-----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, N08EbKCOXudFfOdufUVDyzwK22b2WRliWfbCkCJyOuka1Tv4WNBH8vhuar7u3KX+ a+N0PdNrzLo+oU+xx4CqJQ== 0000950123-05-004990.txt : 20050426 0000950123-05-004990.hdr.sgml : 20050426 20050426092725 ACCESSION NUMBER: 0000950123-05-004990 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050426 DATE AS OF CHANGE: 20050426 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: 1934 Act SEC FILE NUMBER: 001-06571 FILM NUMBER: 05771659 BUSINESS ADDRESS: STREET 1: ONE GIRALDA FARMS CITY: MADISON STATE: NJ ZIP: 07940-1000 BUSINESS PHONE: 9738227000 10-Q 1 y08100e10vq.txt SCHERING-PLOUGH CORPORATION FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2005 COMMISSION FILE NUMBER 1-6571 SCHERING-PLOUGH CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-1918501 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.) 2000 Galloping Hill Road (908) 298-4000 Kenilworth, NJ (Registrant's telephone number, (Address of principal executive offices) including area code) 07033 (Zip Code)
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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO --- --- Common Shares Outstanding as of March 31, 2005: 1,475,081,515 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS (UNAUDITED) (Amounts in millions, except per share figures)
Three Months Ended March 31, -------------------------------- 2005 2004 ------------- ------------- Net sales $ 2,369 $ 1,963 ------------- ------------- Cost of sales 889 740 Selling, general and administrative 1,081 914 Research and development 384 372 Other expense, net 17 36 Special charges 27 70 Equity income from cholesterol joint venture (220) (78) ------------- ------------- Income / (loss) before income taxes 191 (91) Income tax expense/(benefit) 64 (18) ------------- ------------- Net income/(loss) $ 127 $ (73) ------------- ------------- Preferred stock dividends 22 -- ------------- ------------- Net income/(loss) available to common shareholders $ 105 $ (73) ------------- ------------- Diluted earnings/(loss) per common share $ .07 $ (.05) ============= ============= Basic earnings/(loss) per common share $ .07 $ (.05) ============= ============= Dividends per common share $ .055 $ .055 ============= =============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED) (Amounts in millions)
Three Months Ended March 31, 2005 2004 ------------- ------------- Operating Activities: Net income/ (loss) $ 127 $ (73) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Tax refund from U.S. loss carryback -- 404 Special charges 27 42 Depreciation and amortization 118 110 Changes in assets and liabilities: Accounts receivable (337) (214) Inventories 82 23 Prepaid expenses and other assets (56) 12 Accounts payable and other liabilities 239 (75) ------------- ------------- Net cash provided by operating activities 200 229 ------------- ------------- Investing Activities: Capital expenditures (83) (102) Dispositions of property and equipment 33 2 Purchases of investments (10) (122) Reduction of investments 58 -- ------------- ------------- Net cash used for investing activities (2) (222) ------------- ------------- Financing Activities: Cash dividends paid to common shareholders (81) (81) Cash dividends paid to preferred shareholders (22) -- Net change in short-term borrowings (1,169) (219) Other, net 9 9 ------------- ------------- Net cash used for financing activities (1,263) (291) ------------- ------------- Effect of exchange rates on cash and cash equivalents (7) (2) ------------- ------------- Net decrease in cash and cash equivalents (1,072) (286) Cash and cash equivalents, beginning of period 4,984 4,218 ------------- ------------- Cash and cash equivalents, end of period $ 3,912 $ 3,932 ============= =============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions, except per share figures) (UNAUDITED)
March 31, December 31, Assets 2005 2004 ------------- ------------- Cash and cash equivalents $ 3,912 $ 4,984 Short-term investments 792 851 Accounts receivable, net 1,702 1,407 Inventories 1,470 1,580 Deferred income taxes 314 309 Prepaid and other current assets 914 872 ------------- ------------- Total current assets 9,104 10,003 Property, plant and equipment 7,051 7,085 Less accumulated depreciation 2,528 2,492 ------------- ------------- Property, net 4,523 4,593 Goodwill 208 209 Other intangible assets, net 369 371 Other assets 717 735 ------------- ------------- Total assets $ 14,921 $ 15,911 ============= ============= Liabilities and Shareholders' Equity Accounts payable $ 1,038 $ 978 Short-term borrowings and current portion of long-term debt 398 1,569 Other accrued liabilities 2,760 2,661 ------------- ------------- Total current liabilities 4,196 5,208 Long-term debt 2,392 2,392 Other long-term liabilities 793 755 ------------- ------------- Total long-term liabilities 3,185 3,147 Commitments and contingent liabilities (Note 15) Shareholders' equity: 6% Mandatory convertible preferred shares - $1 par value; issued - 29; $50 per share face value 1,438 1,438 Common shares - $.50 per share par value; issued: 2,030 1,015 1,015 Paid-in capital 1,243 1,234 Retained earnings 9,638 9,613 Accumulated other comprehensive loss (352) (300) ------------- ------------- Total 12,982 13,000 Less treasury shares: 2005 - 555 shares; 2004 - 555 shares, at cost 5,442 5,444 ------------- ------------- Total shareholders' equity 7,540 7,556 ------------- ------------- Total liabilities and shareholders' equity $ 14,921 $ 15,911 ============= =============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION These unaudited condensed consolidated financial statements of Schering-Plough Corporation and subsidiaries (the Company), included herein 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 footnote 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. Certain prior year amounts have been reclassified to conform to the current year presentation. These statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 2004 Annual Report on Form 10-K. In the opinion of the Company's management, the financial statements reflect all adjustments necessary for a fair statement of the operations, cash flows and financial position for the interim periods presented. 2. SPECIAL CHARGES Special charges for the three months ended March 31, 2005 totaled $27 million, primarily relating to employee termination costs at a manufacturing facility. Special charges for the three months ended March 31, 2004 totaled $70 million, comprised of $44 million in employee termination costs and $26 million in asset impairment charges. Employee Termination Costs In August 2003, the Company announced a global workforce reduction initiative. The first phase of this initiative was a Voluntary Early Retirement Program (VERP) in the United States. Under this program, eligible employees in the United States had until December 15, 2003, to elect early retirement and receive an enhanced retirement benefit. Approximately 900 employees elected to retire under the program, of which approximately 850 employees retired through year-end 2004 and approximately 50 employees have staggered retirement dates in 2005. The total cost of this program is approximately $191 million, comprised of increased pension costs of $108 million, increased post-retirement health care costs of $57 million, vacation payments of $4 million and costs related to accelerated vesting of stock grants of $22 million. Amounts recognized relating to the VERP during the three months ended March 31, 2005 and 2004 were $2 million and $9 million respectively, with cumulative costs recognized of $186 million as of March 31, 2005. In addition, the Company recognized $19 million and $35 million of other employee severance costs for the three months ended March 31, 2005 and 2004, respectively. 4 The following summarizes the activity in the accounts related to employee termination costs (Dollars in millions):
Employee Termination Costs 2005 2004 - -------------------------- ---- ---- Special charges liability balance at December 31, $ 18 $ 29 Special charges incurred during three months ended March 31, 21 44 Credit to retirement benefit plan liability during the three months ended March 31, (2) (9) Disbursements during the three months ended March 31, -- (28) ----- ---- Special charges liability balance at March 31, $ 37 $ 36 ===== ====
The balance at March 31, 2005, represents disbursements to be made after March 31, 2005. Asset Impairment and Related Charges For the three months ended March 31, 2005 and 2004, the Company recognized asset impairment and related charges of $6 million and $26 million, respectively. The charge in the 2004 period related primarily to the exit from a small European research-and-development facility. 5 3. EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE In May 2000, the Company and Merck and Company, Inc. (Merck) entered into separate agreements to jointly develop and market in the U.S. (1) two cholesterol lowering drugs and (2) an allergy/asthma drug. In December 2001, the cholesterol agreement was 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 mode to the maximum degree possible by relying on the respective infrastructures of the two companies. These agreements generally provide for equal sharing of research and development costs and for co- promotion of approved products by each company. The cholesterol partnership agreements provide for the Company and Merck to jointly develop ezetimibe (marketed as ZETIA in the U.S. and Asia and EZETROL in Europe): i. as a once-daily monotherapy; ii. in co-administration with any statin drug, and; iii. as a once-daily fixed-combination tablet of ezetimibe and simvastatin (Zocor), Merck's 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 several international markets. The Company utilizes the equity method of accounting in recording its share of activity from the Merck / Schering-Plough Cholesterol Partnership (the Partnership or the joint venture). The cholesterol partnership agreements provide for the sharing of operating income generated by the Partnership 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 (the Partners) share profits equally. Schering-Plough's allocation of joint venture income is increased by milestones recognized. Further, either Partner's share of the joint venture's income from operations is subject to a reduction if the Partner fails to perform a specified minimum number of physician details in a particular country. The Partners agree annually to the minimum number of physician details by country. The Partners 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 partner for physician details that are set on an annual basis. This reimbursed amount is equal to each Partner's physician details multiplied by a contractual fixed fee. Schering-Plough reports this reimbursement as part of Equity income from cholesterol joint venture as under U.S. GAAP this amount does not represent a reimbursement of specific, incremental and identifiable costs for the Company's detailing of the cholesterol products in these markets. In addition, this reimbursement amount is not reflective of Schering-Plough's sales effort related to the joint venture as Schering-Plough's sales force and related costs associated with the joint venture are generally estimated to be higher. During the first quarter of 2005 Schering-Plough earned a milestone of $20 million of which $14 million was recognized for financial reporting purposes. This milestone related to certain European approvals of VYTORIN (ezetimibe/simvastatin) in the first quarter of 2005. During the first quarter of 2004 Schering-Plough earned and recognized a milestone of $7 million related to the approval of ezetimibe/simvastatin in Mexico in 2004. Under certain other conditions, as specified in the partnership agreements with Merck, the Company could earn additional milestones totaling $105 million. 6 Costs of the joint venture that the Partners 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 the Partners. The unaudited financial information below presents summarized combined financial information for the Merck / Schering-Plough Cholesterol Partnership for the three months ended March 31, 2005:
(Dollars in millions) 2005 ---------- Net sales $ 516 Cost of sales 28 Income from operations 226
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 Partnership. Schering-Plough's share of the Partnership's income from operations for the three months ended March 31, 2005 was $169 million. 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-Plough's share of the Partnership's income from operations is generally higher in the first quarter than in subsequent quarters. In addition, during the first quarter of 2005, the Company's share of the Partnership's income from operations includes a milestone of $14 million. The following information provides a summary of the components of the Company's Equity income from cholesterol joint venture for the three months ended March 31, 2005:
(Dollars in millions) 2005 ---------- Schering-Plough's share of income from operations ...................................... $ 169 Reimbursement to Schering-Plough for physician details ................................. 45 Elimination of intercompany profit and other, net ...................................... 6 ---------- Total Equity income from cholesterol joint venture ................................... $ 220 ----------
Equity income excludes any profit arising from transactions between the Company 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 the Company or Merck. Due to the virtual nature of the Partnership, the Company 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 the Company. These costs are reported on their respective line items in the Statements of Condensed Consolidated Operations. 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 Merck or the Company. The allergy/asthma agreement provides for the development and marketing of a once-daily, fixed-combination tablet containing CLARITIN and Singulair. Singulair is Merck's once-daily leukotriene receptor antagonist for the treatment of asthma and seasonal allergic rhinitis. In January 2002, the Merck/Schering-Plough respiratory joint venture reported on results of Phase III clinical trials of a fixed-combination tablet containing CLARITIN and Singulair. This Phase III study did not demonstrate sufficient added benefits in the treatment of seasonal allergic rhinitis. The CLARITIN and Singulair combination tablet does not have approval in any country and remains in clinical development. 7 4. ACCOUNTING FOR STOCK BASED COMPENSATION Currently the Company accounts for its stock compensation arrangements using the intrinsic value method. No stock-based employee compensation cost is reflected in Net income/(loss), other than for the Company's deferred stock units, as stock options granted under all other plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In December 2004 the Financial Accounting Standards Board (FASB) issued SFAS 123R (Revised 2004), "Share Based Payment." Statement 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. The Company is required to implement this SFAS in the first quarter of 2006 by recognizing compensation on all share-based grants made on or after January 1, 2006, and for the unvested portion of share-based grants made prior to January 1, 2006. Restatement of previously issued statements is permitted, but not required. The Company is currently evaluating the various implementation options and related financial impacts available under SFAS 123R. The following table reconciles Net income/(loss) available to common shareholders and basic/diluted earnings/(loss) per common share, as reported, to pro forma net income/(loss) available to common shareholders and basic/diluted earnings/(loss) per common share, as if the Company had expensed the grant-date fair value of both stock options and deferred stock units as permitted by SFAS 123, "Accounting for Stock-Based Compensation." 8
Three months ended March 31 ------------------------------ (Dollars in millions) ------------------------------ 2005 2004 ------------ ------------ Net income/(loss) available to common shareholders, as reported $ 105 $ (73) Add back: Expense included in reported net income/(loss) for deferred stock units, net of tax in 2004 15 12 Deduct: Pro forma expense as if both stock options and deferred stock units were charged against net income/(loss), net of tax in 2004 (36) (29) ------------ ------------ Pro forma net income/(loss) available to common shareholders using the fair value method $ 84 $ (90) ============ ============ Diluted earnings/(loss) per common share: Diluted earnings/(loss) per common share, as reported $ .07 $ (.05) ------------ ------------ Pro forma diluted earnings/(loss) per common share using the fair value method .06 (.06) ------------ ------------ Basic earnings/(loss) per common share: Basic earnings/(loss) per common share, as reported $ .07 $ (.05) ------------ ------------ Pro forma basic earnings/(loss) per common share using the fair value method .06 (.06) ------------ ------------
Basic and diluted earnings/ (loss) per common share are calculated based on net income/ (loss) available to common shareholders. 5. OTHER EXPENSE, NET The components of other expense, net are as follows (Dollars in millions):
Three Months Ended March 31, 2005 2004 ---------- ---------- Interest cost incurred $ 48 $ 53 Less: amount capitalized on construction (3) (5) ---------- ---------- Interest expense 45 48 Interest income (33) (14) Foreign exchange losses 4 1 Other, net 1 1 ---------- ---------- Total $ 17 $ 36 ========== ==========
9 6. INCOME TAXES At December 31, 2004 the Company has approximately $1 billion of U.S. Net Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S. taxable income through 2024. The Company generated an additional U.S. NOL during the first quarter of 2005. If Congress does not legislate certain technical corrections related to the American Jobs Creation Act, the Company's total U.S. NOL could be reduced by approximately $675 million. The Company's tax provision for the three-month period ended March 31, 2005 is primarily related to foreign taxes and does not include any benefit related to U.S. NOLs. The Company has established a valuation allowance on net U.S. deferred tax assets, including the benefit of U.S. NOLs, as management cannot conclude that it is more likely than not the benefit of U.S. net deferred tax assets can be realized. 7. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS The Company has defined benefit pension plans covering eligible employees in the United States and certain foreign countries, and the Company provides post-retirement health care benefits to its eligible U.S. retirees and their dependents. The components of net pension expense were as follows:
Three months ended March 31, ---------------------------- (Dollars in millions) 2005 2004 ---------- ---------- Service cost $ 27 $ 26 Interest cost 35 35 Expected return on plan assets (36) (41) Amortization, net 11 8 Termination benefits 2 6 Settlement -- 2 ---------- ---------- Net pension expense $ 39 $ 36 ========== ==========
The components of other post-retirement benefits expense were as follows:
Three months ended March 31, ------------------------------ (Dollars in millions) 2005 2004 ------------ ------------ Service cost $ 3 $ 3 Interest cost 6 6 Expected return on plan assets (4) (4) Amortization, net -- 1 Termination benefits -- 1 ------------ ------------ Net other post-retirement benefits expense $ 5 $ 7 ============ ============
10 8. EARNINGS PER COMMON SHARE The following table reconciles the components of the basic and diluted earnings / (loss) per share computations:
Three Months Ended March 31, (Dollars and shares in millions) EPS Numerator: 2005 2004 ------------- ------------- Net income/(loss) $ 127 $ (73) Less: Preferred stock dividends 22 -- ------------- ------------- Net income/(loss) available to common shareholders $ 105 $ (73) ------------- ------------- EPS Denominator: Average shares outstanding for basic EPS 1,474 1,471 Dilutive effect of options and deferred stock units 6 -- ------------- ------------- Average shares outstanding for diluted EPS 1,480 1,471 ------------- -------------
For the three months ended March 31, 2005 and 2004, the equivalent of 37 million and 93 million, respectively, of common shares issuable under the Company's stock incentive plans were excluded from the computation of diluted EPS because their effect would have been antidilutive. Also, at March 31, 2005, 79 million of common shares obtainable upon conversion of the Company's 6% Mandatory Convertible Preferred Stock were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. 9. COMPREHENSIVE INCOME / (LOSS) Total comprehensive income / (loss) for the three months ended March 31, 2005 and 2004 was $75 million and $(114) million, respectively. 11 10. INVENTORIES Inventories consisted of the following:
March 31, December 31, 2005 2004 ------------ ------------ (Dollars in millions) Finished products $ 574 $ 648 Goods in process 598 602 Raw materials and supplies 298 330 ------------ ------------ Total inventories $ 1,470 $ 1,580 ============ ============
11. OTHER INTANGIBLE ASSETS The components of other intangible assets, net are as follows (Dollars in millions):
March 31, 2005 December 31, 2004 ---------------------------------------------- ---------------------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net ------------ ------------ ------------ ------------ ------------ ------------ Patents and licenses $ 558 $ 297 $ 261 $ 558 $ 287 $ 271 Trademarks and other 153 45 108 144 44 100 ------------ ------------ ------------ ------------ ------------ ------------ Total other intangible assets $ 711 $ 342 $ 369 $ 702 $ 331 $ 371 ============ ============ ============ ============ ============ ============
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. 12 12. SHORT AND LONG-TERM BORROWINGS AND OTHER COMMITMENTS Short and Long-Term Borrowings At March 31, 2005, short-term borrowings totaled approximately $400 million. Approximately 75 percent of such borrowings were outstanding commercial paper. On November 26, 2003, the Company issued $1.25 billion aggregate principal amount of 5.3 percent senior unsecured notes due 2013 and $1.15 billion aggregate principal amount of 6.5 percent senior unsecured notes due 2033 (collectively the Notes) . Interest is payable semi-annually. The net proceeds from this offering were $2.37 billion. Upon issuance, the Notes were rated A3 by Moody's Investors Service, Inc. (Moody's), and A+ by Standard & Poor's Rating Services (S&P). The interest rates payable on the Notes are subject to adjustment as follows: If the rating assigned to a particular series of Notes by either Moody's or S&P changes to a rating set forth below, the interest rate payable on that series of notes will be the initial interest rate (5.3 percent for the notes due 2013 and 6.5 percent for the notes due 2033) plus the additional interest rate set forth below for each rating assigned by Moody's and S&P.
