-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJstntO1zfE27wAmHBdqlv1bqx+EuDQ+SjUDoQrCrJLc9URDLqVDyaxF9Aszwvyc 3KrXpQ9UigY9amRpfiANbA== 0000310158-99-000015.txt : 19990811 0000310158-99-000015.hdr.sgml : 19990811 ACCESSION NUMBER: 0000310158-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHERING PLOUGH CORP CENTRAL INDEX KEY: 0000310158 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221918501 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06571 FILM NUMBER: 99682197 BUSINESS ADDRESS: STREET 1: ONE GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940-1000 BUSINESS PHONE: 9738227000 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission file number 1-6571 SCHERING-PLOUGH CORPORATION Incorporated in New Jersey 22-1918501 One Giralda Farms (I.R.S. Employer Identification No.) Madison, N.J. 07940-1000 (973) 822-7000 (telephone number) 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO Common Shares Outstanding as of June 30, 1999: 1,468,302,898 PART I. - FINANCIAL INFORMATION Item 1. Financial Statements SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (Amounts in millions, except per share figures)
Three Months Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 Net Sales . . . . . . . . . . . $2,451 $2,124 $4,637 $4,032 Costs and expenses: Cost of sales. . . . . . . . . 472 423 904 803 Selling, general and administrative. . . . . . 963 828 1,757 1,540 Research and development . . . 297 261 559 485 Other, net . . . . . . . . . . (7) 9 (22) 5 1,725 1,521 3,198 2,833 Income before income taxes. . . 726 603 1,439 1,199 Income taxes. . . . . . . . . . 179 148 353 294 Net Income. . . . . . . . . . . $ 547 $ 455 $1,086 $ 905 Basic earnings per common share $ .37 $ .31 $ .74 $ .62 Diluted earnings per common share $ .37 $ .31 $ .73 $ .61 Dividends per common share. . . $.125 $ .11 $ .235 $ .205 See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in millions, except per share figures)
June 30, December 31, 1999 1998 Assets Cash and cash equivalents . . . . . . . . $ 1,523 $ 1,259 Accounts receivable, net. . . . . . . . . 1,018 704 Inventories . . . . . . . . . . . . . . . 861 841 Prepaid expenses, deferred income taxes and other current assets . . . . . 1,058 1,154 Total current assets. . . . . . . . . 4,460 3,958 Property, plant and equipment . . . . . . 4,153 4,068 Less accumulated depreciation . . . . . . 1,412 1,393 Property, net . . . . . . . . . . . . 2,741 2,675 Intangible assets, net. . . . . . . . . . 551 565 Other assets. . . . . . . . . . . . . . . 867 642 $ 8,619 $ 7,840 Liabilities and Shareholders' Equity Accounts payable. . . . . . . . . . . . . $ 914 $ 1,003 Short-term borrowings and current portion of long-term debt. . . . . . . . 749 558 Other accrued liabilities . . . . . . . . 1,548 1,471 Total current liabilities . . . . . . 3,211 3,032 Long-term liabilities . . . . . . . . . . 1,010 806 Shareholders' Equity: Preferred shares - $1 par value; Issued: none . . . . . . . . . . . . . . - - Common shares - $.50 par value; Issued: 1999 and 1998 - 2,030. . . . . . 1,015 1,015 Paid-in capital . . . . . . . . . . . . . 493 365 Retained earnings . . . . . . . . . . . . 7,541 6,802 Accumulated other comprehensive income. . (276) (238) Total . . . . . . . . . . . . . . . . 8,773 7,944 Less treasury shares, at cost - 1999 - 562 shares; 1998 - 558 shares . . . . 4,375 3,942 Total shareholders' equity. . . . . . 4,398 4,002 $ 8,619 $ 7,840 See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 (UNAUDITED) (Amounts in millions)
1999 1998 Operating Activities: Net Income. . . . . . . . . . . . . . . . $1,086 $905 Depreciation and amortization . . . . . . 121 114 Accounts receivable . . . . . . . . . . . (352) (223) Inventories . . . . . . . . . . . . . . . (49) (43) Prepaid expenses and other assets . . . . (84) (174) Accounts payable and other liabilities . 45 262 Net cash provided by operating activities 767 841 Investing Activities: Capital expenditures . . . . . . . . . . (201) (127) Reduction of investments. . . . . . . . . 213 - Purchases of investments. . . . . . . . . (257) (69) Other, net. . . . . . . . . . . . . . . . (2) (2) Net cash used for investing activities. . (247) (198) Financing Activities: Dividends paid to common shareholders . . (347) (302) Common shares repurchased . . . . . . . . (425) (85) Short-term borrowings, net. . . . . . . . 204 (256) Other, net, primarily equity proceeds . . 314 (6) Net cash used for financing activities . . . . . . . . . . . . . . . (254) (649) Effect of exchange rates on cash and cash equivalents. . . . . . . . . . . . . (2) (1) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 264 (7) Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 1,259 714 Cash and cash equivalents, end of period . $1,523 $707 See notes to consolidated financial statements. SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in millions, except per share figures) Basis of Presentation The unaudited financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 1998 Annual Report on Form 10-K. In the opinion of management, the financial statements reflect all adjustments necessary for a fair statement of the operations for the interim periods presented. