FORM 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2007
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Commission file number 1-6571
SCHERING-PLOUGH
CORPORATION
(Exact name of registrant as
specified in its charter)
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New Jersey
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22-1918501
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State or other jurisdiction
of
incorporation or organization
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(I.R.S. Employer
identification No.)
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2000 Galloping Hill Road,
Kenilworth, NJ
(Address of principal
executive offices)
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07033
Zip
Code
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Registrant’s telephone number, including area code:
(908) 298-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act.
Large Accelerated
Filer þ Accelerated
Filer o Non-accelerated
Filer o
Indicate whether the registrant is a shell company (as defined
in
Rule 12b-2
of the
Act). Yes o No þ
Common Shares Outstanding as of June 30, 2007: 1,496,297,204
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(Unaudited)
(Amounts in millions, except per share figures)
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Six Months
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Three Months Ended
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Ended
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June 30,
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June 30,
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2007
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2006
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2007
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2006
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Net sales
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$
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3,178
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$
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2,818
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$
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6,153
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$
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5,369
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Cost of sales
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977
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1,004
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1,913
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1,897
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Selling, general and administrative
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1,358
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1,224
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2,572
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2,310
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Research and development
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696
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539
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1,403
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1,020
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Other income, net
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(16
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)
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(19
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)
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(62
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)
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(52
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)
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Special and acquisition related
charges
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11
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80
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12
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80
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Equity income from cholesterol
joint venture
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(490
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)
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(355
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)
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(978
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)
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(666
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)
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Income before income taxes
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642
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345
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1,293
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780
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Income tax expense
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103
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86
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190
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172
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Net income before cumulative
effect of a change in accounting principle
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539
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259
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1,103
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608
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Cumulative effect of a change in
accounting principle, net of tax
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—
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—
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—
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22
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Net income
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539
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259
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1,103
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630
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Preferred stock dividends
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22
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22
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43
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43
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Net income available to common
shareholders
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$
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517
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$
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237
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$
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1,060
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$
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587
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Diluted earnings per common share:
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Earnings available to common
shareholders before cumulative effect of a change in accounting
principle
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$
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0.34
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$
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0.16
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$
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0.70
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$
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0.38
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Cumulative effect of a change in
accounting principle, net of tax
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—
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—
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—
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0.02
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Diluted earnings per common share
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$
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0.34
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$
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0.16
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$
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0.70
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$
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0.40
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Basic earnings per common share:
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Earnings available to common
shareholders before cumulative effect of a change in accounting
principle
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$
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0.35
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$
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0.16
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$
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0.71
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$
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0.38
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Cumulative effect of a change in
accounting principle, net of tax
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—
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—
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—
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0.02
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Basic earnings per common share
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$
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0.35
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$
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0.16
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$
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0.71
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$
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0.40
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Dividends per common share
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$
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0.065
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$
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0.055
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$
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0.13
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$
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0.11
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in millions)
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Six Months Ended
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June 30,
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2007
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2006
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Operating Activities:
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Net income
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$
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1,103
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$
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630
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Cumulative effect of a change in
accounting principle, net of tax
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—
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(22
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)
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Net income before cumulative
effect of a change in accounting principle, net of tax
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1,103
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608
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Adjustments to reconcile net
income to net cash provided by operating activities:
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Special and acquisition related
charges and payments
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(438
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70
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Depreciation and amortization
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243
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251
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Accrued share-based compensation
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88
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79
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Change in fair value of foreign
currency option
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31
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—
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Changes in assets and liabilities:
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Accounts receivable
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(293
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)
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(332
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)
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Inventories
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(16
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)
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13
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Prepaid expenses and other assets
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(99
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)
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5
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Accounts payable and other
liabilities
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139
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116
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Purchase of derivative instruments
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(130
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)
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—
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Net cash provided by operating
activities
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628
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810
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Investing Activities:
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Capital expenditures
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(275
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)
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(192
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)
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Dispositions of property and
equipment
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1
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8
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Purchases of short-term investments
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(1,182
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)
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(3,795
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)
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Maturities of short-term
investments
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3,065
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1,270
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Other investments
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(11
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)
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—
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Net cash provided by (used for)
investing activities
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1,598
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(2,709
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)
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Financing Activities:
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Cash dividends paid to common
shareholders
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(179
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)
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(162
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)
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Cash dividends paid to preferred
shareholders
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(43
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)
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(43
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)
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Net change in short-term borrowings
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(10
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)
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(849
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)
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Stock option exercises
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177
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32
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Other
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(2
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)
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—
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Net cash used for financing
activities
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(57
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)
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(1,022
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)
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Effect of exchange rates on cash
and cash equivalents
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18
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(4
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)
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Net increase/(decrease) in cash
and cash equivalents
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2,187
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(2,925
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)
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Cash and cash equivalents,
beginning of period
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2,666
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4,767
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Cash and cash equivalents, end
of period
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$
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4,853
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$
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1,842
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except per share figures)
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June 30,
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December 31,
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2007
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2006
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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4,853
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$
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2,666
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Short-term investments
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1,381
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3,267
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Accounts receivable, net
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2,119
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1,804
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Inventories
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1,723
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1,676
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Deferred income taxes
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234
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266
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Prepaid expenses and other current
assets
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|
993
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|
744
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Total current assets
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11,303
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10,423
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Property, plant and equipment
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7,508
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7,321
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Less accumulated depreciation
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3,113
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2,956
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Property, net
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4,395
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4,365
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Goodwill
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210
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206
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Other intangible assets, net
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|
265
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|
286
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Other assets
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|
888
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|
|
|
791
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|
|
|
|
|
|
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Total assets
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$
|
17,061
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|
|
$
|
16,071
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LIABILITIES AND
SHAREHOLDERS’ EQUITY
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Current Liabilities:
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Accounts payable
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$
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1,334
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$
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1,254
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Short-term borrowings and current
portion of long-term debt
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|
246
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|
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|
242
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|
U.S., foreign and state income tax
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|
169
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|
|
|
323
|
|
Accrued compensation
|
|
|
531
|
|
|
|
794
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Other accrued liabilities
|
|
|
1,647
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
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Total current liabilities
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|
|
3,927
|
|
|
|
4,162
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|
Long-term Liabilities:
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|
|
|
|
|
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Long-term debt
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|
2,414
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|
|
|
2,414
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|
Deferred income tax
|
|
|
111
|
|
|
|
122
|
|
Other long-term liabilities
|
|
|
1,739
|
|
|
|
1,465
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|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
4,264
|
|
|
|
4,001
|
|
Commitments and contingent
liabilities (Note 18)
|
|
|
|
|
|
|
|
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Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Mandatory convertible preferred
shares — $1 par value; issued: 29; $50 per share
face value
|
|
|
1,438
|
|
|
|
1,438
|
|
Common shares —
authorized shares: 2,400, $.50 par value; issued: 2,044 at
June 30, 2007 and 2,034 at December 31, 2006
|
|
|
1,021
|
|
|
|
1,017
|
|
Paid-in capital
|
|
|
1,921
|
|
|
|
1,661
|
|
Retained earnings (The
June 30, 2007 amount includes a reduction of
$259 million for the cumulative effect of implementing
FIN 48. See Note 6.)
|
|
|
10,723
|
|
|
|
10,119
|
|
Accumulated other comprehensive loss
|
|
|
(773
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,330
|
|
|
|
13,363
|
|
Less treasury shares: 2007,547;
2006, 547; at cost
|
|
|
5,460
|
|
|
|
5,455
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
8,870
|
|
|
|
7,908
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders’ equity
|
|
$
|
17,061
|
|
|
$
|
16,071
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These unaudited condensed consolidated financial statements of
Schering-Plough Corporation and subsidiaries (Schering-Plough),
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 disclosures normally included in
financial statements prepared in accordance with
U.S. Generally Accepted Accounting Principles have been
condensed or omitted pursuant to such SEC rules and regulations
These statements should be read in conjunction with the
accounting policies and notes to consolidated financial
statements included in Schering-Plough’s 2006 Annual Report
on
Form 10-K.
In the opinion of Schering-Plough’s management, the
financial statements reflect all adjustments necessary for a
fair presentation of the statements of operations, cash flows
and financial position for the interim periods presented.
Impact
of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 157, “Fair Value Measurements,”
(SFAS 157) which is effective for calendar year
companies on January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. SFAS 157
codifies the definition of fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. SFAS 157 clarifies the principle that
fair value should be based on the assumptions market
participants would use when pricing the asset or liability and
establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Schering-Plough
is currently assessing the potential impacts of implementing
this standard.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans,” (SFAS 158) an
amendment of FASB Statements No. 87, 88, 106, and 132R.
Effective December 31, 2006, Schering-Plough accounted for
its retirement and other post-retirement benefit plans in
accordance with SFAS 158. SFAS 158 allows an extended
adoption date for the requirement to have the company’s
year-end date as the measurement date for all defined benefit
pension and other postretirement plans. For the plans which had
measurement dates other than year-end, Schering-Plough adopted
the year-end measurement date effective with the 2007 plan year.
The impact on the consolidated financial statements related to
this measurement date change is not material.
In November 2006, the FASB issued Emerging Issues Task Force
Issue (EITF)
No. 06-10,
“Accounting for Deferred Compensation and Postretirement
Benefits Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements,” which is effective for calendar
year companies on January 1, 2008. The Task Force concluded
that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement in accordance with
either FASB Statement No. 106 or APB Opinion No. 12
based on the substantive agreement with the employee. The Task
Force also concluded that an employer should recognize and
measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement
No. 115” (SFAS 159), which permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS 159 also includes an amendment to
SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities,” which applies to all
entities with available-for-sale and trading securities. This
statement is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
5
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
In June 2007, the FASB issued EITF Issue
No. 07-3,
“Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,” which is effective for calendar year companies
on January 1, 2008. The Task Force concluded that
nonrefundable advance payments for goods or services that will
be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
delivered or the services are performed, or when the goods or
services are no longer expected to be provided. Schering-Plough
is currently assessing the potential impacts of implementing
this standard.
|
|
2.
|
SPECIAL
AND ACQUISITION RELATED CHARGES
|
During the three and six months ended June 30, 2007,
Schering-Plough made cash payments of $56 million and
$435 million, respectively, for the settlement of the
Massachusetts Investigation. For the six months ended
June 30, 2007, Schering-Plough made cash payments of
$9 million related to the 2006 manufacturing streamlining.
At June 30, 2007, there was no remaining liability related
to the 2006 manufacturing streamlining.
During the three and six months ended June 30, 2007,
Schering-Plough incurred $11 million and $12 million,
respectively, of acquisition related charges (integration
planning) for the planned Organon BioSciences N.V. (Organon
BioSciences) acquisition.
Special charges for the three and six months ended June 30,
2006 totaled $80 million related to the changes in
Schering-Plough’s manufacturing operations, consisting of
$25 million of severance and $55 million of fixed
asset impairments.
In May 2000, Schering-Plough and Merck & Co., Inc.
(Merck) entered into two separate sets of agreements to jointly
develop and market certain products in the U.S. including
(1) two cholesterol-lowering drugs and (2) an
allergy/asthma drug. In December 2001, the cholesterol
agreements were expanded to include all countries of the world
except Japan. In general, the companies agreed that the
collaborative activities under these agreements would operate in
a virtual joint venture to the maximum degree possible by
relying on the respective infrastructures of the two companies.
These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by
each company.
The cholesterol agreements provide for Schering-Plough 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 many international markets.
Schering-Plough utilizes the equity method of accounting in
recording its share of activity from the Merck/Schering-Plough
cholesterol joint venture. As such, Schering-Plough’s net
sales do not include the sales of the joint venture. The
cholesterol joint venture agreements provide for the sharing of
operating income generated by the joint venture based upon
percentages that vary by product, sales level and country. In
the U.S. market, Schering-Plough receives a greater share
of profits on the first $300 million of annual ZETIA sales.
Above $300 million of annual ZETIA sales, Merck and
Schering-Plough (the Partners) generally share profits equally.
Schering-Plough’s allocation of the 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
6
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
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,
and in Italy, a contractual amount is included in the profit
sharing calculation that is not reimbursed. In the U.S., Canada
and Puerto Rico, this amount is equal to Partner’s
physician details multiplied by a contractual fixed fee.
Schering- Plough reports these amounts as part of equity income
from the cholesterol joint venture. These amounts do not
represent a reimbursement of specific, incremental and
identifiable costs for Schering-Plough’s detailing of the
cholesterol products in these markets. In addition, these
amounts are 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.
Under certain other conditions, as specified in the joint
venture agreements with Merck, Schering-Plough could earn
additional milestones totaling $105 million.
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 and six months ended
June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
1,264
|
|
|
$
|
973
|
|
|
$
|
2,432
|
|
|
$
|
1,767
|
|
Cost of sales
|
|
|
51
|
|
|
|
46
|
|
|
|
101
|
|
|
|
85
|
|
Income from operations
|
|
|
889
|
|
|
|
634
|
|
|
|
1,685
|
|
|
|
1,091
|
|
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 joint venture’s income
from operations for the three and six months ended June 30,
2007 was $436 million and $869 million, respectively,
and $311 million and $577 million, respectively, for
the three and six months ended June 30, 2006. In the
U.S. market, Schering-Plough receives a greater share of
income from operations on the first $300 million of annual
ZETIA sales.
The following information provides a summary of the components
of Schering-Plough’s equity income from the cholesterol
joint venture for the three and six months ended June 30,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Schering-Plough’s share of
income from operations
|
|
$
|
436
|
|
|
$
|
311
|
|
|
$
|
869
|
|
|
$
|
577
|
|
Contractual amounts for physician
details
|
|
|
61
|
|
|
|
42
|
|
|
|
123
|
|
|
|
83
|
|
Elimination of intercompany profit
and other, net
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
(14
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity income from
cholesterol joint venture
|
|
$
|
490
|
|
|
$
|
355
|
|
|
$
|
978
|
|
|
$
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Equity income from the joint venture excludes any profit arising
from transactions between Schering-Plough and the joint venture
until such time as there is an underlying profit realized by the
joint venture in a transaction with a party other than
Schering-Plough or Merck.
Due to the virtual nature of the cholesterol joint venture,
Schering-Plough incurs substantial costs, such as selling,
general and administrative costs, that are not reflected in
equity income and are borne by the overall cost structure of
Schering-Plough. These costs are reported on their respective
line items in the Statements of Condensed Consolidated
Operations. The cholesterol agreements do not provide for any
jointly owned facilities and, as such, products resulting from
the joint venture are manufactured in facilities owned by either
Schering-Plough or Merck.
The allergy/asthma agreements provide for the joint development
and marketing by the Partners 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.
Although the CLARITIN and Singulair combination tablet does not
have approval in any country, Phase III clinical
development is ongoing.
During 2007, Schering-Plough announced that it had entered into
a separate development agreement with Merck to commence
development of an ezetimibe and atorvastatin combination product.
|
|
4.
|
SHARE-BASED
COMPENSATION
|
Schering-Plough adopted SFAS No. 123 (Revised 2004),
“Share-Based Payment” (SFAS 123R), effective
January 1, 2006. SFAS 123R requires companies to
recognize compensation expense in an amount equal to the fair
value of all share-based payments granted to employees.
Schering-Plough elected the modified prospective transition
method and therefore adjustments to prior periods were not
required as a result of adopting SFAS 123R. Under this
method, the provisions of SFAS 123R apply to all awards
granted after the date of adoption and to any unrecognized
expense of awards unvested at the date of adoption based on the
grant date fair value.
During the first six months of 2007, Schering-Plough issued
performance-based deferred stock units under the 2006 Stock
Incentive Plan, which provide certain senior managers the
opportunity to earn shares of Schering-Plough common stock.
These units will only be earned if specific pre-established
levels of performance and service are achieved during a three
year performance period
(2007-2009).