Additional Additional Moody's Rating Interest Rate S&P Rating Interest Rate - -------------- ------------- ---------- ------------- Baa1 0.25% BBB+ 0.25% Baa2 0.50% BBB 0.50% Baa3 0.75% BBB- 0.75% Ba1 or below 1.00% BB+ or below 1.00%
In no event will the interest rate for any of the Notes increase by more than 2 percent above the initial coupon rates of 5.3 percent and 6.5 percent, respectively. If either Moody's or S&P subsequently upgrades its ratings, the interest rates will be correspondingly reduced, but not below 5.3 percent or 6.5 percent, respectively. Furthermore, the interest rate payable on a particular series of notes will return to 5.3 percent and 6.5 percent, respectively, and the rate adjustment provisions will permanently cease to apply if, following a downgrade by both Moody's and S&P below A3 or A-, respectively, both Moody's and S&P raise their rating to A3 and A-, respectively, or better. On July 14, 2004, Moody's lowered its rating of the Notes to Baa1 and, accordingly, the interest payable on each note increased by 25 basis points, respectively, effective December 1, 2004. Therefore, on December 1, 2004, the interest rate payable on the notes due 2013 increased from 5.3% to 5.55%, and the interest rate payable on the notes due 2033 increased from 6.5% to 6.75%. At March 31, 2005 the Notes were rated Baa1 by Moody's and A- by S&P. The Notes are redeemable in whole or in part, at the Company's option at any time, at a redemption price equal to the greater of (1) 100 percent of the principal amount of such notes or (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted using the rate of treasury notes with comparable remaining terms plus 25 basis points for the 2013 notes or 35 basis points for the 2033 notes. 13 Credit Facilities The Company has a revolving credit facility from a syndicate of major financial institutions. During March 2005, the Company negotiated an increase in the commitments under this credit facility from $1.25 billion to $1.5 billion with no changes in the basic terms of the pre-existing credit facility. Concurrently with the increase in commitments under this facility, the Company terminated early a separate $250 million line of credit which would have matured in May 2006. There was no outstanding balance under this facility at the time it was terminated. The existing $1.5 billion credit facility matures in May 2009 and requires the Company to maintain a total debt to capital ratio of no more than 60 percent. This credit line is available for general corporate purposes and is considered as support to the Company's commercial paper borrowings. Borrowings under the credit facility may be drawn by the U.S. parent company or by its wholly-owned foreign subsidiaries when accompanied by a parent guarantee. This facility does not require compensating balances; however, a nominal commitment fee is paid. As of March 31, 2005 no funds have been drawn down under this facility. 6% Mandatory Convertible Preferred Stock and Shelf Registration In August 2004, the Company issued 28,750,000 shares of 6% Mandatory Convertible Preferred stock (the Preferred Stock) with a face value of $1.44 billion. Net proceeds to the Company were $1.4 billion after deducting commissions, discounts and other underwriting expenses. The Preferred Stock will automatically convert into between 2.2451 and 2.7840 common shares of the Company depending on the average closing price of the Company's common shares over a period immediately preceding the mandatory conversion date of September 14, 2007, as defined in the prospectus. The preferred shareholders may elect to convert at any time prior to September 14, 2007, at the minimum conversion ratio of 2.2451 common shares per share of the Preferred Stock. Additionally, if at any time prior to the mandatory conversion date, the closing price of the Company's common shares exceeds $33.41 (for at least 20 trading days within a period of 30 consecutive trading days), the Company may elect to cause the conversion of all, but not less than all, of the Preferred Stock then outstanding at the same minimum conversion ratio of 2.2451 common shares for each preferred share. 14 The Preferred Stock accrues dividends at an annual rate of 6 percent on shares outstanding. The dividends are cumulative from the date of issuance and, to the extent the Company is legally permitted to pay dividends and the Board of Directors declares a dividend payable, the Company will pay dividends on each dividend payment date. The dividend payment dates are March 15, June 15, September 15 and December 15. As of March 31, 2005 the Company has the ability to issue $563 million (principal amount) of securities under a currently effective SEC shelf registration. Interest Rate Swap Contract The Company previously disclosed an interest rate swap arrangement with a counterparty bank. The arrangement utilized two long-term interest rate swap contracts, one between a foreign-based subsidiary of the Company and a bank and the other between a U.S. subsidiary of the Company and the same bank. The two contracts had equal and offsetting terms and were covered by a master netting arrangement. The contract involving the foreign-based subsidiary permitted the subsidiary to prepay a portion of its future obligation to the bank, and the contract involving the U.S. subsidiary permitted the bank to prepay a portion of its future obligation to the U.S. subsidiary. Interest was paid on the prepaid balances by both parties at market rates. Prepayments totaling $1.9 billion were made under both contracts as of December 31, 2004. The terms of the swap contracts, as amended, called for a phased termination of the swaps based on an agreed repayment schedule that was to begin no later than March 31, 2005. Termination would require the Company and the counterparty each to repay all prepayments pursuant to the agreed repayment schedule. The terms also allowed the Company, at its option, to accelerate the termination of the arrangement and associated scheduled repayments for a nominal fee. On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary each gave notice to the counterparty of their intent to terminate the arrangement. On March 21, 2005 the Company terminated these swap agreements and all associated repayments were made by the respective obligors with no material impact on the Company's Condensed Consolidated Statement of Operations. 13. SEGMENT DATA The Company has three reportable segments: Prescription Pharmaceuticals, Consumer Health Care and Animal Health. The segment sales and profit data that follow are consistent with the Company's current management reporting structure. The Prescription Pharmaceuticals segment discovers, develops, manufactures and markets human pharmaceutical products. The Consumer Health Care segment develops, manufactures and markets OTC, foot care and sun care products, primarily in the United States. The Animal Health segment discovers, develops, manufactures and markets animal health products. 15 Net sales by segment:
Three months ended March 31, ------------------------------ (Dollars in millions) ------------------------------ 2005 2004 ------------ ------------ Prescription Pharmaceuticals $ 1,846 $ 1,481 Consumer Health Care 330 312 Animal Health 193 170 ------------ ------------ Consolidated net sales $ 2,369 $ 1,963 ============ =============
Profit by segment:
Three months ended March 31, ------------------------------ (Dollars in millions) ------------------------------ 2005 2004 ------------ ------------ Prescription Pharmaceuticals $ 160 $ (41) Consumer Health Care 106 100 Animal Health 17 5 Corporate and other, including net interest expense of $12 in 2005 and $34 in 2004 (92) (155) ------------ ------------ Consolidated profit/(loss) before tax $ 191 $ (91) ============ ============
Corporate and other includes interest income and expense, foreign exchange gains and losses, headquarters expenses, special 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 the Company's 2004 10-K. For the three months ended March 31, 2005, "Corporate and other" included special charges of $27 million related to the Voluntary Early Retirement Program, other employee severance costs and asset impairment charges (see "Special Charges" footnote for additional information). It is estimated that the special charges relate to the reportable segments as follows: Prescription Pharmaceuticals - $24 million, Consumer Health Care - $1 million, Animal Health - - $1 million and Corporate and other - $1 million. For the three months ended March 31, 2004, "Corporate and other" included special charges of $70 million related to the Voluntary Early Retirement Program, other employee severance costs and asset impairment charges (see Note 2 "Special Charges" for additional information). It is estimated that the special charges relate to the reportable segments as follows: Prescription Pharmaceuticals - $58 million, Consumer Health Care - $1 million, Animal Health - - $1 million and Corporate and other - $10 million. 16 Net sales of products comprising 10% or more of the Company's U.S. or international net sales in the three months ended March 31, 2005 were as follows (Dollars in millions):
U.S. International NASONEX $109 $ 74 OTC CLARITIN 109 7 REMICADE -- 220
14. CONSENT DECREE On May 17, 2002, the Company announced that it had reached an agreement with the FDA for a consent decree to resolve issues involving the Company's compliance with current Good Manufacturing Practices (cGMP) at certain manufacturing facilities in New Jersey and Puerto Rico. The U.S. District Court for the District of New Jersey approved and entered the consent decree on May 20, 2002. Under terms of the consent decree, the Company agreed to pay a total of $500 million to the U.S. government in two equal installments of $250 million; the first installment was paid in May 2002, and the second installment was paid in May 2003. The consent decree requires the Company to complete a number of actions, including comprehensive cGMP Work Plans for the Company's manufacturing facilities in New Jersey and Puerto Rico and revalidation of the finished drug products and bulk active pharmaceutical ingredients manufactured at those facilities. Under the decree, the scheduled completion dates are December 31, 2005, for cGMP Work Plans; September 30, 2005, for revalidation programs for bulk active pharmaceutical ingredients; and December 31, 2005, for revalidation programs for finished drugs. The cGMP Work Plans contain a number of Significant Steps whose timely and satisfactory completion are subject to payments of $15 thousand per business day for each deadline missed. These payments may not exceed $25 million for 2002, and $50 million for each of the years 2003, 2004 and 2005. These payments are subject to an overall cap of $175 million. In general, the timely and satisfactory completion of the revalidations are subject to payments of $15 thousand per business day for each deadline missed, subject to the caps described above. However, if a product scheduled for revalidation has not been certified as having been validated by the last date on the validation schedule, the FDA may assess a payment of 24.6 percent of the net domestic sales of the uncertified product until the validation is certified. Further, in general, if a product scheduled for revalidation under the consent decree is not certified within six months of its scheduled date, the Company must cease production of that product until certification is obtained. 17 The completion of the Significant Steps in the Work Plans and the completion of the revalidation programs are subject to third-party expert certification, as well as the FDA's acceptance of such certification. The consent decree provides that if the Company believes that it may not be able to meet a deadline, the Company has the right, upon the showing of good cause, to request extensions of deadlines in connection with the cGMP Work Plans and revalidation programs. However, there is no guarantee that the FDA will grant any such requests. Although the Company believes it has made significant progress in meeting its obligations under the consent decree, it is possible that (1) the Company may fail to complete a Significant Step or a revalidation by the prescribed deadline; (2) the third-party expert may not certify the completion of the Significant Step or revalidation; or (3) the FDA may disagree with an expert's certification of a Significant Step or revalidation. In such a case, it is possible that the FDA may assess payments as described above. The Company would expense any payments assessed under the decree if and when incurred. 15. LEGAL, ENVIRONMENTAL AND REGULATORY MATTERS BACKGROUND The Company is involved in various claims, investigations and legal proceedings. The Company records a liability for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company 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 the Company 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 the Company 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. The Company reviews the status of the matters discussed in the remainder of this Note on an ongoing basis. From time to time, the Company may settle or otherwise resolve these matters on terms and conditions management believes are in the best interests of the Company. Resolution of any or all of the items discussed in the remainder of this Note, individually or in the aggregate, could have a material adverse effect on the Company's results of operations, cash flows or financial condition. 18 Resolution (including settlements) of matters of the types set forth in the remainder of this Note, and in particular under Investigations, frequently involve fines and penalties of an amount that would be material to the Company's results of operations, cash flows or financial condition. Resolution of such matters may also involve injunctive or administrative remedies that would adversely impact the business such as exclusion from government reimbursement programs, which in turn would have a material adverse impact on the business, future financial condition, cash flows or the results of operations. There are no assurances that the Company will prevail in any of the matters discussed in the remainder of this Note, that settlements can be reached on acceptable terms (including the scope of the release provided and the absence of injunctive or administrative remedies that would adversely impact the business such as exclusion from government reimbursement programs) or in amounts that do not exceed the amounts reserved. Even if an acceptable settlement were to be reached, there can be no assurance that further investigations or litigations will not be commenced raising similar issues, potentially exposing the Company to additional material liabilities. The outcome of the matters discussed below under Investigations could include 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. Total liabilities reserved reflect an estimate (and in the case of the Investigations, an estimate of the minimum liability), and any final settlement or adjudication of any of these matters could possibly be less than, or could materially exceed the liabilities recorded in the financial statements and could have a material adverse impact on the Company's results of operations, cash flows or financial condition. Further, the Company cannot predict the timing of the resolution of these matters or their outcomes. Except for the matters discussed in the remainder of this Note, the recorded liabilities for contingencies at March 31, 2005, and the related expenses incurred during the three-month period ended March 31, 2005, 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 the Company's results of operations, cash flows or financial condition. During 2002 and 2003, the Company increased its litigation contingent liabilities by an aggregate amount of $500 million as a result of the investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Eastern District of Pennsylvania. As noted below the Pennsylvania investigation has been settled and payments have been made. The Company has recorded a liability of approximately $250 million related to the Massachusetts investigation. It is reasonably possible that a settlement of the Massachusetts investigation could involve amounts materially in excess of this accrual. This could have a material adverse impact on the Company's financial condition, cash flows or operations. As required by U.S. GAAP, since the Company cannot reasonably estimate the potential final resolution, the Company has recognized the estimated minimum liability for the Massachusetts investigation. 19 PATENT MATTERS DR. SCHOLL'S FREEZE AWAY Patent. On July 26, 2004, OraSure Technologies filed an action in the U.S. District Court for the Eastern District of Pennsylvania alleging patent infringement by Schering-Plough HealthCare Products by its sale of DR. SCHOLL'S FREEZE AWAY wart removal product. The complaint seeks a permanent injunction and unspecified damages, including treble damages. The FREEZE AWAY product was launched in March 2004. Net sales of this product totaled approximately $20 million for the year-ended December 31, 2004 and $4 million and $3 million for the three months ended March 31, 2005 and 2004, respectively. INVESTIGATIONS Pennsylvania Investigation. On July 30, 2004, Schering-Plough Corporation, the U.S. Department of Justice and the U.S. Attorney's Office for the Eastern District of Pennsylvania announced settlement of the previously disclosed investigation by that Office. Under the settlement, Schering Sales Corporation, an indirect wholly owned subsidiary of Schering-Plough Corporation, pled guilty to a single federal criminal charge concerning a payment to a managed care customer. In connection with the settlement: o The aggregate settlement amount was $345.5 million in fines and damages. Schering-Plough Corporation was credited with $53.6 million that was previously paid in additional Medicaid rebates, leaving a net settlement amount of $291.9 million. The $291.9 million plus interest was paid during 2004. o Schering Sales Corporation will be excluded from participating in federal health care programs. The settlement will not affect the ability of Schering-Plough Corporation to participate in those programs. o Schering-Plough Corporation entered into a five-year corporate integrity agreement with the Office of the Inspector General of the Department of Health and Human Services, under which Schering-Plough Corporation agreed to implement specific measures to promote compliance with regulations on issues such as marketing. Failure to comply can result in financial penalties. The Company cannot predict the impact of this settlement, if any, on other outstanding investigations. Massachusetts Investigation. The U.S. Attorney's Office for the District of Massachusetts is investigating a broad range of the Company's sales, marketing and clinical trial practices and programs along with those of Warrick Pharmaceuticals (Warrick), the Company's generic subsidiary. 20 Schering-Plough has disclosed that, in connection with this investigation, on May 28, 2003, Schering Corporation, a wholly owned and significant operating subsidiary of Schering-Plough, received a letter (the Boston Target Letter) from that Office advising that Schering Corporation (including its subsidiaries and divisions) is a target of a federal criminal investigation with respect to four areas: 1. Providing remuneration, such as drug samples, clinical trial grants and other items or services of value, to managed care organizations, physicians and others to induce the purchase of Schering pharmaceutical products; 2. Sale of misbranded or unapproved drugs, which the Company understands to mean drugs promoted for indications for which approval by the U.S. FDA had not been obtained (so-called off-label uses); 3. Submitting false pharmaceutical pricing information to the government for purposes of calculating rebates required to be paid to the Medicaid program, by failing to include prices of a product manufactured and sold under a private label arrangement with a managed care customer as well as the prices of free and nominally priced goods provided to that customer to induce the purchase of Schering products; and 4. Document destruction and obstruction of justice relating to the government's investigation. A target is defined in Department of Justice guidelines as a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant (U.S. Attorney's Manual, Section 9-11.151). The Company has implemented certain changes to its sales, marketing and clinical trial practices and is continuing to review those practices to ensure compliance with relevant laws and regulations. The Company is cooperating with this investigation. See information about prior increases to the liabilities reserved in the financial statements, including in relation to this investigation and the other potential impacts of the outcome of this investigation in the Background section of this Note. The Company previously recorded a liability of approximately $250 million related to this investigation. It is reasonably possible that a settlement of the investigation could involve amounts materially in excess of this accrual. This could have a material adverse impact on the Company's financial condition, cash flows or operations. As required by U.S. GAAP, since the Company cannot reasonably estimate the potential final resolution, the Company has recognized the estimated minimum liability. 