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, requires adoption no later than January 1, 2001; the Company plans to adopt the new standard at that time. This statement is not expected to materially impact the Company's financial statements because management has not engaged in a formula-based program using derivative instruments to hedge market risks. Earnings Per Common Share The shares used for basic earnings per common share and diluted earnings per common share are reconciled as follows: Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 Average shares outstanding for basic earnings per share . . . 1,470 1,467 1,471 1,467 Dilutive effect of options and deferred stock units . . . . . 16 21 17 19 Average shares outstanding for diluted earnings per share . . 1,486 1,488 1,488 1,486 As of June 30, 1999, there were nine million options outstanding with exercise prices higher than the average price of the Company's common stock during the second quarter of 1999. Accordingly, these options are not included in the dilutive effects indicated above. Comprehensive Income Comprehensive income for the three months ended June 30, 1999 and 1998 was $549 and $431, respectively. Comprehensive income for the six months ended June 30, 1999 and 1998 was $1,048 and $876, respectively. Inventories Inventories consisted of: June 30, December 31, 1999 1998 Finished products . . . . . . . $401 $483 Goods in process. . . . . . . . 248 174 Raw materials and supplies. . . 212 184 Total inventories . . . . . . $861 $841 Segment Reporting Schering-Plough is a worldwide research-based pharmaceutical company engaged in the discovery, development, manufacturing and marketing of pharmaceutical products. Discovery and development efforts target the field of human health. However, application in the field of animal health can result from these efforts. The Company views animal health applications as a means to maximize the return on investments in discovery and development. The Company operates primarily in the prescription pharmaceutical marketplace. However, the Company has sought regulatory approval to switch prescription products to over-the-counter (OTC) status as a means of extending a product's life cycle. In this way the OTC marketplace is yet another means of maximizing the return on investments in discovery and development. Effective January 1, 1999, the Company changed the structure of its internal organization to reflect this focus on pharmaceutical research and development. As a result, the Company will report as one segment. Previously, the Company was organized into two business units: pharmaceuticals and healthcare. Net sales by major therapeutic category were as follows: Three Months Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 Allergy & Respiratory . . . . . $1,124 $962 $1,990 $1,715 Anti-infectives & Anticancer. . 408 271 830 583 Dermatologicals . . . . . . . . 160 168 311 329 Cardiovasculars . . . . . . . . 172 208 332 381 Other Pharmaceuticals . . . . . 201 142 405 290 Animal Health . . . . . . . . . 172 169 325 314 Foot Care . . . . . . . . . . . 100 99 183 171 OTC . . . . . . . . . . . . . . 43 42 105 103 Sun Care . . . . . . . . . . . 71 63 156 146 Consolidated Net Sales. . . . . $2,451 $2,124 $4,637 $4,032 Financing During the second quarter of 1999, a subsidiary of the Company issued $200 of equity-type securities, which have a carrying cost based on LIBOR. The rate is fixed through November 28, 2003; thereafter, the Company can elect to reset the rate annually or fix the rate for an additional five years. The Company can call the securities at fair value at any time after November 30, 2004, or earlier under certain circumstances. The holders can put the securities back to the Company at fair value at any time after November 30, 2027, and sooner under certain circumstances. Because of the put and call features, this obligation is included in other long-term liabilities. Legal and Environmental Matters The Company has responsibilities for environmental clean-up 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), the Company is alleged to be a potentially responsible party (PRP). The Company estimates its obligations for clean-up costs for Superfund sites based on information obtained from the federal Environmental Protection Agency, an equivalent state agency, and/or studies prepared by independent engineers, and on the probable costs to be paid by other PRPs. The Company records a liability for environmental assessments and/or clean-up when it is probable a loss has been incurred and the amount can reasonably be estimated. The Company is also involved in various other claims and legal proceedings of a nature considered normal to its business, including product liability cases. The estimated costs the Company expects to pay in these cases are accrued when the liability is considered probable and the amount can be reasonably estimated. Consistent with trends in the pharmaceutical industry, the Company is self-insured for certain events. The recorded liabilities for the above matters at June 30, 1999 were not material. Expected insurance recoveries have not been considered in determining the costs for environmental-related liabilities. Management believes that, except for the matters discussed in the following paragraphs, it is remote