. These events impacted sales, as discussed in
Part I, Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Medical experts and health advisory groups have long recognized
high LDL cholesterol as a significant cardiovascular risk factor
and recommended increasingly aggressive treatment of high
cholesterol for certain patients. Lowering LDL cholesterol,
along with healthy diet and lifestyle changes, remains the
cornerstone of lipid treatment for patients at risk for heart
disease.
Clinical studies prior to ENHANCE have demonstrated that VYTORIN
lowered patients LDL cholesterol more than rosuvastatin,
atorvastatin and simvastatin at the doses studied and was able
to get more patients to their LDL cholesterol goals (as defined
by ATP III). The findings from the Merck/Schering-Plough
cholesterol joint ventures ENHANCE clinical trial further
confirmed VYTORINs effectiveness, compared to simvastatin,
at lowering LDL cholesterol as well as triglycerides and
C-reactive protein (CRP). Specifically, there was a significant
difference in LDL cholesterol lowering seen between the
treatment groups 58% LDL cholesterol lowering at
24 months on VYTORIN as compared to 41% at 24 months
on simvastatin alone. VYTORIN is not indicated for the reduction
of CRP.
The ENHANCE surrogate endpoint study was not powered nor
designed to assess cardiovascular clinical event outcomes, such
as the effectiveness of the drugs at lowering the risk of heart
attack and stroke. The Merck/Schering-Plough cholesterol joint
venture is currently conducting the IMPROVE-IT trial, a large
clinical trial comparing VYTORIN (ezetimibe/simvastatin) and
simvastatin in approximately 18,000 patients. The results
of the IMPROVE-IT trial will compare the effectiveness of
VYTORIN to simvastatin alone in reducing heart attacks
and/or
strokes.
Schering-Ploughs stock price declined significantly in
early 2008, from $26.64 (closing price) on December 31,
2007 to a 2008 low of $12.76 (closing price) on October 27,
2008 to $14.05 (closing price) on October 28, 2008, the day
before this
10-Q was
filed. During the same time period (December 31, 2007 to
October 28, 2008) the S&P 500 declined approximately
36 percent.
Investigation and Inquiries. Through the date
of filing this
10-Q,
Schering-Plough, the joint venture
and/or its
joint venture partner, Merck, have received a number of
governmental inquiries and have been the subject of a number of
investigations. These include several letters from Congress,
including the House
46
Committee on Energy and Commerce, the House Subcommittee on
Oversight and Investigations, and the ranking minority member of
the Senate Finance Committee, collectively seeking a combination
of witness interviews, documents and information on a variety of
issues related to the Merck/Schering-Plough cholesterol joint
ventures ENHANCE clinical trial, the companies sale
and promotion of VYTORIN, as well as sales of stock by certain
of the companies corporate officers (including an
executive vice president of Schering-Plough) since April 2006.
These also include several subpoenas from state officials,
including State Attorneys General, and requests for information
from U.S. Attorneys and the Department of Justice seeking
similar information and documents.
Litigation. In addition, since mid-January
2008, Schering-Plough has become aware of or been served with
litigation, including civil class action lawsuits alleging
common law and state consumer fraud claims in connection with
Schering-Ploughs sale and promotion of the
Merck/Schering-Plough joint-venture products VYTORIN and
ZETIA; several putative shareholder securities class action
lawsuits (where several officers are also named defendants)
alleging false and misleading statements and omissions by
Schering-Plough and its representatives related to the timing of
disclosures concerning the ENHANCE results, allegedly in
violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934; a putative shareholder securities class
action lawsuit (where several officers and directors are also
named), alleging material misstatements and omissions related to
the ENHANCE results in the offering documents in connection with
Schering-Ploughs 2007 securities offerings, allegedly in
violation of the Securities Act of 1933, including
Section 11; several putative class action suits alleging
that Schering-Plough and certain officers and directors breached
their fiduciary duties under ERISA and seeking damages in the
amount of losses allegedly suffered by the Plans; a Shareholder
Derivative Action alleging that the Board of Directors breached
its fiduciary obligations relating to the timing of the release
of the ENHANCE results; and a letter on behalf of a single
shareholder requesting that the Board of Directors investigate
the allegations in the litigation described above and, if
warranted, bring any appropriate legal action on behalf of
Schering-Plough.
Schering-Plough is cooperating fully with the various
investigations and responding to the requests for information,
and Schering-Plough intends to vigorously defend the lawsuits
that have been filed relating to the ENHANCE study.