21 NITRO-DUR Investigation. In August 2003, the Company received a civil investigative subpoena issued by the Office of Inspector General of the U.S. Department of Health and Human Services seeking documents concerning the Company's classification of NITRO-DUR for Medicaid rebate purposes, and the Company's use of nominal pricing and bundling of product sales. The Company is cooperating with the investigation. It appears that the subpoena is one of a number addressed to pharmaceutical companies concerning an inquiry into issues relating to the payment of government rebates. PRICING MATTERS AWP Investigations. The Company continues to respond to existing and new investigations by, among others, the U.S. Department of Health and Human Services, the U.S. Department of Justice and certain states into industry and Company practices regarding average wholesale price (AWP). These investigations include a Department of Justice review of the merits of a federal action filed by a private entity on behalf of the U.S. in the U.S. District Court for the Southern District of Florida, as well as an investigation by the U.S. Attorney's Office for the District of Massachusetts, regarding, inter alia, whether the AWP set by pharmaceutical companies for certain drugs improperly exceeds the average prices paid by dispensers and, as a consequence, results in unlawful inflation of certain government drug reimbursements that are based on AWP. The Company is cooperating with these investigations. The outcome of these investigations could include the imposition of substantial fines, penalties and injunctive or administrative remedies. Prescription Access Litigation. In December 2001, the Prescription Access Litigation project (PAL), a Boston-based group formed in 2001 to litigate against drug companies, filed a class action suit in Federal Court in Massachusetts against the Company. In September 2002, a consolidated complaint was filed in this court as a result of the coordination by the Multi-District Litigation Panel of all federal court AWP cases from throughout the country. The consolidated complaint alleges that the Company and Warrick Pharmaceuticals, the Company's generic subsidiary, conspired with providers to defraud consumers by reporting fraudulently high AWPs for prescription medications reimbursed by Medicare or third-party payers. The complaint seeks a declaratory judgment and unspecified damages, including treble damages. Included in the litigation described in the prior paragraph are lawsuits that allege that the Company and Warrick reported inflated AWPs for prescription pharmaceuticals and thereby caused state and federal entities and third-party payers to make excess reimbursements to providers. Some of these actions also allege that the Company and Warrick failed to report accurate prices under the Medicaid Rebate Program and thereby underpaid rebates to some states. Some cases filed by State Attorneys General also seek to recover on behalf of citizens of the State and entities located in the State for excess payments as a result of inflated AWPs. These actions, which began in October 2001, have been brought by State Attorneys General, private plaintiffs, nonprofit organizations and employee benefit funds. They allege violations of federal and state law, including fraud, antitrust, Racketeer Influenced Corrupt Organizations Act (RICO) and other claims. During the first quarter of 2004, the Company and Warrick were among five groups of companies put on an accelerated discovery track in the proceeding. In addition, Warrick and the Company are defendants in a number of such lawsuits in state courts. The actions are generally brought by states and/or political subdivisions and seek unspecified damages, including treble and punitive damages. 22 SECURITIES AND CLASS ACTION LITIGATION On February 15, 2001, the Company stated in a press release that the FDA had been conducting inspections of the Company's manufacturing facilities in New Jersey and Puerto Rico and had issued reports citing deficiencies concerning compliance with current Good Manufacturing Practices, primarily relating to production processes, controls and procedures. The next day, February 16, 2001, a lawsuit was filed in the U.S. District Court for the District of New Jersey against the Company and certain named officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Additional lawsuits of the same tenor followed. These complaints were consolidated into one action in the U.S. District Court for the District of New Jersey, and a lead plaintiff, the Florida State Board of Administration, was appointed by the Court on July 2, 2001. On October 11, 2001, a consolidated amended complaint was filed, alleging the same violations described in the second sentence of this paragraph and purporting to represent a class of shareholders who purchased shares of Company stock from May 9, 2000, through February 15, 2001. The complaint seeks compensatory damages on behalf of the class. The Company's motion to dismiss the consolidated amended complaint was denied on May 24, 2002. On October 10, 2003, the Court certified the shareholder class. Discovery is ongoing. In addition to the lawsuits described in the immediately preceding paragraph, two lawsuits were filed in the U.S. District Court for the District of New Jersey, and two lawsuits were filed in New Jersey state court against the Company (as a nominal defendant) and certain officers, directors and a former director seeking damages on behalf of the Company, including disgorgement of trading profits made by defendants allegedly obtained on the basis of material non-public information. The complaints in each of those four lawsuits relate to the issues described in the Company's February 15, 2001, press release, and allege a failure to disclose material information and breach of fiduciary duty by the directors. One of the federal court lawsuits also includes allegations related to the investigations by the U.S. Attorney's Offices for the Eastern District of Pennsylvania and the District of Massachusetts, the FTC's administrative proceeding against the Company, and the lawsuit by the state of Texas against Warrick, the Company's generic subsidiary. The U.S. Attorney's investigations and the FTC proceeding are described herein. The Texas litigation is described in previously filed 10-Ks and 10-Qs. Each of these lawsuits is a shareholder derivative action that purports to assert claims on behalf of the Company, but as to which no demand was made on the Board of Directors and no decision had been made on whether the Company can or should pursue such claims. In August 2001, the plaintiffs in each of the New Jersey state court shareholder derivative actions moved to dismiss voluntarily the complaints in those actions, which motions were granted. The two shareholder derivative actions pending in the U.S. District Court for the District of New Jersey have been consolidated into one action, which is in its very early stages. 23 On January 2, 2002, the Company received a demand letter dated December 26, 2001, from a law firm not involved in the derivative actions described above, on behalf of a shareholder who also is not involved in the derivative actions, demanding that the Board of Directors bring claims on behalf of the Company based on allegations substantially similar to those alleged in the derivative actions. On January 22, 2002, the Board of Directors adopted a Board resolution establishing an Evaluation Committee, consisting of three directors, to investigate, review and analyze the facts and circumstances surrounding the allegations made in the demand letter and the consolidated amended derivative action complaint described above, but reserving to the full Board authority and discretion to exercise its business judgment in respect of the proper disposition of the demand. The Committee engaged independent outside counsel to advise it and issued a report on the findings of its investigation to the independent directors of the Board in late October 2002. That report determined that the shareholder demand should be refused, and finding no liability on the part of any officers or directors. In November 2002, the full Board adopted the recommendation of the Evaluation Committee. The Company is a defendant in a number of purported nationwide or state class action lawsuits in which plaintiffs seek a refund of the purchase price of laxatives or phenylpropanolamine-containing cough/cold remedies (PPA products) they purchased. Other pharmaceutical manufacturers are co-defendants in some of these lawsuits. In general, plaintiffs claim that they would not have purchased or would have paid less for these products had they known of certain defects or medical risks attendant with their use. In the litigation of the claims relating to the Company's PPA products, courts in the national class action suit and several state class action suits have denied certification and dismissed the suits. A similar application to deny class certification in New Jersey, the only remaining statewide class action suit involving the Company, was granted on September 30, 2004. Approximately 96 individual lawsuits relating to the laxative products, PPA products and recalled albuterol/VANCERIL/VANCENASE inhalers are also pending against the Company seeking recovery for personal injuries or death. In a number of these lawsuits punitive damages are claimed. Litigation filed in 2003 in the U.S. District Court in New Jersey alleging that the Company, Richard Jay Kogan, the Company's Employee Savings Plan (Plan) administrator, several current and former directors, and certain 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 was dismissed on June 29, 2004. The plaintiffs' appeal is pending. A 2003 lawsuit filed in the New Jersey Superior Court, Chancery Division, Union County alleging breach of fiduciary duty by the outside directors relating to the Company's receipt of the Boston Target Letter (described under the Investigations section in this Note) was dismissed in September 2004 upon consent of the parties. 24 ANTITRUST AND FTC MATTERS K-DUR. K-DUR is Schering-Plough's long-acting potassium chloride product supplement used by cardiac patients. Schering-Plough had settled patent litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle), which had related to generic versions of K-DUR for which Lederle and Upsher Smith had filed Abbreviated New Drug Applications (ANDAs). On April 2, 2001, the FTC started an administrative proceeding against Schering-Plough, Upsher-Smith and Lederle. The complaint alleged anti-competitive effects from those settlements. In June 2002, the administrative law judge overseeing the case issued a decision that the patent litigation settlements complied with the law in all respects and dismissed all claims against the Company. The FTC Staff appealed that decision to the full Commission. On December 18, 2003, the full Commission issued an opinion that reversed the 2002 decision and ruled that the settlements did violate the antitrust laws. The full Commission issued a cease and desist order imposing various injunctive restraints. By opinion filed March 8, 2005, the federal court of appeals set aside that 2003 Commission ruling and vacated the cease and desist order. The FTC has filed a petition with the Court of Appeals that the Court vacate its March 8, 2005 decision. Following the commencement of the FTC administrative proceeding, 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 all allege essentially the same facts and claim violations of federal and state antitrust laws, as well as other state statutory and/or common law causes of action. These suits seek unspecified damages. Discovery is ongoing. SEC INQUIRIES AND RELATED LITIGATION On September 9, 2003, the SEC and the Company announced settlement of the SEC enforcement proceeding against the Company and Richard Jay Kogan, former chairman and chief executive officer, regarding meetings held with investors the week of September 30, 2002, and other communications. Without admitting or denying the allegations, the Company agreed not to commit future violations of Regulation FD and related securities laws and paid a civil penalty of $1 million. Mr. Kogan paid a civil penalty of $50 thousand. On September 25, 2003, a lawsuit was filed in New Jersey Superior Court, Union County, against Richard Jay Kogan and the Company's outside Directors alleging breach of fiduciary duty, fraud and deceit and negligent misrepresentation, all relating to the alleged disclosures made during the meetings mentioned above. The Company removed this case to federal court. The case was remanded to state court. The Company has filed a motion to dismiss. OTHER MATTERS EMEA Pharmacovigilance Matter. During 2003 pharmacovigilance inspections by officials of the British and French medicines agencies conducted at the request of the European Agency for the Evaluation of Medicinal Products (EMEA), serious deficiencies in reporting processes were identified. Schering-Plough continues to work on its action plan to rectify the deficiencies and provides regular updates to EMEA. The Company does not know what action, if any, the EMEA or national authorities will take in response to these findings. Possible actions include further inspections, demands for improvements in reporting systems, criminal sanctions against the Company and/or responsible individuals and changes in the conditions of marketing authorizations for the Company's products. 25 Biopharma Contract Dispute. Biopharma S.r.l. filed a claim in the Civil Court of Rome on July 21, 2004 (docket No. 57397/2004, 9th Chamber) against certain Schering-Plough subsidiaries. The matter relates to certain contracts dated November 15, 1999, (distribution and supply agreements between Biopharma and a Schering-Plough subsidiary) for distribution by Schering-Plough of generic products manufactured by Biopharma to hospitals and to pharmacists in France; and July 26, 2002 (letter agreement among Biopharma, a Schering-Plough subsidiary and Medipha Sante, S.A., appointing Medipha to distribute products in France). Biopharma alleges that Schering-Plough did not fulfill its duties under the contracts. TAX MATTERS In October 2001, IRS auditors asserted, in reports, that the Company is liable for additional tax for the 1990 through 1992 tax years. The reports allege that two interest rate swaps that the Company entered into with an unrelated party should be recharacterized as loans from affiliated companies. In April 2004, the Company received a formal Notice of Deficiency (Statutory Notice) from the IRS asserting additional federal income tax due. The Company received bills related to this matter from the IRS on September 7, 2004. Payment in the amount of $194 million for income tax and $279 million for interest was made on September 13, 2004. The Company filed refund claims for the tax and interest with the IRS on December 23, 2004. The Company was notified on February 16, 2005, that its refund claims were denied by the IRS. The Company believes it has complied with all applicable rules and regulations and intends to file a suit for refund for the full amount of the tax and interest. The Company's tax reserves were adequate to cover the above-mentioned payments. ENVIRONMENTAL The Company 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), the Company is alleged to be a potentially responsible party (PRP). Except where a site is separately disclosed, the Company believes that it is remote at this time that there is any material liability in relation to such sites. The Company 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. The Company records a liability for environmental assessments and/or cleanup when it is probable a loss has been incurred and the amount can be reasonably estimated. 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Schering-Plough Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Schering-Plough Corporation and subsidiaries (the "Corporation") as of March 31, 2005, and the related statements of condensed consolidated operations for the three-month periods ended March 31, 2005 and 2004, and the statements of condensed consolidated cash flows for the three-month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of the Corporation's 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 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 Schering-Plough Corporation and subsidiaries as of December 31, 2004, 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 March 8, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 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 April 25, 2005 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations EXECUTIVE SUMMARY OVERVIEW OF THE COMPANY Schering-Plough (the Company) discovers, develops, manufactures and markets medical therapies and treatments to enhance human health. The Company also markets leading consumer brands in the over-the-counter (OTC), foot care and sun care markets and operates a global animal health business. As a research-based pharmaceutical company, Schering-Plough's core strategy is to invest substantial funds in scientific research with the goal of creating important medical and commercial value. Research and development activities focus on mechanisms to treat serious diseases. There is a high rate of failure inherent in such research and, as a result, there is a high risk that the funds invested 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 the commercial phase may take a decade or more. Because of the high-risk nature of research investments, financial resources typically must come from internal sources (operations and cash reserves) or from equity-type capital. There are two sources of new products: products acquired through acquisition and licensing arrangements, and products in the Company's late-stage research pipeline. With respect to acquisitions and licensing, there are limited opportunities for obtaining or licensing critical late-stage products, and these limited opportunities typically require substantial amounts of funding. The Company competes for these opportunities against companies often with far greater financial resources than that of the Company. Due to the present financial situation, it may be challenging for the Company to acquire or license critical late-stage products that will have a positive material financial impact. 28 During the period 2002 to 2004, the Company experienced a number of negative events that have strained and continue to strain the Company's financial resources. These negative events included, but were not limited to, the following matters: o Entered into a formal consent decree with the U.S. Food and Drug Administration (FDA) in 2002 and agreed to revalidate manufacturing processes at certain manufacturing sites in the U.S. and Puerto Rico. Significant increased spending associated with manufacturing compliance efforts will continue through the completion of the FDA consent decree obligation. In addition, the Company has found it necessary to discontinue certain older profitable products and outsource other products. o Switch of CLARITIN in the U.S., beginning in December 2002 from prescription to OTC status. This switch coupled with private label competition has resulted in a much lower average unit selling price for this product and ongoing intense competition. The Company's exposure to powerful retail purchasers has also increased. o Market shares and sales levels of certain other Company products have fallen significantly and have experienced increased competition. Many of these products compete in declining or volatile markets. o Investigations into certain of the Company's sales and marketing practices by the U.S. Attorney's Offices in Massachusetts and Pennsylvania. During 2004 the Company made payments totaling $294 million to the U.S. Attorney's Office for the Eastern District of Pennsylvania in settlement of that investigation. The Massachusetts investigation is continuing and poses significant financial and commercial risks to the Company. In response to these matters, beginning in April 2003 the Company appointed a new management team that formulated, and has begun to implement, a six- to eight-year Action Agenda to stabilize, repair and then turn around the Company. Throughout 2004, Schering-Plough moved to stabilize its primary business franchises; secure cost savings through a Value Enhancement Initiative (VEI) and reinvest much of those savings into more productive areas. In 2005, the Company continues to make progress on its Action Agenda as evidenced by recent product approvals and launches and performance in certain key products. During the first quarter of 2005, the Company began repatriating previously unremitted foreign earnings at a reduced tax rate as provided by the American Job Creation Act of 2004 (the Act). 