that any material liability in excess of the amounts accrued will be incurred. The Company is a defendant in more than 160 antitrust actions commenced (starting in 1993) in state and federal courts by independent retail pharmacies, chain retail pharmacies and consumers. The plaintiffs allege price discrimination and/or conspiracy between the Company and other defendants to restrain trade by jointly refusing to sell prescription drugs at discounted prices to the plaintiffs. One of the federal cases is a class action on behalf of approximately two-thirds of all retail pharmacies in the United States and alleges a price-fixing conspiracy. The Company agreed to settle the federal class action for a total of $22, which has been paid in full. The settlement provides, among other things, that the Company shall not refuse to grant discounts on brand- name prescription drugs to a retailer based solely on its status as a retailer and that, to the extent a retailer can demonstrate its ability to affect market share of a Company brand-name prescription drug in the same manner as a managed care organization with which the retailer competes, it will be entitled to negotiate similar incentives subject to the rights, obligations, exemptions and defenses of the Robinson-Patman Act and other laws and regulations. The United States District Court in Illinois approved the settlement of the federal class action on June 21, 1996. In June 1997, the Seventh Circuit Court of Appeals dismissed all appeals from that settlement, and it is not subject to further review. The defendants that did not settle the class action proceeded to trial in September 1998. The trial ended in November 1998 with a directed verdict in the defendants' favor. Three of the state antitrust cases have been certified as class actions. Two are class actions on behalf of certain retail pharmacies in California and Wisconsin, and the other is a class action in the District of Columbia, on behalf of consumers of prescription medicine. In addition, an action has been brought in Alabama purportedly on behalf of consumers in Alabama and several other states. Plaintiffs are seeking to maintain the action as a class action. The Company has settled the retailer class action in Wisconsin and the alleged class action in Minnesota. The settlements of the state antitrust cases in Wisconsin and Minnesota have been approved by the respective courts. The settlement amounts were not significant. In August 1998, a class action was brought in Tennessee purportedly on behalf of consumers in Tennessee and several other states. The court has conditionally certified a class of consumers, but has stayed the case pending the resolution of an earlier-filed Tennessee case, which the Company has settled in principle. In April - June 1999, state consumer cases were filed in state courts in North Dakota, West Virginia and New Mexico. The Company has also recently settled the state consumer cases in all of the states except Alabama, Tennessee, North Dakota, West Virginia and New Mexico. Court approval of those settlements has been obtained. The settlement amounts were not material to the Company. In June 1999, the Alabama Supreme Court reversed the denial of a motion for judgment on the pleadings in one of the Alabama retailer cases. The court held that the Alabama antitrust law did not apply to conspiracies alleged to be in interstate commerce. The Company believes that this ruling should result in the dismissal of all of the Alabama state court cases. Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. In May 1998, the Company settled six of the federal antitrust cases brought by 26 food and drug chain retailers and several independent retail stores. Plaintiffs in these cases comprise collectively approximately one-fifth of the prescription drug retail market. In April 1999, the company settled federal antitrust cases brought by independent pharmacists and small pharmacy chains comprising about 2% of the prescription drug retail market. The settlement amounts were not material to the Company. In April 1997, certain of the plaintiffs in the federal class action commenced another purported class action in United States District Court in Illinois against the Company and the other defendants who settled the previous federal class action. The complaint alleges that the defendants conspired not to implement the settlement commitments following the settlement discussed above. The District Court has denied the plaintiffs' motion for a preliminary injunction hearing. The Company believes all the antitrust actions are without merit and is defending itself vigorously. On March 13, 1996, the Company was notified that the United States Federal Trade Commission (FTC) is investigating whether the Company, along with other pharmaceutical companies, conspired to fix prescription drug prices. The investigation is ongoing. The Company vigorously denies that it has engaged in any price- fixing conspiracy. The Company is a defendant in a state court action in Texas brought by Foxmeyer Health Corporation, the parent of a pharmaceutical wholesaler that filed for bankruptcy in August 1996. The case is against another pharmaceutical wholesaler and 11 pharmaceutical companies and alleges that