Patent
Challenges Under the Hatch-Waxman Act
Although Schering-Plough does not currently believe any pending
Paragraph IV certification proceeding under the
Hatch-Waxman Act is material, because there is frequently media
and investor interest in such proceedings, Schering-Plough is
listing the pending proceedings each quarter. Currently, the
following are pending:
|
|
|
|
|
in July 2007, Schering-Plough and its licensor, Cancer Research
Technologies, Limited, filed a patent infringement action
against companies seeking approval of a generic version of
certain strengths of TEMODAR capsules;
|
|
|
|
in March 2007, Schering-Plough and an entity jointly owned with
Merck filed a patent infringement action against companies
seeking approval of a generic version of ZETIA; and
|
|
|
|
in September 2006 and dates thereafter, Schering-Plough filed
patent infringement actions against companies seeking approval
of generic versions of CLARINEX Tablets, CLARINEX Reditabs,
CLARINEX D-24, and CLARINEX D-12.
|
Schering-Ploughs future operating results and cash flows
may differ materially from the results described in this
10-Q due to
risks and uncertainties related to Schering-Ploughs
business, including those discussed below. In addition, these
factors represent risks and uncertainties that could cause
actual results to differ materially from those implied by
forward-looking statements contained in this report.
47
Key
Schering-Plough products generate a significant amount of
Schering-Ploughs profits and cash flows, and any events
that adversely affect the markets for its leading products could
have a material and negative impact on results of operations and
cash flows.
Schering-Ploughs ability to generate profits and operating
cash flow depends largely upon the continued profitability of
Schering-Ploughs cholesterol franchise, consisting of
VYTORIN and ZETIA, and other key products such as REMICADE,
NASONEX, TEMODAR, PEGINTRON, CLARINEX, FOLLISTIM, AVELOX,
CLARITIN and NUVARING. As a result of Schering-Ploughs
dependence on key products, any event that adversely affects any
of these products or the markets for any of these products could
have a significant impact on results of operations and cash
flows. These events could include loss of patent protection,
increased costs associated with manufacturing, generic or OTC
availability of Schering-Ploughs product or a competitive
product, the discovery of previously unknown side effects,
increased competition from the introduction of new, more
effective treatments and discontinuation or removal from the
market of the product for any reason.
There
is a high risk that funds invested in research will not generate
financial returns because the development of novel drugs
requires significant expenditures with a low probability of
success.
There is a high rate of failure inherent in the research to
develop new drugs to treat diseases. As a result, there is a
high risk that funds invested by Schering-Plough in research
programs will not generate financial returns. This risk profile
is compounded by the fact that this research has a long
investment cycle. To bring a pharmaceutical compound from the
discovery phase to market may take a decade or more and failure
can occur at any point in the process, including later in the
process after significant funds have been invested.
Schering-Ploughs
success is dependent on the successful development and marketing
of new products, which are subject to substantial
risks.
Products that appear promising in development may fail to reach
market for numerous reasons, including the following:
|
|
|
|
|
findings of ineffectiveness, superior safety or efficacy of
competing products, or harmful side effects in clinical or
pre-clinical testing;
|
|
|
|
failure to receive the necessary regulatory approvals, including
delays in the approval of new products and new indications, and
increasing uncertainties about the time required to obtain
regulatory approvals and the benefit/risk standards applied by
regulatory agencies in determining whether to grant approvals;
|
|
|
|
lack of economic feasibility due to manufacturing costs or other
factors; and
|
|
|
|
preclusion from commercialization by the proprietary rights of
others.
|
Intellectual
property protection for innovation is an important contributor
to Schering-Ploughs profitability. Generic forms of
Schering-Ploughs products may be introduced to the market
as a result of the expiration of patents covering
Schering-Ploughs products, a successful challenge to
Schering-Ploughs
patents, or the at-risk launch of a generic version of a
Schering-Plough product, which may have a material and negative
effect on results of operations.
Intellectual property protection is critical to
Schering-Ploughs ability to successfully commercialize its
products. U.S. patents relating to Schering-Ploughs
significant products are of material importance to
Schering-Plough. Upon the expiration or the successful challenge
of Schering-Ploughs patents covering a product,
competitors may introduce lower-priced generic or similar
branded versions of that product, which may include
Schering-Ploughs well-established products.
A generic manufacturer may file an Abbreviated New Drug
Application seeking approval after the expiration of the
applicable data exclusivity and alleging that one or more of the
patents listed in the innovators New Drug Application are
invalid, not infringed or unenforceable. This allegation is
commonly known as a Paragraph IV certification. The
innovator then has the ability to file suit against the generic
manufacturer to enforce its patents. Generic manufacturers have
used Paragraph IV certifications extensively
48
to challenge patents on a wide array of innovative
pharmaceuticals, and it is anticipated that this trend will
continue. In recent years, some generic manufacturers have
launched generic versions of products before the ultimate
resolution of patent litigation (commonly known as
at-risk product launches). Generic entry may result
in the loss of a significant portion of sales or downward
pressures on the prices at which Schering-Plough offers formerly
patented products. Please refer to Legal Proceedings
in Schering-Ploughs 2007
10-K/A and
subsequent
10-Qs for
descriptions of pending intellectual property litigation.