29 Repatriating funds under the Act is benefiting the Company in the following ways: o The Company's U.S. operations currently incur significant negative cash flow. The Company believes the repatriations being made during 2005 under the Act are providing the Company with greater financial stability and the ability to fund the U.S. cash needs for the intermediate term. o The negative cash flow from U.S. operations results in U.S. tax net operating losses (U.S. NOL's). Under the Act, qualifying repatriations do not reduce U.S. tax losses. As such the Company will have both the cash necessary to fund its U.S. cash needs as well as maintaining the potential benefit of being able to carry forward U.S. NOL's to reduce U.S. taxable income in the future. This potential future benefit could be significant but is dependent on the Company achieving profitability in the U.S. CURRENT STATE OF THE BUSINESS First quarter 2005 net sales of $2.4 billion were 21 percent higher than the 2004 period. The first quarter 2005 sales increase was driven by U.S. and international product growth, 6 percent of which relates to the U.S. sales contribution from the antibiotics AVELOX and CIPRO under an agreement with Bayer that became effective in October 2004, and a 4 percent positive impact from currency exchange. Sales and marketing costs have increased due to the need to reinvest in the business and to launch new products as well as a need to stabilize market shares of the Company's remaining pharmaceutical products. The Company recorded Net income available to common shareholders of $105 million in the first quarter of 2005 as compared to a loss in the first quarter of 2004. While the first quarter 2005 results improved versus the 2004 period, they may not be indicative of future periods, as certain favorable circumstances helped benefit the first quarter. These factors included a higher proportional share of ZETIA profits from the Company's cholesterol joint venture, a milestone earned from its cholesterol joint venture partner, timing of R&D expenses, positive impact of foreign exchange and certain other items. During 2003 and 2004 and continuing into 2005, the Company's cash flow has declined significantly. The overriding cause of this was the loss of marketing exclusivity for two of the Company's major pharmaceutical products, CLARITIN and REBETOL as well as increased competition in the hepatitis C market. Many of the Company's manufacturing sites operate well below optimum production levels primarily due to sales declines and to a lesser extent the reduction in output related to the FDA consent decree. At the same time, overall costs of operating manufacturing sites have significantly increased due to the consent decree and other compliance activities. The Company continues to review the carrying value of these assets for indications of impairment. The Company continues to pursue its core strategy of supporting its marketed and new products in its research and development pipeline and plans to invest in sales and marketing and scientific research at historical levels. However, this level of investment is not sustainable without a significant increase in profits and cash flow from operations. The ability of the Company to generate profits and significant operating cash flow is directly and predominantly dependent upon the increasing profitability of the Company's cholesterol franchise (which includes VYTORIN and ZETIA) and to a much lesser extent growing sales and profitability of the base pharmaceutical business products, developing or acquiring new products and controlling expenses. If the Company cannot generate significant operating cash flow, its ability to invest in sales, marketing and research efforts at historical levels may be negatively impacted. 30 ZETIA is the Company's novel cholesterol absorption inhibitor. VYTORIN is the combination of ZETIA and Zocor, Merck & Co., Inc.'s statin medication. These two products have been launched through a joint venture between the Company and Merck. The cholesterol-reduction market is the single largest pharmaceutical market in the world. VYTORIN and ZETIA are well positioned in this market, but these products compete against other well established cholesterol management products marketed by companies with financial resources much greater than that of the Company. In addition, the Company expects generic forms of cholesterol lowering products to be introduced as existing products lose patent protection. The impact of this on the cholesterol lowering market is not yet known. The financial commitment to compete in this market is shared with Merck and profits from the sales of VYTORIN and ZETIA are also shared with Merck. Management cannot provide assurance that profits in the near-term will be sufficient for the Company to maintain its core marketing and research strategies. If a sufficient level of profit and cash flow cannot be achieved, the Company would need to evaluate strategic alternatives. With regard to an examination of strategic alternatives, the contracts with Merck for VYTORIN and ZETIA and the contract with Centocor, Inc. for REMICADE (exhibits 10 (r) and 10 (u), respectively, to the Company's 2003 Form 10-K) contain provisions related to a change of control, as defined in those contracts. These provisions could result in the aforementioned products being acquired by Merck or reverting back to Centocor, Inc. REGULATORY ENVIRONMENT IN WHICH THE COMPANY OPERATES Government regulatory agencies throughout the world regulate the Company's discovery, development, manufacturing and marketing efforts. The U.S. Food and Drug Administration (FDA) is a central regulator of the Company's business. Since 2001, the Company has been working with the FDA to resolve issues involving the Company's compliance with current Good Manufacturing Practices (cGMP) at certain of its manufacturing sites in New Jersey and Puerto Rico. In 2002, the Company reached a formal agreement with the FDA to enter into a consent decree. Under the terms of the consent decree, the Company made payments totaling $500 million and agreed to revalidate the manufacturing processes at these sites. These manufacturing sites have remained open throughout this period; however, the consent decree has placed significant additional controls on production and release of products from these sites, including review and third-party certification of production activities. The third-party certifications and other cGMP improvement projects have resulted in higher costs as well as reduced output at these facilities. In addition, the Company has found it necessary to discontinue certain profitable older products. The Company's research and development operations have also been negatively impacted by the decree because these operations share common facilities with the manufacturing operations. In the U.S., the pricing of the Company's pharmaceutical products are subject to competitive pressure as managed care organizations seek price discounts and rebates. Also in the U.S., the Company is 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. In most international markets, the Company operates in an environment of government-mandated cost-containment programs. 31 Recently, clinical trials and post-marketing surveillance of certain marketed drugs 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. The Company maintains a process for monitoring and addressing adverse events and other new data relating to its products around the world. In addition, Company 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. Many pharmaceutical companies, including Schering-Plough, have been the subject of government investigations at the federal, state and local levels into sales and marketing practices. These matters are discussed in more detail under "Additional Factors Influencing Operations." 32 DISCUSSION OF OPERATING RESULTS NET SALES Consolidated net sales for the three months ended March 31, 2005 totaled $2.4 billion, an increase of $406 million or 21 percent compared with the same period in 2004. Consolidated net sales reflected higher volumes, the inclusion of the sales of AVELOX and CIPRO coupled with a favorable foreign exchange rate impact of 4 percent. Net sales for the three months ended March 31, 2005 and 2004 were as follows:
% INCREASE (DOLLARS IN MILLIONS) 2005 2004 (DECREASE) - --------------------- ------------ ------------ ------------ PRESCRIPTION PHARMACEUTICALS .......................... $ 1,846 $ 1,481 25% REMICADE ............................................ 220 165 33 NASONEX ............................................. 183 140 30 PEG-INTRON .......................................... 170 148 14 CLARINEX/AERIUS ..................................... 144 130 11 TEMODAR ............................................. 131 86 52 CLARITIN Rx(a) ...................................... 111 91 22 INTEGRILIN .......................................... 75 73 3 INTRON A ............................................ 73 69 6 AVELOX .............................................. 73 -- N/M REBETOL ............................................. 64 99 (35) SUBUTEX ............................................. 51 44 16 CAELYX .............................................. 43 34 27 ELOCON .............................................. 41 38 6 CIPRO ............................................... 37 -- N/M Other Pharmaceutical ................................ 430 364 18 CONSUMER HEALTH CARE .................................. 330 312 6 OTC(b) .............................................. 162 157 4 Foot Care ........................................... 84 76 10 Sun Care ............................................ 84 79 5 ANIMAL HEALTH ......................................... 193 170 14 ------------ ------------ CONSOLIDATED NET SALES ................................ $ 2,369 $ 1,963 21% ------------ ------------
- ---------- N/M -- Not a meaningful percentage. (a) Amounts shown for 2005 and 2004 include international sales of CLARITIN Rx only. (b) Includes OTC CLARITIN of $116 million and $117 million in 2005 and 2004, respectively. International net sales of REMICADE, for the treatment of rheumatoid arthritis, psoriatic arthritis, Crohn's disease and ankylosing spondylitis, were up $55 million or 33 percent in the first quarter of 2005 to $220 million due to greater medical use and expanded indications in European markets. Global net sales of NASONEX Nasal Spray, a once-daily corticosteroid nasal spray for allergies, rose 30 percent to $183 million in the first quarter of 2005 primarily due to market share gains in 33 the U.S., helped by the launch and related promotion of NASONEX SCENT-FREE, coupled with U.S. and international market growth. Global net sales of PEG-INTRON Powder for Injection, a pegylated interferon product for treating hepatitis C, increased 14 percent to $170 million for the first quarter of 2005 due primarily to the launch in Japan in late 2004. Sales in Japan also benefited from the significant number of patients who were waiting for approval of PEG-INTRON before beginning treatment ("patient warehousing"). Comparisons in 2006 will be unfavorably impacted by the absence of this patient warehousing. Sales and market share of PEG-INTRON in the U.S. have declined compared to the prior year due to increased competition and market decline. Global net sales of CLARINEX (marketed as AERIUS in many countries outside the U.S.) for the treatment of seasonal outdoor allergies and year-round indoor allergies were $144 million for 2005, an increase of 11 percent versus the first quarter of last year. Sales outside the U.S. increased 26 percent to $77 million in 2005 due to market share gains and conversions from prescription CLARITIN. In the U.S., CLARINEX continued to experience reduced market share in a declining market. As a result, sales decreased 3 percent to $67 million from an unusually weak comparable period in 2004. Global net sales of TEMODAR Capsules, for treating certain types of brain tumors, increased $45 million or 52 percent to $131 million in 2005 due to increased market penetration. In March 2005, TEMODAR received U.S. FDA approval for use with radiation in treating patients with newly diagnosed glioblastoma multiform (GBM), the most prevalent form of brain cancer. This treatment has been rapidly adopted by U.S. physicians and many patients with GBM in the U.S. are already being treated with TEMODAR. International net sales of prescription CLARITIN increased 22 percent to $111 million in 2005 from $91 million in 2004 due to a severe Japanese allergy season and the launch of CLARITIN REDITABS in Japan. 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 3 percent to $75 million in the first quarter of 2005 due to increased patient utilization. Millennium Pharmaceuticals, Inc. ("Millennium") and the Company have a co-promotion agreement for INTEGRILIN. Millennium notified the Company that it intends to exercise its right under the agreement to assume responsibilities for customer service, managed care contracting, government reporting and physical distribution of INTEGRILIN. As a result, based on the final assumption agreement, as early as the fourth quarter of 2005, the Company may be required to cease the recording of sales of INTEGRILIN and record its share of co-promotion profits as alliance revenue. Currently, the Company anticipates that this change in recording sales of INTEGRILIN would have no impact on earnings. Global net sales of INTRON A Injection, for chronic hepatitis B and C and other antiviral and anticancer indications, increased 6 percent to $73 million versus the first quarter of 2004, reflecting favorable trade inventory comparisons in the U.S. 34 Net sales of AVELOX, a fluoroquinolone antibiotic for the treatment of certain respiratory and skin infections, which is sold primarily in the U.S. by Schering-Plough as a result of the Company's license agreement with Bayer in October 2004, were $73 million in the first quarter of 2005. Global net sales of REBETOL Capsules, for use in combination with INTRON A or PEG-INTRON for treating hepatitis C, decreased 35 percent to $64 million due to the launch of generic versions of REBETOL in the U.S. in April 2004 and increased price competition outside the U.S. International net sales of SUBUTEX Tablets, for the treatment of opiate addiction, increased 16 percent to $51 million due to increased market penetration. SUBUTEX may be vulnerable to generic competition in the future. International sales of CAELYX, for the treatment of ovarian cancer, metastatic breast cancer and Kaposi's sarcoma, increased 27 percent to $43 million reflecting further adoption of the metastatic breast cancer indication in patients who are at increased cardiac risk. Global net sales of ELOCON cream, a medium-potency topical steroid, increased 6 percent to $41 million. A generic version of this drug was introduced in the U.S. in the first quarter of 2005. Generic competition in the U.S. is expected to adversely affect sales of this product. Net sales of ELOCON in the U.S. during the first quarter of 2005 were $4 million. Net sales of CIPRO, a fluoroquinolone antibiotic for the treatment of certain respiratory, skin, urinary tract and other infections, which is sold primarily in the U.S. by Schering-Plough as a result of the Company's license agreement with Bayer in October 2004, were $37 million in the first quarter of 2005. Other pharmaceutical net sales include a large number of lower sales volume prescription pharmaceutical products. Several of these products are sold in limited markets outside the U.S., and many are multiple source products no longer protected by patents. The products include treatments for respiratory, cardiovascular, dermatological, infectious, oncological and other diseases. Global net sales of Consumer Health Care products, which include OTC, foot care and sun care products, increased $18 million or 6 percent in 2005 to $330 million. Net sales of foot care products increased $8 million or 10 percent in 2005 due primarily to the new Memory Fit Insole and Freeze Away products. Net sales of sun care products increased $5 million or 5 percent in 2005, primarily due to the timing of shipments coupled with the launch of new Coppertone Continuous Spray products. Sales of OTC CLARITIN were $116 million in 2005, a decrease of $1 million or 1 percent from 2004. OTC CLARITIN continues to face competition from private label and branded loratadine. Global net sales of Animal Health products increased 14 percent in 2005 to $193 million. The increased sales reflected solid growth across core brands and a favorable foreign exchange impact of 4 percent. 35 COSTS, EXPENSES AND EQUITY INCOME A summary of costs, expenses and equity income for the three months ended March 31, 2005 and 2004 follows:
% INCREASE (DOLLARS IN MILLIONS) 2005 2004 (DECREASE) - --------------------- --------- --------- ---------- Cost of sales............................................................ $ 889 $ 740 20% % of net sales........................................................... 37.5% 37.7% Selling, general and administrative...................................... $ 1,081 $ 914 18% % of net sales........................................................... 45.6% 46.6% Research and development................................................. $ 384 $ 372 3% % of net sales........................................................... 16.2% 19.0% Other expense, net....................................................... $ 17 $ 36 (52%) % of net sales........................................................... 0.7% 1.8% Special charges.......................................................... $ 27 $ 70 N/M % of net sales........................................................... 1.1% 3.6% Equity income from cholesterol joint venture............................. $ (220) $ (78) N/M
N/M -- Not a meaningful percentage. Cost of sales as a percentage of net sales decreased from 37.7 percent in 2004 to 37.5 percent in 2005. This decrease was due to product mix and some benefit of foreign exchange. Substantially all the sales of cholesterol products are not included in the Company's net sales. The results of the operations of the joint venture are reflected in equity income and have no impact on the Company's gross and other operating margins. Selling, general and administrative expenses (SG&A) increased 18 percent to $1.1 billion in the first quarter of 2005 versus $0.9 billion in 2004 primarily due to the expansion of the sales field force and higher promotional spending. The ratio of SG&A to net sales was 45.6 percent in 2005 as compared to the ratio of 46.6 percent in 2004. The Company has had several regulatory product successes in recent months, including the approval of ASMANEX, which have resulted in new promotional opportunities. This may increase promotional spending during the remainder of 2005. Research and development (R&D) spending increased 3 percent to $384 million, representing 16.2 percent of net sales in the first quarter of 2005, compared with 19.0 percent in 2004. Generally, changes in R&D spending reflect the timing of the Company's funding of both internal research efforts and research collaborations with various partners to discover and develop a steady flow of innovative products. The Company expects R&D spending in subsequent quarters to be higher reflecting the timing of clinical trials and the progression of the Company's early-stage pipeline. In the first quarter of 2005, the decrease in other expense, net, is primarily the result of higher interest income. 36 SPECIAL CHARGES The components of Special Charges for the three months ended March 31, 2005 and 2004 are as follows:
(DOLLARS IN MILLIONS) 2005 2004 - --------------------- ---------- ---------- Employee termination costs ............................ 21 44 Asset impairment and related charges .................. 6 26 ---------- ---------- $ 27 $ 70 ========== ==========
Employee Termination Costs In August 2003, the Company announced a global workforce reduction initiative. The first phase of this initiative was a Voluntary Early Retirement Program (VERP) in the U.S. Under this program, eligible employees in the U.S. had until December 15, 2003 to elect early retirement and receive an enhanced retirement benefit. Approximately 900 employees elected to retire under the program, of which approximately 850 employees retired through year-end 2004 and approximately 50 employees have staggered retirement dates in 2005. The total cost of this program is approximately $191 million, comprised of increased pension costs of $108 million, increased post-retirement health care costs of $57 million, vacation payments of $4 million and costs related to accelerated vesting of stock grants of $22 million. For employees with staggered retirement dates in 2005, these amounts will be recognized as a charge over the employees' remaining service periods. Amounts recognized in the first quarter of 2005 and 2004 for this program were $2 million and $9 million, respectively. The amount expected to be recognized in the remainder of 2005 is $5 million. Termination costs not associated with the VERP totaled $19 million and $35 million in the first quarter of 2005 and 2004, respectively. The termination costs in 2005 related primarily to employee termination costs at a manufacturing facility. 37 The following summarizes the activity in the accounts related to employee termination costs (Dollars in millions):
Employee Termination Costs 2005 2004 - -------------------------- ------------ ------------ Special charges liability balance at December 31, $ 18 $ 29 Special charges incurred during three months ended March 31, 21 44 Credit to retirement benefit plan liability during the three months ended March 31, (2) (9) Disbursements during the three months ended March 31, -- (28) ------------ ------------ Special charges liability balance at March 31, $ 37 $ 36 ============ ============
