10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007

Commission file number 1-6571

SCHERING-PLOUGH CORPORATION

(Exact name of registrant as specified in its charter)


New Jersey		22-1918501
State or other jurisdiction of incorporation or organization		(I.R.S. Employer identification No.)

2000 Galloping Hill Road, Kenilworth, NJ (Address of principal executive offices)		07033 Zip Code

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 September 30, 2007: 1,619,721,867

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PART II. OTHER INFORMATION
SIGNATURES
EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-15: AWARENESS LETTER
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(Unaudited)
(Amounts in millions, except per share figures)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006

Net sales	$	2,812		$	2,574		$	8,965		$	7,944

Cost of sales		925			885			2,838			2,782
Selling, general and administrative		1,262			1,158			3,833			3,467
Research and development		669			536			2,071			1,557
Other income, net (See Note 5)		(390	)		(37	)		(451	)		(89	)
Special and acquisition related charges		20			10			32			90
Equity income from cholesterol joint venture		(506	)		(390	)		(1,483	)		(1,056	)

Income before income taxes		832			412			2,125			1,193
Income tax expense		82			103			272			275

Net income before cumulative effect of a change in accounting principle		750			309			1,853			918
Cumulative effect of a change in accounting principle, net of tax		—			—			—			22

Net income		750			309			1,853			940

Preferred stock dividends		37			22			80			65

Net income available to common shareholders	$	713		$	287		$	1,773		$	875

Diluted earnings per common share:
Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.45		$	0.19		$	1.15		$	0.57
Cumulative effect of a change in accounting principle, net of tax		—			—			—			0.02

Diluted earnings per common share	$	0.45		$	0.19		$	1.15		$	0.59

Basic earnings per common share:
Earnings available to common shareholders before cumulative effect of a change in accounting principle	$	0.46		$	0.19		$	1.17		$	0.57
Cumulative effect of a change in accounting principle, net of tax		—			—			—			0.02

Basic earnings per common share	$	0.46		$	0.19		$	1.17		$	0.59

Dividends per common share	$	0.065		$	0.055		$	0.195		$	0.165

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in millions)


	Nine Months Ended
	September 30,
	2007			2006

Operating Activities:
Net income	$	1,853		$	940
Cumulative effect of a change in accounting principle, net of tax		—			(22	)

Net income before cumulative effect of a change in accounting principle, net of tax		1,853			918
Adjustments to reconcile net income to net cash provided by operating activities:
Payments to U.S. taxing authorities		(98	)		—
Special and acquisition related charges and payments		(429	)		66
Depreciation and amortization		370			408
Accrued share-based compensation		149			120
Change in fair value of foreign currency option		(289	)		—
Changes in assets and liabilities:
Accounts receivable		(106	)		(188	)
Inventories		(48	)		(58	)
Prepaid expenses and other assets		(65	)		(101	)
Accounts payable and other liabilities		64			350
Purchases of derivative instruments		(153	)		—

Net cash provided by operating activities		1,248			1,515

Investing Activities:
Capital expenditures		(412	)		(265	)
Dispositions of property and equipment		—			8
Purchases of short-term investments		(1,182	)		(4,729	)
Maturities of short-term investments		4,254			2,573
Other		(23	)		(1	)

Net cash provided by (used for) investing activities		2,637			(2,414	)

Financing Activities:
Cash dividends paid to common shareholders		(276	)		(243	)
Cash dividends paid to preferred shareholders		(61	)		(65	)
Proceeds from preferred stock issuance, net		2,438			—
Proceeds from common stock issuance, net		1,536			—
Issuance of long-term debt, net		1,989			—
Net change in short-term borrowings		(22	)		(1,040	)
Stock option exercises		200			52
Other		(16	)		—

Net cash provided by (used for) financing activities		5,788			(1,296	)

Effect of exchange rates on cash and cash equivalents		27			2

Net increase/(decrease) in cash and cash equivalents		9,700			(2,193	)
Cash and cash equivalents, beginning of period		2,666			4,767

Cash and cash equivalents, end of period	$	12,366		$	2,574

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except per share figures)


	September 30,			December 31,
	2007			2006

ASSETS
Current Assets:
Cash and cash equivalents	$	12,366		$	2,666
Short-term investments		195			3,267
Accounts receivable, net		1,993			1,804
Inventories		1,801			1,676
Deferred income taxes		234			266
Prepaid expenses and other current assets		1,212			744

Total current assets		17,801			10,423
Property, plant and equipment		7,637			7,321
Less accumulated depreciation		3,206			2,956

Property, net		4,431			4,365
Goodwill		213			206
Other intangible assets, net		256			286
Other assets		951			791

Total assets	$	23,652		$	16,071


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,240		$	1,254
Short-term borrowings and current portion of long-term debt		265			242
U.S., foreign and state income tax		213			323
Accrued compensation		652			794
Other accrued liabilities		1,501			1,549

Total current liabilities		3,871			4,162
Long-term Liabilities:
Long-term debt		4,403			2,414
Deferred income tax		104			122
Other long-term liabilities		1,715			1,465

Total long-term liabilities		6,222			4,001
Commitments and contingent liabilities (Note 18)
Shareholders’ Equity:
2004 mandatory convertible preferred shares — $1 par value; issued: 29; $50 per share face value		—			1,438
2007 mandatory convertible preferred shares — $1 par value; issued: 10; $250 per share face value		2,500			—
Common shares — authorized shares: 2,400, $.50 par value; issued: 2,109 at September 30, 2007 and 2,034 at December 31, 2006		1,055			1,017
Paid-in capital		4,727			1,661
Retained earnings (The September 30, 2007 amount includes a reduction of $259 million for the cumulative effect of implementing FIN 48. See Note 6.)		11,328			10,119
Accumulated other comprehensive loss		(748	)		(872	)

Total		18,862			13,363
Less treasury shares: 2007, 490; 2006, 547; at cost		5,303			5,455

Total shareholders’ equity		13,559			7,908

Total liabilities and shareholders’ equity	$	23,652		$	16,071

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	BASIS OF PRESENTATION

These unaudited condensed consolidated financial statements of Schering-Plough Corporation and subsidiaries (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 currently 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. The impact of this standard on the consolidated financial statements is not expected to be material.

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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 nine months ended September 30, 2007, Schering-Plough made cash payments of $435 million for the settlement of the Massachusetts Investigation. For the nine months ended September 30, 2007, Schering-Plough made cash payments of $9 million related to the 2006 manufacturing streamlining. At September 30, 2007, there was no remaining liability related to the 2006 manufacturing streamlining.