Additionally, certain foreign governments have indicated that
compulsory licenses to patents may be granted in the case of
national emergencies, which could diminish or eliminate sales
and profits from those regions and negatively affect
Schering-Ploughs results of operations. Further, recent
court decisions relating to other companies
U.S. patents, potential U.S. legislation relating to
patent reform, as well as regulatory initiatives may result in
further erosion of intellectual property protection.
Patent
disputes can be costly to prosecute and defend and adverse
judgments could result in damage awards, increased royalties and
other similar payments and decreased sales.
Patent positions can be highly uncertain and patent disputes in
the pharmaceutical industry are not unusual. An adverse result
in a patent dispute involving Schering-Ploughs patents, or
the patents of its collaborators, may lead to a determination by
a court that the patent is not infringed, is invalid,
and/or is
unenforceable. Such an adverse determination could lead to
Schering-Ploughs loss of market exclusivity. An adverse
result in a patent dispute alleging that Schering-Plough has
infringed patents held by a third party may lead to a
determination by a court that the patent is infringed, valid,
and enforceable. Such an adverse determination may preclude the
commercialization of Schering-Ploughs products
and/or may
lead to significant financial damages for past and ongoing
infringement. Due to the uncertainty surrounding patent
litigation, parties may settle patent disputes by obtaining a
license under mutually agreeable terms in order to decrease risk
of an interruption in manufacturing
and/or
marketing of its products.
The potential for litigation regarding Schering-Ploughs
intellectual property rights always exists and litigation may be
initiated by third parties attempting to abridge
Schering-Ploughs rights. Even if Schering-Plough is
ultimately successful in a particular dispute, Schering-Plough
may incur substantial costs in defending its patents and other
intellectual property rights. See Patent Challenges Under
the Hatch-Waxman Act in Part II, Item 1,
Legal Proceedings for a list of current
Paragraph IV certifications for Schering-Plough products.
Multi-jurisdictional
regulations, including those establishing Schering-Ploughs
ability to price products, may negatively affect
Schering-Ploughs sales and profit margins.
Schering-Plough faces increasing pricing pressure globally from
managed care organizations, institutions and government agencies
and programs that could negatively affect Schering-Ploughs
sales and profit margins. For example, in the U.S., the Medicare
Prescription Drug Improvement and Modernization Act of 2003
contains a prescription drug benefit for individuals who are
eligible for Medicare. The prescription drug benefit became
effective on January 1, 2006 and has resulted in increased
use of generics and increased purchasing power of those
negotiating on behalf of Medicare recipients, which in turn has
resulted in increased price pressure on Schering-Ploughs
products.
In addition to legislation concerning price controls, other
trends could adversely affect Schering-Ploughs sales and
profit margins. These trends include legislative or regulatory
action relating to pharmaceutical pricing and reimbursement,
health care reform initiatives, drug importation legislation and
involuntary approval of medicines for OTC use. These trends also
include non-governmental initiatives and practices such as
consolidation among customers, managed care practices and health
care costs containment. Increasingly, market approval,
reimbursement of products, prescribers practices and
policies of third-party payors may be influenced by health
technology assessments by the National Institute for Health and
Clinical Excellence in the UK and other such organizations.
49
In the U.S., as a result of the governments efforts to
reduce health care expenditures and other payors efforts
to reduce health care costs, Schering-Plough faces increased
pricing pressure as payors continue to seek price discounts with
respect to Schering-Ploughs products.
In other countries, many governmental agencies strictly control,
directly or indirectly, the prices at which pharmaceutical
products are sold. In these markets, cost control methods
including restrictions on physician prescription levels and
patient reimbursements; emphasis on greater use of generic
drugs; and
across-the-board
price cuts may decrease revenues internationally.
Through
the acquisition of OBS, Schering-Plough acquired marketed
products and pipeline projects in new therapeutic areas,
including womens health and fertility, anesthesia, and
neuroscience, each of which carry unique risks and uncertainties
which could have a negative impact on future results of
operations.
With its acquisition of OBS, Schering-Plough acquired products
in additional therapeutic areas. Each therapeutic area presents
a different risk profile, including different benefits and
safety issues that must be balanced by Schering-Plough and
regulators as various research and development and marketing
decisions are made; unique product liability risks; different
patient and prescriber priorities; and different societal
pressures. While adding new therapeutic areas may strengthen
Schering-Ploughs business by increasing sales and profits;
making the combined company more relevant to patients and
prescribers; and diversifying enterprise risk across more areas,
such positives may not outweigh the additional risk in a
particular therapeutic area or could result in unanticipated
costs that could have a significant adverse impact on results of
operations and cash flows.