For certain of these units, fair value was estimated at the
grant date using a lattice valuation model using expected
volatility assumptions and other assumptions appropriate for
determining fair value. Compensation expense for these units is
based on the fair values of the awards and is recognized over
the performance period.
8
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
During the second quarter of 2007 and 2006, Schering-Plough
issued its annual share-based compensation grants, including
stock options and deferred stock units. A summary of the
options, deferred stock units and performance-based deferred
stock units granted during the three and six months ended
June 30, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
|
Underlying
|
|
|
Grant-Date
|
|
Number of Underlying Shares in Thousands
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Stock options
|
|
|
9,792
|
|
|
$
|
8.11
|
|
|
|
9,466
|
|
|
$
|
5.22
|
|
|
|
9,974
|
|
|
$
|
8.07
|
|
|
|
9,586
|
|
|
$
|
5.22
|
|
Deferred stock units
|
|
|
5,358
|
|
|
|
31.43
|
|
|
|
6,452
|
|
|
|
19.23
|
|
|
|
5,483
|
|
|
|
31.26
|
|
|
|
6,507
|
|
|
|
19.23
|
|
Performance-based deferred stock
units
|
|
|
22
|
|
|
|
38.77
|
|
|
|
—
|
|
|
|
|
|
|
|
1,397
|
|
|
|
23.47
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Awards
|
|
|
15,172
|
|
|
|
|
|
|
|
15,918
|
|
|
|
|
|
|
|
16,854
|
|
|
|
|
|
|
|
16,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options become exercisable in equal annual installments over a
three-year period. The deferred stock units generally vest at
the end of a three year period from the date they were granted.
The performance-based deferred stock units vest at the end of a
three year performance period if specific pre-established levels
of performance and service are met.
The weighted-average assumptions used in the Black-Scholes
option pricing model for the three and six months ended
June 30, 2007 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Volatility
|
|
|
24.8
|
%
|
|
|
25.7
|
%
|
|
|
24.8
|
%
|
|
|
25.7
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
5.0
|
%
|
|
|
4.6
|
%
|
|
|
5.0
|
%
|
Expected term of options (in years)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Total compensation expense related to stock options, deferred
stock units and performance-based deferred stock units for the
three and six months ended June 30, 2007 was
$46 million and $88 million, respectively. Total
compensation expense related to stock options, deferred stock
units and performance-based deferred stock units for the three
and six months ended June 30, 2006 was $48 million and
$83 million, respectively.
At June 30, 2007, the total remaining unrecognized
compensation cost related to the performance-based deferred
stock units amounted to $36 million, which will be
amortized over the weighted-average remaining requisite service
period of 2.6 years. The remaining unrecognized
compensation cost for the performance-based deferred stock units
may vary each reporting period based on changes in the expected
achievement of performance measures.
Liability
Plans
Schering-Plough has two compensation plans that are classified
as liability plans under SFAS 123R. Schering-Plough
recognized expense of $20 million and $27 million for
these plans for the three and six months ended
June 30, 2007, respectively. For the three and six months
ended June 30, 2006,
Schering-Plough
recognized $3 million of expense and $4 million of
income, respectively.
9
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The components of other income, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Interest cost incurred
|
|
$
|
44
|
|
|
$
|
48
|
|
|
$
|
86
|
|
|
$
|
98
|
|
Less: amount capitalized on
construction
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
39
|
|
|
|
45
|
|
|
|
76
|
|
|
|
91
|
|
Interest income
|
|
|
(86
|
)
|
|
|
(69
|
)
|
|
|
(167
|
)
|
|
|
(137
|
)
|
Foreign exchange (gains)/losses
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
6
|
|
Mark-to-market loss on fair value
of foreign currency option
|
|
|
35
|
|
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
Other, net
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
(16
|
)
|
|
$
|
(19
|
)
|
|
$
|
(62
|
)
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2007, as part of an overall risk management strategy
and in consideration of various preliminary financing scenarios
associated with the planned acquisition of Organon BioSciences,
Schering-Plough purchased a Euro denominated currency option
(derivative) for U.S. $130 million. This derivative
did not qualify for hedge accounting in accordance with
SFAS No. 133, “Derivative Instruments and
Financial Hedging Activities,” as amended. The change in
fair value of this derivative is recognized each period in the
Statement of Condensed Consolidated Operations. For the three
and six month periods ended June 30, 2007, Schering-Plough
recognized losses of $35 million and $31 million,
respectively, on the mark-to-market of this foreign currency
option. The fair value of this currency option was
$99 million at June 30, 2007. This derivative is
short-term (trading) in nature and does not hedge a specific
financing or investment transaction. Accordingly, the cash
impacts of this derivative have been classified as operating
cash flows in the Statement of Condensed Consolidated Cash Flows.
During 2006 and the first six months of 2007, Schering-Plough
participated in healthcare refinancing programs adopted by local
government fiscal authorities in a major European market. During
the three and six months ended June 30, 2007,
Schering-Plough transferred $12 million and
$95 million of its trade accounts receivables owned by a
foreign subsidiary to third-party financial institutions without
recourse. There were no transfers of trade accounts receivable
during the three and six months ended June 30, 2006. The
transfer of trade accounts receivable qualified as sales of
accounts receivable under SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.” For the three and six
months ended June 30, 2007, the transfer of these trade
accounts receivable did not have a material impact on
Schering-Plough’s Statement of Condensed Consolidated
Operations. Cash flows from these transactions are included in
the change in accounts receivable in operating activities.
Schering-Plough expects to report a U.S. Net Operating Loss
(NOL) carryforward of approximately $1.54 billion on its
2006 tax return, which will be available to offset future
U.S. taxable income through 2026. This U.S. NOL
carryforward could be materially reduced after examination of
Schering-Plough’s income tax returns by the Internal
Revenue Service (IRS).
Schering-Plough implemented the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48) as of January 1,
2007. As required by FIN 48, the cumulative effect of
applying the provisions of the Interpretation have been reported
as an adjustment to Schering-Plough’s retained earnings
10
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
balance as of January 1, 2007. Schering-Plough reduced its
January 1, 2007 retained earnings by $259 million with
a corresponding increase to the appropriate tax liability
accounts as a result of the adoption of FIN 48.
Schering-Plough includes interest expense or income as well as
potential penalties on unrecognized tax benefits as a component
of income tax expense in the consolidated statement of
operations. The total amount of accrued interest related to
uncertain tax positions at January 1, 2007 was
$193 million and is included in other accrued liabilities.
Schering-Plough’s unrecognized tax benefits result
primarily from the varying application of statutes, regulations
and interpretations and include exposures on intercompany terms
of cross border arrangements and utilization of cash held by
foreign subsidiaries (investment in U.S. property) as well
as Schering-Plough’s tax matters litigation (see
Note 18). At January 1, 2007, the total amount of
unrecognized tax benefits was $924 million, which includes
reductions to deferred tax assets carrying a full valuation
allowance, potential refund claims and tax liabilities.
Management believes it is reasonably possible that a significant
portion of the total unrecognized tax benefits could decrease
over the next twelve-month period. However, the timing of the
ultimate resolution of Schering-Plough’s tax matters and
the payment and receipt of related cash is dependent on a number
of factors, many of which are outside Schering-Plough’s
control. Approximately $644 million of total unrecognized
tax benefits, if recognized, would affect the effective tax rate.
During the second quarter of 2007, the IRS completed its
examination of Schering-Plough’s
1997-2002
federal income tax returns. Schering-Plough is seeking
resolution of an issue raised during this examination through
the IRS administrative appeals process. Schering-Plough remains
open with the IRS for the 1997-2006 tax years. For most of its
other significant tax jurisdictions (both U.S. state and
foreign), Schering-Plough’s income tax returns are open for
examination for the period 2000 through 2006.
|
|
7.
|
RETIREMENT
PLANS AND OTHER POST-RETIREMENT BENEFITS
|
Schering-Plough has defined benefit pension plans covering
eligible employees in the U.S. and certain foreign
countries. In addition, Schering-Plough provides post-retirement
medical and life insurance benefits primarily to its eligible
U.S. retirees and their dependents through its
post-retirement benefit plans.
The components of net pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
32
|
|
|
$
|
30
|
|
|
$
|
63
|
|
|
$
|
59
|
|
Interest cost
|
|
|
31
|
|
|
|
28
|
|
|
|
62
|
|
|
|
56
|
|
Expected return on plan assets
|
|
|
(31
|
)
|
|
|
(28
|
)
|
|
|
(62
|
)
|
|
|
(56
|
)
|
Amortization, net
|
|
|
9
|
|
|
|
10
|
|
|
|
20
|
|
|
|
21
|
|
Termination benefits
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Settlement
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
41
|
|
|
$
|
42
|
|
|
$
|
85
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The components of other post-retirement benefits expense were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Service cost
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
9
|
|
Interest cost
|
|
|
7
|
|
|
|
6
|
|
|
|
14
|
|
|
|
13
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(7
|
)
|
Amortization, net
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other post-retirement benefits
expense
|
|
$
|
10
|
|
|
$
|
8
|
|
|
$
|
20
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2007,
Schering-Plough contributed $22 million and
$39 million, respectively, to its retirement plans.
Schering-Plough expects to contribute approximately
$140 million to its retirement plans during the remainder
of 2007.
|
|
8.
|
EARNINGS
PER COMMON SHARE
|
The following table reconciles the components of basic and
diluted earnings per common share computations (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars and shares in millions)
|
|
|
EPS Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of a change in accounting principle and preferred stock
dividends
|
|
$
|
539
|
|
|
$
|
259
|
|
|
$
|
1,103
|
|
|
$
|
608
|
|
Add: Cumulative effect of a change
in accounting principle, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
539
|
|
|
|
259
|
|
|
|
1,103
|
|
|
|
630
|
|
Less: Preferred stock dividends
|
|
|
22
|
|
|
|
22
|
|
|
|
43
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
517
|
|
|
$
|
237
|
|
|
$
|
1,060
|
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding for basic EPS
|
|
|
1,494
|
|
|
|
1,481
|
|
|
|
1,491
|
|
|
|
1,480
|
|
Dilutive effect of options and
deferred stock units
|
|
|
28
|
|
|
|
8
|
|
|
|
23
|
|
|
|
7
|
|
Dilutive effect of preferred shares
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for
diluted EPS
|
|
|
1,587
|
|
|
|
1,489
|
|
|
|
1,579
|
|
|
|
1,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share for the three and six months
ended June 30, 2007 is calculated based on net income of
$539 million and $1.103 billion, respectively, and
average diluted shares outstanding of 1.587 billion and
1.579 billion, respectively. Diluted earnings per common
share for the three and six months ended June 30, 2006 is
calculated based on net income available to common shareholders
of $237 million and $587 million, respectively, and
average diluted shares outstanding of 1.489 billion and
1.487 billion, respectively. The increase in average
diluted shares outstanding for the three and six months ended
June 30, 2007 as compared to 2006 is due primarily to the
preferred shares being dilutive for the three and six month
periods ended June 30, 2007. The preferred shares were not
dilutive (antidilutive) for the three and six months ended
June 30, 2006.
12
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
For the three months ended June 30, 2007 and 2006,
39 million and 55 million, respectively, of equivalent
common shares issuable under Schering-Plough’s stock
incentive plans were excluded from the computation of diluted
EPS because their effect would have been antidilutive. For the
six months ended June 30, 2007 and 2006, 34 million
and 51 million, respectively, of equivalent common shares
issuable under Schering-Plough’s stock incentive plans were
excluded from the computation of diluted EPS because their
effect would have been antidilutive.
For the three and six months ended June 30, 2007,
approximately 65 million common shares obtainable upon
conversion of Schering-Plough’s 6 percent mandatory
convertible preferred shares were dilutive to earnings per share
and were therefore included in the computation of diluted
earnings per share. For the three and six months ended
June 30, 2006, approximately 76 million common shares
obtainable upon conversion of the preferred shares were excluded
from the computation of diluted earnings per share because their
effect would have been antidilutive.
Comprehensive income is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Net income
|
|
$
|
539
|
|
|
$
|
259
|
|
|
$
|
1,103
|
|
|
$
|
630
|
|
Foreign currency translation
adjustment
|
|
|
39
|
|
|
|
34
|
|
|
|
58
|
|
|
|
48
|
|
Change in measurement date for
pension and other post-retirement liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Mark-to-market gain on derivative
instrument
|
|
|
35
|
|
|
|
—
|
|
|
|
35
|
|
|
|
—
|
|
Unrealized gain (loss) on
investments available for sale
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
617
|
|
|
$
|
290
|
|
|
$
|
1,202
|
|
|
$
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the three and six months ended
June 30, 2007 includes a mark-to-market gain of
$35 million on a series of three interest rate swaps.
Schering-Plough executed the swaps in anticipation of financing
the planned acquisition of Organon BioSciences. The interest
rate swaps are for three, five and ten-year periods with
Schering-Plough paying fixed rates and receiving floating rates
based on individual notional amounts of 750 million Euro
each, aggregating 2.25 billion Euro. The objective of the
swaps is to hedge the interest rate payments to be made on
future issuances of debt. As such, the swaps have been
designated as cash flow hedges of future interest rate payments,
and in accordance with SFAS 133, “Derivative
Instruments and Financial Hedging Activities,” as amended,
the effective portion of the gains and losses on the hedges are
reported in other comprehensive income and any ineffective
portion is reported in operations.
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Finished products
|
|
$
|
794
|
|
|
$
|
728
|
|
Goods in process
|
|
|
730
|
|
|
|
771
|
|
Raw materials and supplies
|
|
|
300
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
Total inventories and inventory
classified in other non-current assets
|
|
$
|
1,824
|
|
|
$
|
1,747
|
|
|
|
|
|
|
|
|
|
|
13
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Included in non-current assets at June 30, 2007 and
December 31, 2006 were $101 million and
$71 million, respectively, of inventory not expected to be
sold within one year.
|
|
11.
|
OTHER
INTANGIBLE ASSETS
|
The components of other intangible assets, net are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses
|
|
$
|
599
|
|
|
$
|
385
|
|
|
$
|
214
|
|
|
$
|
599
|
|
|
$
|
368
|
|
|
$
|
231
|
|
Trademarks and other
|
|
|
114
|
|
|
|
63
|
|
|
|
51
|
|
|
|
114
|
|
|
|
59
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
713
|
|
|
$
|
448
|
|
|
$
|
265
|
|
|
$
|
713
|
|
|
$
|
427
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These intangible assets are amortized on the straight-line
method over their respective useful lives. The residual value of
intangible assets is estimated to be zero. Amortization expense
for the three months ended June 30, 2007 and 2006 was
$11 million and $13 million, respectively, and
$21 million and $24 million for the six months ended
June 30, 2007 and 2006, respectively. Annual amortization
expenses related to these intangible assets for the years 2007
to 2012 is expected to be approximately $40 million.
On March 12, 2007, Schering-Plough announced that its Board
of Directors approved the acquisition of Organon BioSciences for
approximately 11.0 billion Euro in cash. The transaction is
subject to certain closing conditions, including regulatory
approvals, and is expected to close by the end of 2007.
Schering-Plough has a committed bridge financing facility for
the entire purchase price which it may draw upon for closing.
During the three and six months ended June 30, 2007,
Schering-Plough recognized upfront payments related to certain
licensing transactions aggregating $60 million and
$156 million, respectively. These payments have been
expensed and reported in research and development expense for
the three and six months ended June 30, 2007.
|
|
14.
|
SHORT-TERM
BORROWINGS
|
Short-term borrowings consist primarily of bank loans and
commercial paper. Short-term borrowings at June 30, 2007
and December 31, 2006 totaled $246 million and
$242 million, respectively.
Effective July 10, 2007, the Board of Directors of
Schering-Plough adopted an amended and restated certificate of
incorporation to reflect the expiration of
Schering-Plough’s existing shareholders’ rights plan.