During the three and nine months ended September 30, 2007, Schering-Plough incurred $20 million and $32 million, respectively, of acquisition-related charges (integration planning) for the planned Organon BioSciences N.V. (Organon BioSciences) acquisition.

Special charges for the three and nine months ended September 30, 2006 totaled $10 million and $90 million, respectively, related to the changes in Schering-Plough’s manufacturing operations. These charges consisted of $10 million and $35 million of severance for the three and nine months ended September 30, 2006, respectively, and $55 million of fixed asset impairments for the nine months ended September 30, 2006.


3.	EQUITY INCOME

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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

U.S. market, Schering-Plough receives a greater share of profits on the first $300 million of annual ZETIA sales. Above $300 million of annual ZETIA sales, Merck and Schering-Plough generally share profits equally. Schering-Plough’s allocation of the joint venture income is increased by milestones recognized. Further, either company’s share of the joint venture’s income from operations is subject to a reduction if that company fails to perform a specified minimum number of physician details in a particular country. The companies agree annually to the minimum number of physician details by country.

The companies bear the costs of their own general sales forces and commercial overhead in marketing joint venture products around the world. In the U.S., Canada and Puerto Rico, the cholesterol agreements provide for a reimbursement to each company for physician details that are set on an annual basis, and in Italy, a contractual amount is included in the profit sharing calculation that is not reimbursed. In the U.S., Canada and Puerto Rico, this amount is equal to each company’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 agreements with Merck, Schering-Plough could earn additional milestones totaling $105 million.

Costs of the joint venture that the companies contractually share are a portion of manufacturing costs, specifically identified promotion costs (including direct-to-consumer advertising and direct and identifiable out-of-pocket promotion) and other agreed upon costs for specific services such as market support, market research, market expansion, a specialty sales force and physician education programs.

Certain specified research and development expenses are generally shared equally by Schering-Plough and Merck.

The unaudited financial information below presents summarized combined financial information for the Merck/Schering-Plough cholesterol joint venture for the three and nine months ended September 30, 2007 and 2006:


					Nine Months
	Three Months Ended				Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(Dollars in millions)

Net sales	$	1,300	$	1,028	$	3,732	$	2,795
Cost of sales		61		47		162		132
Income from operations		936		698		2,621		1,789

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 joint venture.

Schering-Plough’s share of the joint venture’s income from operations for the three and nine months ended September 30, 2007 was $454 million and $1.3 billion, respectively, and $343 million and $920 million, respectively, for the three and nine months ended September 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.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following information provides a summary of the components of Schering-Plough’s equity income from the cholesterol joint venture for the three and nine months ended September 30, 2007 and 2006:


							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Dollars in millions)

Schering-Plough’s share of income from operations	$	454		$	343		$	1,323		$	920
Contractual amounts for physician details		58			48			181			146
Elimination of intercompany profit and other, net		(6	)		(1	)		(21	)		(10	)

Total equity income from cholesterol joint venture	$	506		$	390		$	1,483		$	1,056

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 companies 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. A New Drug Application filing for this combination tablet has been accepted by the U.S. Food and Drug Administration (FDA) for standard review.

During 2007, Schering-Plough announced that it had agreed with Merck to commence development of a single-tablet combination of ezetimibe and atorvastatin. The parties will have an option to commercialize this product when the patent on the atorvastatin innovator product expires in 2011.


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 nine 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.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Schering-Plough issued its annual share-based compensation grants, including stock options and deferred stock units, during the second quarter of 2007 and 2006. A summary of the options, deferred stock units and performance-based deferred stock units granted during the three and nine months ended September 30, 2007 and 2006 is as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,

(Number of underlying
shares in thousands) 2007					2006				2007				2006

			Weighted-				Weighted-				Weighted-				Weighted-
			Average				Average				Average				Average
	Underlying		Grant-Date		Underlying		Grant-Date		Underlying		Grant-Date		Underlying		Grant-Date
	Shares		Fair Value		Shares		Fair Value		Shares		Fair Value		Shares		Fair Value

Stock options		53	$	7.50		52	$	5.24		10,024	$	8.07		9,638	$	5.22
Deferred stock units		94		30.55		99		20.38		5,573		31.25		6,606		19.24
Performance-based deferred stock units		—				—				1,397		23.47		—

Total Awards		147				151				16,994				16,244

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 nine months ended September 30, 2007 and 2006, were as follows:


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006

Dividend yield		1.1	%		1.1	%		1.1	%		1.1	%
Volatility		23.2	%		24.0	%		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 nine months ended September 30, 2007 was $62 million and $149 million, respectively. Total compensation expense related to stock options, deferred stock units and performance-based deferred stock units for the three and nine months ended September 30, 2006 was $45 million and $128 million, respectively.

At September 30, 2007, the total remaining unrecognized compensation cost related to the performance-based deferred stock units amounted to $32 million, which will be amortized over the weighted-average remaining requisite service period of 2.3 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 $8 million and $35 million related to these plans for the three and nine months ended September 30, 2007, respectively. For the three and nine months ended September 30, 2006, Schering-Plough recognized expense of $22 million and $18 million, respectively, related to these plans.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	OTHER INCOME, NET

The components of other income, net are as follows:


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Dollars in millions)

Interest cost incurred	$	49		$	44		$	134		$	142
Less: amount capitalized on construction		(4	)		(4	)		(14	)		(11	)

Interest expense		45			40			120			131
Interest income		(117	)		(77	)		(283	)		(214	)
Foreign exchange (gains)/losses, net		(4	)		—			(6	)		6
Mark-to-market (gains) on fair value of foreign currency options		(321	)		—			(289	)		—
Ineffective portion of interest rate swaps		7			—			7			—
Other, net		—			—			—			(12	)

Total other income, net	$	(390	)	$	(37	)	$	(451	)	$	(89	)

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. In September 2007, Schering-Plough purchased an additional euro denominated currency option for U.S. $3 million. These derivatives did not qualify for hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133). The change in fair value of these derivatives is recognized each period in the Statement of Condensed Consolidated Operations. For the three and nine month periods ended September 30, 2007, Schering-Plough recognized mark-to-market gains of $321 million and $289 million, respectively, on these foreign currency options. The fair value of these currency options was $423 million at September 30, 2007. These derivatives are short-term (trading) in nature and do not hedge a specific financing or investment transaction. Accordingly, the cash impacts of these derivatives have been classified as operating cash flows in the Statement of Condensed Consolidated Cash Flows.