Market
forces continue to evolve and can impact Schering-Ploughs
ability to sell products or the price Schering-Plough can charge
for products.
A number of intermediaries are involved between drug
manufacturers, such as Schering-Plough, and patients who use the
drugs. These intermediaries impact the patients ability,
and their prescribers ability, to choose and pay for a
particular drug, which may adversely affect sales of a
particular Schering-Plough drug. These intermediaries include
health care providers, such as hospitals and clinics; payors and
their representatives, such as employers, insurers, managed care
organizations and governments; and others in the supply chain,
such as pharmacists and wholesalers. Examples include: payors
that require a patient to first fail on one or more generic, or
less expensive branded drugs, before reimbursing for a more
effective, branded product that is more expensive; hospitals
that stock and administer only a generic product to in-patients;
managed care organizations that may penalize doctors who
prescribe outside approved formularies which may not include
branded products when a generic is available; and pharmacists
who receive larger revenues when they dispense a generic drug
over a branded drug. Further, the intermediaries are not
required to routinely provide transparent data to patients
comparing the effectiveness of generic and branded products or
to disclose their own economic benefits that are tied to
steering patients toward, or requiring patients to use, generic
products rather than branded products.
Government
investigations involving Schering-Plough could lead to the
commencement of civil and/or criminal proceedings involving the
imposition of substantial fines, penalties and injunctive or
administrative remedies, including exclusion from government
reimbursement programs, which could give rise to other
investigations or litigation by government entities or private
parties.
Schering-Plough cannot predict whether future or pending
investigations to which it may become subject would lead to a
judgment or settlement involving a significant monetary award or
restrictions on its operations.
The pricing, sales and marketing programs and arrangements and
related business practices of Schering-Plough and other
participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities. These entities
include the Department of Justice and its
U.S. Attorneys Offices, the Office of Inspector
General of the Department of Health and
50
Human Services, the FDA, the Federal Trade Commission and
various state Attorneys General offices. Many of the health care
laws under which certain of these governmental entities operate,
including the federal and state anti-kickback statutes and
statutory and common law false claims laws, have been construed
broadly by the courts and permit the government entities to
exercise significant discretion. In the event that any of those
governmental entities believes that wrongdoing has occurred, one
or more of them could institute civil or criminal proceedings
which, if resolved unfavorably, could subject Schering-Plough to
substantial fines, penalties and injunctive or administrative
remedies, including exclusion from government reimbursement
programs. In addition, an adverse outcome to a government
investigation could prompt other government entities to commence
investigations of Schering-Plough or cause those entities or
private parties to bring civil claims against it.
Schering-Plough also cannot predict whether any investigations
will affect its marketing practices or sales. Any such result
could have a material adverse impact on Schering-Ploughs
results of operations, cash flows, financial condition, or its
business.
A number of governmental entities in the U.S. have made
inquiries or initiated investigations into the timing and
disclosures relating to the ENHANCE clinical trial, as well as
the timing of certain stock sales by an executive vice
president. These include several letters from Congress,
investigations by state Attorneys General offices, and requests
for information from U.S. Attorneys Offices and the
Department of Justice.
Regardless of the merits or outcomes of any investigation,
government investigations are costly, divert managements
attention from Schering-Ploughs business and may result in
substantial damage to Schering-Ploughs reputation.
There
are other legal matters in which adverse outcomes could
negatively affect Schering-Ploughs results of operations,
cash flows, financial condition, or business.
Unfavorable outcomes in other pending litigation matters, or in
future litigation, including litigation concerning product
pricing, securities law violations, product liability claims,
ERISA matters, patent and intellectual property disputes, and
antitrust matters could preclude the commercialization of
products, negatively affect the profitability of existing
products and subject Schering-Plough to substantial fines,
penalties and injunctive or administrative remedies, including
exclusion from government reimbursement programs. Any such
result could materially and adversely affect
Schering-Ploughs results of operations, cash flows,
financial condition, or business.
Further, aggressive plaintiffs counsel often file litigation on
a wide variety of allegations whenever there is media attention
or negative discussion about the efficacy or safety of a product
and whenever the stock price is volatile; even when the
allegations are groundless, Schering-Plough may need to expend
considerable funds and other resources to respond to such
litigation.
Please refer to Legal Proceedings in Item 3 in
Schering-Ploughs 2007
10-K/A and
Part II, Item 1, Legal Proceedings, in
this 10-Q
for descriptions of significant pending litigation.
Issues
concerning the Merck/Schering-Plough Cholesterol Joint
Ventures clinical trials could have a material adverse
effect on the joint ventures sales of VYTORIN and ZETIA,
which in turn could have a material adverse impact on
Schering-Ploughs financial condition.