the defendants conspired to drive the plaintiff's wholesaler subsidiary out of business. The complaint also alleged that the defendants defamed the wholesaler and interfered with its business. There are related actions pending in the Delaware bankruptcy proceedings of the wholesaler and certain of the plaintiff's claims against the Company have been dismissed. The Company believes that this action is without merit and is defending itself vigorously against all claims. In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted an Abbreviated New Drug Application (ANDA) to the U.S. Food and Drug Administration (FDA) seeking to market a generic form of CLARITIN in the United States several years before the expiration of the Company's patents. Geneva has alleged that certain of the Company's U.S. CLARITIN patents are invalid and unenforceable. The CLARITIN patents are material to the Company's business. In March 1998, the Company filed suit in federal court seeking a ruling that Geneva's ANDA submission constitutes willful infringement of the Company's patents and that its challenge to the Company's patents is without merit. The Company believes that it should prevail in the suit. However, as with any litigation, there can be no assurance that the Company will prevail. Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc. (Teva) and Novex Pharma (Novex) notified the Company in February, April and June 1999, respectively, that each had submitted an ANDA to the FDA seeking to market a generic form of CLARITIN Syrup in the United States before the expiration of certain of the Company's patents. Each has alleged that one of those patents is invalid and unenforceable. In March 1999, the Company filed suit in federal court seeking a ruling that Copley's ANDA submission and proposed marketing of a generic syrup constitute willful infringement of the Company's patent and that its challenge to the patent is without merit. The Company also sued Teva in June 1999 asking for the same relief. The Company has filed a similar suit in federal court concerning the Novex ANDA submission. In May 1999, the Company received notice from Zenith Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA to the FDA for generic CLARITIN tablets. In June 1999, the Company filed suit in federal court in New Jersey seeking a ruling that Zenith's ANDA submission and proposed marketing of a generic tablet constitute willful infringement of the Company's patent and that Zenith's challenge to the patent is without merit. The Company believes that it should prevail in these suits. However, as with any litigation, there can be no assurance that the Company will prevail. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - three and six months ended June 30, 1999 compared with the corresponding periods in 1998. Net Sales Consolidated net sales for the second quarter advanced $327 million or 15 percent compared with the same period in 1998. For the six months, net sales rose $605 million or 15 percent over 1998. Excluding the effect of foreign currency exchange rate fluctuations, consolidated net sales grew 16 percent in the quarter. Exchange rate fluctuations had no impact on the net sales for the six months. Net sales by major therapeutic category for the second quarter and six months were as follows ($ in millions): Second Quarter Six Months 1999 1998 % 1999 1998 % Allergy & Respiratory $1,124 $ 962 17 $1,990 $1,715 16 Anti-infectives & Anticancer 408 271 50 830 583 42 Dermatologicals 160 168 ( 5) 311 329 ( 5) Cardiovasculars 172 208 (17) 332 381 (13) Other Pharmaceuticals 201 142 41 405 290 39 Animal Health 172 169 2 325 314 4 Foot Care 100 99 2 183 171 7 OTC 43 42 2 105 103 1 Sun Care 71 63 12 156 146 7 Consolidated Net Sales $2,451 $2,124 15 $4,637 $4,032 15 Worldwide net sales of allergy and respiratory products advanced 17 percent in the quarter and 16 percent for the six-month period due to continued strong market growth of the CLARITIN line of nonsedating antihistamines. Worldwide net sales of the CLARITIN brand totaled $819 million and $1,384 million for the quarter and first half, respectively, compared with $687 million and $1,124 million for the corresponding periods in 1998. Franchise sales of nasal inhaled steroid products, which include Vancenase allergy products and Nasonex, a once-daily corticosteroid for allergies, increased in the quarter and year-to-date due to market expansion in the U.S. and international markets. Net sales of anti-infective and anticancer products worldwide increased 50 percent in the quarter and 42 percent for the six months, primarily due to the 1998 U.S. introduction of REBETRON Combination Therapy containing REBETOL Capsules and INTRON A Injection for the treatment of chronic hepatitis C in both relapsed and previously untreated (naive) patients. International sales of INTRON A also contributed to the sales increase in the second quarter and six months due to the 1998 launch of INTRON A solution in a multidose pen in several European markets. Worldwide sales of cardiovascular products decreased 17 percent for the quarter and 13 percent for the six months primarily in the U.S. due to lower sales in the quarter and six month periods of IMDUR, an oral nitrate for angina and NORMODYNE, an