Schering-Plough has three reportable
segments: Prescription Pharmaceuticals, Consumer
Health Care and Animal Health. The segment sales and profit data
that follow are consistent with Schering-Plough’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 over-the-counter, foot care
and sun care products, primarily in the U.S. The Animal
Health segment discovers, develops, manufactures and markets
animal health products.
14
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Net
sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Prescription Pharmaceuticals
|
|
$
|
2,520
|
|
|
$
|
2,230
|
|
|
$
|
4,918
|
|
|
$
|
4,263
|
|
Consumer Health Care
|
|
|
394
|
|
|
|
349
|
|
|
|
739
|
|
|
|
659
|
|
Animal Health
|
|
|
264
|
|
|
|
239
|
|
|
|
496
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
3,178
|
|
|
$
|
2,818
|
|
|
$
|
6,153
|
|
|
$
|
5,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Prescription Pharmaceuticals
|
|
$
|
588
|
|
|
$
|
371
|
|
|
$
|
1,139
|
|
|
$
|
720
|
|
Consumer Health Care
|
|
|
95
|
|
|
|
67
|
|
|
|
207
|
|
|
|
162
|
|
Animal Health
|
|
|
28
|
|
|
|
40
|
|
|
|
46
|
|
|
|
70
|
|
Corporate and other
|
|
|
(69
|
)
|
|
|
(133
|
)
|
|
|
(99
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
642
|
|
|
$
|
345
|
|
|
$
|
1,293
|
|
|
$
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Animal Health’s 2007 profit by segment amounts
are selling and promotional investments related to the New
HomeAgain Proactive Pet Recovery Network, which was launched in
2007.
Schering-Plough’s net sales do not include sales of VYTORIN
and ZETIA, which are marketed in the partnership with Merck, as
Schering-Plough accounts for this joint venture under the equity
method of accounting (see Note 3, “Equity Income from
Cholesterol Joint Venture,” for additional information).
Profit from the Prescription Pharmaceuticals segment includes
equity income from cholesterol joint venture.
“Corporate and other” includes interest income and
expense, foreign exchange gains and losses, headquarters
expenses, special and acquisition related charges and other
miscellaneous items. The accounting policies used for segment
reporting are the same as those described in Note 1,
“Summary of Significant Accounting Policies,” in
Schering-Plough’s 2006
Form 10-K.
Sales of products comprising 10 percent or more of
Schering-Plough’s U.S. or international sales for the
three and six months ended June 30, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASONEX
|
|
$
|
175
|
|
|
|
15
|
|
|
$
|
352
|
|
|
|
15
|
|
OTC CLARITIN
|
|
|
131
|
|
|
|
11
|
|
|
|
253
|
|
|
|
11
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REMICADE
|
|
|
394
|
|
|
|
20
|
|
|
|
767
|
|
|
|
20
|
|
Schering-Plough does not disaggregate assets on a segment basis
for internal management reporting and, therefore, such
information is not presented.
15
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
In May 2002, Schering-Plough agreed with the FDA to the entry of
a Consent Decree to resolve issues related to compliance with
current Good Manufacturing Practices (cGMP) at certain of
Schering-Plough’s facilities in New Jersey and Puerto Rico
(the Consent Decree or the Decree). In summary, the Decree
required Schering-Plough to make payments totaling
$500 million in two equal installments of
$250 million, which were paid in 2002 and 2003. In
addition, the Decree required Schering-Plough to complete
revalidation programs for manufacturing processes used to
produce bulk active pharmaceutical ingredients and finished drug
products at the covered facilities, as well as to implement a
comprehensive cGMP Work Plan for each such facility.
Schering-Plough completed all of the requirements in accordance
with the schedules required by the Decree and obtained
third-party certification of its completion of the Work Plan as
required under the Decree.
Under the terms of the Decree, provided that the FDA has not
notified Schering-Plough of a significant violation of FDA law,
regulations, or the Decree in any five-year period since the
Decree’s entry in May of 2002, Schering-Plough may petition
the court to have the Decree dissolved and the FDA will not
oppose Schering-Plough’s petition. There is no assurance
about any particular date when the Consent Decree will be lifted.
|
|
18.
|
LEGAL,
ENVIRONMENTAL AND REGULATORY MATTERS
|
Background
Schering-Plough is involved in various claims, investigations
and legal proceedings.
Schering-Plough records a liability for contingencies when it is
probable that a liability has been incurred and the amount can
be reasonably estimated. Schering-Plough adjusts its liabilities
for contingencies to reflect the current best estimate of
probable loss or minimum liability, as the case may be. Where no
best estimate is determinable, Schering-Plough records the
minimum amount within the most probable range of its liability.
Expected insurance recoveries have not been considered in
determining the amounts of recorded liabilities for
environmental related matters.
If Schering-Plough believes that a loss contingency is
reasonably possible, rather than probable, or the amount of loss
cannot be estimated, no liability is recorded. However, where a
liability is reasonably possible, disclosure of the loss
contingency is made.
Schering-Plough reviews the status of all claims, investigations
and legal proceedings on an ongoing basis, including related
insurance coverages. From time to time, Schering-Plough may
settle or otherwise resolve these matters on terms and
conditions management believes are in the best interests of
Schering-Plough. Resolution of any or all claims, investigations
and legal proceedings, individually or in the aggregate, could
have a material adverse effect on Schering-Plough’s
consolidated results of operations, cash flows or financial
condition.
Except for the matters discussed in the remainder of this Note,
the recorded liabilities for contingencies at June 30,
2007, and the related expenses incurred during the three and six
months ended June 30, 2007, were not material. In the
opinion of management, based on the advice of legal counsel, the
ultimate outcome of these matters, except matters discussed in
the remainder of this Note, will not have a material impact on
Schering-Plough’s consolidated results of operations, cash
flows or financial condition.
Patent
Matters
As described in “Patents, Trademarks, and Other
Intellectual Property Rights” in the Schering-Plough 2006
10-K,
intellectual property protection is critical to
Schering-Plough’s ability to successfully commercialize its
product innovations. The potential for litigation regarding
Schering-Plough’s intellectual property rights always
exists and may be initiated by third parties attempting to
abridge Schering-Plough’s rights, as well as
16
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
by Schering-Plough in protecting its rights. Patent matters
described below have a potential material effect on
Schering-Plough.
DR. SCHOLL’S
FREEZE AWAY
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.
Massachusetts
Investigation
On August 29, 2006, Schering-Plough announced it had
reached an agreement with the U.S. Attorney’s Office
for the District of Massachusetts to settle an investigation
involving Schering-Plough’s sales, marketing and clinical
trial practices and programs along with those of Warrick
Pharmaceuticals (Warrick), Schering-Plough’s generic
subsidiary (the Massachusetts Investigation). The investigation
was focused on the following alleged practices: providing
remuneration to managed care organizations, physicians and
others to induce the purchase of Schering-Plough pharmaceutical
products; off-label marketing of drugs; and submitting false
pharmaceutical pricing information to the government for
purposes of calculating rebates required to be paid to the
Medicaid program.
Pursuant to the agreement, Schering-Plough paid
$435 million (a criminal fine of $180 million and
$255 million to resolve civil aspects of the investigation).
AWP
Litigation and Investigations
Schering-Plough continues to respond to existing and new
litigation by certain states and private payors and
investigations by the Department of Health and Human Services,
the Department of Justice and several states into industry and
Schering-Plough practices regarding average wholesale price
(AWP). Schering-Plough is cooperating with these investigations.
These litigations and investigations relate to whether the AWP
used by pharmaceutical companies for certain drugs improperly
exceeds the average prices paid by providers and, as a
consequence, results in unlawful inflation of certain
reimbursements for drugs by state programs and private payors
that are based on AWP. The complaints allege violations of
federal and state law, including fraud, Medicaid fraud and
consumer protection violations, among other claims. In the
majority of cases, the plaintiffs are seeking class
certifications. In some cases, classes have been certified. The
outcome of these litigations and investigations could include
substantial damages, the imposition of substantial fines,
penalties and injunctive or administrative remedies.
Securities
and Class Action Litigation
Federal
Securities Litigation
Following Schering-Plough’s announcement that the FDA had
been conducting inspections of Schering-Plough’s
manufacturing facilities in New Jersey and Puerto Rico and had
issued reports citing deficiencies concerning compliance with
current Good Manufacturing Practices, several lawsuits were
filed against Schering-Plough and certain named officers. These
lawsuits allege that the defendants violated the federal
securities law by allegedly failing to disclose material
information and making material misstatements. Specifically,
they allege that Schering-Plough failed to disclose an alleged
serious risk that a new drug application for CLARINEX would be
delayed as a result of these manufacturing issues, and they
allege that Schering-Plough failed to disclose the alleged depth
and severity of its manufacturing issues. These complaints were
consolidated into one action in the U.S. District Court for
the District of New Jersey, and a consolidated amended complaint
was filed on October 11, 2001, purporting to represent a
class of shareholders who
17
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
purchased shares of Schering-Plough stock from May 9, 2000
through February 15, 2001. The complaint seeks compensatory
damages on behalf of the class. The Court certified the
shareholder class on October 10, 2003. Notice of pendency
of the class action was sent to members of that class in July
2007. Discovery is ongoing.
Shareholder
Derivative Action
During the quarter, Schering-Plough and plaintiffs agreed to
settle the derivative action pending in the U.S. District
Court for the District of New Jersey against Schering-Plough,
certain former officers, directors and former directors that
alleged a failure to disclose material information and breach of
fiduciary duty by the directors relating to the FDA inspections
and investigations into Schering-Plough’s pricing practices
and sales, marketing and clinical trials practices. The
settlement, which must be approved by the Court, acknowledges
that the pendency of the suit contributed to decisions by the
Board and management to enhance compliance and governance
processes and provides that Schering-Plough will pay the fees of
the plaintiffs’ counsel.
ERISA
Litigation
On March 31, 2003, Schering-Plough was served with a
putative class action complaint filed in the U.S. District
Court in New Jersey alleging that Schering-Plough, retired
Chairman, CEO and President Richard Jay Kogan,
Schering-Plough’s Employee Savings Plan (Plan)
administrator, several current and former directors, and certain
corporate officers (Messrs. LaRosa and Moore) 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 appealed. On August 19,
2005 the U.S. Court of Appeals for the Third Circuit
reversed the dismissal by the District Court and the matter has
been remanded back to the District Court for further proceedings.
K-DUR
Antitrust Litigation
Schering-Plough had settled patent litigation with Upsher-Smith,
Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle) relating to
generic versions of K-DUR, Schering-Plough’s long-acting
potassium chloride product supplement used by cardiac patients,
for which Lederle and Upsher Smith had filed Abbreviated New
Drug Applications. Following the commencement of an FTC
administrative proceeding alleging anti-competitive effects from
those settlements (which has been resolved in
Schering-Plough’s favor), alleged class action suits were
filed in federal and state courts on behalf of direct and
indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle. These suits claim violations of
federal and state antitrust laws, as well as other state
statutory and common law causes of action. These suits seek
unspecified damages. Discovery is ongoing.
Third-party
Payor Actions
Several purported class action litigations have been filed
following the announcement of the settlement of the
Massachusetts Investigation. Plaintiffs in these actions seek
damages on behalf of third-party payors resulting from the
allegations of off-label promotion and improper payments to
physicians that were at issue in the Massachusetts Investigation.
Tax
Matters
In October 2001, IRS auditors asserted that two interest rate
swaps that Schering-Plough entered into with an unrelated party
should be recharacterized as loans from affiliated companies,
resulting in additional tax liability for the 1991 and 1992 tax
years. In September 2004, Schering-Plough made payments to the
IRS in the amount of $194 million for income tax and
$279 million for interest. Schering-Plough filed refund
claims for the tax and interest with the IRS in December 2004.
Following the IRS’s denial of Schering-Plough’s claims
for a refund, Schering-Plough filed suit in May 2005 in the
U.S. District Court for the District of New
18
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Jersey for refund of the full amount of the tax and interest as
well as any additional interest accruing on the payments made by
Schering-Plough. This refund litigation is currently in the
discovery phase. Schering-Plough’s tax reserves were
adequate to cover the above mentioned payments.
Pending
Administrative Obligations
In connection with the settlement of an investigation with the
U.S. Department of Justice and the
U.S. Attorney’s Office for the Eastern District of
Pennsylvania, Schering-Plough entered into a five-year corporate
integrity agreement (CIA). The CIA was amended in August of 2006
in connection with the settlement of the Massachusetts
Investigation, commencing a new five-year term. As disclosed in
Note 17, “Consent Decree,” Schering-Plough is
subject to obligations under a Consent Decree with the FDA.
Failure to comply with the obligations under the CIA or the
Consent Decree could result in financial penalties.
Other
Matters
NITRO-DUR
Investigation
In August 2003, Schering-Plough 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 Schering-Plough’s classification of
NITRO-DUR for Medicare rebate purposes, and
Schering-Plough’s use of nominal pricing and bundling of
product sales. Schering-Plough 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.
French
Matter
Based on a complaint to the French competition authority from a
competitor in France and pursuant to a court order, the French
competition authority has obtained documents from a French
subsidiary of Schering-Plough relating to one of the products
that the subsidiary markets and sells. Any resolution of this
matter adverse to the French subsidiary could result in the
imposition of civil fines and injunctive or administrative
remedies. On July 17, 2007, the Juge des Libertés et
de la Détention ordered the annulment of the search and
seizure on procedural grounds. On July 19, 2007, the French
authority appealed the order to the French Supreme Court.
Environmental
Schering-Plough has responsibilities for environmental cleanup
under various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. At several Superfund sites (or
equivalent sites under state law), Schering-Plough is alleged to
be a potentially responsible party (PRP). Schering-Plough
believes that it is remote at this time that there is any
material liability in relation to such sites. Schering-Plough
estimates its obligations for cleanup costs for Superfund sites
based on information obtained from the federal Environmental
Protection Agency (EPA), an equivalent state agency
and/or
studies prepared by independent engineers, and on the probable
costs to be paid by other PRPs. Schering-Plough records a
liability for environmental assessments
and/or
cleanup when it is probable a loss has been incurred and the
amount can be reasonably estimated.
19
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Schering-Plough
Corporation:
We have reviewed the accompanying condensed consolidated balance
sheet of Schering-Plough Corporation and subsidiaries (the
“Company”) as of June 30, 2007, and the related
condensed consolidated statements of operations for the three
and six-month periods ended June 30, 2007 and 2006, and the
condensed consolidated statements of cash flows for the
six-month periods ended June 30, 2007 and 2006. These
interim financial statements are the responsibility of the
Company’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 the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of the Company as of
December 31, 2006, and the related statements of
consolidated operations, shareholders’ equity, and cash
flows for the year then ended (not presented herein); and in our
report dated February 27, 2007, we expressed an unqualified
opinion on those consolidated financial statements and included
an explanatory paragraph regarding the Company’s adoption
of Statement of Financial Accounting Standards
(“SFAS”) No. 123 (Revised 2004),
“Share-Based Payment”, and SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans”. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2006 is fairly stated, in
all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 4 to the condensed consolidated
financial statements, effective January 1, 2006, the
Company adopted SFAS No. 123 (Revised 2004),
“Share-Based Payment”, and as discussed in Note 1
to the condensed consolidated financial statements, effective
December 31, 2006, the Company adopted
SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”.
Also, as discussed in Note 6 to the condensed consolidated
financial statements, effective January 1, 2007, the
Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”.
/s/ Deloitte &
Touche LLP
Parsippany, New Jersey
July 26, 2007
20
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
EXECUTIVE
OVERVIEW
Overview
of Schering-Plough
Schering-Plough is a global science-based company that
discovers, develops and manufactures pharmaceuticals for three
customer markets - human prescription, consumer and animal
health. While most of the research and development activity is
directed toward prescription products, there are important
applications of this central research and development platform
into the consumer healthcare and animal health products.
Schering-Plough also accesses external innovation via
partnering, in-licensing and acquisition for all three customer
markets.