During the second quarter of 2007, Schering-Plough executed a series of interest rate swaps in anticipation of financing the planned acquisition of Organon BioSciences. The objective of the swaps was to hedge the interest rate payments to be made on future issuances of debt. As such, the swaps were designated as cash flow hedges of future interest rate payments, and in accordance with SFAS 133, 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. In connection with the euro denominated debt issuances as described in Note 14, “Borrowings,” and Note 19, “Subsequent Events,” portions of the swaps were deemed ineffective during the third quarter and Schering-Plough recognized a $7 million loss in the Statement of Condensed Consolidated Operations during the three and nine month periods ended September 30, 2007. The effective portion of the swaps of $12 million was recorded in other comprehensive income and will be recognized as interest expense over the life of the related debt. The cash flows related to these interest rate swaps are classified as operating cash flows in the Statement of Condensed Consolidated Cash Flows.

During 2006 and the first nine 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 nine months ended September 30, 2007, Schering-Plough transferred $69 million and $164 million of its trade accounts receivables owned by foreign subsidiaries to third-party financial institutions without recourse. During the three and nine months ended September 30, 2006, Schering-Plough transferred $28 million of its trade

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accounts receivables owned by a foreign subsidiary to third-party financial institutions without recourse. The transfer of trade accounts receivable qualified as sales of accounts receivable under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” For the three and nine months ended September 30, 2007 and 2006, 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.


6.	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, and September 30, 2007 was $193 million and $196 million, respectively, 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, “Legal, Environmental and Regulatory Matters”). At January 1, and September 30, 2007, the total amount of unrecognized tax benefits was $924 million and $1.0 billion, respectively, which includes reductions to deferred tax assets carrying a full valuation allowance, potential refund claims and tax liabilities. At January 1, and September 30, 2007, approximately $644 million and $640 million, respectively, of total unrecognized tax benefits, if recognized, would affect the effective tax rate. 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.

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.

In July 2007, Schering-Plough made a payment of $98 million to the IRS pertaining to the 1997-2002 examination.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Dollars in millions)

Service cost	$	32		$	30		$	95		$	89
Interest cost		32			28			93			85
Expected return on plan assets		(31	)		(28	)		(93	)		(85	)
Amortization, net		10			12			30			33
Termination benefits		—			—			—			—
Settlement		—			2			2			4

Net pension expense	$	43		$	44		$	127		$	126

The components of other post-retirement benefits expense were as follows:


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(Dollars in millions)

Service cost	$	5		$	5		$	15		$	13
Interest cost		7			7			21			20
Expected return on plan assets		(3	)		(3	)		(9	)		(10	)
Amortization, net		1			1			3			3

Net other post-retirement benefits expense	$	10		$	10		$	30		$	26

For the three and nine months ended September 30, 2007, Schering-Plough contributed $113 million and $153 million, respectively, to its retirement plans. Schering-Plough expects to contribute approximately $25 million to its retirement plans during the fourth quarter of 2007.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	EARNINGS PER COMMON SHARE

The following table reconciles the components of basic and diluted earnings per common share computations (EPS):


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(Dollars and shares in millions)

EPS numerator:
Net income available to common shareholders (Basic EPS numerator)	$	713	$	287	$	1,773	$	875
Add: Dilutive 2004 preferred stock dividends		18		—		61		—

Diluted EPS numerator	$	731	$	287	$	1,834	$	875

EPS denominator:
Weighted average shares outstanding for basic EPS		1,542		1,482		1,511		1,481
Dilutive effect of options and deferred stock units		27		10		24		8
Dilutive effect of 2004 preferred shares		53		—		61		—

Average shares outstanding for diluted EPS		1,622		1,492		1,596		1,489

On September 14, 2007, Schering-Plough’s 2004 mandatory convertible preferred shares converted into 65 million common shares. These common shares are included in the weighted average shares outstanding for the period after conversion.

For the three months ended September 30, 2007 and 2006, 39 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 nine months ended September 30, 2007 and 2006, 36 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 nine months ended September 30, 2007, approximately 65 million common shares obtainable upon conversion of Schering-Plough’s 2004 mandatory convertible preferred shares were dilutive to earnings per share and were therefore included in the computation of diluted earnings per share on a weighted average basis for the period prior to conversion. For the three and nine months ended September 30, 2006, approximately 65 million common shares obtainable upon conversion of the 2004 preferred shares were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

For the three and nine months ended September 30, 2007, approximately 79 million common shares obtainable upon conversion of the 2007 mandatory convertible preferred shares were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	COMPREHENSIVE INCOME

Comprehensive income is comprised of the following:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
	(Dollars in millions)

Net income	$	750		$	309	$	1,853		$	940
Foreign currency translation adjustment		75			9		132			56
Change in measurement date for pension and other post-retirement liabilities		—			—		3			—
Interest rate swap activity		(47	)		—		(12	)		—
Unrealized gain/(loss) on investments available for sale		(3	)		6		1			2

Total comprehensive income	$	775		$	324	$	1,977		$	998


10.	INVENTORIES

Inventories consisted of the following:


	September 30,		December 31,
	2007		2006
	(Dollars in millions)

Finished products	$	813	$	728
Goods in process		780		771
Raw materials and supplies		309		248

Total inventories and inventory classified in other non-current assets	$	1,902	$	1,747

Included in other assets at September 30, 2007 and December 31, 2006 were $101 million and $71 million, respectively, of inventory not expected to be sold within one year.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	OTHER INTANGIBLE ASSETS

The components of other intangible assets, net are as follows:


	September 30, 2007						December 31, 2006
	Gross						Gross
	Carrying		Accumulated				Carrying		Accumulated
	Amount		Amortization		Net		Amount		Amortization		Net
	(Dollars in millions)

Patents and licenses	$	600	$	394	$	206	$	599	$	368	$	231
Trademarks and other		114		64		50		114		59		55

Total other intangible assets	$	714	$	458	$	256	$	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 September 30, 2007 and 2006 was $11 million and $12 million, respectively, and $32 million and $36 million for the nine months ended September 30, 2007 and 2006, respectively. Amortization expense related to these intangible assets for the years 2007 to 2012 is expected to be approximately $40 million per year.


12.	ACQUISITION

On March 12, 2007, Schering-Plough announced that its Board of Directors approved the acquisition of Organon BioSciences for approximately Euro 11.0 billion 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. However, as of October 2007, Schering-Plough has completed various financings that limit the need to utilize this committed bridge financing facility. See Note 14, “Borrowings,” Note 15, “Shareholders’ Equity,” and Note 19, “Subsequent Events.”