The balance at March 31, 2005, represents disbursements to be made after March 31, 2005. Asset Impairment and Related Charges The Company recorded asset impairment and related charges of $6 million and $26 million in the first quarter of 2005 and 2004, respectively. The charge in 2004 related primarily to the shutdown of a small European research-and-development facility. 38 EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE Global cholesterol franchise sales, which include sales made by the Company and the cholesterol joint venture with Merck of VYTORIN and ZETIA, totaled $509 million and $189 million during the three months ended March 31, 2005 and 2004, respectively. VYTORIN has been approved in 29 countries and has been launched in 13 countries, including the U.S. in July 2004. ZETIA has been approved in 74 countries and was launched in the U.S. and over 60 international markets since November 2002. The Company utilizes the equity method of accounting for the joint venture. Sharing of income from operations is based upon percentages that vary by product, sales level and country. Schering-Plough's allocation of joint venture income is increased by milestones earned. The partners 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 joint venture reimburses each partner for a pre-defined amount of physician details that are set on an annual basis. Schering-Plough reports this reimbursement as part of equity income as under U.S. GAAP this amount does not represent a reimbursement of specific, incremental and identifiable costs for the Company's detailing of the cholesterol products in these markets. In addition, this reimbursement amount is not reflective of Schering-Plough's sales effort related to the joint venture as Schering-Plough's sales force and related costs associated with the joint venture are generally estimated to be higher. Costs of the joint venture that the partners 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 the partners. Equity income from cholesterol joint venture, as defined, totaled $220 million and $78 million in the first quarter of 2005 and 2004, respectively. During the first quarter of 2005 Schering-Plough earned a milestone of $20 million of which $14 million was recognized for financial reporting purposes. This milestone related to certain European approvals of VYTORIN (ezetimibe/simvastatin) in the first quarter of 2005. During the first quarter of 2004 Schering-Plough earned and recognized a milestone of $7 million related to the approval of ezetimibe/simvastatin in Mexico in 2004. Under certain other conditions, as specified in the partnership agreements with Merck, the Company could earn additional milestones totaling $105 million. 39 In addition to the milestone recognized in the first quarter of 2005, Schering-Plough's equity income in the first quarter of 2005 was favorably impacted by the proportionally greater share of income allocated from the joint venture for the first $300 million of annual ZETIA sales and a modest increase in trade inventory buying patterns. It should be noted that the Company incurs substantial costs such as selling costs that are not reflected in Equity income from cholesterol joint venture and are borne entirely by the Company. PROVISION FOR INCOME TAXES Tax expense/(benefit) was $64 million and $(18) million for the three months ended March 31, 2005 and 2004, respectively. At December 31, 2004 the Company has approximately $1 billion of U.S. Net Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S. taxable income through 2024. The Company generated an additional U.S. NOL during the first quarter of 2005. If Congress does not legislate certain technical corrections related to the American Jobs Creation Act, the Company's total U.S. NOL could be reduced by approximately $675 million. The Company's tax provision for the three-month period ended March 31, 2005 is primarily related to foreign taxes and does not include any benefit related to U.S. NOLs . The Company has established a valuation allowance on net U.S. deferred tax assets, including the benefit of U.S. NOLs, as management cannot conclude that it is more likely than not the benefit of U.S. net deferred tax assets can be realized. NET INCOME/(LOSS) Net income of $127 million for the first quarter of 2005 includes higher equity earnings due in part to a higher proportion of annual profit sharing from the Cholesterol Joint Venture and the recognition of a milestone of $14 million. Net income also includes special charges of $27 million and a favorable impact of foreign exchange. NET INCOME/(LOSS) AVAILABLE TO COMMON SHAREHOLDERS The first quarter 2005 Net income available to common shareholders includes the deduction of preferred stock dividends of $22 million related to the issuance of the 6% Mandatory Convertible Preferred Stock in August 2004. 40 LIQUIDITY AND FINANCIAL RESOURCES DISCUSSION OF CASH FLOW In the first three months of 2005, operating activities generated $200 million of cash. Investing activities included $83 million of capital expenditures and $33 million in cash receipts related primarily to the sale of an administrative office facility. Uses of cash for financing activities includes the payment of dividends on common and preferred shares aggregating $103 million and the repayment of approximately $1.2 billion of commercial paper borrowings. During 2004 operating activities on a worldwide basis generated insufficient cash to fund capital expenditures and dividends. Due to the geographic mix of product sales and profits and the corporate and R&D cash requirements in the U.S., this annual cash flow deficit is particularly pronounced when disaggregated on a geographic basis. Foreign operations generate cash in excess of local cash needs. The U.S. operations must fund dividend payments, the vast majority of research and development costs and U.S. capital expenditures. The Company borrowed funds and issued equity securities during 2004 to finance U.S. operations, and continued to accumulate cash in its foreign-based subsidiaries. On an annual basis in 2005, management expects that dividends and capital expenditures on a worldwide basis will again exceed cash generated from operating activities and that U.S. operations will continue to generate negative cash flow. Payments regarding litigation and investigations could increase cash needs. Cash requirements in the U.S. during the first three months of 2005 including operating cash needs, capital expenditures and dividends on common and preferred shares approximated $350 million. During the first quarter of 2005 the Company began the process of repatriating approximately $9.4 billion of previously unremitted foreign earnings pursuant to the American Jobs Creation Act of 2004 (the Act). Tax charges (at a reduced tax rate) associated with the repatriations under the Act were recognized in 2004. In 2005 the Company will be required to make tax payments for the tax liability associated with repatriations of foreign earnings being made under the Act. The funding of additional anticipated repatriations under the Act during 2005 will require the utilization of substantially all of the Company's current and anticipated 2005 foreign cash and short-term investments. The Company has the ability to utilize its $1.5 billion revolving bank credit facility to provide additional liquidity or working capital to its foreign subsidiaries until such time as non-U.S. cash and short-term investment balances are restored. The repatriations of qualified funds under the Act are expected to fund U.S. cash needs for the intermediate term. Total cash, cash equivalents and short-term investments less total debt was approximately $1.9 billion at March 31, 2005. The Company anticipates this amount to decline during the balance of 2005, but remain positive. 41 BORROWINGS AND CREDIT FACILITIES On November 26, 2003, the Company issued $1.25 billion aggregate principal amount of 5.3% senior unsecured notes due 2013 and $1.15 billion aggregate principal amount of 6.5% senior unsecured notes due 2033 (collectively the Notes). Proceeds from this offering of $2.4 billion were used for general corporate purposes, including repaying commercial paper outstanding in the U.S. Upon issuance, the Notes were rated A3 by Moody's Investors Service (Moody's) and A+ (on Credit Watch with negative implications) by Standard & Poor's (S&P). The interest rates payable on the Notes are subject to adjustment. If the rating assigned to the Notes by either Moody's or S&P is downgraded below A3 or A-, respectively, the interest rate payable on that series of notes would increase. See Note 12 "Short and Long-Term Debt and Other Commitments" to the Condensed Consolidated Financial Statements for additional information. On July 14, 2004, Moody's lowered its rating on the Notes to Baa1. Accordingly, the interest payable on each note increased 25 basis points effective December 1, 2004. Therefore, on December 1, 2004, the interest rate payable on the notes due 2013 increased from 5.3% to 5.55%, and the interest rate payable on the notes due 2033 increased from 6.5% to 6.75%. This adjustment to the interest rate payable on the Notes will increase the Company's interest expense by approximately $6 million annually. The Company has a revolving credit facility from a syndicate of major financial institutions. During March 2005, the Company negotiated an increase in the bank commitments under this credit facility from $1.25 billion to $1.5 billion with no changes in the basic terms of the pre-existing credit facility. Concurrently with the increase in commitments under this facility, the Company terminated early a separate $250 million line of credit which would have matured in May 2006. There was no outstanding balance under this facility at the time it was terminated. The existing $1.5 billion credit facility matures in May 2009 and requires the Company to maintain a total debt to capital ratio of no more than 60 percent. This credit line is available for general corporate purposes and is considered as support to the Company's commercial paper borrowings. Borrowings under the credit facility may be drawn by the U.S. parent company or by its wholly-owned foreign subsidiaries when accompanied by a parent guarantee. This facility does not require compensating balances; however, a nominal commitment fee is paid. As of March 31, 2005 no funds have been drawn down under this facility. The Company may utilize this facility to fund repatriations under the American Jobs Creation Act of 2004 or to provide additional liquidity or working capital to its foreign subsidiaries until such time as non-U.S. cash and investment balances are restored. However, any borrowing under the facility to fund repatriations will occur only to the extent the facility is not otherwise necessary to support commercial paper borrowings. 42 At March 31, 2005, short-term borrowings totaled approximately $400 million. Approximately 75 percent of such borrowings were outstanding commercial paper. The commercial paper ratings discussed below have not significantly affected the Company's ability to issue or rollover its outstanding commercial paper borrowings at this time. However, the Company believes the ability of commercial paper issuers, such as the Company, with one or more short-term credit ratings of P-2 from Moody's, A-2 from S&P and/or F2 from Fitch Ratings (Fitch) to issue or rollover outstanding commercial paper can, at times, be less than that of companies with higher short-term credit ratings. In addition, the total amount of commercial paper capacity available to such issuers is typically less than that of higher-rated companies. The Company maintains sizable lines of credit with commercial banks, as well as cash and short-term investments held by U.S. and foreign-based subsidiaries, to serve as alternative sources of liquidity and to support its commercial paper program. The Company's credit ratings could decline below their current levels. The impact of such decline could reduce the availability of commercial paper borrowing and would increase the interest rate on the Company's long-term debt. As discussed above, the Company believes that the repatriation of funds under the American Jobs Creation Act of 2004 will allow the Company to fund its U.S. cash needs for the intermediate term. FINANCIAL ARRANGEMENTS CONTAINING CREDIT RATING DOWNGRADE TRIGGERS The Company had an interest rate swap arrangement in effect with a counterparty bank. The arrangement utilized two long-term interest rate swap contracts, one between a foreign-based subsidiary of the Company and a bank and the other between a U.S. subsidiary of the Company and the same bank. The two contracts had equal and offsetting terms and were covered by a master netting arrangement. The contract involving the foreign-based subsidiary permitted the subsidiary to prepay a portion of its future obligation to the bank, and the contract involving the U.S. subsidiary permitted the bank to prepay a portion of its future obligation to the U.S. subsidiary. Prepayments totaling $1.9 billion were made under both contracts as of December 31, 2004. The terms of the swap contracts, as amended, called for a phased termination of the swaps based on an agreed repayment schedule that was to begin no later than March 31, 2005. Termination would require the Company and the counterparty each to repay all prepayments pursuant to the agreed repayment schedule. The Company, at its option, was allowed to accelerate the termination of the arrangement and associated scheduled repayments for a nominal fee. On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary each gave notice to the counterparty of their intent to terminate the arrangement. On March 21, 2005 the Company terminated these swap agreements and all associated repayments were made by the respective obligors. The termination of this arrangement did not have a material impact on the Company's Statement of Condensed Consolidated Operations. 43 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In November 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) 151 "Inventory Costs". This SFAS requires that abnormal spoilage be expensed in the period incurred (as opposed to inventoried and amortized to income over inventory usage) and that fixed production facility overhead costs be allocated over the normal production level of a facility. This SFAS is effective for inventory costs incurred for annual periods beginning after June 15, 2005. The Company does not anticipate any material impact from the implementation of this accounting standard. In December 2004 the FASB issued SFAS 123R (Revised 2004) "Share Based Payment." Statement 123R requires companies to recognize compensation expense in an amount equal to the fair value of all share-based payments granted to employees. The Company is required to implement this SFAS in the first quarter of 2006 by recognizing compensation on all share-based grants made on or after January 1, 2006, and for the unvested portion of share-based grants made prior to July 1, 2005. Restatement of previously issued statements is allowed, but not required. The Company is currently evaluating the various implementation options available and related financial impacts under SFAS 123R. 44 CRITICAL ACCOUNTING POLICIES Refer to "Management's Discussion and Analysis of Operations and Financial Condition" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 for disclosures regarding the Company's critical accounting policies. Rebates, Discounts and Returns Rebate accruals for Federal and state governmental programs were $161 million at March 31, 2005 and $155 million at December 31, 2004. Commercial discounts and other rebate accruals were $138 million at March 31, 2005 and $123 million at December 31, 2004. These and other rebate accruals are established in the period the related revenue was recognized resulting in a reduction to sales and the establishment of liabilities, which are included in total current liabilities. The following summarizes the activity in the accounts related to accrued rebates, sales returns and discounts:
THREE MONTHS ENDED THREE MONTHS ENDED (DOLLARS IN MILLIONS) MARCH 31, 2005 MARCH 31, 2004 ------------------ ------------------ Accrued Rebates/Returns/Discounts, Beginning of Period ........... $ 432 $ 487 ------------ ------------ Provision for Rebates ............................................ 111 112 Payments ......................................................... (90) (135) ------------ ------------ 21 (23) ------------ ------------ Provision for Returns ............................................ 20 17 Returns .......................................................... (17) (16) ------------ ------------ 3 1 ------------ ------------ Provision for Discounts .......................................... 90 73 Discounts granted ................................................ (94) (76) ------------ ------------ (4) (3) ------------ ------------ Accrued Rebates/Returns/Discounts, End of Period ................. $ 452 $ 462 ============ ============
Management makes estimates and uses assumptions in recording the above accruals. Actual amounts paid in the current period were consistent with those previously estimated. 45 ADDITIONAL FACTORS INFLUENCING OPERATIONS In the U.S., many of the Company's pharmaceutical products are subject to increasingly competitive pricing as managed care groups, institutions, government agencies and other groups seek price discounts. In most international markets, the Company operates in an environment of government-mandated cost-containment programs. In the U.S. market, the Company 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. 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 the Company 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. The Company cannot predict what net effect the Medicare prescription drug benefit will have on markets and sales. The new Medicare Drug Benefit (Medicare Part D), which will take effect January 1, 2006, will offer voluntary prescription drug coverage, subsidized by Medicare, to over 40 million Medicare beneficiaries through competing private prescription drug plans (PDPs) and Medicare Advantage (MA) plans. Many of the Company's leading drugs are already covered under Medicare Part B (e.g., TEMODAR, INTEGRILIN and INTRON A). Medicare Part B provides payment for physician services which can include prescription drugs administered incident to a physician's services. Beginning in 2005 the Medicare Part B drugs will be reimbursed in a manner that may limit Schering-Plough's ability to offer larger price concessions or make large price increases on these drugs. Other Schering-Plough drugs have a relatively small portion of their sales to the Medicare population (e.g., CLARINEX, the hepatitis C franchise). The Company could experience expanded utilization of VYTORIN and ZETIA and new drugs in the Company's R&D pipeline. Of greater consequence for the Company may be the legislation's impact on pricing, rebates and discounts. A significant portion of net sales is made to major pharmaceutical and health care products 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 buying decisions or other factors. The market for pharmaceutical products is competitive. The Company's operations may be affected by technological advances of competitors, industry consolidation, patents granted to competitors, new products of competitors, new information from clinical trials of marketed products or post-marketing surveillance and generic competition as the Company's 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. 46 The Company launched OTC CLARITIN in the U.S. in December 2002. Also in December 2002, a competing OTC loratadine product was launched in the U.S. and private-label competition was introduced. The Company continues to market CLARINEX (desloratadine) 5 mg Tablets for the treatment of allergic rhinitis, which combines the indication of seasonal allergic rhinitis with the indication of perennial allergic rhinitis, as well as the treatment of chronic idiopathic urticaria, or hives of unknown cause. The ability of the Company to capture and maintain market share for CLARINEX and OTC CLARITIN in the U.S. market will depend on a number of factors, including: additional entrants in the market for allergy treatments; clinical differentiation of CLARINEX from other allergy treatments and the perception of the extent of such differentiation in the marketplace; the pricing differentials among OTC CLARITIN, CLARINEX, other allergy treatments and generic OTC loratadine; the erosion rate of OTC CLARITIN and CLARINEX sales upon the entry of additional generic OTC loratadine products; and whether or not one or both of the other branded second-generation antihistamines are switched from prescription to OTC status. CLARINEX is experiencing intense competition in the prescription U.S. allergy market. The prescription allergy market has been shrinking since the OTC switch of CLARITIN in December 2002. The switch of CLARITIN to OTC status and the introduction of competing OTC loratadine have resulted in a rapid, sharp and material decline in CLARITIN sales in the U.S. and the Company's results of operations. U.S. sales of prescription CLARITIN products were $25 million or 0.3 percent of the Company's consolidated global sales in 2003 and $1.4 billion or 14 percent in 2002. Sales of CLARINEX in the U.S. and abroad have also been materially adversely affected by the presence of generic OTC loratadine and OTC CLARITIN. In light of the factors described above, management believes that the Company's December 2002 introduction of OTC CLARITIN, as well as the introduction of a competing OTC loratadine product in December 2002 and additional entrants of generic OTC loratadine products in the market, had a rapid, sharp and material adverse effect on the Company's results of operations in 2003 and 2004. PEG-INTRON and REBETOL combination therapy for hepatitis C has contributed substantially to sales in 2003 and 2002 and to a lesser extent in 2004. During the fourth quarter of 2002, a competing pegylated interferon-based combination product, including a brand of ribavirin, received regulatory approval in most major markets, including the U.S. The overall market share of the hepatitis C franchise has declined sharply, reflecting this new market competition. In addition, the overall market has contracted. Management believes that the ability of PEG-INTRON and REBETOL combination therapy to maintain market share will continue to be adversely affected by competition in the hepatitis C marketplace. Generic forms of ribavirin entered the U.S. market in April 2004. In October 2004, another generic ribavirin was approved by the FDA. The generic forms of ribavirin compete with the Company's REBETOL (ribavirin) Capsules in the U.S. Prior to the second half of 2004 the REBETOL patents were material to the Company's business. As a result of the introduction of a competitor for pegylated interferon and the introduction of generic ribavirin, the value of an important Company product franchise has been severely diminished and earnings and cash flow have been materially and negatively impacted. 