Strategy —
Focused on Science
Earlier this decade, Schering-Plough experienced a number of
business, regulatory, and legal challenges. In April 2003, the
Board of Directors named Fred Hassan as the new Chairman of the
Board and Chief Executive Officer of Schering-Plough
Corporation. With support from the Board, he recruited a new
senior executive team and initiated a strategic plan, with the
goal of stabilizing, repairing and turning around
Schering-Plough in order to build long-term shareholder value.
That strategic plan, the Action Agenda, is a six- to eight-year,
five-phase plan. In October 2006, Schering-Plough announced that
it entered the fourth phase of the Action Agenda —
Build the Base. During the Build the Base phase, Schering-Plough
continues to focus on its strategy of value creation across a
broad front, including:
|
|
|
|
•
|
growing the business;
|
|
|
•
|
penetrating new markets;
|
|
|
•
|
expanding the product portfolio for Schering-Plough’s three
customer markets — human pharmaceutical, consumer
healthcare and animal health; and
|
|
|
•
|
discovering and developing or acquiring new products.
|
As part of the Build the Base phase, in March 2007
Schering-Plough announced its planned acquisition of Organon
BioSciences N.V. (Organon BioSciences) for approximately
11.0 billion Euro in cash. This planned acquisition further
supports Schering-Plough’s value creation strategy.
A key component of the Action Agenda is applying science to meet
unmet medical needs. Research and development activities focus
on mechanisms to treat serious diseases. As a result, a core
strategy of Schering-Plough is to invest substantial funds in
scientific research with the goal of creating therapies and
treatments that address important unmet medical needs and also
have commercial value. Consistent with this core strategy,
Schering-Plough has been increasing its investment in research
and development. Schering-Plough’s progressing pipeline
includes drug candidates across a wide range of therapeutic
areas with more than 20 compounds now approaching or in Phase I
development. As Schering-Plough continues to develop the later
phase growth-drivers of the pipeline (e.g., thrombin receptor
antagonist, golimumab, vicriviroc and HCV protease inhibitor),
it anticipates higher spending on clinical trial activities.
As part of the Action Agenda, Schering-Plough is enhancing
infrastructure, upgrading processes and systems and
strengthening talent — both the recruitment of
talented individuals and the development of key employees. While
these efforts are being implemented on a companywide basis,
Schering-Plough is focusing especially on research and
development to support Schering-Plough’s science-based
business.
Results
and Highlights for the three and six months ended June 30,
2007:
|
|
|
|
•
|
Schering-Plough’s net sales for the three months ended
June 30, 2007 were $3.2 billion, an increase of
$360 million, or 13 percent, as compared to the three
months ended June 30, 2006. Net income available to common
shareholders for the three months ended June 30, 2007 was
$517 million, as compared to $237 million in the three
months ended June 30, 2006.
|
21
|
|
|
|
•
|
Schering-Plough’s net sales for the six months ended
June 30, 2007 were $6.2 billion, an increase of
$784 million, or 15 percent, as compared to the six
months ended June 30, 2006. Net income available to common
shareholders for the six months ended June 30, 2007 was
$1.1 billion, as compared to $587 million in the six
months ended June 30, 2006.
|
|
|
•
|
Global sales of Schering-Plough’s cholesterol franchise
products, VYTORIN and ZETIA, made by the cholesterol joint
venture with Merck & Company, Inc. (Merck) continued
to grow in 2007. Increased sales of pharmaceutical products such
as REMICADE, NASONEX, TEMODAR, CLARINEX, AVELOX and ASMANEX also
contributed favorably to Schering-Plough’s overall
operating results and cash flow.
|
|
|
•
|
Schering-Plough realized approximately $30 million and
$60 million of savings during the three and six months
ended June 30, 2007 related to the manufacturing
streamlining that took place in 2006.
|
|
|
•
|
During the three and six months ended June 30, 2007,
Schering-Plough recognized upfront payments related to certain
licensing transactions aggregating $60 million and
$156 million, respectively. These payments have been
expensed and reported in research and development.
|
Strategic
Alliances
As is typical in the pharmaceutical industry, Schering-Plough
licenses manufacturing, marketing
and/or
distribution rights to certain products to others, and also
manufactures, markets
and/or
distributes products owned by others pursuant to licensing and
joint venture arrangements. Any time that third parties are
involved, there are additional factors relating to the third
party and outside the control of Schering-Plough that may create
positive or negative impacts on Schering-Plough. VYTORIN, ZETIA
and REMICADE are subject to such arrangements and are key to
Schering-Plough’s current business and financial
performance.
In addition, any potential strategic alternatives may be
impacted by the change of control provisions in those
arrangements, which could result in VYTORIN and ZETIA being
acquired by Merck or REMICADE reverting back to Centocor. The
change in control provision relating to VYTORIN and ZETIA is
included in the contract with Merck, filed as Exhibit 10(r)
to Schering-Plough’s 2006
10-K, and
the change of control provision relating to REMICADE is
contained in the contract with Centocor, filed as
Exhibit 10(v) to Schering-Plough’s 2006
10-K.
Cholesterol
Franchise
Schering-Plough’s cholesterol franchise products, VYTORIN
and ZETIA, are managed through a joint venture between
Schering-Plough and Merck for the treatment of elevated
cholesterol levels in all markets outside of Japan. ZETIA is
Schering-Plough’s novel cholesterol absorption inhibitor.
VYTORIN is the combination of ZETIA and Zocor, Merck’s
statin medication. The financial commitment to compete in the
cholesterol reduction market is shared with Merck, and profits
from the sales of VYTORIN and ZETIA are also shared with Merck.
The operating results of the joint venture with Merck are
recorded using the equity method of accounting.
The cholesterol-reduction market is the single largest
pharmaceutical category in the world. VYTORIN and ZETIA are
competing in this market, and on a combined basis, these
products continued to grow in terms of sales and market share
during the second quarter and first six months of 2007. A
material change in the sales or market share of
Schering-Plough’s cholesterol franchise would have a
significant impact on Schering-Plough’s consolidated
results of operations and cash flows. In order to maintain and
enhance its infrastructure and business, Schering-Plough must
continue to increase profits. This increased profitability is
largely dependent upon the performance of Schering-Plough’s
cholesterol franchise.
Japan is not included in the joint venture with Merck. In the
Japanese market, Bayer Healthcare is co-marketing
Schering-Plough’s cholesterol-absorption inhibitor, ZETIA,
which was approved in Japan in April 2007 as a monotherapy and
co- administered with a statin for use in patients with
hypercholesterolemia, familial hypercholesterolemia or
homozygous sitosterolemia. ZETIA was launched in Japan during
June 2007. Schering-Plough’s sales of ZETIA in Japan under
the co-marketing agreement with Bayer Healthcare are recognized
in net sales.
22
License
Arrangements with Centocor
REMICADE is prescribed for the treatment of immune-mediated
inflammatory disorders such as rheumatoid arthritis, early
rheumatoid arthritis, psoriatic arthritis, Crohn’s disease,
ankylosing spondylitis, plaque psoriasis and ulcerative colitis.
REMICADE is Schering-Plough’s second largest marketed
pharmaceutical product line (after the cholesterol franchise).
REMICADE is licensed from and manufactured by Centocor, Inc., a
Johnson & Johnson company. Schering-Plough has the
exclusive marketing rights to this product outside of the U.S.,
Japan and certain Asian markets. During 2005, Schering-Plough
exercised an option under its contract with Centocor for license
rights to develop and commercialize golimumab, a new TNF-alpha
monoclonal antibody, in the same territories as REMICADE.
Golimumab is currently in Phase III trials. Schering-Plough
and Centocor have been collaborating in resolving the difference
in the parties’ opinions as to the expiration date of
Schering-Plough’s rights to golimumab. In August 2006,
Schering-Plough received a determination through arbitration
that its rights to market golimumab will extend to 15 years
after the first commercial sales in its territories, but
Centocor has appealed the ruling.
Manufacturing,
Sales and Marketing
Schering-Plough supports commercialized products with
manufacturing, sales and marketing efforts. Schering-Plough is
also moving forward with additional investments to enhance its
infrastructure and business, including capital expenditures for
the drug development process (where products are moved from the
drug discovery pipeline to markets), information technology
systems, and post-marketing studies and monitoring.
Schering-Plough continually reviews the business, including
manufacturing operations, to identify actions that will enhance
long-term competitiveness. However, Schering-Plough’s
manufacturing cost base is relatively fixed, and actions to
significantly reduce Schering-Plough’s manufacturing
infrastructure involve complex issues. As a result, shifting
products between manufacturing plants can take many years due to
construction and regulatory requirements, including revalidation
and registration requirements. From time to time, actions are
taken to enhance Schering-Plough’s overall manufacturing
efficiency. For example, during 2006, Schering-Plough closed a
manufacturing plant in Puerto Rico and in 2007 began the process
of closing a small manufacturing facility in the Asia Pacific
region. Schering-Plough continues to review the carrying value
of manufacturing assets for indications of impairment. Future
events and decisions may lead to additional asset impairments or
related costs.
Regulatory
and Competitive Environment
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. Regulatory
compliance is complex and costly, impacting the timing needed to
bring new drugs to market and to market drugs for new
indications.
Since 2002, Schering-Plough has been working under a
U.S. FDA Consent Decree to resolve issues involving
Schering-Plough’s compliance with current Good
Manufacturing Practices at certain of its manufacturing sites in
New Jersey and Puerto Rico. Under the terms of the Decree,
provided that the FDA has not notified Schering-Plough of a
significant violation of FDA law, regulations, or the Decree in
any five-year period since the Decree’s entry in May 2002,
Schering-Plough may petition the court to have the Decree
dissolved and FDA will not oppose Schering-Plough’s
petition. There is no assurance about any particular date when
the Consent Decree will be lifted.
Schering-Plough engages in clinical trial research in many
countries around the world. Research activities must comply with
stringent regulatory standards and are subject to inspection by
U.S., the EU, and local country regulatory authorities.
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. Clinical
trials and post-marketing surveillance of certain marketed drugs
of competitors within the industry have raised safety concerns
that have led to recalls, withdrawals or adverse labeling of
marketed products.
In the U.S., many of Schering-Plough’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,
Schering-Plough operates in an environment of government
mandated cost-containment programs. Further, the pricing, sales
and marketing programs and arrangements, and related
23
business practices of Schering-Plough and other participants in
the health care industry are under increasing scrutiny from
federal and state regulatory, investigative, prosecutorial and
administrative entities.
The market for pharmaceutical products is competitive.
Schering-Plough’s operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, loss of patent protection due to
challenges by competitors, competitive combination products, new
products of competitors, new information from clinical trials of
marketed products or post-marketing surveillance and generic
competition as Schering-Plough’s products mature.
DISCUSSION
OF OPERATING RESULTS
Net
Sales
A significant portion of net sales is made to major
pharmaceutical and health care product distributors and major
retail chains in the U.S. Consequently, net sales and
quarterly growth comparisons may be affected by fluctuations in
the buying patterns of major distributors, retail chains and
other trade buyers. These fluctuations may result from
seasonality, pricing, wholesaler buying decisions or other
factors. In addition to these fluctuations, sales of many
pharmaceutical products in the U.S. are subject to
increased pricing pressure from managed care groups,
institutions, government agencies, and other groups seeking
discounts. Schering-Plough and other pharmaceutical
manufacturers in the U.S. market are also required to
provide statutorily defined rebates to various government
agencies in order to participate in the Medicaid program, the
veterans health care program, and other government-funded
programs. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 contains a prescription drug benefit
for individuals who are eligible for Medicare. This prescription
drug benefit became effective on January 1, 2006 and is
resulting in increased use of generics and increased purchasing
power of those negotiating on behalf of Medicare recipients. In
most international markets, Schering-Plough operates in an
environment where governments may and have mandated
cost-containment programs, placed restrictions on physician
prescription levels and patient reimbursements, emphasized
greater use of generic drugs and enacted across-the-board price
cuts as methods to control costs.
Consolidated net sales for the three months ended June 30,
2007 totaled $3.2 billion, an increase of $360 million
or 13 percent compared with the same period in 2006,
including a 3 percent favorable impact from foreign
exchange. For the six months ended June 30, 2007,
consolidated net sales totaled $6.2 billion, an increase of
$784 million or 15 percent as compared to the same
period in 2006, including a 4 percent favorable impact from
foreign exchange. The impact of currency is more pronounced on
products and businesses that are concentrated in Europe.
24
Net sales for the three and six months ended June 30, 2007
and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
(Dollars in millions)
|
|
|
(%)
|
|
|
PRESCRIPTION
PHARMACEUTICALS
|
|
$
|
2,520
|
|
|
$
|
2,230
|
|
|
|
13
|
|
|
$
|
4,918
|
|
|
$
|
4,263
|
|
|
|
15
|
|
REMICADE
|
|
|
394
|
|
|
|
307
|
|
|
|
28
|
|
|
|
767
|
|
|
|
585
|
|
|
|
31
|
|
NASONEX
|
|
|
295
|
|
|
|
242
|
|
|
|
22
|
|
|
|
579
|
|
|
|
471
|
|
|
|
23
|
|
CLARINEX/AERIUS
|
|
|
250
|
|
|
|
226
|
|
|
|
11
|
|
|
|
455
|
|
|
|
386
|
|
|
|
18
|
|
PEGINTRON
|
|
|
234
|
|
|
|
226
|
|
|
|
3
|
|
|
|
451
|
|
|
|
423
|
|
|
|
7
|
|
TEMODAR
|
|
|
216
|
|
|
|
171
|
|
|
|
26
|
|
|
|
412
|
|
|
|
334
|
|
|
|
23
|
|
CLARITIN Rx
|
|
|
102
|
|
|
|
104
|
|
|
|
(1
|
)
|
|
|
214
|
|
|
|
205
|
|
|
|
5
|
|
INTEGRILIN
|
|
|
78
|
|
|
|
82
|
|
|
|
(5
|
)
|
|
|
163
|
|
|
|
162
|
|
|
|
—
|
|
AVELOX
|
|
|
75
|
|
|
|
58
|
|
|
|
30
|
|
|
|
191
|
|
|
|
138
|
|
|
|
38
|
|
REBETOL
|
|
|
74
|
|
|
|
86
|
|
|
|
(14
|
)
|
|
|
146
|
|
|
|
164
|
|
|
|
(11
|
)
|
CAELYX
|
|
|
65
|
|
|
|
53
|
|
|
|
23
|
|
|
|
127
|
|
|
|
104
|
|
|
|
22
|
|
ASMANEX
|
|
|
42
|
|
|
|
20
|
|
|
|
108
|
|
|
|
85
|
|
|
|
40
|
|
|
|
112
|
|
Other Pharmaceutical
|
|
|
695
|
|
|
|
655
|
|
|
|
6
|
|
|
|
1,328
|
|
|
|
1,251
|
|
|
|
6
|
|
CONSUMER HEALTH CARE
|
|
|
394
|
|
|
|
349
|
|
|
|
13
|
|
|
|
739
|
|
|
|
659
|
|
|
|
12
|
|
OTC
|
|
|
182
|
|
|
|
149
|
|
|
|
22
|
|
|
|
359
|
|
|
|
302
|
|
|
|
19
|
|
Sun Care
|
|
|
110
|
|
|
|
104
|
|
|
|
6
|
|
|
|
200
|
|
|
|
178
|
|
|
|
12
|
|
Foot Care
|
|
|
102
|
|
|
|
96
|
|
|
|
7
|
|
|
|
180
|
|
|
|
179
|
|
|
|
1
|
|
ANIMAL HEALTH
|
|
|
264
|
|
|
|
239
|
|
|
|
10
|
|
|
|
496
|
|
|
|
447
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED NET
SALES
|
|
$
|
3,178
|
|
|
$
|
2,818
|
|
|
|
13
|
|
|
$
|
6,153
|
|
|
$
|
5,369
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International net sales of REMICADE, for the treatment of
immune-mediated inflammatory disorders such as rheumatoid
arthritis, early rheumatoid arthritis, ankylosing spondylitis,
psoriatic arthritis, plaque psoriasis, Crohn’s disease,
pediatric Crohn’s disease and ulcerative colitis, were up
$87 million or 28 percent to $394 million in the
second quarter of 2007 and $182 million or 31 percent
to $767 million for the first six months of 2007, driven by
continued market growth and expanded use across indications.