See Recent Cholesterol Clinical Trials, in
Part II of this
10-Q and
ENHANCE Matter in Part II, Item 1,
Legal Proceedings of this
10-Q for
background information about the Merck/Schering-Plough
cholesterol joint ventures clinical trials and related
matters.
There was significant negative media surrounding the release of
the ENHANCE results. As the
Merck/Schering-Plough
cholesterol joint ventures ENHANCE and SEAS clinical trial
results are further reviewed, VYTORIN and ZETIA may receive
additional media attention, which could lead to reduced sales,
or affect enrollment in clinical trials. In the nine months
ended September 30, 2008, sales of VYTORIN and ZETIA in the
U.S. decreased by 20 percent compared to the nine
months ended September 30, 2007. If sales of these products
continue to trend down further in the U.S.,
Schering-Ploughs results of operations, cash flow,
financial position, business and prospects could also be
materially adversely affected. In addition, current
51
or future investigations, analysis of the ENHANCE and SEAS data
by various agencies, litigation concerning the sale and
promotion of these products, or the securities and other class
action litigation relating to such matters could, if resolved
unfavorably to Schering-Plough or the joint venture, have a
material adverse effect on Schering-Ploughs results of
operations, cash flow and financial position.
Schering-Plough
and third parties acting on its behalf are subject to
governmental regulations, and the failure to comply with, as
well as the costs of compliance with, these regulations may
adversely affect Schering-Ploughs results of operations,
cash flow and financial position.
Manufacturing and research practices of Schering-Plough and
third parties acting on its behalf must meet stringent
regulatory standards and are subject to regular inspections. The
cost of regulatory compliance, including that associated with
compliance failures, can materially affect
Schering-Ploughs results of operations, cash flow and
financial position. Failure to comply with regulations, which
include pharmacovigilance reporting requirements and standards
relating to clinical, laboratory and manufacturing practices,
can result in suspension or termination of clinical studies,
delays or failure in obtaining the approval of drugs, seizure or
recalls of drugs, suspension or revocation of the authority
necessary for the production and sale of drugs, withdrawal of
approval, fines and other civil or criminal sanctions.
Schering-Plough also is subject to other regulations, including
environmental, health and safety, and labor regulations.
Developments
following regulatory approval may adversely affect sales of
Schering-Ploughs products.
Even after a product reaches market, certain developments
following regulatory approval, including results in
post-marketing Phase IV trials, may decrease demand for
Schering-Ploughs products, including the following:
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|
the re-review of products that are already marketed;
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new scientific information and evolution of scientific theories;
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the recall or loss of marketing approval of products that are
already marketed;
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changing government standards or public expectations regarding
safety, efficacy or labeling changes; and
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greater scrutiny in advertising and promotion.
|
In the past several years, clinical trials and post-marketing
surveillance of certain marketed drugs of competitors within the
industry have raised safety concerns that have led to recalls,
withdrawals or adverse labeling of marketed products. Clinical
trials and post-marketing surveillance of certain marketed drugs
also have raised concerns among some prescribers and patients
relating to the safety or efficacy of pharmaceutical products in
general that have negatively affected the sales of such
products. In addition, increased scrutiny of the outcomes of
clinical trials have led to increased volatility in market
reaction. Further, these matters often attract litigation and,
even where the basis for the litigation is groundless,
considerable resources may be needed to respond.
In addition, following the wake of product withdrawals of other
companies and other significant safety issues, health
authorities such as the FDA, the European Medicines Agency and
the Pharmaceuticals and Medicines Device Agency have increased
their focus on safety when assessing the benefit/risk balance of
drugs. Some health authorities appear to have become more
cautious when making decisions about approvability of new
products or indications and are re-reviewing select products
that are already marketed, adding further to the uncertainties
in the regulatory processes. There is also greater regulatory
scrutiny, especially in the U.S., on advertising and promotion
and in particular,
direct-to-consumer
advertising.
If previously unknown side effects are discovered or if there is
an increase in negative publicity regarding known side effects
of any of Schering-Ploughs products, it could
significantly reduce demand for the product or require
Schering-Plough to take actions that could negatively affect
sales, including removing the product
52
from the market, restricting its distribution or applying for
labeling changes. Further, in the current environment in which
all pharmaceutical companies operate, Schering-Plough is at risk
for product liability claims for its products.
New
products and technological advances developed by
Schering-Ploughs competitors may negatively affect
sales.
Schering-Plough operates in a highly competitive industry.
Schering-Plough competes with a large number of multinational
pharmaceutical companies, biotechnology companies and generic
pharmaceutical companies. Many of Schering-Ploughs
competitors have been conducting research and development in
areas served both by Schering-Ploughs current products and
by those products Schering-Plough is in the process of
developing. Competitive developments that may impact
Schering-Plough include technological advances by, patents
granted to, and new products developed by competitors or new and
existing generic, prescription
and/or OTC
products that compete with products of Schering-Plough or the
Merck/Schering-Plough cholesterol joint venture. In addition, it
is possible that doctors, patients and providers may favor those
products offered by competitors due to safety, efficacy, pricing
or reimbursement characteristics, and as a result
Schering-Plough will be unable to maintain its sales for such
products.