13.	PRODUCT LICENSES

During the three and nine months ended September 30, 2007, Schering-Plough recognized upfront payments related to certain licensing transactions aggregating $20 million and $176 million, respectively. These payments have been expensed and reported in research and development expense for the three and nine months ended September 30, 2007 as the underlying products had not received regulatory approval. Upfront payments related to licensing transactions were not material during the comparable periods in 2006.


14.	BORROWINGS

Schering-Plough’s long-term borrowings consisted of the following:


	September 30,		December 31,
	2007		2006
	(Dollars in millions)

5.30% senior unsecured notes due 2013	$	1,247	$	1,247
6.00% senior unsecured notes due 2017		995		—
6.50% senior unsecured notes due 2033		1,142		1,142
6.55% senior unsecured notes due 2037		994		—
Capital leases and other		25		25

Total long-term borrowings	$	4,403	$	2,414

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Senior unsecured notes

On September 17, 2007, Schering-Plough issued $1.0 billion aggregate principal amount of 6.00 percent senior unsecured notes due 2017 and $1.0 billion aggregate principal amount of 6.55 percent senior unsecured notes due 2037. The net proceeds from this offering were approximately $2.0 billion. Interest on the notes is payable semi-annually. The effective interest rate on the 6.00 percent senior unsecured notes and the 6.55 percent senior unsecured notes, which incorporates the initial discount and debt issuance fees, is 6.13 percent and 6.67 percent, respectively. The interest rate payable on these notes is not subject to adjustment. The notes generally restrict Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 10 percent of consolidated net tangible assets. These notes are redeemable in whole or in part, at Schering-Plough’s option at any time, at a redemption price equal to the greater of (1) 100 percent of the principal amount of such notes and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the redemption date on a semiannual basis using the rate of Treasury Notes with comparable remaining terms plus 25 basis points for the 2017 notes or 30 basis points for the 2037 notes. If a change of control triggering event occurs, as defined in the prospectus, holders of the notes will have the right to require Schering-Plough to repurchase all or any part of the notes for a cash payment equal to 101 percent of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest, if any, to the date of purchase.

As discussed in Note 19, “Subsequent Events,” on October 1, 2007, Schering-Plough issued Euro 500 million aggregate principal amount of 5.00 percent senior unsecured euro denominated notes due 2010 and Euro 1.5 billion aggregate principal amount of 5.375 percent senior unsecured euro denominated notes due 2014. The net proceeds from this offering were approximately $2.8 billion.

Schering-Plough intends to use the net proceeds from the issuance of these senior unsecured notes to fund a portion of the purchase price for the planned Organon BioSciences acquisition. See Note 12, “Acquisition.”

Credit Facilities

On August 9, 2007, Schering-Plough entered into a $2.0 billion revolving credit agreement with a syndicate of banks and terminated its $1.5 billion credit facility that was to mature in May 2009. This credit facility has a floating interest rate, matures in August 2012 and requires Schering-Plough to maintain a net debt to total capital ratio of no more than 65 percent through 2009 and 60 percent thereafter, in which net debt equals total debt less cash, cash equivalents, short-term investments and marketable securities and total capital equals the sum of total debt and total shareholders’ equity excluding the cumulative effect of acquired in-process research and development in connection with any acquisition consummated after the closing of the credit facility. The credit facility also generally restricts Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 12 percent of consolidated net tangible assets. 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 September 30, 2007, no borrowings were outstanding under this facility.

Term Loan

As discussed in Note 19, “Subsequent Events,” on October 24, 2007, Schering-Plough entered into a Euro 1.25 billion five-year senior unsecured euro denominated term loan facility with a syndicate of banks. Schering-Plough intends to draw on this term loan to fund a portion of the purchase price for the planned Organon BioSciences acquisition. See Note 12, “Acquisition.”

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


15.	SHAREHOLDERS’ EQUITY

Preferred Shares

As of September 30, 2007, Schering-Plough has authorized 50,000,000 shares of preferred stock that consists of 11,500,000 preferred shares designated as 6 percent Mandatory Convertible Preferred Stock and 38,500,000 preferred shares whose designations have not yet been determined. As of September 30, 2007, 10,000,000 of the shares of 6 percent Mandatory Convertible Preferred Stock are issued and outstanding.

2007 Mandatory Convertible Preferred Stock

On August 15, 2007, Schering-Plough issued 10,000,000 shares of 6 percent Mandatory Convertible Preferred Stock (the 2007 Preferred Stock) with a face value of $2.5 billion. Net proceeds to Schering-Plough were approximately $2.4 billion after deducting commissions, discounts and other underwriting expenses. Schering-Plough intends to use the net proceeds from the sale of the 2007 Preferred Stock to fund a portion of the purchase price for the planned Organon BioSciences acquisition. See Note 12, “Acquisition.”

Each share of the 2007 Preferred Stock will automatically convert into between 7.4206 and 9.0909 common shares of Schering-Plough depending on the average closing price of Schering-Plough’s common shares over the 20 trading day period ending on the third trading day prior to the mandatory conversion date of August 13, 2010, as defined in the prospectus. The preferred shareholders may elect to convert at any time prior to August 13, 2010, at the minimum conversion ratio of 7.4206 common shares per share of the 2007 Preferred Stock. Additionally, if at any time prior to the mandatory conversion date the closing price of Schering-Plough’s common shares exceeds $50.53 (for at least 20 trading days within a period of 30 consecutive trading days), Schering-Plough may elect to cause the conversion of all, but not less than all, of the 2007 Preferred Stock then outstanding at the same minimum conversion ratio of 7.4206 common shares for each share of 2007 Preferred Stock.

The 2007 Preferred Stock accrues dividends at an annual rate of 6 percent on shares outstanding. The dividends are cumulative from the date of issuance and, to the extent Schering-Plough is legally permitted to pay dividends and the Board of Directors declares a dividend payable, Schering-Plough will pay dividends on each dividend payment date. The dividend payment dates are February 15, May 15, August 15 and November 15 of each year, with the first dividend to be paid on November 15, 2007.

2004 Mandatory Convertible Preferred Stock

During the three-month period ended September 30, 2007, all shares of 6 percent Mandatory Convertible Preferred Stock issued on August 10, 2004 (the 2004 Preferred Stock) were converted into 64,584,929 shares of Schering-Plough common stock. Following conversion, all 28,750,000 shares of 2004 Preferred Stock resumed their status as authorized and unissued preferred stock, undesignated as to series and available for future issuance.