During 2006, competitive products for some of the indications
referred to above were introduced, and additional competitive
products have been introduced in 2007.
Global net sales of NASONEX Nasal Spray, an inhaled nasal
corticoster for allergies, rose $53 million or
22 percent to $295 million in the second quarter of
2007 and $108 million or 23 percent to
$579 million for the first six months of 2007. Second
quarter U.S. sales climbed 22 percent to
$175 million and international sales climbed
22 percent to $120 million, as the product captured
greater market share in the core countries in which
Schering-Plough competes.
Global net sales of CLARINEX (marketed as AERIUS in many
countries outside the U.S.), a non sedating antihistamine for
the treatment of seasonal outdoor allergies and year-round
indoor allergies, increased 11 percent to $250 million
in the second quarter of 2007 and $69 million or
18 percent to $455 million for the first six months of
2007. Sales outside the U.S. rose 12 percent to
$144 million in the second quarter due to increased demand.
Global net sales of PEGINTRON for treating hepatitis C,
increased 3 percent to $234 million in the second
quarter of 2007 and 7 percent to $451 million for the
first six months of 2007 reflecting growth in Latin America and
Europe tempered by lower sales in the U.S. and Japan.
PEGINTRON sales in Japan will continue to reflect a reduction in
the available patient pool as well as the introduction of
competitive combination therapy.
Global net sales of TEMODAR Capsules, a treatment for certain
types of brain tumors, increased $45 million or
26 percent to $216 million in the second quarter of
2007 and $78 million or 23 percent to
$412 million for the first six months of 2007. The growth
was due primarily to increased sales in international
25
markets. The growth rate for TEMODAR is expected to moderate, as
significant penetration in U.S. and E.U. markets has
already been achieved for this product.
International net sales of prescription CLARITIN decreased
1 percent to $102 million in the second quarter of
2007 and increased 5 percent to $214 million for the
first six months of 2007, reflecting growth in Latin America and
Asia Pacific and declines in Europe.
Net sales of AVELOX, a fluoroquinolone antibiotic for the
treatment of certain respiratory and skin infections, sold
primarily in the U.S. by Schering-Plough as a result of its
license agreement with Bayer, increased $17 million or
30 percent to $75 million in the second quarter of
2007 and $53 million or 38 percent to
$191 million for the first six months of 2007 primarily as
a result of increased market share.
International net sales of CAELYX, for the treatment of ovarian
cancer, metastatic breast cancer and Kaposi’s sarcoma,
increased 23 percent to $65 million in the second
quarter of 2007 and 22 percent to $127 million for the
first six months of 2007, as a result of increased use in
treating ovarian and breast cancer.
Global net sales of ASMANEX, an orally inhaled steroid for
asthma, increased $22 million or 108 percent to
$42 million for the second quarter of 2007 and
$45 million or 112 percent to $85 million for the
first six months of 2007 primarily due to market share growth in
the U.S.
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. These products include treatments for respiratory,
cardiovascular, dermatological, infectious, oncological and
other diseases. Included in other pharmaceutical sales is sales
of Schering-Plough’s albuterol products. In 2005, the FDA
issued a Final Rule that requires all CFC albuterol products,
including Schering-Plough’s PROVENTIL CFC, be removed from
the market no later than December 31, 2008.
Schering-Plough’s transition to albuterol HFA (PROVENTIL
HFA) is well advanced. Schering-Plough no longer manufactures
the CFC product and Schering-Plough anticipates that any
remaining CFC inventories will be sold during 2007.
Schering-Plough is uncertain as to the ultimate impact on
Schering-Plough’s overall future sales of PROVENTIL
products, due to the complexities and multiple external factors
influencing this transition, including competing albuterol HFA
products.
Global net sales of Consumer Health Care products, which include
OTC, foot care and sun care products, increased $45 million
or 13 percent to $394 million in the second quarter of
2007 and $80 million or 12 percent to
$739 million for the first six months of 2007. The growth
was primarily due to higher sales of OTC CLARITIN and MIRALAX,
which was launched in February 2007 as the first Rx-to-OTC
switch in the laxative category in more than 30 years.
Sales of OTC CLARITIN increased $26 million to
$137 million in the second quarter of 2007 and increased
$42 million to $264 million for the first six months
of 2006. The OTC CLARITIN increase was driven by stronger
category performance and new chewable products. OTC CLARITIN
continues to face competition from private labels and branded
loratadine, and a competing prescription antihistamine is
expected to be launched for OTC sale in late 2007. Future sales
are difficult to predict because the consumer healthcare market
is highly competitive, with heavy advertising to consumers and
frequent competitive product introductions.
Global net sales of Animal Health products increased
$25 million or 10 percent in the second quarter of
2007 to $264 million and $49 million or
11 percent to $496 million for the first six months of
2007. The increased sales reflected solid growth
internationally, led by the poultry, companion animal,
aquaculture and swine product lines coupled with a positive
impact of foreign currency exchange rates. Schering-Plough
expects this growth rate to moderate due to increased
competition, including the introduction of generic products.
26
Costs,
Expenses and Equity Income
A summary of costs, expenses and equity income for the three and
six months ended June 30, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
%
|
|
|
(Dollars in millions)
|
|
|
%
|
|
|
Gross margin
|
|
|
69.3
|
%
|
|
|
64.4
|
%
|
|
|
4.9
|
%
|
|
|
68.9
|
%
|
|
|
64.7
|
%
|
|
|
4.2
|
%
|
Selling, general and
administrative (SG&A)
|
|
$
|
1,358
|
|
|
$
|
1,224
|
|
|
|
11.0
|
%
|
|
$
|
2,572
|
|
|
$
|
2,310
|
|
|
|
11.4
|
%
|
Research and development (R&D)
|
|
|
696
|
|
|
|
539
|
|
|
|
29.0
|
%
|
|
|
1,403
|
|
|
|
1,020
|
|
|
|
37.5
|
%
|
Other income, net
|
|
|
(16
|
)
|
|
|
(19
|
)
|
|
|
(15.8
|
)%
|
|
|
(62
|
)
|
|
|
(52
|
)
|
|
|
19.2
|
%
|
Special and acquisition related
charges
|
|
|
11
|
|
|
|
80
|
|
|
|
N/M
|
|
|
|
12
|
|
|
|
80
|
|
|
|
N/M
|
|
Equity income from cholesterol
joint venture
|
|
|
(490
|
)
|
|
|
(355
|
)
|
|
|
38.3
|
%
|
|
|
(978
|
)
|
|
|
(666
|
)
|
|
|
46.8
|
%
|
N/M — Not a meaningful percentage.
Substantially all the sales of cholesterol products are not
included in Schering-Plough’s net sales. The results of
these sales are reflected in equity income from cholesterol
joint venture. In addition, due to the virtual nature of the
joint venture, Schering-Plough incurs substantial selling,
general and administrative expenses that are not captured in
equity income but are included in Schering-Plough’s
Statements of Consolidated Operations. As a result,
Schering-Plough’s gross margin, and ratios of SG&A
expenses and R&D expenses as a percentage of net sales do
not reflect the benefit of the impact of the joint
venture’s operating results.
Gross
margin
Gross margin increased to 69.3 percent in the second
quarter of 2007 and 68.9 percent for the first six months
of 2007 as compared to 64.4 percent and 64.7 percent
for the second quarter and first six months of 2006,
respectively. Gross margin in the second quarter and first six
months of 2006 reflected the negative impact of $58 million
of costs associated with the 2006 manufacturing streamlining
activities included in cost of sales. The increase in gross
margin during 2007 was due primarily to improved product mix and
cost savings from the 2006 manufacturing streamlining
activities. Additionally, Schering-Plough is achieving greater
production efficiencies and process improvements through its
“Right First Time” initiative.
Selling,
general and administrative
Selling, general and administrative expenses (SG&A) were
$1.4 billion in the second quarter of 2007 and
$2.6 billion in the first six months of 2007, up
11 percent versus the prior year periods. The increase in
SG&A in the second quarter and first six months of 2007
primarily reflects higher promotional spending and investments
in emerging markets.
Research
and development
Research and development (R&D) spending increased
29 percent to $696 million in the second quarter of
2007 and 38 percent to $1.4 billion in the first six
months of 2007. R&D spending in the second quarter and
first six months of 2007 included $60 million and
$156 million, respectively, related to upfront payments
made for certain licensing transactions. The increase in
R&D spending versus 2006 also reflects higher spending
associated with clinical trials and related activities and
building greater breadth and capacity to support
Schering-Plough’s progressing pipeline. Generally, changes
in R&D spending reflect the timing of
Schering-Plough’s funding of both internal research efforts
and research collaborations with various partners to discover
and develop a steady flow of innovative products.
To maximize Schering-Plough’s chances for the successful
development of new products, Schering-Plough began a Development
Excellence initiative in 2005 to build talent and critical mass,
create a uniform level of
27
excellence and deliver on high-priority programs within
R&D. In 2006, Schering-Plough began a Global Clinical
Harmonization Program to maximize and globalize the quality of
clinical trial execution, pharmacovigilance and regulatory
processes.
Other
income, net
Schering-Plough had $16 million and $62 million of
other income, net, in the second quarter and first six months of
2007, respectively, as compared to $19 million and
$52 million of other income, net, in the second quarter and
first six months of 2006, respectively. Other income for the
second quarter and first six months of 2007 reflected higher
interest income due to higher interest rates on cash equivalents
and short-term investments and lower interest expense due to
lower short-term borrowing levels partially offset by losses of
$35 million and $31 million, respectively, on the
mark-to-market of a foreign currency option.
Special
and acquisition related charges
During the three and six months ended June 30, 2007,
Schering-Plough incurred $11 million and $12 million
of acquisition related charges (integration planning) for the
planned Organon BioSciences acquisition.
Special charges for the three and six months ended June 30,
2006 totaled $80 million related to the changes in
Schering-Plough’s manufacturing operations consisting of
$25 million of severance and $55 million of fixed
asset impairments.
Equity
income from cholesterol joint venture
Sales of the
Merck/Schering-Plough
Cholesterol Partnership for the three and six months ended
June 30, 2007 totaled $1.3 billion and
$2.4 billion, respectively, as compared to
$973 million and $1.8 billion for the three and six
months ended June 30, 2006. The sales growth in 2007 was
due to an increase in market share.
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,
and in Italy, a contractual amount is included in the profit
sharing calculation that is not reimbursed. In the U.S., Canada
and Puerto Rico, this amount is equal to Partner’s
physician details multiplied by a contractual fixed fee.
Schering-Plough reports these amounts as part of equity income
from the cholesterol joint venture. These amounts do not
represent a reimbursement of specific, incremental and
identifiable costs for Schering-Plough’s detailing of the
cholesterol products in these markets. In addition, these
amounts are 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 totaled
$490 million and $978 million for the three and six
months ended June 30, 2007, respectively, as compared to
$355 million and $666 million for the three and six
months ended June 30, 2006, respectively. The increase in
2007 equity income as compared to 2006 reflects continued strong
sales of VYTORIN and ZETIA. Schering-Plough’s equity income
in the first six months of the year is favorably impacted by the
proportionally greater share of income allocated from the joint
venture on the first $300 million of annual ZETIA sales.
It should be noted that Schering-Plough incurs substantial
selling, general and administrative and other costs, which are
not reflected in equity income from the cholesterol joint
venture and instead are included in the overall cost structure
of Schering-Plough.
28
Provision
for income taxes
Tax expense was $103 million and $190 million for the
three and six months ended June 30, 2007, respectively. Tax
expense was $86 million and $172 million for the three
and six months ended June 30, 2006, respectively. The
income tax expense primarily relates to foreign taxes and does
not include any benefit related to U.S. operating losses.
Schering-Plough continues to maintain a valuation allowance
against its U.S. deferred tax assets, as management cannot
conclude that it is more likely than not the benefit of the
U.S. net deferred tax assets can be realized.
Schering-Plough expects to report a U.S. Net Operating Loss
(NOL) carryforward of approximately $1.54 billion on its
2006 tax return, which will be available to offset future
U.S. taxable income through 2026. This U.S. NOL
carryforward could be materially reduced after examination of
Schering-Plough’s income tax returns by the Internal
Revenue Service (IRS). Schering-Plough expects to generate
additional U.S. operating losses and NOLs in 2007.
Differences between U.S. operating losses and NOLs are due
to differences between financial and tax reporting.
LIQUIDITY
AND FINANCIAL RESOURCES
Discussion
of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Cash flow provided by operating
activities
|
|
$
|
628
|
|
|
$
|
810
|
|
Cash flow provided by/ (used for)
investing activities
|
|
|
1,598
|
|
|
|
(2,709
|
)
|
Cash flow used for financing
activities
|
|
|
(57
|
)
|
|
|
(1,022
|
)
|
Operating
Activities
In the first six months of 2007, operating activities provided
$628 million of cash, compared with net cash provided by
operations of $810 million in the first six months of 2006.
The decrease was primarily due to payments of $435 million
for the settlement of the Massachusetts Investigation, and the
purchase of a foreign currency option for $130 million
partially offset by higher net income.
During March 2007, Schering-Plough purchased a foreign currency
option for $130 million as part of an overall risk
management strategy and in consideration of various preliminary
financing scenarios associated with the planned acquisition of
Organon BioSciences. See “Foreign Currency Exchange
Risk” included in Item 3. “Quantitative
and Qualitative Disclosures about Market Risk,” for
additional information about this foreign currency option. This
derivative is short-term (trading) in nature and does not hedge
a specific financing or investment transaction. Accordingly, the
cash impacts of this derivative have been classified as
operating cash flows in the Statement of Condensed Consolidated
Cash Flows.
Investing
Activities
Net cash provided by investing activities during the first six
months of 2007 was $1.6 billion and included a net
reduction of short-term investments of $1.9 billion
partially offset by $275 million of capital expenditures.
Net cash used for investing activities for the first six months
of 2006 was $2.7 billion due primarily to net investment
purchases of $2.5 billion.
Financing
Activities
Net cash used for financing activities was $57 million for
the first six months of 2007, compared to $1.0 billion for
the same period in 2006. Uses of cash for financing activities
for the six months ended June 30, 2007 included the payment
of dividends on common and preferred shares of $222 million
partially offset by $177 million of proceeds from stock
option exercises. Net cash used for financing activities for the
six months ended June 30, 2006 included dividends on common
and preferred shares of $205 million and the repayment of
short-term borrowings of $849 million.
29
Other
Discussion of Cash Flows
Total cash, cash equivalents and short-term investments less
total debt was approximately $3.6 billion at June 30,
2007. Cash generated from operations and available cash and
short-term investments are expected to provide Schering-Plough
with the ability to fund cash needs for the intermediate term,
not including the impact of the planned Organon BioSciences
acquisition expected to be closed later in 2007. See
“Borrowings and Credit Facilities” below for
information on the potential impact of the Organon BioSciences
transaction on Schering-Plough’s liquidity.
In July 2007, Schering-Plough made a cash payment of
$98 million for tax and interest due in connection with an
examination by the IRS of Schering-Plough’s
1997-2002
federal income tax returns.
Borrowings
and Credit Facilities
Schering-Plough has outstanding $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. As previously
disclosed, the interest rates payable on the notes are subject
to adjustment and have been adjusted as discussed below.
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 percent to
5.55 percent, and the interest rate payable on the notes
due 2033 increased from 6.5 percent to 6.75 percent.