Competition
from third parties may make it difficult for Schering-Plough to
acquire or license new products or product candidates
(regardless of stage of development) or to enter into such
transactions on terms that permit Schering-Plough to generate a
positive financial impact.
Schering-Plough depends on acquisition and in-licensing
arrangements as a source for new products. Opportunities for
obtaining or licensing new products are limited, however, and
securing rights to them typically requires substantial amounts
of funding or substantial resource commitments. Schering-Plough
competes for these opportunities against many other companies
and third parties that have greater financial resources and
greater ability to make other resource commitments.
Schering-Plough may not be able to acquire or license new
products, which could adversely impact Schering-Plough and its
prospects. Schering-Plough may also have difficulty acquiring or
licensing new products on acceptable terms. To secure rights to
new products, Schering-Plough may have to make substantial
financial or other resource commitments that could limit its
ability to produce a positive financial impact from such
transactions.
Schering-Plough
relies on third-party relationships for its key products, and
the conduct and changing circumstances of such third parties may
adversely impact the business.
Schering-Plough has several relationships with third parties on
which Schering-Plough depends for many of its key products. Very
often these third parties compete with Schering-Plough or have
interests that are not aligned with the interests of
Schering-Plough. Notwithstanding any contracts Schering-Plough
has with these third parties, Schering-Plough may not be able to
control or influence the conduct of these parties, or the
circumstances that affect them, either of which could adversely
impact Schering-Plough.
The relationships are long-standing and, as the third
partys work and Schering-Ploughs work evolves,
priorities and alignments also change. At times new issues
develop that were not anticipated at the time contracts were
negotiated. These new issues, and related uncertainties in the
contracts, also can adversely impact Schering-Plough.
Schering-Ploughs
global operations expose Schering-Plough to additional risks,
and any adverse event could have a material negative impact on
results of operations.
A majority of Schering-Ploughs operations are outside the
U.S. With the acquisition of OBS in late 2007,
Schering-Ploughs global operations in Human Prescription
Pharmaceuticals and Animal Health increased. Acquisitions, such
as the recently completed purchase of OBS, further expanded the
size, scale and scope of Schering-Ploughs global
operations. Risks inherent in conducting a global business
include:
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|
|
|
changes in medical reimbursement policies and programs and
pricing restrictions in key markets;
|
53
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|
|
|
multiple regulatory requirements that could restrict
Schering-Ploughs ability to manufacture and sell its
products in key markets;
|
|
|
|
trade protection measures and import or export licensing
requirements;
|
|
|
|
diminished protection of intellectual property in some
countries; and
|
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|
|
possible nationalization and expropriation.
|
In addition, there may be changes to Schering-Ploughs
business and political position if there is instability,
disruption or destruction in a significant geographic region,
regardless of cause, including war, terrorism, riot, civil
insurrection or social unrest; and natural or man-made
disasters, including famine, flood, fire, earthquake, storm or
disease.
The
integration of the businesses of Schering-Plough and OBS to
create a combined company is a complex process and may be
subject to unforeseen developments, which could have an adverse
impact on the results of future operations.
As the two companies are combined, the workforces of
Schering-Plough and OBS will continue to face uncertainties
until the completion of the integration phase. Cultural
integration particularly in trans-Atlantic transactions are
complex and can take several years. Although substantial efforts
are being made to complete the integration phase of the OBS
acquisition as quickly as possible, it is difficult to predict
how long the integration phase will last.
The workforces of both companies are learning to use new
processes as work is integrated and streamlined. Further, for
those employees of the new combined company who have not in the
past worked for a
U.S.-based
global company, the applicable regulatory requirements are
different in a number of respects. While substantial efforts are
being made to facilitate smooth execution of integration
including thorough training and transparent and motivational
employee communications there may be an increased risk of slower
execution of various work processes, repeated execution to
achieve quality standards and reputational harm in the event of
a compliance failure with new and complex regulatory
requirements, even if such a failure were inadvertent. Any such
events could have an adverse impact on the results of future
operations.
The
acquisition of OBS expanded Schering-Ploughs animal health
business worldwide, which increases the risk that negative
events in the animal health industry could have a negative
impact on future results of operations.