47 In October 2002, Merck/Schering-Plough Pharmaceuticals announced that the FDA approved ZETIA (ezetimibe) 10 mg for use either by itself or together with statins for the treatment of elevated cholesterol levels. In March 2003, the Company announced that ezetimibe (EZETROL, as marketed in Europe) had successfully completed the European Union (EU) mutual recognition procedure (MRP). With the completion of the MRP process, the 15 EU member states as well as Iceland and Norway can grant national marketing authorization with unified labeling for EZETROL. EZETROL has been launched in many international markets. The Merck/Schering-Plough Cholesterol Partnership also developed a once-daily tablet combining ezetimibe with simvastatin (Zocor), Merck's cholesterol-modifying medicine. This product is marketed as VYTORIN in the U.S. and INEGY in many international markets. Ezetimibe/simvastatin has been approved for marketing in several countries, including Germany in April of 2004 and in Mexico in March of 2004. On July 23, 2004, Merck/Schering-Plough Pharmaceuticals announced that the FDA had approved VYTORIN. INEGY completed the MRP in Europe on October 1, 2004. In September 2004, the Company announced that it entered into an agreement with Bayer intended to enhance the companies' pharmaceutical resources. The agreement was entered into by the Company primarily for strategic purposes. Commencing in October 2004, in the U.S. and Puerto Rico, the Company began marketing, selling and distributing Bayer's primary care products including AVELOX and CIPRO under an exclusive license agreement. The Company pays Bayer royalties in excess of 50 percent on these products based on sales, which has an unfavorable impact on the Company's gross margin percentage. Also commencing in October 2004, the Company assumed Bayer's responsibilities for U.S. commercialization activities related to the erectile dysfunction medicine LEVITRA under Bayer's co-promotion agreement with GlaxoSmithKline PLC. The Company reports its share of LEVITRA results as alliance revenue. Additionally, under the terms of the agreement, Bayer supports the promotion of certain of the Company's oncology products in the U.S. and key European markets for a defined period of time. In Japan, upon regulatory approval, Bayer will co-market the Company's cholesterol absorption inhibitor ZETIA. This arrangement does not include the rights to any future cholesterol combination product. ZETIA was filed with regulatory authorities in Japan during the fourth quarter of 2003. The Company believes that this approval for ZETIA is not likely to be completed until 2006 due to a slow down in the regulatory review process in Japan. This agreement with Bayer potentially restricts the Company from marketing products in the U.S. that would compete with any of the products under the strategic alliance. As a result, the Company expects that it may need to sublicense rights to garenoxacin, the quinolone antibacterial agent that the Company licensed from Toyama. The Company is exploring its options with regard to garenoxacin and will continue to fulfill its commitments to Toyama under its arrangement, including taking the product through regulatory approval. 48 Uncertainties inherent in government regulatory approval processes, including, among other things, delays in approval of new products, formulations or indications, may also affect the Company's operations. The effect of regulatory approval processes on operations cannot be predicted. The Company is subject to the jurisdiction of various national, state and local regulatory agencies and is, therefore, subject to potential administrative actions. Of particular importance is the FDA in the U.S. It has jurisdiction over all the Company's businesses and administers requirements covering the testing, safety, effectiveness, approval, manufacturing, labeling and marketing of the Company's products. From time to time, agencies, including the FDA, may require the Company to address various manufacturing, advertising, labeling or other regulatory issues, such as those noted below relating to the Company's current manufacturing issues. Failure to comply with governmental regulations can result in delays in the release of products, seizure or recall of products, suspension or revocation of the authority necessary for the production and sale of products, discontinuance of products, fines and other civil or criminal sanctions. Any such result could have a material adverse effect on the Company's financial position and its results of operations. Additional information regarding government regulation that may affect future results is provided in Part I, Item I, Business, in the Company's 2004 Form 10-K. Additional information about cautionary factors that may affect future results is provided under the caption Cautionary Factors That May Affect Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) in this Management's Discussion and Analysis of Operations and Financial Condition. As included in Note 14 "Consent Decree," to the Condensed Consolidated Financial Statements, on May 17, 2002, the Company announced that it had reached an agreement with the FDA for a consent decree to resolve issues involving the Company's compliance with current Good Manufacturing Practices at certain manufacturing facilities in New Jersey and Puerto Rico. The U.S. District Court for the District of New Jersey approved and entered the consent decree on May 20, 2002. Under terms of the consent decree, the Company agreed to pay a total of $500 million to the U.S. government in two equal installments of $250 million; the first installment was paid in May 2002 and the second installment was paid in May 2003. As previously reported, the Company accrued a $500 million provision for this consent decree in the fourth quarter of 2001. The consent decree requires the Company to complete a number of actions. In the event certain actions agreed upon in the consent decree are not satisfactorily completed on time, the FDA may assess payments for each deadline missed. The consent decree required the Company to develop and submit for the FDA's concurrence comprehensive cGMP Work Plans for the Company's manufacturing facilities in New Jersey and Puerto Rico that are covered by the decree. The Company received FDA concurrence with its proposed cGMP Work Plans on May 14, 2003. The cGMP Work Plans contain a number of Significant Steps whose timely and satisfactory completion are subject to payments of $15,000 per business day for each deadline missed. These payments may not exceed $25 million for 2002, and $50 million for each of the years 2003, 2004 and 2005. These payments are subject to an overall cap of $175 million. 49 In connection with its discussions with the FDA regarding the Company's cGMP Work Plans, and pursuant to the terms of the decree, the Company and the FDA entered into a letter agreement dated April 14, 2003. In the letter agreement, the Company and the FDA agreed to extend by six months the time period during which the Company may incur payments as described above with respect to certain of the Significant Steps whose due dates are December 31, 2005. The letter agreement does not increase the yearly or overall caps on payments described above. In addition, the decree requires the Company to complete programs of revalidation of the finished drug products and bulk active pharmaceutical ingredients manufactured at the covered manufacturing facilities. The Company is required under the consent decree to complete its revalidation programs for bulk active pharmaceutical ingredients by September 30, 2005, and for finished drugs by December 31, 2005. In general, the timely and satisfactory completions of the revalidations are subject to payments of $15,000 per business day for each deadline missed, subject to the caps described above. However, if a product scheduled for revalidation has not been certified as having been validated by the last date on the validation schedule, the FDA may assess a payment of 24.6 percent of the net domestic sales of the uncertified product until the validation is certified. Any such payment would not be subject to the caps described above. Further, in general, if a product scheduled for revalidation under the consent decree is not certified within six months of its scheduled date, the Company must cease production of that product until certification is obtained. The completion of the Significant Steps in the Work Plans and the completion of the revalidation programs are subject to third-party expert certification, as well as the FDA's acceptance of such certification. The consent decree provides that if the Company believes that it may not be able to meet a deadline, the Company has the right, upon the showing of good cause, to request extensions of deadlines in connection with the cGMP Work Plans and revalidation programs. However, there is no guarantee that FDA will grant any such requests. Although the Company believes it has made significant progress in meeting its obligations under the consent decree, it is possible that (1) the Company may fail to complete a Significant Step or a revalidation by the prescribed deadline; (2) the third-party expert may not certify the completion of the Significant Step or revalidation; or (3) the FDA may disagree with an expert's certification of a Significant Step or revalidation. In such a case, it is possible that the FDA may assess payments as described above. The Company would expense any payments assessed under the decree if and when incurred. As of March 31, 2005 the Company has not made any payments for missed deadlines. In addition, the failure to meet the terms of the consent decree could result in delays in approval of new products, seizure or recall of products, suspension or revocation of the authority necessary for the production and sale of products, fines and other civil or criminal sanctions. The Company is subject to pharmacovigilance reporting requirements in many countries and other jurisdictions, including the U.S., the European Union (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 manufacturer of the drug and the governmental agency to potential problems. 50 During 2003 pharmacovigilance inspections by officials of the British and French medicines agencies conducted at the request of the European Agency for the Evaluation of Medicinal Products (EMEA), serious deficiencies in reporting processes were identified. The Company is taking urgent actions to rectify these deficiencies as quickly as possible. The Company does not know what action, if any, the EMEA or national authorities will take in response to these findings. Possible actions include further inspections, demands for improvements in reporting systems, criminal sanctions against the Company and/or responsible individuals and changes in the conditions of marketing authorizations for the Company's products. The Company sells numerous upper respiratory products which contain pseudoephedrine (PSE), an FDA-approved ingredient for the relief of nasal congestion. The Company's annual North American sales of upper respiratory products that contain PSE totaled approximately $305 million in 2004 and $80 million and $70 million for the three months ended March 31, 2005 and 2004 respectively. These products include all CLARITIN-D products as well as some DRIXORAL, CORICIDIN and CHLOR-TRIMETON products. The Company understands that PSE has been used in the illicit manufacture of methamphetamine, a dangerous and addictive drug. As of April 2005, 17 states, Canada and Mexico have enacted regulations concerning the sale of PSE, including limiting the amount of these products that can be purchased at one time, or requiring that these products be located behind the pharmacist's counter, with the stated goal of deterring the illicit/illegal manufacture of methamphetamine. An additional eight states have enacted limits on the quantity of PSE any person can possess. In addition the U.S. Federal government has proposed legislation placing restrictions on the sale of this product. Further, major U.S. retailers that are customers of the Company have announced that they will voluntarily place products containing PSE behind the pharmacist counter at all of their stores, whether or not required by local law. To date, the regulations have not had a material impact on the Company's operations or financial results. However the Company continues to monitor matters in this area that could have a negative impact on operations or financial results. The Company sources an OTC product with annual net sales of approximately $50 million from a third party manufacturer. Recently the third party manufacturer informed the Company that they have encountered manufacturing problems in the facility producing this product. As a consequence, the Company is assessing alternative sourcing plans to meet market requirements. There is a potential that supplies of this OTC product may not be available in sufficient quantities to fully meet demand over the next several months until an alternate manufacturing supply can be established. 51 As described more specifically in Note 15 "Legal, Environmental and Regulatory Matters" to the Condensed Consolidated Financial Statements, the pricing, sales and marketing programs and arrangements, and related business practices of the Company 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. Attorney's 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 the Company to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs, and the Company also cannot predict whether any investigations will affect its marketing practices or sales. Any such result could have a material adverse impact on the Company, its financial condition, cash flows or results of operations. DISCLOSURE NOTICE Cautionary Factors That May Affect Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report and other written reports and oral statements made from time to time by the Company may contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations or forecasts of future events. They use words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "project," "intend," "plan," "potential," "will," and other words and terms of similar meaning in connection with a discussion of potential future events, circumstances or future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. In particular, forward-looking statements include statements relating to future actions, ability to access the capital markets, prospective products, the status of product approvals, future performance or results of current and anticipated products, sales efforts, development programs, estimates of rebates, discounts and returns, expenses and programs to reduce expenses, the cost of and savings from reductions in work force, the outcome of contingencies such as litigation and investigations, growth strategy and financial results. Any or all forward-looking statements here or in other publications may turn out to be wrong. Actual results may vary materially, and there are no guarantees about Schering-Plough's financial and operational performance or the performance of Schering-Plough stock. Schering-Plough does not assume the obligation to update any forward-looking statement. 52 Many factors could cause actual results to differ from Schering-Plough's 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, they may include the following: o A significant portion of net sales are made to major pharmaceutical and health care products 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 buying decisions or other factors. o Competitive factors, including technological advances attained by competitors, patents granted to competitors, new products of competitors coming to the market, new indications for competitive products, and new and existing generic, prescription and/or OTC products that compete with products of Schering-Plough or the Merck/Schering-Plough Cholesterol Partnership (such as competition from OTC statins, like the one approved for use in the U.K., the impact of which in the cholesterol reduction market is not yet known). o Increased pricing pressure both in the U.S. and abroad from managed care organizations, institutions and government agencies and programs. In the U.S., among other developments, consolidation among customers may increase pricing pressures and may result in various customers having greater influence over prescription decisions through formulary decisions and other policies. o The potential impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003; possible other U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including Medicaid and Medicare; involuntary approval of prescription medicines for over-the-counter use; and other health care reform initiatives and drug importation legislation. Legislation or regulations in markets outside the U.S. affecting product pricing, reimbursement or access. Laws and regulations relating to trade, antitrust, monetary and fiscal policies, taxes, price controls and possible nationalization. o Patent positions can be highly uncertain and patent disputes are not unusual. An adverse result in a patent dispute can preclude commercialization of products or negatively impact sales of existing products or result in injunctive relief and payment of financial remedies. o Uncertainties in the regulatory and approval process in the U.S. and other countries, including delays in the approval of new products and new indications and uncertainties in the FDA approval process; and uncertainties concerning regulatory decisions regarding labeling and other matters. 53 o Failure to meet current Good Manufacturing Practices established by the FDA and other governmental authorities can result in delays in the approval of products, release of products, seizure or recall of products, suspension or revocation of the authority necessary for the production and sale of products, fines and other civil or criminal sanctions. The resolution of manufacturing issues with the FDA discussed in Schering-Plough's 10-Ks, 10-Qs and 8-Ks are subject to substantial risks and uncertainties. These risks and uncertainties, including the timing, scope and duration of a resolution of the manufacturing issues, will depend on the ability of Schering-Plough to assure the FDA of the quality and reliability of its manufacturing systems and controls, and the extent of remedial and prospective obligations undertaken by Schering-Plough. o Difficulties in product development. Pharmaceutical product development is highly uncertain. Products that appear promising in development may fail to reach market for numerous reasons. They may be found to be ineffective or to have harmful side effects in clinical or pre-clinical testing, they may fail to receive the necessary regulatory approvals, they may turn out not to be economically feasible because of manufacturing costs or other factors or they may be precluded from commercialization by the proprietary rights of others. o Post-marketing issues. Once a product is approved and marketed, clinical trials of marketed products or post-marketing surveillance may raise efficacy or safety concerns. Whether or not scientifically justified, this new information could lead to recalls, withdrawals or adverse labeling of marketed products, which may negatively impact sales. Concerns of prescribers or patients relating to the safety or efficacy of Schering-Plough products, or other companies' products or pharmaceutical products generally, may also negatively impact sales. o Major products such as CLARITIN, CLARINEX, INTRON A, PEG-INTRON, REBETOL Capsules, REMICADE, TEMODAR and NASONEX accounted for a material portion of Schering-Plough's 2004 revenues. If any major product were to become subject to a problem such as loss of patent protection, OTC availability of the Company's product or a competitive product (as has been disclosed for CLARITIN and its current and potential OTC competition), previously unknown side effects; if a new, more effective treatment should be introduced; generic availability of competitive products; or if the product is discontinued for any reason, the impact on revenues could be significant. Also, such information about important new products, such as ZETIA and VYTORIN, or important products in our pipeline, may impact future revenues. Further, sales of VYTORIN may negatively impact sales of ZETIA. o Unfavorable outcomes of government (local and federal, domestic and international) investigations, litigation about product pricing, product liability claims, other litigation and environmental concerns could preclude commercialization of products, negatively affect the profitability of existing products, materially and adversely impact Schering-Plough's financial condition and results of operations, or contain conditions that impact business operations, such as exclusion from government reimbursement programs. o Economic factors over which Schering-Plough has no control, including changes in inflation, interest rates and foreign currency exchange rates. 54 o Instability, disruption or destruction in a significant geographic region -- due to the location of manufacturing facilities, distribution facilities or customers -- 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. o Changes in tax laws including changes related to taxation of foreign earnings. o Changes in accounting and auditing standards promulgated by the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, the SEC, or the Public Company Accounting Oversight Board that would require a significant change to Schering-Plough's accounting practices. For further details and a discussion of these and other risks and uncertainties, see Schering-Plough's past and future SEC reports and filings. 55 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk primarily from changes in foreign currency exchange rates and, to a lesser extent, from interest rates and equity prices. Refer to "Management's Discussion and Analysis of Operations and Financial Condition" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 for additional information. Item 4. Controls and Procedures Management, including the chief executive officer and the chief financial officer, has evaluated the Company's disclosure controls and procedures as of the end of the quarterly period covered by this Form 10-Q and has concluded that the Company's disclosure controls and procedures are effective. They also concluded that there were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings There were no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company, or any of its subsidiaries, became a party during the quarter ended March 31, 2005, or subsequent thereto, but before the filing of this report. All material pending legal proceedings involving the Company are described in Item 3 of the 2004 10-K. 56 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This table provides information with respect to purchases by the Company of its common shares during the first quarter of 2005. ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares Purchased as Maximum Number of Part of Publicly Shares that May Yet Be Total Number of Shares Average Price Paid Announced Plans or Purchased Under the PERIOD Purchased per Share Programs Plans or Programs - ------------------------------ ---------------------- ---------------------- -------------------- ------------------------ January 1, 2005 through 10,175(1) $20.42 N/A N/A January 31, 2005 February 1, 2005 through 15,367(1) $19.28 N/A N/A February 28, 2005 March 1, 2005 through March 13,920(1) $18.68 N/A N/A 31, 2005 TOTAL JANUARY 1, 2005 THROUGH 39,462 (1) $19.37 N/A N/A MARCH 31, 2005