This adjustment to the interest rate payable on the notes
increased Schering-Plough’s interest expense by
approximately $6 million annually. 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 either Moody’s or S&P below
A3 or A-, respectively, the notes are subsequently rated above
Baa1 by Moody’s and BBB+ by S&P.
Schering-Plough has a $1.5 billion credit facility with a
syndicate of banks. This facility matures in May 2009 and
requires Schering-Plough to maintain a total debt to total
capital ratio of no more than 60 percent. This credit line
is available for general corporate purposes and is considered as
support to Schering-Plough’s commercial paper borrowings.
Borrowings under this credit facility may be drawn by the
U.S. parent company or by its wholly-owned international
subsidiaries when accompanied by a parent guarantee. This
facility does not require compensating balances, however, a
nominal commitment fee is paid. As of June 30, 2007, no
borrowings were outstanding under this facility.
Schering-Plough has an 11.0 billion Euro committed bridge
financing facility to fund the planned acquisition of Organon
BioSciences. Long term, Schering-Plough intends to utilize a mix
of cash, debt of varying maturities and issuances of equity to
fund the transaction.
At June 30, 2007 and December 31, 2006, short-term
borrowings totaled $246 million and $242 million,
respectively, including outstanding commercial paper of
$154 million at June 30, 2007 and $149 million at
December 31, 2006. The short-term credit ratings discussed
below have not significantly affected Schering-Plough’s
ability to issue or rollover its outstanding commercial paper
borrowings at this time. However, Schering-Plough believes the
ability of commercial paper issuers, such as Schering-Plough,
with one or more short-term credit ratings of
P-2 from
Moody’s,
A-2 from
S&P
and/or F2
from 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 these issuers is
typically less than that of higher-rated companies.
Schering-Plough’s sizable lines of credit with commercial
banks as well as cash and short-term investments held by
U.S. and international subsidiaries serve as alternative
sources of liquidity and to support its commercial paper program.
Schering-Plough’s current unsecured senior credit ratings
and ratings review status are as follows:
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Credit Ratings
|
|
Long-Term
|
|
|
Short-Term
|
|
|
Long-Term Ratings Review Status
|
|
Moody’s Investors Service
|
|
|
Baa1
|
|
|
|
P-2
|
|
|
Under review for possible downgrade
|
Standard and Poor’s
|
|
|
A-
|
|
|
|
A-2
|
|
|
Credit Watch with negative
implications
|
Fitch Ratings
|
|
|
BBB+
|
|
|
|
F-2
|
|
|
Rating Watch for possible
downgrade
|
30
Schering-Plough’s credit ratings are currently under review
due to the financing associated with the planned Organon
BioSciences acquisition and 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 Schering-Plough’s short and long-term debt. As
discussed above, Schering-Plough believes that existing cash,
short-term investments and cash generated from operations will
allow Schering-Plough to fund its cash needs for the
intermediate term, not including the impact of the planned
Organon BioSciences acquisition.
6 Percent Mandatory
Convertible Preferred Stock
In August 2004, Schering-Plough issued 28,750,000 shares of
6 percent mandatory convertible preferred stock with a face
value of $1.44 billion. The preferred stock will
automatically convert into between 2.2451 and 2.7840 common
shares of Schering-Plough depending on the average closing price
of Schering-Plough’s common shares over a period
immediately preceding the mandatory conversion date of
September 14, 2007, as defined in the prospectus. This
preferred stock is described in more detail in Note 15,
“Shareholders’ Equity” under Item 8,
“Financial Statements and Supplementary Data,” in the
2006 10-K.
REGULATORY
AND COMPETITIVE ENVIRONMENT IN WHICH SCHERING-PLOUGH
OPERATES
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. These regulations
are described in more detail in Part I, Item I,
Business, in Schering-Plough’s 2006
10-K.
Regulatory compliance is complex, as regulatory standards
(including Good Clinical Practices, Good Laboratory Practices
and Good Manufacturing Practices) vary by jurisdiction and are
constantly evolving. Regulatory compliance is also costly.
Regulatory compliance impacts the timing needed to bring new
drugs to market and to market drugs for new indications.
Further, failure to comply with regulations can result in delays
in the approval of drugs, seizure or recall of drugs, suspension
or revocation of the authority necessary for the production and
sale of drugs, fines and other civil or criminal sanctions.
Regulatory compliance, and the cost of compliance failures, can
have a material impact on Schering-Plough’s results of
operations, its cash flows or financial condition.
Much is still unknown about the science of human health and with
every drug there are benefits and risks that must be balanced.
Societal and government pressures are constantly shifting
between the demand for innovation to meet urgent unmet medical
needs and adversity to risk. These pressures impact the
regulatory environment and the market for Schering-Plough’s
products.
Regulatory
Compliance and Pharmacovigilance
Consent
Decree
Since 2002, Schering-Plough has been working under a
U.S. FDA Consent Decree to resolve issues involving
Schering-Plough’s compliance with current Good
Manufacturing Practices (cGMP) at certain of its manufacturing
sites in New Jersey and Puerto Rico. See details in
Note 17, “Consent Decree” under Item 1,
“Financial Statements.”
Regulatory
Inspections
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. The
requirements differ from jurisdiction to jurisdiction, but all
include requirements for reporting adverse events that occur
while a patient is using a particular drug, in order to alert
the drug’s manufacturer and the governmental agency to
potential problems.
During 2003, pharmacovigilance inspections by officials of the
British and French medicines agencies conducted at the request
of the European Medicines Agency (EMEA) cited serious
deficiencies in reporting processes. Schering-Plough has
continued to work on its long-term action plan to rectify the
deficiencies and has provided regular updates to the EMEA.
During the fourth quarter 2005, local UK and EMEA regulatory
authorities conducted a follow up inspection to assess
Schering-Plough’s implementation of its action plan. In the
first quarter of 2006, these authorities also inspected the
U.S.-based
components of Schering-Plough’s pharmacovigilance system.
The
31
inspectors acknowledged that progress had been made since 2003,
but also continued to note significant concerns with the quality
systems supporting Schering-Plough’s pharmacovigilance
processes. Similarly, in a follow up inspection of
Schering-Plough’s clinical trial practices in the UK,
inspectors identified issues with respect to
Schering-Plough’s management of clinical trials and related
pharmacovigilance practices.
Schering-Plough intends to continue upgrading skills, processes
and systems in clinical practices and pharmacovigilance.
Schering-Plough remains committed to accomplish this work and to
invest significant resources in this area. Further, in February
2006, Schering-Plough began the Global Clinical Harmonization
Program for building clinical excellence (in trial design,
execution and tracking), which will strengthen
Schering-Plough’s scientific and compliance rigor on a
global basis.
Schering-Plough does not know what action, if any, the EMEA or
national authorities will take in response to the inspections.
Possible actions include further inspections, demands for
improvements in reporting systems, criminal sanctions against
Schering-Plough
and/or
responsible individuals and changes in the conditions of
marketing authorizations for Schering-Plough’s products.
Regulatory
Compliance and Post-Marketing Surveillance
Schering-Plough engages in clinical trial research in many
countries around the world. These clinical trial research
activities must comply with stringent regulatory standards and
are subject to inspection by U.S., EU and local country
regulatory authorities. Failure to comply with current Good
Clinical Practices or other applicable laws or regulations can
result in delays in approval of clinical trials, suspension of
ongoing clinical trials, delays in approval of marketing
authorizations, criminal sanctions against Schering-Plough
and/or
responsible individuals, and changes in the conditions of
marketing authorizations for Schering-Plough’s products.
Clinical trials and post-marketing surveillance of certain
marketed drugs of competitors within the industry have raised
safety concerns that have led to recalls, withdrawals or adverse
labeling of marketed products. In addition, these situations
have raised concerns among some prescribers and patients
relating to the safety and efficacy of pharmaceutical products
in general. Schering-Plough’s 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.
Following this wave of recent product withdrawals by other
companies and other significant safety issues, health
authorities such as the FDA, the EMEA and the PMDA have
continued to increase their focus on safety when assessing the
benefit/risk balance of drugs. Some health authorities appear to
have become more cautious when making decisions about
approvability of new products or indications and are
re-reviewing select products which are already marketed, adding
further to the uncertainties in the regulatory processes. There
is also greater regulatory scrutiny, especially in the U.S., on
advertising and promotion and in particular direct-to-consumer
advertising.
Similarly, major health authorities, including the FDA, EMEA and
PMDA, have also increased collaboration amongst themselves,
especially with regard to the evaluation of safety and
benefit/risk information. Media attention has also increased. In
the current environment, a health authority regulatory action in
one market, such as a safety labeling change, may have
regulatory, prescribing and marketing implications in other
markets to an extent not previously seen.
Some health authorities, such as the PMDA in Japan, have
publicly acknowledged a significant backlog in workload due to
resource constraints within their agency. This backlog has
caused long regulatory review times for new indications and
products and has added to the uncertainty in predicting approval
timelines in these markets. While the PMDA has committed to
correcting the backlog and has made some progress over the last
year, it is expected to continue for the foreseeable future.
These and other uncertainties inherent in government regulatory
approval processes, including, among other things, delays in
approval of new products, formulations or indications, may also
affect Schering-Plough’s operations. The effect of
regulatory approval processes on operations cannot be predicted.
Schering-Plough has nevertheless achieved a significant number
of important regulatory approvals since 2004, including
approvals for VYTORIN, CLARINEX D-24, CLARINEX REDITABS,
CLARINEX D-12 and
32
new indications for TEMODAR and NASONEX. Other significant
approvals since 2004 include ASMANEX DPI (Dry Powder for
Inhalation) in the U.S.; NOXAFIL in the U.S., the EU and
Australia; PEGINTRON and ZETIA in Japan, and new indications for
REMICADE. Schering-Plough also has a number of significant
regulatory submissions filed in major markets awaiting approval.
Pricing
Pressures
As described more specifically in Note 18, “Legal,
Environmental and Regulatory Matters,” under Item 1,
“Financial Statements,” the pricing, sales and
marketing programs and arrangements, and related business
practices of Schering-Plough and other participants in the
health care industry are under increasing scrutiny from federal
and state regulatory, investigative, prosecutorial and
administrative entities. These entities include the Department
of Justice and its U.S. 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
Schering-Plough to substantial fines, penalties and injunctive
or administrative remedies, including exclusion from government
reimbursement programs. Schering-Plough also cannot predict
whether any investigations will affect its marketing practices
or sales. Any such result could have a material adverse impact
on Schering-Plough’s results of operations, cash flows,
financial condition, or its business.
In the U.S., many of Schering-Plough’s pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
groups seek price discounts. In the U.S. market,
Schering-Plough and other pharmaceutical manufacturers are
required to provide statutorily defined rebates to various
government agencies in order to participate in Medicaid, the
veterans health care program and other government-funded
programs. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 contains a prescription drug benefit
for individuals who are eligible for Medicare. This prescription
drug benefit became effective on January 1, 2006 and is
resulting in increased use of generics and increased purchasing
power of those negotiating on behalf of Medicare recipients.
In most international markets, Schering-Plough operates in an
environment of government mandated cost-containment programs.
Several governments have placed restrictions on physician
prescription levels and patient reimbursements; emphasized
greater use of generic drugs; and enacted across-the-board price
cuts as methods to control costs.
Since Schering-Plough is unable to predict the final form and
timing of any future domestic or international governmental or
other health care initiatives, including the passage of laws
permitting the importation of pharmaceuticals into the U.S.,
their effect on operations and cash flows cannot be reasonably
estimated. Similarly, the effect on operations and cash flows of
decisions of government entities, managed care groups and other
groups concerning formularies and pharmaceutical reimbursement
policies cannot be reasonably estimated.
Competition
The market for pharmaceutical products is competitive.
Schering-Plough’s operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, competitive combination
products, new products of competitors, new information from
clinical trials of marketed products or post-marketing
surveillance and generic competition as Schering-Plough’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.
OUTLOOK
Schering-Plough continues to anticipate that sales from VYTORIN
and ZETIA will grow in 2007. However, there is growing
competition for Schering-Plough’s key brands.
33
Schering-Plough expects its gross margin for the full year of
2007 to improve versus 2006, primarily as a result of annual
cost savings of approximately $100 million expected from
its manufacturing streamlining actions in 2006 and improved
product mix. However, gross margin in the second half of 2007 is
expected to be slightly lower than the first half due to the
seasonality of some respiratory products.
As Schering-Plough’s pipeline continues to progress, it
expects that the number of patients in Schering-Plough’s
clinical trials will continue to increase in the remainder of
2007. As a result, Schering-Plough expects research and
development expenses, excluding any upfront payments, to
continue to grow faster than adjusted net sales in 2007.
Adjusted net sales is defined as net sales plus an assumed
50 percent of global cholesterol joint venture net sales.
Schering-Plough expects its full year 2007 tax rate to be in the
mid-teens on a GAAP basis, but vary between quarters depending
on the product and country mix of earnings.
In advance of the planned acquisition of Organon BioSciences,
Schering-Plough will incur integration planning related costs
and potential foreign currency related activity associated with
the purchase. The transaction is anticipated to be accretive to
Schering-Plough’s earnings per share in the first full
year, excluding purchase-accounting adjustments and
acquisition-related costs. Schering-Plough expects to achieve
annual synergies of $500 million, however it is expected
that it will take three years from the closing to reach this
level of synergies.
The risks set forth in Part II, Item 1A, “Risk
Factors,” in this
10-Q could
cause actual results to differ from the expectation provided in
this section.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Refer to “Management’s Discussion and Analysis of
Operations and Financial Condition” in
Schering-Plough’s 2006
10-K for
disclosures regarding Schering-Plough’s critical accounting
policies and estimates.
Rebates,
Discounts and Returns
Schering-Plough’s rebate accruals for Federal and State
governmental programs at June 30, 2007 and 2006 were
$122 million and $299 million, respectively.
Commercial discounts, returns and other rebate accruals at
June 30, 2007 and 2006 were $377 million and
$304 million, respectively. 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.
34
The following summarizes the activity in the accounts related to
accrued rebates, sales returns and discounts for the six months
ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Accrued Rebates/Returns/Discounts,
Beginning of Period
|
|
$
|
486
|
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
Provision for Rebates
|
|
|
298
|
|
|
|
260
|
|
Adjustment to prior-year estimates
|
|
|
(17
|
)
|
|
|
—
|
|
Payments
|
|
|
(257
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Provision for Returns
|
|
|
94
|
|
|
|
99
|
|
Adjustment to prior-year estimates
|
|
|
(23
|
)
|
|
|
—
|
|
Returns
|
|
|
(57
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Provision for Discounts
|
|
|
349
|
|
|
|
265
|
|
Adjustment to prior-year estimates
|
|
|
—
|
|
|
|
—
|
|
Discounts granted
|
|
|
(374
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Accrued Rebates/Returns/Discounts,
End of Period
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$
|
499
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$
|
603
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In formulating and recording the above accruals, management
utilizes assumptions and estimates that include historical
experience, wholesaler data, the projection of market
conditions, the estimated lag time between sale and payment of a
rebate, utilization estimates, and forecasted product demand
amounts.
As part of its review of these accruals, management performs a
sensitivity analysis that considers differing assumptions, which
are most subject to judgment in its rebate accrual calculation.
Adjustments to prior year estimates for rebate accruals are
expected to be $20 million to $30 million in 2007.
Provision
for Income Taxes
Schering-Plough implemented the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48) as of January 1, 2007. As
required by FIN 48, the cumulative effect of applying the
provisions of the Interpretation have been reported as an
adjustment to Schering-Plough’s retained earnings balance
as of January 1, 2007. Schering-Plough reduced its
January 1, 2007 retained earnings by $259 million with
a corresponding increase to the appropriate tax liability
accounts as a result of the adoption of FIN 48.
Schering-Plough includes interest expense or income as well as
potential penalties on unrecognized tax benefits as a component
of income tax expense in the consolidated statement of
operations. The total amount of accrued interest related to
uncertain tax positions at January 1, 2007 was
$193 million and is included in other accrued liabilities.