Through the acquisition of OBS animal health businesses,
Schering-Ploughs global animal health business is now a
more significant business segment. The combined companys
future sales of key animal health products could be adversely
impacted by a number of risk factors including certain that are
specific to the animal health business. For example, the
outbreak of disease carried by animals, such as Bovine
Spongiform Encephalopathy (BSE) or mad cow disease,
could lead to their widespread death and precautionary
destruction as well as the reduced consumption and demand for
animals, which could adversely impact Schering-Ploughs
results of operations. Also, the outbreak of any highly
contagious diseases near Schering-Ploughs main production
sites could require Schering-Plough to immediately halt
production of vaccines at such sites or force Schering-Plough to
incur substantial expenses in procuring raw materials or
vaccines elsewhere. Other risks specific to animal health
include epidemics and pandemics, government procurement and
pricing practices, weather and global agribusiness economic
events. As the animal health segment of Schering-Ploughs
business becomes more significant, the impact of any such events
on future results of operations would also become more
significant.
54
The
acquisition of OBS increased Schering-Ploughs biologics
human and animal health product offerings, including animal
health vaccines. Biologics carry unique risks and uncertainties,
which could have a negative impact on future results of
operations.
The successful development, testing, manufacturing and
commercialization of biologics, particularly human and animal
health vaccines, is a long, expensive and uncertain process.
There are unique risks and uncertainties with biologics,
including:
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There may be limited access to and supply of normal and diseased
tissue samples, cell lines, pathogens, bacteria, viral strains
and other biological materials. In addition, government
regulations in multiple jurisdictions such as the U.S. and
European states within the EU, could result in restricted access
to, or transport or use of, such materials. If Schering-Plough
loses access to sufficient sources of such materials, or if
tighter restrictions are imposed on the use of such materials,
Schering-Plough may not be able to conduct research activities
as planned and may incur additional development costs.
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The development, manufacturing and marketing of biologics are
subject to regulation by the FDA, the European Medicines Agency
and other regulatory bodies. These regulations are often more
complex and extensive than the regulations applicable to other
pharmaceutical products. For example, in the U.S., a Biologics
License Application, including both preclinical and clinical
trial data and extensive data regarding the manufacturing
procedures, is required for human vaccine candidates and FDA
approval for the release of each manufactured lot.
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Manufacturing biologics, especially in large quantities, is
often complex and may require the use of innovative technologies
to handle living micro-organisms. Each lot of an approved
biologic must undergo thorough testing for identity, strength,
quality, purity and potency. Manufacturing biologics requires
facilities specifically designed for and validated for this
purpose, and sophisticated quality assurance and quality control
procedures are necessary. Slight deviations anywhere in the
manufacturing process, including filling, labeling, packaging,
storage and shipping and quality control and testing, may result
in lot failures, product recalls or spoilage. When changes are
made to the manufacturing process, Schering-Plough may be
required to provide pre-clinical and clinical data showing the
comparable identity, strength, quality, purity or potency of the
products before and after such changes.
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Biologics are frequently costly to manufacture because
production ingredients are derived from living animal or plant
material, and most biologics cannot be made synthetically. In
particular, keeping up with the demand for vaccines may be
difficult due to the complexity of producing vaccines.
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The use of biologically derived ingredients can lead to
allegations of harm, including infections or allergic reactions,
or closure of product facilities due to possible contamination.
Any of these events could result in substantial costs.
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There currently is no process in the U.S. for the
submission or approval of generic biologics based upon
abbreviated data packages or a showing of sameness to another
approved biologic, but there is public dialogue at the FDA and
in Congress regarding the scientific and statutory basis upon
which such products, known as biosimilars or follow-on
biologics, could be approved and marketed in the
U.S. Schering-Plough cannot be certain when Congress will
create a statutory pathway for the approval of biosimilars, and
Schering-Plough cannot predict what impact, if any, the approval
of biosimilars would have on the sales of Schering-Plough
products in the U.S. In Europe, however, the EMEA has
issued guidelines for approving biological products through an
abbreviated pathway, and biosimilars have been approved in
Europe. If a biosimilar version of one of Schering-Ploughs
products were approved in Europe, it could have a negative
effect on sales of the product.
|
Schering-Plough
is exposed to market risk from fluctuations in currency exchange
rates and interest rates.
Schering-Plough operates in multiple jurisdictions and, as such,
virtually all sales are denominated in currencies of the local
jurisdiction. Additionally, Schering-Plough has entered and will
enter into acquisition, licensing, borrowings or other financial
transactions that may give rise to currency and interest rate
exposure.
55
Since Schering-Plough cannot, with certainty, foresee and
mitigate against such adverse fluctuations, fluctuations in
currency exchange rates and interest rates could negatively
affect Schering-Ploughs results of operations
and/or cash
flows.
In order to mitigate against the adverse impact of these market
fluctuations, Schering-Plough will from time to time enter into
hedging agreements. While hedging agreements, such as currency
options and interest rate swaps, limit some of the exposure to
exchange rate and interest rate fluctuations, such attempts to
mitigate these risks are costly and not always successful.