alpha-beta blocker for hypertension due to generic product introductions, as well as lower sales of K-DUR, a sustained-released potassium supplement, due to unusually high trade purchases in the first half of 1998. Partially offsetting these declines in both periods were higher U.S. sales of INTEGRILIN injection, a platelet receptor glycoprotein inhibitor following its launch in the second quarter of 1998. Other pharmaceuticals consist of products that do not fit into the Company's major therapeutic categories and include bulk manufacturing and alliance revenues. International sales of Subutex, a treatment for opiate addiction, increased in both the quarter and the first half of 1999. Sales of suncare products grew 12 percent in the second quarter and 7 percent in the first six months of 1999 led by the Children's Sunblock lines. Sales of foot care products increased 2 percent in the quarter and 7 percent for the six months. The increase in the first half of 1999 was driven by higher sales of Dr. Scholl's insoles and devices reflecting new product introductions and increased sales of the antifungal line of products which includes Tinactin and Lotrimin brands. Costs and Expenses Cost of sales as a percentage of sales decreased slightly to 19.3 percent in the quarter and 19.5 percent for the first six months from 19.9 percent in both periods of 1998. The slight decrease in the overall rate is primarily due to product mix improvements. Selling, general and administrative expenses represented 39.3 percent of sales in the second quarter of 1999, a slight increase compared with 39.0 percent last year. For the six-month period, the ratio decreased slightly to 37.9 percent versus 38.2 percent in 1998. The second quarter increase was primarily driven by increased product promotion. Research and development spending rose 14 percent in the second quarter representing 12.1 percent of sales compared with 12.3 percent in 1998. For the first half of 1999 spending increased 15 percent and represented 12.1 percent of sales, compared to 12.0 percent in 1998. The higher spending in 1999 reflects the Company's funding of both internal research efforts and research collaborations with various partners to develop a steady flow of innovative products. The Company expects research and development spending for 1999 to increase by more than 15 percent over prior year spending. Income before income taxes increased 20 percent for the quarter and six months compared with the same periods in 1998, and represented 29.6 percent of sales for the second quarter versus 28.4 percent last year and 31.0 percent of sales for the first half of 1999 versus 29.7 percent last year. The effective tax rate was 24.5 percent in the three and six month periods of both 1999 and 1998. Diluted earnings per common share grew 19 percent in the second quarter to $.37 from $.31 in 1998. For the six-month period, diluted earnings per common share increased 20 percent from $.61 last year to $.73. Basic earnings per common share advanced 19 percent in the quarter and six-month periods. Foreign currency exchange rate changes had no impact on basic or diluted earnings per common share for the second quarter or first half of 1999. Additional Factors Influencing Operations In the United States, many of the Company's pharmaceutical products are subject to increasingly competitive pricing as managed care groups, institutions, government agencies and other buying groups seek price discounts. In most international markets, the Company 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 of cost control. Since the Company is unable to predict the final form and timing of any future domestic and international governmental or other health care initiatives, their effect on operations and cash flows cannot be reasonably estimated. The market for pharmaceutical products is competitive. The Company's operations may be affected by technological advances of competitors, patents granted to competitors, new products of competitors and generic competition as the Company's products mature. In addition, patent positions can be highly uncertain and 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. Uncertainties inherent in government regulatory approval processes, including among other things delays in approval of new products, may also affect the Company's operations. The effect on operations of regulatory approval processes cannot be predicted. Liquidity and financial resources - six months ended June 30, 1999 Cash generated from operations continues to be the Company's major source of funds to finance working capital, additions to property, shareholder dividends and common share repurchases. Cash provided by operating activities was $767 million for the first six months of 1999, a decrease of $74 million from 1998. The decrease in 1999 is primarily due to an increase in accounts receivable due to the increase in second quarter net sales and a reduction in accounts payable. Cash provided by financing activities included equity proceeds as well as proceeds from short-term borrowings which was used to pay shareholder dividends of $347 million and repurchase shares for $425 million. Cash was also used to fund capital expenditures of $201 million. In October 