(1) All of the shares included in the table above were repurchased pursuant to the Company's stock incentive program and represent shares delivered to the Company by option holders for payment of the exercise price and tax withholding obligations in connection with stock options and stock awards. 57 Item 6. Exhibits Exhibit Number Description 10(e)(xi) The Company's Severance Benefit Plan (as amended and restated effective December 17, 2004 with amendments through April 18, 2005) 12 Computation of Ratio of Earnings to Fixed Charges 15 Awareness letter 31.1 Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board, Chief Executive Officer and President 31.2 Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer 32.1 Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board, Chief Executive Officer and President 32.2 Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer 58 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 April 25, 2005 /s/ Douglas J. Gingerella ------------------------------ Douglas J. Gingerella Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) 59 EX-10.E.XI 2 y08100exv10wewxi.txt SEVERANCE BENEFIT PLAN Exhibit 10(e)(xi) SCHERING-PLOUGH CORPORATION SEVERANCE BENEFIT PLAN AMENDED AND RESTATED EFFECTIVE DECEMBER 17, 2004 WITH AMENDMENTS THROUGH APRIL 18, 2005 PREAMBLE Schering-Plough Corporation ("Schering-Plough") established the Schering-Plough Severance Benefit Plan (the "Plan") for the purpose of providing severance benefits to certain Employees whose employment terminates on or after February 4, 2004. The Plan constitutes a formal employee welfare benefit plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is hereby amended and restated, effective for all terminations occurring on or after December 17, 2004, and supersedes any policy, plan, or program theretofore maintained or in effect under which Schering-Plough, or any of its U.S. affiliated companies (or their predecessors), ever made payments of severance benefits prior to December 17, 2004. The Plan, as set forth herein, is intended to alleviate in part or in full financial hardships that may be experienced by certain of those Employees of Schering-Plough and its U.S. affiliated companies, whose employment is terminated for certain reasons. In essence, benefits under the Plan are intended to be supplemental unemployment benefits. The Plan is not intended to be included in the definitions of "employee pension benefit plan" and "pension plan" set forth under Section 3(2) of ERISA as a "severance pay arrangement" within the meaning of Section 3(2)(b)(i) of ERISA. Rather, the Plan is intended to meet the descriptive requirements of a plan constituting a "severance pay plan" within the meaning of regulations published by the Secretary of Labor at Title 29, Code of Federal Regulations, Section 2510.3-2(b). Accordingly, the benefits paid by the Plan are not deferred compensation and no employee shall have a vested right to such benefits. The Plan shall continue until such time as it is amended or terminated in accordance with Article 6. -i - TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS................................................ 1 ARTICLE 2 PARTICIPATION AND ELIGIBILITY FOR BENEFITS................. 6 ARTICLE 3 BENEFITS................................................... 8 ARTICLE 4 METHOD OF SEVERANCE PAYMENTS............................... 11 ARTICLE 5 THE ADMINISTRATIVE COMMITTEE............................... 12 ARTICLE 6 AMENDMENT AND TERMINATION.................................. 13 ARTICLE 7 CLAIMS PROCEDURES.......................................... 14 ARTICLE 8 MISCELLANEOUS.............................................. 15
-ii - ARTICLE 1 DEFINITIONS When used herein, the following terms shall have the meanings set forth below. 1.01 "ADMINISTRATIVE COMMITTEE" means Schering-Plough Corporation's Employee Benefits Committee or its designee. 1.02 "BASE PAY" means the Employee's highest Weekly Base Rate of Pay during the 12 month period prior to the his or her termination. In the case of a Termination Due to Change of Control, Base Pay shall mean the sum of (a) Employee's highest Weekly Base Rate of Pay during the 12 month period prior to his or her termination or, if greater, the Employee's Weekly Base Rate of Pay in effect immediately prior to such Change of Control, and (b) an amount equal to 1/52 of the Employee's annual Target Incentive. Notwithstanding the foregoing, for purposes of calculating Base Pay in order to determine a Participant's benefit under Column A of Exhibit B, Base Pay shall not include any portion of the Employee's Target Incentive. 1.03 "BENEFITS" means the benefits that a Participant is eligible to receive pursuant to Article 3 of the Plan. 1.04 "CHANGE OF CONTROL" means a Change of Control (or Change in Control) as defined in the Company's 2002 Stock Incentive Plan and any successor to such plan. 1.05 "COMPANY" means Schering-Plough Corporation and its U.S. affiliated companies. 1.06 "COMPARABLE POSITION" means employment with the Company or a successor employer in which the individual's level of responsibilities would not constitute a Demotion. For purposes of a Termination Due to Change of Control, a position shall not be a Comparable Position if such position would require the Employee's principal business location to be relocated more than 50 miles from the Employee's principal business location immediately prior to the Change of Control. 1.07 "CORPORATE INTEGRITY AGREEMENT" means the five-year settlement agreement entered into between the Company and the Office of Inspector General of the U.S. Department of Health and Human Services, effective July 29, 2004. 1.08 "DEMOTION" means continued employment in a position that, as determined by the Administrative Committee, constitutes a demotion under Schering-Plough's U.S. compensation guidelines or a position that is one or more levels lower on a Company-recognized career ladder, whether or not such employment is with the Company or a successor employer. 1.09 "DECLINE TO RELOCATE" means a termination of a Participant's employment as a result of his or her rejection of an offer of continued employment in the same position or a -1- Comparable Position that would require relocation of the Participant's principal business location of more than 50 miles. 1.10 "EMPLOYEE" means any regular full-time or regular part-time employee of the Company who is employed in the United States and as to whom the terms and conditions of employment are not covered by a collective bargaining agreement unless the collective bargaining agreement specifically provides for coverage under the Plan. For this purpose, a regular part-time employee shall be an employee who is regularly scheduled to work approximately 20 to 32 hours per week. The term "Employee" shall not include (a) temporary employees (including college coops, summer employees, high school coops, flexible workforce employees and any other such temporary classifications); (b) any individual characterized by the Company as an "independent contractor" or as a "contract worker;" (c) officers and other employees of the Company who are parties to employment agreements; (d) officers or other employees of the Company who participate in any severance plan of the Company that provides for the payment of severance benefits in connection with a Change of Control of the Company and such individual qualifies for the payment of such benefits; (e) any other individual who is not treated by the Company as an employee for purposes of withholding federal income taxes, regardless of any contrary Internal Revenue Service, governmental, or judicial determination relating to such employment status or tax withholding; or (f) effective April 13, 2005, any employee of the Company who (i) is not a U.S. citizen, (ii) is on temporary assignment in the United States, and (iii) normally works outside the United States. In the event that an individual engaged in an independent contractor or similar non-employee capacity is subsequently reclassified by the Company, the Internal Revenue Service, or a court as an employee, such individual, for purposes of the Plan, shall be deemed an Employee from the actual (and not effective) date of such classification, unless expressly provided otherwise by the Company. An Employee also includes any employee of the Company otherwise satisfying the definition for Employee above who works in the United States permanently or who normally works in the United States and receives compensation from one of the Company's United States affiliates or participating companies but is on temporary assignment outside of the United States. 1.11 "EMPLOYMENT SERVICE DATE" means the first day on which an individual became an Employee. 1.12 "EMPLOYMENT TERMINATION DATE" means the date on which the employment of the Employee by the Company is terminated. 1.13 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.14 "JOB ELIMINATION" means a termination of a Participant's employment by the Company due to job elimination, as determined by the Administrative Committee in its sole discretion, for purposes of the Plan only. -2- 1.15 "JOB RESTRUCTURING" means a termination of a Participant's employment by the Company due to a change in required competencies or qualifications for the Participant's job, as determined by the Administrative Committee in its sole discretion, for purposes of the Plan only. 1.16 "MISCONDUCT" means conduct which includes (a) falsification of company records/misrepresentation; (b) theft; (c) acts or threats of violence; (d) refusal to carry out assigned work; (e) unauthorized possession of alcohol or illegal drugs on company premises; (f) being under the influence of alcohol or illegal drugs during work hours; (g) willful intent to damage or destroy company property; (h) violation of the Business Conduct Policy; (i) acts of discrimination/harassment; (j) conduct jeopardizing the integrity of our products; (k) violation of Company rules, policies, and/or practices; or (l) other conduct considered to be detrimental to the Company. 1.17 "PARTICIPANT" means any Terminated Employee eligible for Benefits in accordance with Article 2. 1.18 "PLAN" means the Schering-Plough Severance Benefit Plan, as set forth herein, and as the same may from time to time be amended. 1.19 "PLAN YEAR" means the period commencing on each January 1 during which the Plan is in effect and ending on the subsequent December 31. 1.20 "SEVERANCE BENEFIT PLAN COMMITTEE" means the Committee that reviews initial benefit claims under the Plan, which shall be comprised of no less than three members who shall include the Company's Executive Director of Global Benefits, and Vice Presidents of Human Resources representing the Company's major operating groups as the Company shall appoint. 1.21 "TARGET INCENTIVE" means an Employee's target incentive for any given year under the Company's annual incentive plan applicable to the Employee immediately preceding his or her termination. Notwithstanding the foregoing sentence, in the event of a Termination Due to Change of Control, Target Incentive shall mean the greater of the Target Incentive described in the preceding sentence or the Target Incentive in effect immediately preceding the Change of Control. 1.22 "TERMINATED EMPLOYEE" means an Employee who has experienced an Employment Termination Date. 1.23 "TERMINATION DUE TO CHANGE OF CONTROL" means a termination of a Participant's employment by the Company within two years following a Change of Control that is involuntary or that is as a result of his or her written rejection of an offer of continued employment with the Company or an affiliate if such employment is not a Comparable Position. For purposes of the preceding sentence, an involuntary termination shall be deemed to occur as of the sixtieth (60th) day (or such longer period of time as the Company shall establish not to exceed one year) immediately following the later of (a) the date on which the Participant rejects in writing an offer of continued employment -3- with the Company or an affiliate for a position that is not a Comparable Position; or (b) the date of the Change of Control. 1.24 "TERMINATION DUE TO NON-PERFORMANCE" means a termination of an Employee's employment by the Company due to the Employee's failure to perform his or her job assignments in a satisfactory manner, as determined by the Administrative Committee in its sole discretion, for purposes of the Plan only. In addition, a Termination Due to Non-Performance means a termination of an Employee's employment by the Company due to the Employee being deemed an "ineligible person" pursuant to the Corporate Integrity Agreement. 1.25 "TERMINATION DUE TO WORKFORCE RESTRUCTURING" means termination of an Employee's employment by the Company due to a Decline to Relocate, a Job Elimination, a Job Restructuring, or such other termination determined by the Administrative Committee. An Employee who has been absent from employment on a (a) short-term disability leave, or (b) long-term disability leave or "medical no pay" leave lasting, in both cases, for a period of less than two years shall be deemed to have suffered a Termination Due to Workforce Restructuring if neither the Employee's latest position nor a Comparable Position exists for the Employee once he or she is released to return to work. Nothing in this paragraph shall prevent such an Employee from experiencing a Termination Due to Workforce Restructuring as a result of a Job Elimination, Job Restructuring, or other determination by the Administrative Committee or its designee to the extent otherwise provided under this Plan. 1.26 "VOLUNTARY RESIGNATION" means a resignation that is a voluntary separation from employment initiated by the Employee. 1.27 "WEEKLY BASE RATE OF PAY" means (a) for a regular full-time Employee paid on a weekly payroll period basis, the Employee's weekly rate of pay. (b) for a regular full-time Employee paid on a bi-monthly payroll period basis, the Employee's rate of pay for one payroll period divided by 2.166. (c) for a regular part-time Employee paid on any hourly basis, the Employee's highest base hourly rate during the last 12 months multiplied by the average number of weekly hours worked during that 12 month period. 1.28 "YEARS OF SERVICE" means the total number of a Participant's full years of active service with the Company subject to the following rules: (a) For purposes of determining a Participant's number of Years of Service, a full year of active service is any consecutive twelve-month period of service occurring after the Participant's most recent break in service lasting one year or more. For example, a Participant whose Employment Service Date is June 21, 2003 will be credited with -4- one Year of Service at the end of the business day June 20, 2004 provided that he or she has been continuously employed by the Company through that date. (b) For purposes of determining a Participant's number of Years of Service, such Participant shall be treated as if his Employment Termination Date was December 31 of the calendar year in which his or her actual Employment Termination Date occurs. (c) Any break in a Participant's active service for a period of less than one year shall be disregarded for purposes of calculating a Participant's number of Years of Service. For example, a Participant who was hired on June 1, 2000, was terminated on February 3, 2002, rehired on December 18, 2002, and terminated again on March 3, 2003 shall have three Years of Service under the Plan. -5- ARTICLE 2 PARTICIPATION AND ELIGIBILITY FOR BENEFITS 2.01 Eligibility. (a) Subject to Sections 2.01(b), 2.02, and 2.03, any Terminated Employee (other than an employee who is employed in Puerto Rico) who has provided the Company with at least 90 consecutive days of service and incurs a Termination Due to Workforce Restructuring, a Termination Due to Non-Performance, or a Termination Due to Change of Control shall become a Participant and shall be eligible for Benefits in accordance with the provisions of this Plan. A Terminated Employee who is eligible to participate in the Plan as a result of a Termination Due to Change of Control shall not otherwise be deemed to have incurred a Termination Due to Workforce Restructuring or a Termination Due to Non-Performance. For purposes of determining whether a Participant who either (i) transferred employment from NeoGenesis Pharmaceuticals, Inc. to the Company in connection with the asset purchase agreement, dated February 14, 2005, or (ii) became an Employee as a result of the Company's collaborative agreement with Bayer HealthCare AG, dated October 1, 2004, has satisfied the 90 consecutive days of service requirement set forth in this section 2.01(a) above, his or her service shall include service with NeoGenesis Pharmaceuticals, Inc. and Bayer HealthCare AG, as appropriate. In no event shall such individual be credited with such prior service for purposes of calculating their severance benefits under the Plan. (b) Notwithstanding anything herein to the contrary, a Terminated Employee shall not be considered to have incurred a Termination Due to Workforce Restructuring, a Termination Due to Non-Performance, or a Termination Due to Change of Control for the purposes of the Plan, if his or her employment is discontinued due to (i) a Voluntary Resignation; (ii) voluntary resignation after reaching early or normal retirement date under the Company's qualified pension plan; (iii) the divestiture of a business unit of the Company if the Employee is offered a Comparable Position with the Company or a successor employer; (iv) a rejection of an offer of a Comparable Position that is not a Decline to Relocate; (v) a Decline to Relocate and such Terminated Employee was on international assignment immediately preceding his or her termination; (vi) discharge for Misconduct; (vii) being placed on layoff status; (viii) failure to transfer to another location after initially accepting the transfer within the acceptance period of the offer; (ix) a termination of employment during or immediately following a long-term disability leave or a "medical no pay" leave lasting, in each case, at least two years; (x) death; or (xi) his or her refusal to cooperate with the screening process pursuant to the Corporate Integrity Agreement. (c) Notwithstanding anything herein to the contrary, in no event shall any Employee or former Employee who is receiving benefits under a Company-sponsored long-term disability plan and/or who was on "medical no pay" leave of absence lasting, in the aggregate, for a period of two consecutive years or more ending at or immediately preceding the time of his or her termination of employment be eligible for Benefits -6- under this Plan. For clarification purposes, the determination of whether an Employee or former Employee is ineligible for benefits as a result of the two-year leave of absence restriction set forth in the preceding sentence shall be made by aggregating any time periods in which the Employee or former Employee had received benefits under a Company-sponsored long-term disability plan together with any consecutive time periods that he or she was on "medical no pay" leave. 2.02 Termination of Eligibility for Benefits. A Participant shall cease to participate in the Plan, and all Benefits shall cease upon the occurrence of the earliest of: (a) Termination of the Plan prior to, or more than two years following, a Change of Control; (b) Inability of the Company to pay Benefits when due; (c) Completion of payment to the Participant of the Benefits for which the Participant is eligible; and (d) The Administrative Committee's determination, in its sole discretion, of the occurrence of the Employee's Misconduct, regardless of whether such determination occurs before or after the Employee's Employment Termination Date, unless the Administrative Committee determines in its sole discretion that Misconduct shall not cause the cessation of Benefits in a particular case. Notwithstanding the foregoing, the Administrative Committee must act in good faith in making such a determination at any time within the two years following a Change of Control. 