Equity Issuance and Treasury Shares

On August 15, 2007, Schering-Plough issued 57,500,000 common shares from treasury shares at $27.50 per share. Net proceeds to Schering-Plough were approximately $1.5 billion after deducting commissions, discounts and other underwriting expenses. Schering-Plough intends to use the net proceeds from the sale of the common shares to fund a portion of the purchase price for the planned Organon BioSciences acquisition. See Note 12, “Acquisition.”

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective September 17, 2007, the Board of Directors of Schering-Plough adopted an amended and restated certificate of incorporation, reflecting both the automatic conversion of the 2004 Preferred Stock issued into shares of common stock on September 14, 2007 and the terms of the 2007 Preferred Stock.


16.	SEGMENT DATA

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.

Net sales by segment:


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(Dollars in millions)

Prescription Pharmaceuticals	$	2,291	$	2,087	$	7,209	$	6,350
Consumer Health Care		273		259		1,012		918
Animal Health		248		228		744		676

Consolidated net sales	$	2,812	$	2,574	$	8,965	$	7,944

Profit by segment:


	Three Months					Nine Months
	Ended					Ended
	September 30,					September 30,
	2007		2006			2007		2006
	(Dollars in millions)

Prescription Pharmaceuticals	$	468	$	355		$	1,606	$	1,074
Consumer Health Care		56		74			264		237
Animal Health		20		36			66		106
Corporate and other		288		(53	)		189		(224	)

Income before income taxes	$	832	$	412		$	2,125	$	1,193

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 joint venture with Merck, as Schering-Plough accounts for this joint venture under the equity method of accounting (see Note 3, “Equity Income,” for additional information). Profit from the Prescription Pharmaceuticals segment includes equity income from cholesterol joint venture.

“Corporate and other” includes interest income and expense, mark-to-market gains on foreign currency options, 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.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sales of products comprising 10 percent or more of Schering-Plough’s U.S. or international sales for the three and nine months ended September 30, 2007, were as follows:


	Three Months				Nine Months
	Ended				Ended
	September 30, 2007				September 30, 2007
	Amount		Percentage		Amount		Percentage
	(Dollars in		(%)		(Dollars in		(%)
	millions)				millions)

U.S.
NASONEX	$	153		15	$	505		15
OTC CLARITIN		101		10		353		10
International
REMICADE		426		24		1,193		21
PEGINTRON		175		10		531		10

Schering-Plough does not disaggregate assets on a segment basis for internal management reporting and, therefore, such information is not presented.


17.	CONSENT DECREE

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.

On August 2, 2007, Schering-Plough announced the dissolution of the Consent Decree by the U.S. District Court for the District of New Jersey.

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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 September 30, 2007, and the related expenses incurred during the three and nine months ended September 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 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, 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

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.

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.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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. Failure to comply with the obligations under the CIA 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.

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


19.	SUBSEQUENT EVENTS

On October 1, 2007, Schering-Plough issued Euro 500 million aggregate principal amount of 5.00 percent senior unsecured euro denominated notes due 2010 and Euro 1.5 billion aggregate principal amount of 5.375 percent senior unsecured euro denominated notes due 2014. The net proceeds from this offering were approximately $2.8 billion. Interest on the notes is payable annually. The interest rate payable on these notes is not subject to adjustment. The notes generally restrict Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 10 percent of consolidated net tangible assets. These notes are redeemable in whole or in part, at Schering-Plough’s option at any time, at a redemption price specified in the prospectus. If a change of control triggering event occurs, as defined in the prospectus, holders of the notes will have the right to require Schering-Plough to repurchase all or any part of the notes for a cash payment equal to 101 percent of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest, if any, to the date of purchase.

On October 24, 2007, Schering-Plough entered into a Euro 1.25 billion five-year senior unsecured euro denominated term loan facility with a syndicate of banks. Schering-Plough intends to draw on this term loan to fund a portion of the purchase price for the planned Organon BioSciences acquisition. See Note 12, “Acquisition.” This new term loan will have a floating interest rate and requires Schering-Plough to maintain a net debt to total capital ratio of no more than 65 percent through 2009 and 60 percent thereafter, in which net debt equals total debt less cash, cash equivalents, short-term investments and marketable securities and total capital equals the sum of total debt and total shareholders’ equity excluding the cumulative effect of acquired in-process research and development in connection with any acquisition consummated after the closing of the term loan. The term loan also generally restricts Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 12 percent of consolidated net tangible assets.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Schering-Plough Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of Schering-Plough Corporation and subsidiaries (the “Company”) as of September 30, 2007, and the related statements of condensed consolidated operations for the three and nine-month periods ended September 30, 2007 and 2006, and the statements of condensed consolidated cash flows for the nine-month periods ended September 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

October 25, 2007


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 initiated a strategic plan, with the goal of stabilizing, repairing and turning around Schering-Plough in order to build long-term shareholder value. He also installed a new senior executive team. 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 Euro 11.0 billion 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. Schering-Plough has been successful in advancing its pipeline into several late-stage projects that will require sizable resources to complete. Consistent with this core strategy, Schering-Plough is increasing its investment in research and 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. Schering-Plough’s progressing early pipeline includes drug candidates across a wide range of therapeutic areas with more than 20 compounds now approaching or in Phase I development.

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 nine months ended September 30, 2007:


	•	Schering-Plough’s net sales for the three months ended September 30, 2007 were $2.8 billion, an increase of $238 million, or 9 percent, as compared to the three months ended September 30, 2006. Net income available to common shareholders for the three months ended September 30, 2007 was


		$713 million, which includes mark-to-market gains of $321 million on foreign currency options, as compared to $287 million in the three months ended September 30, 2006.


	•	Schering-Plough’s net sales for the nine months ended September 30, 2007 were $9.0 billion, an increase of $1.0 billion, or 13 percent, as compared to the nine months ended September 30, 2006. Net income available to common shareholders for the nine months ended September 30, 2007 was $1.8 billion, which includes mark-to-market gains of $289 million on foreign currency options, as compared to $875 million in the nine months ended September 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, AVELOX and ASMANEX also contributed favorably to Schering-Plough’s overall operating results and cash flow.

	•	Schering-Plough realized approximately $18 million and $76 million of savings during the three and nine months ended September 30, 2007 related to the manufacturing streamlining that took place in 2006.

	•	During the three and nine months ended September 30, 2007, Schering-Plough recognized upfront payments related to certain licensing transactions aggregating $20 million and $176 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 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.

License Arrangements with Centocor

REMICADE is prescribed for the treatment of inflammatory diseases 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.