1997, the Board of Directors authorized the repurchase of $1 billion of the Company's common shares. As of June 30, 1999 this program was approximately 57 percent complete. In April 1999, the Board of Directors increased the quarterly dividend by 14 percent to $.125 from $.11 per common share. In September 1998, the Board of Directors authorized a 2-for-1 stock split of the Company's common shares. The distribution of the split shares was made on December 2, 1998, to the shareholders of record at the close of business on November 6, 1998. Certain 1998 amounts have been restated to reflect this stock split. The Company's liquidity and financial resources continue to be sufficient to meet its operating needs. Year 2000 Many computer systems ("IT systems") and equipment and instruments with embedded microprocessors ("non-IT systems") were designed to recognize only the last two digits of a calendar year. With the arrival of the Year 2000, these systems and microprocessors may encounter operating problems due to their inability to distinguish years after 1999 from years preceding 1999. As a result, the Company is engaged in an extensive project to remediate or replace its date-sensitive IT systems and non-IT systems. The project involves four phases: (1) compiling an inventory of IT and non-IT systems; (2) distinguishing "critical" systems from "non-critical" systems; (3) remediating or replacing IT and non- IT systems; and (4) testing the remediated or replaced IT and non-IT systems. "Critical" systems for this purpose include systems that may affect health and safety, product manufacturing, product distribution, customer service and certain research systems. The following chart indicates the estimated state of completion of each phase of this project as of June 30, 1999: IT Systems Non-IT Systems Inventory systems 100% 100% Identify critical and non-critical systems 100% 100% Remediate or replace systems 99% 99% Testing systems 97% 97% The last two lines of the preceding table exclude non-critical, non-IT equipment because the Company has concluded that any failure of such equipment will not adversely affect the Company's operations. Repairs or replacements of non-critical, non-IT equipment will continue into the year 2000. The Company expects to complete all phases of this project for all IT systems and all critical, non-IT systems by December 31, 1999. The estimated maximum cost of the Year 2000 project is approximately $95 million. Approximately 55 percent of the $95 million will be of an expense nature and 45 percent will be for capitalizable replacements. As of June 30, 1999, $53 million of the $95 million has been incurred; $17 million has been capitalized and $36 million has been expensed. This $95 million cost estimate includes the estimated cost to repair or replace non-critical, non-IT equipment some of which will be spent in the year 2000. No other significant information systems projects have been deferred as a result of the Company's Year 2000 project. The book value of computers, software and equipment that will need to be written-off as a result of not being Year 2000 compliant is immaterial. The Company's internal auditors are reviewing progress on the Year 2000 project and provide evaluations of the Company's readiness to senior management on a regular basis. Management believes that the Year 2000 issue will not have a material adverse effect on the Company's internal operating systems. However, the Company's operations may be impacted in the event that computer disruption is encountered by third parties with whom the Company conducts significant business. These third parties include wholesalers, distributors, managed care organizations, hospitals, suppliers, clinical researchers, research partners and government agencies. The Company has initiated communications with these third parties concerning their state of readiness and intends to continue these communications throughout 1999. However, the Company can provide no assurance that these third parties will not experience business disruption. The Company currently believes that the most reasonably likely worst case scenario concerning the Year 2000 involves potential business disruption among the third parties with whom it conducts significant business. If a number of these third parties (including, in particular, wholesalers, managed care organizations and clinical researchers) experience business disruption due to a Year 2000 computer problem, the Company's results of operations and cash flows could be materially adversely affected. The Company is in the process of developing contingency plans to address potential business disruptions at these third parties. Contingency planning will include increasing inventory levels, establishing secondary sources of supply and manufacturing and maintaining backup lines of communications with our customers. However, it is unlikely that any contingency plan can fully mitigate the impact of significant business disruptions among these third parties. Certain third parties, such as retail pharmacies and wholesalers, have informed the Company that they plan to order extra inventory as part of their contingency planning. The impact to the Company of such contingency planning by third