Schering-Plough’s unrecognized tax benefits result
primarily from the varying application of statutes, regulations
and interpretations and include exposures on intercompany terms
of cross border arrangements and utilization of cash held by
foreign subsidiaries (investment in U.S. property) as well
as Schering-Plough’s tax matters litigation (see
Note 18). At January 1, 2007, the total amount of
unrecognized tax benefits was $924 million which includes
reductions to deferred tax assets carrying a full valuation
allowance, potential refund claims and tax liabilities.
Management believes it is reasonably possible that a significant
portion of the total unrecognized tax benefits could decrease
over the next twelve-month period. However, the timing of the
ultimate resolution of Schering-Plough’s tax matters and
the payment and receipt of related cash is dependent on a number
of factors, many of which are outside Schering-Plough’s
control. Approximately $644 million of total unrecognized
tax benefits, if recognized, would affect the effective tax rate.
35
During the second quarter of 2007, the IRS completed its
examination of Schering-Plough’s
1997-2002
federal income tax returns. Schering-Plough is seeking
resolution of an issue raised during this examination through
the IRS administrative appeals process. Schering-Plough remains
open with the IRS for the 1997-2006 tax years. For most of its
other significant tax jurisdictions (both U.S. state and
foreign), Schering-Plough’s income tax returns are open for
examination for the period 2000 through 2006.
DISCLOSURE
NOTICE
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 Schering-Plough may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements do not relate strictly to
historical or current facts and are based on current
expectations or forecasts of future events. You can identify
these forward-looking statements by their use of words such as
“anticipate,” “believe,” “could,”
“estimate,” “expect,” “forecast,”
“project,” “intend,” “plan,”
“potential,” “will,” and other similar words
and terms. In particular, forward-looking statements include
statements relating to future actions, ability to access the
capital markets, prospective products or product approvals,
timing and conditions of regulatory approvals, patent and other
intellectual property protection, future performance or results
of current and anticipated products, sales efforts, research and
development programs and anticipated spending, estimates of
rebates, discounts and returns, expenses and programs to reduce
expenses, the outcome of contingencies such as litigation and
investigations, growth strategy, expected synergies and
financial results.
Any or all forward-looking statements here or in other
publications may turn out to be wrong. There are no guarantees
about Schering-Plough’s financial and operational
performance or the performance of Schering-Plough’s stock.
Schering-Plough does not assume the obligation to update any
forward-looking statement. 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,
Schering-Plough refers you to Part II, Item 1A,
“Risk Factors,” in this
10-Q for
identification of important factors with respect to risks and
uncertainties.
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Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Schering-Plough is exposed to market risk primarily from changes
in foreign currency exchange rates and, to a lesser extent, from
interest rates and equity prices. The impact of currency is more
pronounced on products and businesses that are concentrated in
Europe.
Foreign
Currency Exchange Risk
In March 2007, as part of an overall risk management strategy
and in consideration of various preliminary financing scenarios
associated with the planned acquisition of Organon BioSciences,
Schering-Plough entered into a foreign currency option contract
to mitigate its exposure in the event there was a significant
strengthening in the Euro as compared to the U.S. Dollar.
At June 30, 2007 Schering-Plough had an option to purchase
7.7 billion Euro at $1.38 per Euro expiring on
December 31, 2007. At June 30, 2007 a 5 percent
decrease in value of the U.S. dollar as compared to the
Euro would have resulted in an unrealized gain of approximately
$312 million and a five percent strengthening of the
U.S. dollar as compared to the Euro would have resulted in
an unrealized loss of approximately $85 million.
Interest
Rate Risk
In consideration of Schering-Plough’s plans to finance the
planned acquisition of Organon BioSciences, Schering-Plough
executed three separate interest rate swaps. The interest rate
swaps are for three, five and ten-year periods with
Schering-Plough paying fixed rates and receiving floating rates
based on individual notional amounts of 750 million Euro
each, aggregating 2.25 billion Euro. The objective of the
swaps is to hedge the interest rate payments to be made on
future issuances of debt. As such, the swaps have been
designated as cash flow hedges of future interest payments, and
in accordance with SFAS 133, “Derivative Instruments
and Financial Hedging Activities,” as amended, the
effective portion of the gains or losses on the hedges are
reported in other comprehensive income and any ineffective
portion is reported in operations. At June 30,
36
2007 a 25 basis point increase in interest rates would have
resulted in an unrealized gain to other comprehensive income of
approximately $36 million and a 25 basis point
decrease in interest rates would have resulted in an unrealized
loss of approximately $37 million to other comprehensive
income.
Refer to “Management’s Discussion and Analysis”
in Schering-Plough’s 2006
10-K for
further discussion of market risks.
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Item 4.
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Controls
and Procedures
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Management, including the chief executive officer and the chief
financial officer, has evaluated Schering-Plough’s
disclosure controls and procedures as of the end of the
quarterly period covered by this
10-Q and has
concluded that Schering-Plough’s disclosure controls and
procedures are effective. They also concluded that there were no
changes in Schering-Plough’s internal control over
financial reporting that occurred during Schering-Plough’s
most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, Schering-Plough’s
internal control over financial reporting.
As part of the changing business environment in which
Schering-Plough operates, Schering-Plough is replacing and
upgrading a number of information systems. This process will be
ongoing for several years. In connection with these changes, as
part of Schering-Plough’s management of both internal
control over financial reporting and disclosure controls and
procedures, management has concluded that the new systems are at
least as effective with respect to those controls as the prior
systems. An example of a change in information systems that
occurred during the first six months of 2007 is the replacement
of Schering-Plough’s system for consolidation and reporting.
PART II.
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
|
Material pending legal proceedings involving Schering-Plough are
described in Item 3, “Legal Proceedings,” of the
2006 10-K. The following discussion is limited to material
developments to previously reported proceedings, which
Schering-Plough, or any of its subsidiaries, became a party
during the quarter ended June 30, 2007, or subsequent thereto,
but before the filing of this report. There were no new legal
proceedings. This section should be read in conjunction with
Part I, Item 3, “Legal Proceedings” in the 2006 10-K.
During the quarter, Schering-Plough and plaintiffs agreed to
settle the derivative action pending in the U.S. District
Court for the District of New Jersey against Schering-Plough,
certain former officers, directors and former directors that
alleged a failure to disclose material information and breach of
fiduciary duty by the directors relating to the FDA inspections
and investigations into Schering-Plough’s pricing practices
and sales, marketing and clinical trials practices. The
settlement, which must be approved by the Court, acknowledges
that the pendency of the suit contributed to decisions by the
Board and Management to enhance compliance and governance
processes and provides that Schering-Plough will pay the fees of
the plaintiffs’ counsel.
Patent
Challenges under the Hatch-Waxman Act
While Schering-Plough does not currently believe that any
pending Paragraph IV certification proceeding under the
Hatch-Waxman Act is material, because there is frequently media
and investor interest in such proceedings, Schering-Plough is
listing the pending proceedings each quarter. Currently, the
following are pending:
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On July 20, 2007, Schering-Plough and its licensor, Cancer
Research Technologies, Limited, brought a patent infringement
action against companies seeking approval of a generic version
of certain strengths of Temodar capsules;
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•
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in March 2007, Schering-Plough and an entity jointly owned with
Merck filed a patent infringement action against companies
seeking approval of a generic version of ZETIA; and
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37
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•
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in September 2006, Schering-Plough filed patent infringement
actions against companies seeking approval of generic versions
of Clarinex Tablets, Clarinex Reditabs and Clarinex D12.
|
Schering-Plough’s future operating results and cash flows
may differ materially from the results described in this
10-Q due to
risks and uncertainties related to Schering-Plough’s
business, including those discussed below. In addition, these
factors represent risks and uncertainties that could cause
actual results to differ materially from those implied by
forward-looking statements contained in this report.
Key
Schering-Plough products generate a significant amount of
Schering-Plough’s profits and cash flows, and any events
that adversely affect the market for its leading products could
have a material and negative impact on results of operations and
cash flows.
Schering-Plough’s ability to generate profits and operating
cash flow is largely dependent upon the continued profitability
of Schering-Plough’s cholesterol franchise, consisting of
VYTORIN and ZETIA. In addition, other key products such as
REMICADE, NASONEX, PEGINTRON, TEMODAR, CLARINEX, and AVELOX
account for a material portion of revenues. As a result of
Schering-Plough’s dependence on key products, any events
that adversely affect the markets for these products could have
a significant impact on results of operations. These events
include loss of patent protection, increased costs associated
with manufacturing, OTC availability of Schering-Plough’s
product or a competitive product, the discovery of previously
unknown side effects, increased competition from the
introduction of new, more effective treatments and
discontinuation or removal from the market of the product for
any reason.
For example, the profitability of Schering-Plough’s
cholesterol franchise may be adversely affected by the
introduction of multiple generic forms in December 2006 of two
competing cholesterol products that lost patent protection
earlier in 2006.
There is
a high risk that funds invested in research will not generate
financial returns because the development of novel drugs
requires significant expenditures with a low probability of
success.
There is a high rate of failure inherent in the research to
develop new drugs to treat diseases. As a result, there is a
high risk that funds invested in research programs will not
generate financial returns. This risk profile is compounded by
the fact that this research has a long investment cycle. To
bring a pharmaceutical compound from the discovery phase to
market may take a decade or more and failure can occur at any
point in the process, including later in the process after
significant funds have been invested.
Schering-Plough’s
success is dependent on the development and marketing of new
products, and uncertainties in the regulatory and approval
process may result in the failure of products to reach the
market.
Products that appear promising in development may fail to reach
market for numerous reasons, including the following:
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findings of ineffectiveness, superior safety or efficacy of
competing products, or harmful side effects in clinical or
pre-clinical testing;
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•
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failure to receive the necessary regulatory approvals, including
delays in the approval of new products and new indications;
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•
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lack of economic feasibility due to manufacturing costs or other
factors; and
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•
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preclusion from commercialization by the proprietary rights of
others.
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38
Intellectual
property protection for innovation is an important contributor
to Schering-Plough’s profitability. Generic forms of
Schering-Plough’s products may be introduced to the market
as a result of the expiration of patents covering
Schering-Plough’s products, a successful challenge to
Schering-Plough’s patents, or the
at-risk
launch of a generic version of a Schering-Plough product, which
may have a material and negative effect on results of
operations.
Intellectual property protection is critical to
Schering-Plough’s ability to successfully commercialize its
products. Upon the expiration or the successful challenge of
Schering-Plough’s patents covering a product, competitors
may introduce lower-priced generic versions of that product,
which may include Schering-Plough’s well-established
products. In recent years, some generic manufacturers have
launched generic versions of products before the ultimate
resolution of patent litigation (commonly known as
“at-risk” product launches). Such generic competition
could result in the loss of a significant portion of sales or
downward pressures on the prices at which Schering-Plough offers
formerly patented products, particularly in the
U.S. Patents and patent applications relating to
Schering-Plough’s significant products are of material
importance to Schering-Plough.
Additionally, certain foreign governments have indicated that
compulsory licenses to patents may be granted in the case of
national emergencies, which could diminish or eliminate sales
and profits from those regions and negatively affect
Schering-Plough’s results of operations. Further, recent
court decisions relating to other companies’ patents in the
U.S., as well as the discussion of regulatory initiatives may
result in further erosion of intellectual property protection.
Patent
disputes can be costly to prosecute and defend and adverse
judgments could result in damage awards, increased royalties and
other similar payments and decreased sales.
Patent positions can be highly uncertain and patent disputes in
the pharmaceutical industry are not unusual. An adverse result
in a patent dispute involving Schering-Plough’s patents, or
the patents of its collaborators, may lead to a loss of market
exclusivity and render such patents invalid. An adverse result
in a patent dispute involving patents held by a third party may
preclude the commercialization of Schering-Plough’s
products, force Schering-Plough to obtain licenses in order to
continue manufacturing or marketing the affected products, which
licenses may not be available on commercially reasonable terms,
negatively affect sales of existing products or result in
injunctive relief and payment of financial remedies.
The potential for litigation regarding Schering-Plough’s
intellectual property rights always exists and may be initiated
by third parties attempting to abridge Schering-Plough’s
rights, as well as by Schering-Plough in protecting its rights.
A generic manufacturer may file an Abbreviated New Drug
Application seeking approval after the expiration of the
applicable data exclusivity and alleging that one or more of the
patents listed in the innovator’s New Drug Application are
invalid or not infringed. This allegation is commonly known as a
Paragraph IV certification. The innovator then has the
ability to file suit against the generic manufacturer to enforce
its patents. In recent years, generic manufacturers have used
Paragraph IV certifications extensively to challenge
patents on a wide array of innovative pharmaceuticals, and it is
anticipated that this trend will continue. Even if
Schering-Plough is ultimately successful in a particular
dispute, Schering-Plough may incur substantial costs in
defending its patents and other intellectual property rights.
See “Patent Challenges Under the Hatch-Waxman Act” in
Part II, Item 1, “Legal Proceedings” in this
10-Q, for a
list of current Paragraph IV certifications for
Schering-Plough products.
Multi-jurisdictional
regulations, including those establishing Schering-Plough’s
ability to price products, may negatively affect
Schering-Plough’s sales and profit margins.
Schering-Plough faces increased pricing pressure globally from
managed care organizations, institutions and government agencies
and programs that could negatively affect Schering-Plough’s
sales and profit margins. For example, in the U.S., the Medicare
Prescription Drug Improvement and Modernization Act of 2003
contains a prescription drug benefit for individuals who are
eligible for Medicare. The prescription drug benefit became
effective on January 1, 2006 and is resulting in increased
use of generics and increased purchasing power of those
negotiating on behalf of Medicare recipients.
In addition to legislation concerning price controls, other
trends that could affect Schering-Plough’s business include
legislative or regulatory action relating to pharmaceutical
pricing and reimbursement, health
39
care reform initiatives and drug importation legislation,
involuntary approval of medicines for OTC use, consolidation
among customers and trends toward managed care and health care
costs containment. Increasingly, market approval or
reimbursement of products may be impacted by health technology
assessments, which seek to condition approval or reimbursement
on an assessment of the impact of health technologies on the
healthcare system.
In the U.S., as a result of the government’s efforts to
reduce Medicaid expenses, managed care organizations continue to
grow in influence, and Schering-Plough faces increased pricing
pressure as managed care organizations continue to seek price
discounts with respect to Schering-Plough’s products.
In other countries, many governmental agencies strictly control,
directly or indirectly, the prices at which pharmaceutical
products are sold. In these markets, cost control methods
including restrictions on physician prescription levels and
patient reimbursements; emphasis on greater use of generic
drugs; and across-the-board price cuts may decrease revenues
internationally.
Government
investigations against Schering-Plough, could lead to the
commencement of civil and/or criminal proceedings involving the
imposition of substantial fines, penalties and injunctive or
administrative remedies, including exclusion from government
reimbursement programs, which could give rise to other
investigations or litigation by government entities or private
parties.
Schering-Plough cannot predict whether future or pending
investigations to which it may become subject, would lead to a
judgment or settlement involving a significant monetary award or
restrictions on its operations.
The pricing, sales and marketing programs and arrangements, and
related business practices of Schering-Plough and other
participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities. These entities
include the Department of Justice and its
U.S. Attorney’s Offices, the Office of Inspector
General of the Department of Health and Human Services, the FDA,
the Federal Trade Commission and various state Attorneys General
offices. Many of the health care laws under which certain of
these governmental entities operate, including the federal and
state anti-kickback statutes and statutory and common law false
claims laws, have been construed broadly by the courts and
permit the government entities to exercise significant
discretion. In the event that any of those governmental entities
believes that wrongdoing has occurred, one or more of them could
institute civil or criminal proceedings which, if resolved
unfavorably, could subject Schering-Plough to substantial fines,
penalties and injunctive or administrative remedies, including
exclusion from government reimbursement programs. In addition,
an adverse outcome to a government investigation could prompt
other government entities to commence investigations of
Schering-Plough or cause those entities or private parties to
bring civil claims against it. Schering-Plough also cannot
predict whether any investigations will affect its marketing
practices or sales. Any such result could have a material
adverse impact on Schering-Plough’s results of operations,
cash flows, financial condition, or its business.