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 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 September 30, 2007 totaled $2.8 billion, an increase of $238 million or 9 percent compared with the same period in 2006, including a 3 percent favorable impact from foreign exchange. For the nine months ended September 30, 2007, consolidated net sales totaled $9.0 billion, an increase of $1.0 billion or 13 percent as compared to the same period in 2006, including a 3 percent favorable impact from foreign exchange. The impact of currency is more pronounced on products and businesses that are concentrated in Europe.

Net sales for the three and nine months ended September 30, 2007 and 2006 were as follows:


	Three Months Ended							Nine Months Ended
	September 30,							September 30,
					Increase							Increase
	2007		2006		(Decrease)			2007		2006		(Decrease)
	(Dollars in millions)				(%)			(Dollars in millions)				(%)

PRESCRIPTION PHARMACEUTICALS(a)	$	2,291	$	2,087		10		$	7,209	$	6,350		14
REMICADE		426		317		34			1,193		902		32
NASONEX		242		221		10			821		691		19
PEGINTRON		221		206		7			672		629		7
TEMODAR		215		179		20			627		513		22
CLARINEX/AERIUS		171		171		—			625		557		12
CLARITIN Rx		83		74		12			297		279		7
INTEGRILIN		78		82		(4	)		241		244		(1	)
AVELOX		78		63		24			269		201		34
CAELYX		64		52		23			191		156		22
INTRON A		61		57		7			176		180		(2	)
REBETOL		60		72		(16	)		206		237		(13	)
ASMANEX		36		28		30			121		68		79
Other Pharmaceutical		556		565		(2	)		1,770		1,693		5
CONSUMER HEALTH CARE		273		259		5			1,012		918		10
OTC		162		138		17			521		440		18
Sun Care		19		29		(33	)		219		208		6
Foot Care		92		92		—			272		270		1
ANIMAL HEALTH		248		228		8			744		676		10

CONSOLIDATED NET SALES(a)	$	2,812	$	2,574		9		$	8,965	$	7,944		13


(a)		Included in consolidated net sales for the three and nine month periods ended September 30, 2006 were approximately $47 million and $24 million, respectively, related to the reversal of previously accrued rebate amounts for the U.S. Government’s TRICARE Retail Pharmacy Program that a U.S. Federal Court ruled pharmaceutical manufacturers were not obligated to pay.

International net sales of REMICADE, for the treatment of inflammatory diseases 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 $109 million or 34 percent to $426 million in the third quarter of 2007 and $291 million or 32 percent to $1.2 billion for the first nine 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 corticosteroid for allergies, rose $21 million or 10 percent to $242 million in the third quarter of 2007 and $130 million or 19 percent to $821 million for the first nine months of 2007 due to increased sales in the international markets.

Global net sales of PEGINTRON, for treating hepatitis C, increased 7 percent to $221 million in the third quarter of 2007 and 7 percent to $672 million for the first nine months of 2007 due to higher sales in Latin America and emerging markets across Europe, and tempered by lower sales in Japan and the U.S. In addition, 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 $36 million or 20 percent to $215 million in the third quarter of 2007 and $114 million or 22 percent to $627 million for the first nine months of 2007. The growth was due primarily to increased sales across all geographic markets, including Japan, where the product was launched in September 2006. The growth rate for TEMODAR is expected to continue to moderate as significant penetration in U.S. and E.U. markets has already been achieved for this product.

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, were $171 million in the third quarter of both 2007 and 2006, as higher sales of CLARINEX in international markets were offset by lower sales in the U.S. Net sales increased $68 million or 12 percent to $625 million for the first nine months of 2007 due primarily to increased demand outside the U.S.

International net sales of prescription CLARITIN increased 12 percent to $83 million in the third quarter of 2007 and increased 7 percent to $297 million for the first nine months of 2007, reflecting growth in Latin America, Asia Pacific and Japan.

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 $15 million or 24 percent to $78 million in the third quarter of 2007 and $68 million or 34 percent to $269 million for the first nine 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 $64 million in the third quarter of 2007 and 22 percent to $191 million for the first nine months of 2007, as a result of increased use in treating ovarian and breast cancer.

Global net sales of REBETOL capsules, for use in combination with INTRON A or PEG-INTRON for treating hepatitis C, decreased 16 percent to $60 million in the third quarter of 2007 and 13 percent to $206 million for the nine months ended September 30, 2007 as compared to the same periods in 2006, due to lower patient enrollment in Japan and increased generic competition.

Global net sales of ASMANEX, an orally inhaled steroid for asthma, increased $8 million or 30 percent to $36 million for the third quarter of 2007 and $53 million or 79 percent to $121 million for the first nine 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 net 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 all remaining CFC inventories have been sold during 2007. Schering-Plough is uncertain as to the ultimate impact on Schering-Plough’s overall future sales of PROVENTIL HFA, 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 $14 million or 5 percent to $273 million in the third quarter of 2007 and $94 million or 10 percent to $1.0 billion for the first nine months of 2007. The increase during the third quarter was primarily due to sales of MiraLAX, which was launched in February 2007 as the first Rx-to-OTC switch in the laxative category in more than 30 years; higher sales of OTC CLARITIN; and partially offset by a decline in sun care sales. Sales of OTC CLARITIN increased $9 million to $104 million in the third quarter of 2007 and increased $50 million to $368 million for the first nine months of 2007. 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 $20 million or 8 percent in the third quarter of 2007 to $248 million and $68 million or 10 percent to $744 million for the first nine 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. The growth in international markets was tempered by a decline in the U.S.

Costs, Expenses and Equity Income

A summary of costs, expenses and equity income for the three and nine months ended September 30, 2007 and 2006 is as follows:


										Nine Months Ended
	Three Months Ended									September 30,
	September 30,									2007			2006
							Increase									Increase
	2007			2006			(Decrease)									(Decrease)
	(Dollars in millions)						%			(Dollars in millions)						%

Gross margin		67.1	%		65.6	%		1.5	%		68.3	%		65.0	%		3.3	%
Selling, general and administrative (SG&A)	$	1,262		$	1,158			9.0	%	$	3,833		$	3,467			10.6	%
Research and development (R&D)		669			536			24.8	%		2,071			1,557			33.0	%
Other income, net		(390	)		(37	)		N/M			(451	)		(89	)		N/M
Special and acquisition related charges		20			10			N/M			32			90			N/M
Equity income from cholesterol joint venture		(506	)		(390	)		29.7	%		(1,483	)		(1,056	)		40.4	%

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 67.1 percent in the third quarter of 2007 and 68.3 percent for the first nine months of 2007 as compared to 65.6 percent and 65.0 percent for the third quarter and first nine months of 2006, respectively. Gross margin in the third quarter and first nine months of 2006 reflected the negative impact of $43 million and $101 million, respectively, of costs associated with the 2006 manufacturing streamlining activities included in cost of sales. The increase in gross margin during the nine months ended 2007 was due primarily to cost savings from the 2006 manufacturing streamlining activities and improved product mix.