2.03 Waiver and Release. Notwithstanding anything in the Plan to the contrary, unless determined otherwise by the Administrative Committee in its sole discretion, no Benefits shall be due or paid under the Plan to any Employee, unless the Employee executes (and does not rescind) a written waiver and release, in a form prescribed by Schering-Plough, of any and all claims against Schering-Plough, its affiliates, and all related parties arising out of the Employee's employment or termination of employment. -7- ARTICLE 3 BENEFITS 3.01 Amount of Severance Pay. The amount of severance pay payable to a Participant shall be equal to the number of weeks of the Participant's Base Pay corresponding to his or her Years of Service at his or her Employment Termination Date as set forth on that portion of Exhibit A applicable to the reason for his or her termination from employment (determined by the Company, in its sole discretion) as listed on Exhibit A hereto. In the event of a Termination Due to Change of Control, the amount of severance pay payable to a Participant shall be equal to the number of weeks of the Participant's Base Pay corresponding to his or her Years of Service at his or her Employment Termination Date as set forth under Column B of Exhibit B applicable to his or her band as listed on Exhibit B hereto. Notwithstanding the foregoing, in the event of a Termination Due to Change of Control for a Participant who was an E-grade employee as of December 31, 2003, the amount of severance pay payable to the Participant shall be equal to the greater of the benefits as listed under Column A and B under Exhibit B hereto as applicable to E-grade employees and to his or her Years of Service at his or her Employment Termination Date. Notwithstanding the foregoing, in the event of a Termination Due to Change of Control for a Participant who was a weekly/hourly or a semi-monthly employee as of December 31, 2003, the amount of severance pay payable to the Participant shall be equal to the greater of the benefits as listed under Column A and B under Exhibit B hereto as applicable to his or her pay status and Years of Service at his or her Employment Termination Date. 3.02 Medical and Dental Benefits. A Participant covered under any of the Company's group medical and dental plans prior to his or her Employment Termination Date shall be provided the opportunity to elect to continue such coverage in accordance with the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, Section 4980B of the Internal Revenue Code of 1986, as amended, and Section 601, et seq., of ERISA ("COBRA") and in accordance with the Company's regular COBRA coverage payment practices. Participants who experience a Termination Due to Workforce Restructuring or Termination due to Non-Performance shall be eligible to continue medical and dental benefits under COBRA coverage at active employee rates, as the same may be changed from time to time, for the greater of (a) three months or (b) the number of weeks of severance under Section 3.01 (to a maximum of 12 months) following his or her Employment Termination Date. Participants who experience a Termination Due to Change of Control shall be eligible (a) to continue medical and dental benefits under COBRA coverage at active employee rates, as the same may be changed from time to time, for the greater of (i) three months or (ii) the number of weeks of severance pay under Section 3.01 (to a maximum of 18 months) -8- following his or her Employment Termination Date, and (b) for retiree medical benefits under the terms of the retiree medical coverage generally applicable to the Company's retiree medical eligible retirees provided that such Participants are at least age 50 at the time of their termination of employment. 3.03 Life Insurance. Participants who experience a Termination Due to Workforce Restructuring or Termination Due to Non-Performance shall be eligible to receive continued basic life insurance coverage for the greater of (a) three months or (b) the number of weeks of severance under Section 3.01 (to a maximum of 12 months) following his or her Employment Termination Date. Participants who experience a Termination Due to Change of Control shall be eligible to receive continued basic life insurance coverage for the greater of (a) three months or (b) the number of weeks of severance under Section 3.01 (to a maximum of 18 months) following his or her Employment Termination Date. At the end of the coverage period, the Participant may convert the life insurance coverage to a personal policy. 3.04 Incentive Plan Payments. A Participant's entitlement to an incentive payment under the annual incentive plan applicable to such Participant following a termination of employment and the amount of such incentive payment, if any, shall be determined solely be reference to the applicable terms of such annual incentive plan, provided, however, for purposes of calculating a Participant's severance pay with respect to a Termination Due to Change of Control, a Participant's Base Pay shall include a pro rata portion of his or her Target Incentive as described under the definition of Base Pay in Section 1.02 of the Plan. 3.05 Reduction for Other Payments; Offsets. The Benefits payable hereunder to any Participant shall be reduced by any and all payments required to be made by the Company or its affiliates under federal, state, and local law, under any employment agreement or special severance arrangement or under any other separation policy, plan, or program. The Benefits payable hereunder to any Participant shall also be reduced by (a) any benefits previously paid to such Participant under this or any other separation or severance plan sponsored by the Company with respect to any periods of service with respect to which Benefits are being paid under this Plan; and (b) any and all amounts that the Participant owes to the Company or an affiliate. 3.06 Effect on Other Benefit Plans. Except as expressly provided herein, nothing under the Plan shall constitute an extension of eligibility for, or the vesting or exercise periods relating to, any employee benefit or equity compensation plan or an agreement with the Company. 3.07 Different Severance Benefits. Notwithstanding the foregoing, the Human Resources representative having jurisdiction over the Participant may recommend, and the Senior Vice President Global Human Resources, acting on behalf of the Company, will have complete discretion to approve a different amount of severance pay and/or benefits, either higher or lower (including no severance pay and/or benefits at all), than otherwise -9- provided on Exhibit A, provided that no such discretion shall be applicable to a Termination Due to Change of Control. 3.08 Change of Control Notification. Not later than six months following a Change of Control, the Company shall notify all of its otherwise eligible Employees (who were Employees as of the day immediately before the Change of Control) who have not been given notice of termination of whether they will, until the second anniversary of such Change of Control, continue in the same job, be offered a Comparable Position, or be involuntarily terminated. -10- ARTICLE 4 METHOD OF SEVERANCE PAYMENTS 4.01 Method of Payment. The severance pay to which a Participant is eligible, as calculated pursuant to Article 3, shall be paid in accordance with the provisions of this Article 4. (a) Severance payments payable under this Plan shall be made in a single sum cash payment. (b) Payment shall be made by mailing to the last address provided by the Participant to the Company. Separate payment(s) shall be made to pay any earned and unused vacation pay for the year during which the Employment Termination Date occurs. In no event shall interest be credited on any amounts for which a Participant may become eligible. (c) In general, payments shall be made as promptly as practicable after the participant's Employment Termination Date, the execution of the release required under Section 2.03, and the expiration of the required release revocation period. -11- ARTICLE 5 THE ADMINISTRATIVE COMMITTEE 5.01 Authority and Duties. The Administrative Committee shall have the full power, authority, and discretion to construe, interpret, and administer the Plan, to correct deficiencies therein, and to supply omissions. All decisions, actions, and interpretations of the Administrative Committee shall be final, binding, and conclusive upon the parties, subject only to determinations by the applicable claims fiduciary with respect to denied claims for Benefits. Unless the Administrative Committee determines otherwise, the Human Resources Managers of the Company shall have the authority to act on behalf of the Administrative Committee in all respects set forth in this Section 5.01. 5.02 Records. The Company shall supply to the Administrative Committee all records and information necessary to the performance of the Administrative Committee's duties. 5.03 Payment. The Company shall make payments of Benefits, in such amount as determined by the Administrative Committee under Article 3, from its general assets to Participants in accordance with the terms of the Plan, as directed by the Administrative Committee. -12- ARTICLE 6 AMENDMENT AND TERMINATION 6.01 The Plan may be amended, suspended, discontinued, or terminated at any time by the Board of Directors of Schering-Plough Corporation or its designee, in whole or in part, for any reason, and without either the consent of or the prior notification to any Participant. No such amendment shall give the Company the right to recover any amount paid to a Participant prior to the date of such amendment. Any such amendment, however, may cause the cessation and discontinuance of payments of Benefits to any person or persons under the Plan. No such amendment made following a Change of Control may reduce the benefits to which any Participant may become entitled in the two years following such Change of Control. Notwithstanding the foregoing, no amendment of any kind may be made to the Plan for a period of two years following a Change of Control. -13- ARTICLE 7 CLAIMS PROCEDURES 7.01 Claim. Each eligible terminated Employee may contest the administration of Benefits by completing and filing with the Severance Benefit Plan Committee a written request for review in the manner specified by the Administrative Committee. Each such application must be filed within 60 days following the Employee's termination of employment and must be supported by such information as the Severance Benefit Plan Committee deems relevant and appropriate. 7.02 Appeals of Denied Claims for Benefits. In the event that any claim for benefits is denied in whole or in part, the claimant whose claim has been so denied shall be notified of such denial by the Severance Benefit Plan Committee within 90 days of receipt of the claim (unless the Severance Benefit Plan Committee determines that special circumstances require an extension of time of up to an additional 90 days for processing the claim). The notice advising of the denial shall specify the reason(s) for denial, make specific reference to relevant Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed), and shall advise the claimant of the procedure for the appeal of such denial and a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on appeal. All appeals shall be made by the following procedure: (a) A claimant whose claim has been denied shall file with the Administrative Committee a notice of desire to appeal the denial. Such notice shall be filed within 60 days of notification by the Severance Benefits Plan Committee of the initial claim denial, be made in writing, and set forth all of the facts upon which the appeal is based. Appeals not timely filed shall be barred. (b) The Administrative Committee shall consider the merits of the claimant's written presentations, the merits of any facts or evidence in support of the denial of benefits, and such other facts and circumstances as the Administrative Committee shall deem relevant. (c) The Administrative Committee shall render a determination upon the appealed claim within 60 days of its receipt of such appeal (unless the Administrative Committee determines that special circumstances require an extension of time of up to an additional 60 days for processing the appeal). The determination shall specify the reason(s) for the denial, make specific reference to relevant Plan provisions, and contain a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA. (d) The determination so rendered shall be binding upon all parties. No Employee may bring a civil action under Section 502(a) of ERISA until the Employee has exhausted his or her rights under this Section 7.02. -14- ARTICLE 8 MISCELLANEOUS 8.01 Nonalienation of Benefits. None of the payments, benefits, or rights of any Participant shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant. No Participant shall have the right to alienate, anticipate, commute, plead, encumber, or assign any of the benefits or payments which he/she may expect to receive, contingently or otherwise, under the Plan. 8.02 No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant or Employee, or any person whosoever, the right to be retained in the service of the Company, and all Participants and other Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 8.03 Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 8.04 Heirs, Assigns, and Personal Representatives. The Plan shall be binding upon the heirs, executors, administrators, successors, and assigns of the parties, including each Participant, present and future. 8.05 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 8.06 Number. Except where otherwise clearly indicated by context, the singular shall include the plural, and vice-versa. 8.07 Unfunded Plan. The Plan shall not be funded. No Participant shall have any right to, or interest in, any assets of Schering-Plough that may be applied by Schering-Plough to the payment of Benefits. 8.08 Payments to Incompetent Persons, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge Schering-Plough, the Administrative Committee and all other parties with respect thereto. 8.09 Lost Payees. Benefits shall be deemed forfeited if the Administrative Committee is unable to locate a Participant to whom Benefits are due. Such Benefits shall be reinstated -15- if application is made by the Participant for the forfeited Benefits within one year of the Participant's Employment Termination Date and while the Plan is in operation. 8.10 Controlling Law. The Plan shall be construed and enforced according to the laws of the State of New Jersey to the extent not superseded by federal law. -16- SCHERING-PLOUGH CORPORATION SEVERANCE PAY PLAN EXHIBIT A TERMINATION DUE TO WORKFORCE RESTRUCTURING (CHART SHOWS AMOUNT OF SEVERANCE PAY IN WEEKS OF BASE PAY)
BANDS D-O; BANDS D-O; BASE > OR = YEARS OF SERVICE BANDS A-C BASE <$275,000 $275,000 ---------------- --------- -------------- -------- 1 15 26 39 2 15 26 39 3 15 26 39 4 15 26 39 5 15 26 39 6 17 26 39 7 19 26 39 8 21 26 41 9 23 28 43 10 25 30 45 11 27 32 47 12 29 34 49 13 31 36 51 14 33 38 53 15 35 40 55 16 37 42 57 17 39 44 59 18 41 46 61 19 43 48 63 20 45 50 65 21 47 52 67 22 49 54 69 23 51 56 71 24 53 58 73 25 55 60 75 26 57 62 77 27 59 64 79 28 61 66 81 29 63 68 83 30 and above 65 70 85
-17- SCHERING-PLOUGH CORPORATION SEVERANCE PAY PLAN EXHIBIT A (CONT'D) TERMINATION DUE TO NON-PERFORMANCE (CHART SHOWS AMOUNT OF SEVERANCE PAY IN WEEKS OF BASE PAY)
YEARS OF SERVICE BANDS A-O ---------------- --------- 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 and above 30
-18- SCHERING-PLOUGH CORPORATION SEVERANCE PAY PLAN EXHIBIT B TERMINATION DUE TO CHANGE OF CONTROL (CHART SHOWS AMOUNT OF SEVERANCE PAY IN WEEKS OF BASE PAY)
COLUMN A COLUMN B (If this column is applicable, multiply applicable (If this column is applicable, multiply applicable number number of weeks by Base Pay excluding Target Incentive) of weeks by Base Pay including 1/52 of Target Incentive) - ------------------------------------------------------- ------------------------------------------------------------ BANDS D-O; BANDS D-O; BASE(1) < BASE(1) > OR = WEEKLY / HOURLY SEMI-MONTHLY E-GRADE YEARS OF SERVICE BANDS A-C $275,000 $275,000 - --------------- ------------ ------- ---------------- --------- -------- -------- 8 16 32 1 23 39 59 8 16 32 2 23 39 59 12 16 32 3 23 39 59 16 16 32 4 23 39 59 20 20 40 5 23 39 59 24 24 48 6 26 39 59 28 28 56 7 29 39 59 32 32 64 8 32 39 62 36 36 72 9 35 42 65 40 40 80 10 38 45 68 44 44 88 11 41 48 71 48 48 96 12 44 51 74 52 52 104 13 47 54 77 56 56 104 14 50 57 80 60 60 104 15 53 60 83 64 64 104 16 56 63 86 68 68 104 17 59 66 89 72 72 104 18 62 69 92 76 76 104 19 65 72 95 80 80 104 20 68 75 98 84 84 104 21 71 78 101 88 88 104 22 74 81 104 92 92 104 23 77 84 107 96 96 104 24 80 87 110 100 100 104 25 83 90 113 104 104 104 26 86 93 116 104 104 104 27 89 96 119 104 104 104 28 92 99 122 104 104 104 29 95 102 125 104 104 104 30 and above 98 105 128
- ---------- (1) For this purpose, Base Pay excludes Target Incentive. -19- EX-12 3 y08100exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) (unaudited)
Years Ended December 31 Three Months Ended March 31, 2005 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- Income/(Loss) Before Income Taxes $ 191 $ (168) $ (46) $ 2,563 $ 2,523 $ 3,188 Less: Equity Income 220 347 54 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- (Loss)/Income Before Income Taxes and Equity Income (29) (515) (100) 2,563 2,523 3,188 Add Fixed Charges: Preference Dividends 22 34 -- -- -- -- Interest Expense 45 168 81 28 40 44 One-third of Rental Expense 9 30 30 27 24 24 Capitalized Interest 3 20 11 24 25 20 ---------- ---------- ---------- ---------- ---------- ---------- Total Fixed Charges 79 252 122 79 89 88 Less: Capitalized Interest 3 20 11 24 25 20 Less: Preference Dividends 22 34 -- -- -- -- Add: Amortization of Capitalized Interest 2 9 9 8 7 7 Add: Distributed Income of Equity Investees 18 228 32 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Earnings/(Loss) Before Income Taxes and Fixed Charges (other than Capitalized Interest) $ 45 $ (80) $ 52 $ 2,626 $ 2,594 $ 3,263 ========== ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges 0.6* (0.3)** 0.4** 33.2 29.1 37.1 ========== ========== ========== ========== ========== ==========
* For the three months ended March 31, 2005, earnings were insufficient to cover fixed charges by $34 million. ** For the years ended December 31, 2004 and 2003, earnings were insufficient to cover fixed charges by $332 million and $70 million, respectively. "Earnings" consist of (loss)/income before income taxes and equity income, plus fixed charges (other than capitalized interest and preference dividends), amortization of capitalized interest and distributed income of equity investee. "Fixed charges" consist of interest expense, capitalized interest, preference dividends and one-third of rentals which Schering-Plough believes to be a reasonable estimate of an interest factor on leases. EX-15 4 y08100exv15.txt AWARENESS LETTER Exhibit 15 April 25, 2005 To the Shareholders and Board of Directors of Schering-Plough Corporation: We have made a review, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Schering-Plough Corporation and subsidiaries for the periods ended March 31, 2005 and 2004, as indicated in our report dated April 25, 2005; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, is incorporated by reference in Registration Statements No. 2-83963, No. 33-50606, No. 333-30331, No. 333-87077, No. 333-91440, No. 333-104714, No. 333-105567, No. 333-105568, No. 333-112421 and No. 333-121089 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 2-84723 on Form S-8, Post Effective Amendment No. 1 to Registration Statement No. 333-105567 on Form S-8, and Registration Statements No. 333-12909, No. 333-853, No. 333-30355, and No. 333-113222 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/Deloitte & Touche LLP Parsippany, New Jersey EX-31.1 5 y08100exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, Fred Hassan, Chairman of the Board, Chief Executive Officer and President, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Schering-Plough Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 25, 2005 /s/ Fred Hassan - ------------------ Fred Hassan Chairman of the Board, Chief Executive Officer and President EX-31.2 6 y08100exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Robert J. Bertolini, Executive Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Schering-Plough Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 25, 2005 /s/ Robert J. Bertolini - --------------------------- Robert J. Bertolini Executive Vice President and Chief Financial Officer EX-32.1 7 y08100exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION I, Fred Hassan, Chairman of the Board, Chief Executive Officer and President of Schering-Plough Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Schering-Plough Corporation. Dated: April 25, 2005 /s/ Fred Hassan - --------------- Fred Hassan Chairman of the Board, Chief Executive Officer and President EX-32.2 8 y08100exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION I, Robert J. Bertolini, Executive Vice President and Chief Financial Officer of Schering-Plough Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the "Report") which this statement accompanies fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Schering-Plough Corporation. Dated: April 25, 2005 /s/ Robert J. Bertolini - ----------------------- Robert J. Bertolini Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----