The
current stock market and credit market conditions are extremely
volatile and unpredictable. It is difficult to predict whether
these conditions will continue or worsen, and, if so, whether
the conditions would impact Schering-Plough and whether such
impact could be material.
Schering-Plough has exposure to many different industries and
counterparties, including commercial banks, investment banks and
customers (which include wholesalers, managed care organizations
and governments) that may be unstable or may become unstable in
the current economic environment. Any such instability may
impact these parties ability to fulfill contractual
obligations to Schering-Plough or they might limit or place
burdensome conditions upon future transactions with
Schering-Plough. Customers may also reduce spending during times
of economic uncertainty. Also, it is possible that suppliers may
be negatively impacted. In such events, there could be a
resulting material and adverse impact on operations and results
of operations.
Although Schering-Plough currently has no plan to access the
equity or debt markets to meet capital or liquidity needs,
constriction and volatility in these markets may restrict future
flexibility to do so if unforeseen capital or liquidity needs
were to arise.
Further, the conditions have resulted in severe downward
pressure on the stock and credit markets, which could reduce the
return available on invested corporate cash, reduce the return
on investments under the pension plans and thereby potentially
increase funding obligations, all of which if severe and
sustained could have material and adverse impacts on
Schering-Ploughs results of operations and cash flows.
Insurance
coverage for product liability may be limited, cost prohibitive
or unavailable.
Schering-Plough maintains insurance coverage with such
deductibles and self-insurance to reflect market conditions
(including cost and availability) existing at the time it is
written, and the relationship of insurance coverage to
self-insurance varies accordingly. For certain products,
third-party insurance is increasingly cost prohibitive,
available on more limited terms than past coverage, or
unavailable.
Schering-Plough
is subject to evolving and complex tax laws, which may result in
additional liabilities that may affect results of
operations.
Schering-Plough is subject to evolving and complex tax laws in
the jurisdictions in which it operates. Significant judgment is
required for determining Schering-Ploughs tax liabilities,
and Schering-Ploughs tax returns are periodically examined
by various tax authorities. Schering-Plough believes that its
accrual for tax contingencies is adequate for all open years
based on past experience, interpretations of tax law, and
judgments about potential actions by tax authorities; however,
due to the complexity of tax contingencies, the ultimate
resolution of any tax matters may result in payments greater or
less than amounts accrued.
In addition, Schering-Plough may be impacted by changes in tax
laws including tax rate changes, changes to the laws related to
the remittance of foreign earnings, new tax laws and revised tax
law interpretations in domestic and foreign jurisdictions.
56
|
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Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
This table provides information with respect to purchases by
Schering-Plough of its common shares during the second quarter
of 2008.
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Total Number of
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Maximum Number
|
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Shares Purchased as
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of Shares that May
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Average
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Part of Publicly
|
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Yet Be Purchased
|
|
|
|
Total Number of
|
|
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Price Paid
|
|
|
Announced Plans or
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Under the Plans or
|
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Period
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Shares Purchased
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|
per Share
|
|
|
Programs
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|
|
Programs
|
|
|
July 1, 2008 through July 31, 2008
|
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|
3,669
|
(1)
|
|
$
|
20.01
|
|
|
|
N/A
|
|
|
|
N/A
|
|
August 1, 2008 through August 31, 2008
|
|
|
5,487
|
(1)
|
|
$
|
20.41
|
|
|
|
N/A
|
|
|
|
N/A
|
|
September 1, 2008 through September 30, 2008
|
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|
8,755
|
(1)
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$
|
19.35
|
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|
N/A
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|
|
|
N/A
|
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Total July 1, 2008 through September 30, 2008
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|
17,911
|
(1)
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|
$
|
19.81
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|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
All of the shares included in the table above were repurchased
pursuant to Schering-Ploughs stock incentive program and
represent shares delivered to Schering-Plough by option holders
for payment of the exercise price and tax withholding
obligations in connection with stock options and stock awards. |
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Exhibit
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Number
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Description
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Location
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12
|
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
Attached
|
|
15
|
|
|
Awareness letter.
|
|
Attached
|
|
31
|
.1
|
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for
Chairman of the Board and Chief Executive Officer.
|
|
Attached
|
|
31
|
.2
|
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for
Executive Vice President and Chief Financial Officer.
|
|
Attached
|
|
32
|
.1
|
|
Sarbanes-Oxley Act of 2002, Section 906 Certification for
Chairman of the Board and Chief Executive Officer.
|
|
Attached
|
|
32
|
.2
|
|
Sarbanes-Oxley Act of 2002, Section 906 Certification for
Executive Vice President and Chief Financial Officer.
|
|
Attached
|
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SCHERING-PLOUGH CORPORATION
(Registrant)
Steven H. Koehler
Vice President and Controller
(Duly Authorized Officer
and Chief Accounting Officer)
Date: October 28, 2008
58