Selling, general and administrative

Selling, general and administrative expenses (SG&A) were $1.3 billion in the third quarter of 2007 and $3.8 billion in the first nine months of 2007, up 9 percent and 11 percent versus the prior year periods, respectively. The increase in SG&A in the third quarter and first nine months of 2007 primarily reflects higher promotional spending and investments in emerging markets.

Research and development

Research and development (R&D) spending increased 25 percent to $669 million in the third quarter of 2007 and 33 percent to $2.1 billion in the first nine months of 2007. R&D spending in the third quarter and first nine months of 2007 included $20 million and $176 million, respectively, related to upfront payments made for certain licensing transactions. The increase in R&D spending versus 2006 also reflects higher spending for clinical trials and related activities and investments to build greater breadth and capacity to support the dramatic expansion of Schering-Plough’s Phase III pipeline during the past 12 months. 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 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. In 2007, certain aspects of the Global Clinical Harmonization Program have been implemented.

Other income, net

Schering-Plough had $390 million and $451 million of other income, net, in the third quarter and first nine months of 2007, respectively, as compared to $37 million and $89 million of other income, net, in the third quarter and first nine months of 2006, respectively. Other income, net, included mark-to-market gains on foreign currency options of $321 million and $289 million for the third quarter and first nine months of 2007, respectively. Other income, net, also reflected higher interest income due to higher balances of cash equivalents and short-term investments partially offset by a loss on interest rate swaps and higher interest expense due to the issuance of new debt.

Special and acquisition related charges

Equity income from cholesterol joint venture

Sales of the Merck/Schering-Plough cholesterol joint venture for the three and nine months ended September 30, 2007 totaled $1.3 billion and $3.7 billion, respectively, as compared to $1.0 billion and $2.8 billion for the three and nine months ended September 30, 2006. The sales growth in 2007 was due to an increase in market share.

Certain specified research and development expenses are generally shared equally by Schering-Plough and Merck.

Equity income from cholesterol joint venture totaled $506 million and $1.5 billion for the three and nine months ended September 30, 2007, respectively, as compared to $390 million and $1.1 billion for the three and nine months ended September 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 nine 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.

Provision for income taxes

Tax expense was $82 million and $272 million for the three and nine months ended September 30, 2007, respectively. Tax expense was $103 million and $275 million for the three and nine months ended September 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’s manufacturing subsidiaries in Puerto Rico, Singapore and Ireland operate under various incentive tax grants that begin to expire in 2011. 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 reported a U.S. Net Operating Loss (NOL) carryforward of approximately $1.6 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


	Nine Months Ended
	September 30,
	2007		2006
	(Dollars in millions)

Cash flow provided by operating activities	$	1,248	$	1,515
Cash flow provided by/(used for) investing activities		2,637		(2,414	)
Cash flow provided by/(used for) financing activities		5,788		(1,296	)

Operating Activities

In the first nine months of 2007, operating activities provided $1.2 billion of cash, compared with net cash provided by operations of $1.5 billion in the first nine months of 2006. The decrease was primarily due to payments of $435 million for the settlement of the Massachusetts Investigation, the purchase of foreign currency options for $133 million and 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, partially offset by higher net income.

During the nine months ended September 30, 2007, Schering-Plough purchased foreign currency options for $133 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 these foreign currency options. These derivatives are short-term (trading) in nature and do not hedge a specific financing or investment transaction. Accordingly, the cash impacts of these derivatives 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 nine months of 2007 was $2.6 billion and included a net reduction of short-term investments of $3.1 billion partially offset by $412 million of capital expenditures. Net cash used for investing activities for the first nine months of 2006 was $2.4 billion due primarily to net investment purchases of $2.2 billion.

Financing Activities

Net cash provided by financing activities was $5.8 billion for the first nine months of 2007, compared to cash used of $1.3 billion for the same period in 2006. Net cash provided by financing activities for the nine months ended September 30, 2007 included net proceeds on the issuance of common and preferred shares of approximately $1.5 billion and $2.4 billion, respectively, and net proceeds of approximately $2.0 billion on the issuance of long-term debt. Net cash provided by financing activities also included $200 million of proceeds from stock option exercises offset by the payment of dividends on common and preferred shares of $337 million. Net cash used for financing activities for the nine months ended September 30, 2006 included dividends on common and preferred shares of $308 million and the repayment of short-term borrowings of $1.0 billion.

Other Discussion of Cash Flows

Total cash, cash equivalents and short-term investments was approximately $12.6 billion at September 30, 2007. Schering-Plough expects to fund the Euro 11 billion purchase price of Organon BioSciences with existing cash, cash equivalents and short-term investments, the net proceeds of approximately $2.8 billion from the debt issuances closed during the fourth quarter of 2007 and available credit facilities. Cash, cash equivalents and short-term investments at September 30, 2007 includes aggregate net proceeds of approximately $6.0 billion from the debt and equity offerings closed during the third quarter of 2007. Remaining cash, cash equivalents and short-term investments after the planned acquisition is consummated, cash generated from operations and available credit facilities are expected to provide Schering-Plough with the ability to fund cash needs for the intermediate term.

Schering-Plough’s cash and cash equivalents have increased significantly as a result of the various financings completed in the third and fourth quarters of 2007 in contemplation of the planned acquisition of Organon BioSciences. As a result, significant cash balances are held at various financial institutions. This concentration is mitigated as these financial institutions are considered to be of a high credit quality.

Borrowings and Credit Facilities

On October 24, 2007, Schering-Plough entered into a Euro 1.25 billion five-year senior unsecured euro denominated term loan facility with a syndicate of banks. Schering-Plough intends to draw on this term loan to fund a portion of the purchase price for the planned Organon BioSciences acquisition. This new term loan will have a floating interest rate and requires Schering-Plough to maintain a net debt to total capital ratio of no more than 65 percent through 2009 and 60 percent thereafter, in which net debt equals total debt less cash, cash equivalents, short-term investments and marketable securities and total capital equals the sum of total debt and total shareholders’ equity excluding the cumulative effect of acquired in-process research and development in connection with any acquisition consummated after the closing of the term loan. The term loan also generally restricts Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 12 percent of consolidated net tangible assets.