parties cannot be predicted. The estimates and conclusions in this description of the Year 2000 issue contain forward-looking statements and are based on management's estimates of future events. Risks to completing the Year 2000 project include the continued availability of resources and qualified information systems personnel. Cautionary Statements for Forward Looking Information Management's discussion and analysis set forth above contains certain forward looking statements, including statements regarding the Company's financial position and results of operations. These forward looking statements are based on current expectations. Certain factors have been identified by the Company in Exhibit 99 of the Company's December 31, 1998, Form 10-K filed with the Securities and Exchange Commission, which could cause the Company's actual results to differ materially from expected and historical results. Exhibit 99 from the Form 10-K is incorporated by reference herein. Item 3. Market Risk Disclosures As discussed in the 1998 Annual Report to Shareholders, the Company's exposure to market risk from changes in foreign currency exchange rates and interest rates, in general, is not material. PART II OTHER INFORMATION Item 1. Legal Proceedings Item 3, Legal Proceedings, of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated by reference. Reference is made to the fifth paragraph of Item 3, Legal Proceedings, of Part I of the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1998, relating to state antitrust cases. In April-June 1999, state consumer cases were filed in state courts in North Dakota, West Virginia and New Mexico. The Company has also recently settled the state consumer cases in all of the states except Alabama, Tennessee, North Dakota, West Virginia and New Mexico. Court approval of those settlements has been obtained. The settlement amounts were not material to the Company. In June 1999, the Alabama Supreme Court reversed the denial of a motion for judgment on the pleadings in one of the Alabama retailer cases. The court held that the Alabama antitrust law did not apply to conspiracies alleged to be in interstate commerce. The Company believes that this ruling should result in a dismissal of all of the Alabama state court cases. Reference is made to the twelfth paragraph of Item 3, Legal Proceedings, of Part I of the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 1998, relating to CLARITIN patent litigation. Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc. (Teva) and Novex Pharma (Novex) notified the Company in February 1999, April 1999 and June 1999, respectively, that each had submitted an Abbreviated New Drug Application (ANDA) to the U.S. Food and Drug Administration seeking to market a generic form of CLARITIN Syrup in the United States before the expiration of certain of the Company's patents. Each has alleged that one of those patents is invalid and unenforceable. In March 1999, the Company filed suit in federal court seeking a ruling that Copley's ANDA submission and proposed marketing of generic syrup constitute willful infringement of the Company's patent and that its challenge to the patent is without merit. The Company also sued Teva in June 1999 asking for the same relief. The Company has filed a similar suit in federal court concerning the Novex ANDA submission. In May 1999, the Company received notice from Zenith Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA to the FDA for generic CLARITIN tablets. In June 1999, the Company filed suit in federal court in New Jersey seeking a ruling that Zenith's ANDA submission and proposed marketing of a generic tablet constitute willful infringement of the Company's patent and that Zenith's challenge to the patent is without merit. The Company believes that it should prevail in these suits. However, as with any litigation, there can be no assurance that the Company will prevail. Item 6. Exhibits and Reports on Form 8-K a) Exhibits - The following Exhibits are filed with this document: Exhibit Number Description 27 - Financial Data Schedule 99 - Company Statement Relating to Forward Looking Information b) Reports on Form 8-K: No report was filed during the three months ended June 30, 1999. SIGNATURE(S) 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) Date August 10, 1999 /s/Thomas H. Kelly Thomas H. Kelly Vice President and Controller S:\2188\2nd qtr 99 10 Q.doc 08/10/99 8:49 AM S:\2188\2nd qtr 99 10 Q.doc 08/10/99 8:49 AM - 9 -
EX-27 2
5 This schedule contains financial data extracted from Schering-Plough Corporation and Subsidiaries consolidated financial statements for the six months ended June 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 1523 0 1018 0 861 4460 4153 1412 8619 3211 0 0 0 1015 3383 8619 4637 4637 904 904 559 0 0 1439 353 1086 0 0 0 1086 .74 .73
EX-99 3 Exhibit 99 Company Statement Relating to Forward Looking Information From press releases by the Company dated June 24, 1999 and July 21, 1999 (Filed Pursuant to Rule 175) Mr. Richard J. Kogan, Chairman and Chief Executive Officer, commenting on the Company's business results, stated "For the full year, we expect the increase in Schering-Plough's 1999 earnings per share to approach 20 percent." -----END PRIVACY-ENHANCED MESSAGE-----