Regardless of the merits or outcomes of any investigations,
government investigations are costly, divert management’s
attention from Schering-Plough’s business and may result in
substantial damage to Schering-Plough’s reputation.
There are
other legal matters in which adverse outcomes could negatively
affect Schering-Plough’s business.
Unfavorable outcomes in other pending litigation matters, or in
future litigation, including litigation concerning product
pricing, securities law violations, product liability claims,
ERISA matters, patent and intellectual property disputes, and
antitrust matters could preclude the commercialization of
products, negatively affect the profitability of existing
products and could subject Schering-Plough to substantial fines,
penalties and injunctive or administrative remedies, including
exclusion from government reimbursement programs. Any such
result could materially and adversely affect
Schering-Plough’s results of operations, cash flows,
financial condition, or its business.
Please refer to “Legal Proceedings” in Item 3 in
Schering-Plough’s 2006
10-K and
Part II, Item 1 in this
10-Q for
descriptions of significant pending litigation.
40
Schering-Plough
is subject to governmental regulations, and the failure to
comply with, as well as the costs of compliance of, these
regulations may adversely affect Schering-Plough’s
financial position and results of operations.
Schering-Plough’s manufacturing facilities and
clinical/research practices must meet stringent regulatory
standards and are subject to regular inspections. The cost of
regulatory compliance, including that associated with compliance
failures, can materially affect Schering-Plough’s financial
position, cash flows and results of operations. Failure to
comply with regulations, which include pharmacovigilance
reporting requirements and standards relating to clinical,
laboratory and manufacturing practices, can result in delays in
the approval of drugs, seizure or recalls of drugs, suspension
or revocation of the authority necessary for the production and
sale of drugs, fines and other civil or criminal sanctions.
For example, in May 2002, Schering-Plough agreed with the FDA to
the entry of a Consent Decree to resolve issues related to
compliance with current Good Manufacturing Practices at certain
of Schering-Plough’s facilities in New Jersey and Puerto
Rico. The Consent Decree work placed significant additional
controls on production and release of products from these sites,
which increased costs and slowed production and led to a
reduction in the number of products produced at the sites.
Further, Schering-Plough’s research and development
operations were negatively impacted by the Consent Decree
because these operations share common facilities with the
manufacturing operations.
Schering-Plough also is subject to other regulations, including
environmental, health and safety, and labor regulations.
Developments
following regulatory approval may decrease demand for
Schering-Plough’s products.
Even after a product reaches market, certain developments
following regulatory approval, including results in
post-marketing Phase IV trials, may decrease demand for
Schering-Plough’s products, including the following:
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the re-review of products that are already marketed;
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new scientific information and evolution of scientific theories;
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the recall or loss of marketing approval of products that are
already marketed;
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uncertainties concerning safety labeling changes; and
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greater scrutiny in advertising and promotion.
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In the past several years, clinical trials and post-marketing
surveillance of certain marketed drugs of competitors within the
industry have raised safety concerns that have led to recalls,
withdrawals or adverse labeling of marketed products. These
situations also have raised concerns among some prescribers and
patients relating to the safety and efficacy of pharmaceutical
products in general, which have negatively affected the sales of
such products.
In addition, following the wake of recent product withdrawals of
other companies and other significant safety issues, health
authorities such as the FDA, the European Medicines Agency and
the Pharmaceuticals and Medicines Device Agency have increased
their focus on safety when assessing the benefit/risk balance of
drugs. Some health authorities appear to have become more
cautious when making decisions about approvability of new
products or indications and are re-reviewing select products
that are already marketed, adding further to the uncertainties
in the regulatory processes. There is also greater regulatory
scrutiny, especially in the U.S., on advertising and promotion
and in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is
an increase in the prevalence of negative publicity regarding
known side effects of any of Schering-Plough’s products, it
could significantly reduce demand for the product or may require
Schering-Plough to remove the product from the market. Further,
in the current environment in which all pharmaceutical companies
operate, Schering-Plough is at risk for product liability claims
for its products.
41
New
products and technological advances developed by
Schering-Plough’s competitors may negatively affect
sales.
Schering-Plough operates in a highly competitive industry.
Schering-Plough competes with a large number of multinational
pharmaceutical companies, biotechnology companies and generic
pharmaceutical companies. Many of Schering-Plough’s
competitors have been conducting research and development in
areas served both by Schering-Plough’s current products and
by those products Schering-Plough is in the process of
developing. Competitive developments that may impact
Schering-Plough include technological advances by, patents
granted to, and new products developed by competitors or new and
existing generic, prescription
and/or OTC
products that compete with products of Schering-Plough or the
Merck/Schering-Plough Cholesterol Partnership. In addition, it
is possible that doctors, patients and providers may favor those
products offered by competitors due to safety, efficacy, pricing
or reimbursement characteristics, and as a result
Schering-Plough will be unable to maintain its sales for such
products.
Competition
from third parties may make it difficult for Schering-Plough to
acquire or license new products or product candidates
(regardless of stage of development) or to enter into such
transactions on terms that permit Schering-Plough to generate a
positive financial impact.
Schering-Plough depends on acquisition and in-licensing
arrangements as a source for new products. Opportunities for
obtaining or licensing new products are limited, however, and
securing rights to them typically requires substantial amounts
of funding or substantial resource commitments. Schering-Plough
competes for these opportunities against many other companies
and third parties that have greater financial resources and
greater ability to make other resource commitments.
Schering-Plough may not be able to acquire or license new
products, which could adversely impact Schering-Plough and its
prospects. Schering-Plough may also have difficulty acquiring or
licensing new products on acceptable terms. To secure rights to
new products, Schering-Plough may have to make substantial
financial or other resource commitments that could limit its
ability to produce a positive financial impact from such
transactions.
Schering-Plough
relies on third-party relationships for its key products, and
the conduct and changing circumstances of such third parties may
adversely impact the business.
Schering-Plough has several relationships with third parties on
which Schering-Plough depends for many of its key products. Very
often these third parties compete with Schering-Plough or have
interests that are not aligned with the interests of
Schering-Plough. Notwithstanding any contracts Schering-Plough
has with these third parties, Schering-Plough may not be able to
control or influence the conduct of these parties, or the
circumstances that affect them, either of which could adversely
impact Schering-Plough.
Schering-Plough’s
global operations expose Schering-Plough to additional risks,
and any adverse event could have a material negative impact on
results of operations.
Schering-Plough operates in more than 120 countries, and the
majority of Schering-Plough’s profit and cash flow is
generated from international operations. Acquisitions, such as
the recently announced purchase of Organon BioSciences, would
further expand the size, scale and scope of its global
operations. Risks, inherent in conducting a global business
include:
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changes in medical reimbursement policies and programs and
pricing restrictions in key markets;
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multiple regulatory requirements that could restrict
Schering-Plough’s ability to manufacture and sell its
products in key markets;
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trade protection measures and import or export licensing
requirements;
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diminished protection of intellectual property in some
countries; and
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possible nationalization and expropriation.
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In addition, there may be changes to Schering-Plough’s
business and political position if there is instability,
disruption or destruction in a significant geographic region,
regardless of cause, including war, terrorism, riot, civil
insurrection or social unrest; and natural or man-made
disasters, including famine, flood, fire, earthquake, storm or
disease.
42
Schering-Plough
is exposed to market risk from fluctuations in currency exchange
rates and interest rates.
Schering-Plough operates in multiple jurisdictions and as such,
virtually all sales are denominated in currencies of the local
jurisdiction. Additionally, Schering-Plough has entered and will
enter into acquisition, licensing, borrowings or other financial
transactions that may give rise to currency and interest rate
exposure. Since Schering-Plough cannot, with certainty, foresee
and mitigate against such adverse fluctuations, fluctuations in
currency exchange rates and interest rates could negatively
affect Schering-Plough’s results of operations
and/or cash
flows.
In order to mitigate against the adverse impact of these market
fluctuations, Schering-Plough will from time to time enter into
hedging agreements. Schering-Plough has entered into a foreign
currency option to partially mitigate the currency exchange rate
risk on the Euro purchase price of the Organon BioSciences
acquisition. In addition, Schering-Plough has entered into a
series of interest rate swaps to partially mitigate interest
rate risk associated with financing the purchase of Organon
BioSciences. While hedging agreements, such as currency options
and interest rate swaps, limit some of the exposure to exchange
rate and interest rate fluctuations, such attempts to mitigate
these risks are costly and not always successful.
Insurance
coverage for product liability may be limited, cost prohibitive
or unavailable.
Schering-Plough maintains insurance coverage with such
deductibles and self-insurance to reflect market conditions
(including cost and availability) existing at the time it is
written, and the relationship of insurance coverage to
self-insurance varies accordingly. For certain products,
third-party insurance may be cost prohibitive, available on
limited terms or unavailable.
Schering-Plough
is subject to evolving and complex tax laws, which may result in
additional liabilities that may affect results of
operations.
Schering-Plough is subject to evolving and complex tax laws in
its jurisdictions. Significant judgment is required for
determining Schering-Plough’s tax liabilities, and
Schering-Plough’s tax returns are periodically examined by
various tax authorities. Schering-Plough’s
1997-2006
tax returns remain open for examination by the IRS.
Schering-Plough may be challenged by the IRS and other tax
authorities on positions it has taken in its income tax returns.
Although Schering-Plough believes that its accrual for tax
contingencies is adequate for all open years, based on past
experience, interpretations of tax law, and judgments about
potential actions by tax authorities, due to the complexity of
tax contingencies, the ultimate resolution of any tax matters
may result in payments greater or less than amounts accrued.
In addition, Schering-Plough may be impacted by changes in tax
laws including tax rate changes, changes to the laws related to
the remittance of foreign earnings, new tax laws and revised tax
law interpretations in domestic and foreign jurisdictions.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
This table provides information with respect to purchases by
Schering-Plough of its common shares during the second quarter
of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares That May
|
|
|
|
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Yet be Purchased
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
April 1, 2007 through
April 30, 2007
|
|
|
60,924(1
|
)
|
|
$
|
28.66
|
|
|
|
N/A
|
|
|
|
N/A
|
|
May 1, 2007 through
May 31, 2007
|
|
|
55,521(1
|
)
|
|
$
|
32.43
|
|
|
|
N/A
|
|
|
|
N/A
|
|
June 1, 2007 through
June 30, 2007
|
|
|
16,119(1
|
)
|
|
$
|
31.03
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total April 1, 2007
through June 30, 2007
|
|
|
132,564(1
|
)
|
|
$
|
30.53
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
All of the shares included in the table above were repurchased
pursuant to Schering-Plough’s stock incentive program and
represent shares delivered to Schering-Plough by option holders
for payment of the exercise price and tax withholding
obligations in connection with stock options and stock awards. |
43
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
The annual meeting of shareholders was held on May 18, 2007
and shareholders voted on the following matters with the results
indicated:
(1) Election of
Directors: Thirteen nominees for*( director
were elected for a one-year term by a vote of shares as follows:
Hans W. Becherer received 1,219,203,973 votes for his election
(90.78% of shares voted) and 123,884,350 votes were withheld
(9.22% of shares voted); Thomas J. Colligan received
1,269,098,484 votes for his election (94.49% of shares voted)
and 73,989,839 votes were withheld (5.51% of shares voted); Fred
Hassan received 1,263,077,296 votes for his election (94.04% of
shares voted) and 80,011,027 votes were withheld (5.96% of
shares voted); C. Robert Kidder received 1,268,458,498 votes for
his election (94.44% of shares voted) and 74,629,825 votes were
withheld (5.56% of shares voted); Philip Leder, M.D.
received 1,263,089,288 votes for his election (94.04% of shares
voted) and 79,999,035 votes were withheld (5.96% of shares
voted); Eugene R. McGrath received 1,268,522,318 votes for his
election (94.45% of shares voted) and 74,566,005 votes were
withheld (5.55% of shares voted); Carl E. Mundy received
1,260,447,608 votes for his election (93.85% of shares voted)
and 82,640,715 votes were withheld (6.15% of shares voted);
Antonio M. Perez received 1,329,595,713 votes for his election
(99.00% of shares voted) and 13,492,610 votes were withheld
(1.00% of shares voted); Patricia F. Russo received
1,260,174,538 votes for his election (93.83% of shares voted)
and 82,913,785 votes were withheld (6.17% of shares voted); Jack
L. Stahl received 1,329,560,727 votes for his election (98.99%
of shares voted) and 13,527,596 votes were withheld (1.01% of
shares voted); Kathryn C. Turner received 1,265,355,957 votes
for his election (94.21% of shares voted) and 77,732,366 votes
were withheld (5.79% of shares voted); Robert F.W. van Oordt
received 1,259,061,794 votes for his election (93.74% of shares
voted) and 84,026,529 votes were withheld (6.26% of shares
voted); and Arthur F. Weinbach received 1,268,219,933 votes for
his election (94.43% of shares voted) and 74,868,390 votes were
withheld (5.57% of shares voted).
(2) Ratification of Auditors: The
designation by the Audit Committee of Deloitte &
Touche LLP to audit the books and accounts of the Company for
the year ending December 31, 2007 was ratified with a vote
of 1,322,966,475 shares for*, 10,969,266 shares
against and 9,152,582 abstentions.
(3) Reduction of Supermajority Vote
Requirements: The amendments to the governing
instruments to reduce shareholder supermajority vote
requirements to a majority vote was approved with a vote of
1,322,101,786 shares for* (88.78% of outstanding shares),
10,788,350 shares against and 10,198,187 abstentions.
(4) Election of Directors by a Majority
Vote: The amendment to the Certificate of
Incorporation to elect Directors by a majority vote rather than
a plurality vote was not approved with a vote of
946,099,114 shares for* (63.53% of outstanding shares),
386,601,719 shares against and 10,387,490 abstentions.
(5) Shareholder Proposal: A
shareholder proposal relating to equity grants was not approved
with a vote of 346,977,095 shares for,
824,169,740 shares against, 13,851,387 abstentions and
158,090,101 broker non-votes.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Location
|
|
|
3
|
(a)
|
|
Amended and Restated Certificate
of Incorporation
|
|
Incorporated by reference to
Exhibit 3.1 to Schering-Plough’s 8-K filed July 11, 2007
|
|
3
|
(b)
|
|
Amended and Restated By-Laws
|
|
Incorporated by reference to
Exhibit 3.2 to Schering-Plough’s 8-K filed June 28, 2007.
|
|
12
|
|
|
Computation of Ratio of Earnings
to Fixed Charges
|
|
Attached
|
|
15
|
|
|
Awareness letter
|
|
Attached
|
( * Includes 158,090,101
broker non-votes
44
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Location
|
|
|
31
|
.1
|
|
Sarbanes-Oxley Act of 2002,
Section 302 Certification for Chairman of the Board and
Chief Executive Officer.
|
|
Attached
|
|
31
|
.2
|
|
Sarbanes-Oxley Act of 2002,
Section 302 Certification for Executive Vice President and
Chief Financial Officer.
|
|
Attached
|
|
32
|
.1
|
|
Sarbanes-Oxley Act of 2002,
Section 906 Certification for Chairman of the Board and
Chief Executive Officer.
|
|
Attached
|
|
32
|
.2
|
|
Sarbanes-Oxley Act of 2002,
Section 906 Certification for Executive Vice President and
Chief Financial Officer.
|
|
Attached
|
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SCHERING-PLOUGH CORPORATION
(Registrant)
Steven H. Koehler
Vice President and Controller
(Duly Authorized Officer
and Chief Accounting Officer)
Date: July 26, 2007
46