The reported U.S. dollar amounts of the outstanding debt balance and interest expense on the euro denominated notes and euro denominated term loan will fluctuate due to the impact of foreign currency translation.

Schering-Plough also has outstanding $1.25 billion aggregate principal amount of 5.30 percent senior unsecured notes due 2013 and $1.15 billion aggregate principal amount of 6.50 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 5.30 percent to 5.55 percent, and the interest rate payable on the notes due 2033 increased from 6.50 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 5.30 percent and 6.50 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.

On August 9, 2007, Schering-Plough entered into a $2.0 billion revolving credit agreement with a syndicate of banks and terminated its $1.5 billion credit facility that was due to mature in May 2009. This credit facility has a floating interest rate, matures in August 2012 and requires Schering-Plough to maintain a net debt to total capital ratio of no more than 65 percent through 2009 and 60 percent thereafter, in which net debt equals total debt less cash, cash equivalents, short-term investments and marketable securities and total capital equals the sum of total debt and total shareholders’ equity excluding the cumulative effect of acquired in-process research and development in connection with any acquisition consummated after the closing of the credit facility. The credit facility also generally restricts Schering-Plough from creating or assuming liens or entering into sale and leaseback transactions unless the aggregate outstanding indebtedness secured by any such liens and related to any such sale and leaseback transactions does not exceed 12 percent of consolidated net tangible assets. 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 September 30, 2007, no borrowings were outstanding under this facility.

Schering-Plough has a Euro 11.0 billion committed bridge financing facility available to fund the planned acquisition of Organon BioSciences. However, funding for the acquisition is expected to be provided by existing cash and short-term investments, which include aggregate net proceeds of approximately $6.0 billion from the debt and equity offerings closed during the third quarter of 2007, as well as the net proceeds of approximately $2.8 billion from the debt issuances closed during the fourth quarter of 2007 and available credit facilities.

At September 30, 2007 and December 31, 2006, short-term borrowings totaled $265 million and $242 million, respectively, including outstanding commercial paper of $174 million at September 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

Reaffirmed September 11, 2007

Standard and Poor’s

A-

A-2

Affirmed August 15, 2007

Fitch Ratings

BBB+

F-2

Affirmed September 11, 2007

Schering-Plough’s credit ratings could decline below their current levels. The impact of such decline could reduce the availability of commercial paper borrowing and would increase the interest rate on a portion of Schering-Plough’s short and long-term debt. As discussed above, Schering-Plough believes that existing cash and short-term investments, which includes aggregate net proceeds of approximately $6.0 billion from the debt and equity offerings closed during the third quarter of 2007, as well as the aggregate net proceeds of approximately $2.8 billion from the debt issuances closed during the fourth quarter of 2007, available credit facilities and cash generated from operations will allow Schering-Plough to fund the planned Organon BioSciences acquisition for approximately Euro 11 billion as well as its cash needs for the intermediate term.

Mandatory Convertible Preferred Stock

Equity Issuance and Treasury Shares

Contractual Obligations

Schering-Plough’s contractual obligations as of December 31, 2006 were included in tabular format in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of the 2006 10-K. During the third quarter of 2007, Schering-Plough issued debt requiring cash payments, excluding interest obligations, of $1.0 billion in 2017 and $1.0 billion in 2037.

On October 1, 2007, Schering-Plough issued euro denominated debt requiring cash payments, excluding interest obligations, of approximately $705 million in 2010 and approximately $2.1 billion in 2014 based on current exchange rates. In addition, in connection with the implementation of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48), Management believes it is reasonably possible that a significant portion of the total unrecognized tax benefits of $1.0 billion at September 30, 2007 could decrease over the next twelve-month period.

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, of 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

On August 2, 2007, Schering-Plough announced the dissolution of the Consent Decree by the U.S. District Court for the District of New Jersey. See 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 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. In 2007, certain aspects of the Global Harmonization Program have been implemented.

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

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 expects the Organon BioSciences transaction to be completed by year-end 2007.

Schering-Plough anticipates that sales from VYTORIN and ZETIA will continue to grow in the fourth quarter of 2007 and in 2008.

Schering-Plough is confident in its key products, however, these products face growing competition. Schering-Plough will invest in its key brands to sustain their leadership position.

As Schering-Plough’s pipeline continues to progress, it expects that the number of patients in clinical trials will continue to increase especially with new Phase III trials for the thrombin receptor antagonist, vicriviroc and recently in-licensed products. As a result, Schering-Plough expects research and development expenses on a stand-alone basis, excluding any upfront payments, to continue to grow faster than adjusted net sales in the fourth quarter of 2007. Research and development expenses will continue to grow in 2008. Adjusted net sales is defined as net sales plus an assumed 50 percent of global cholesterol joint venture net sales.

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 September 30, 2007 and 2006 were $115 million and $151 million, respectively. Commercial discounts, returns and other rebate accruals at September 30, 2007 and 2006 were $366 million and $397 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.

The following summarizes the activity in the accounts related to accrued rebates, sales returns and discounts for the nine months ended September 30, 2007 and 2006:


	For the
	Nine Months Ended
	September 30
	2007			2006
	(Dollars in millions)
Accrued Rebates/Returns/Discounts, Beginning of Period	$	486		$	522

Provision for Rebates		440			363
Adjustment to prior-year estimates(1)		(19	)		(54	)
Payments		(404	)		(313	)

		17			(4	)

Provision for Returns		121			123
Adjustment to prior-year estimates		(24	)		(8	)
Returns		(92	)		(88	)

		5			27

Provision for Discounts		534			426
Adjustment to prior-year estimates		—			—
Discounts granted		(561	)		(423	)

		(27	)		3

Accrued Rebates/Returns/Discounts, End of Period	$	481		$	548


(1)		For the nine months ended September 30, 2006, the adjustment to prior-year estimates for rebates includes $24 million related to the reversal of previously accrued rebate amounts recorded in 2005 and 2004 for the U.S. Government’s TRICARE Retail Pharmacy Program that a U.S. Federal Court ruled pharmaceutical manufacturers were not obligated to pay.

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 for the year ended December 31, 2007.

Provision for Income Taxes

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, and September 30, 2007 was $193 and $196 million, respectively, 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, “Legal, Environmental and Regulatory Matters” in Item 1, “Financial Statements”). At January 1, and September 30, 2007, the total amount of unrecognized tax benefits was $924 million and $1.0 billion, respectively, which includes reductions to deferred tax assets carrying a full valuation allowance, potential refund claims and tax liabilities. At January 1, and September 30, 2007, approximately $644 million and $640 million of total unrecognized tax benefits, if recognized, would affect the effective tax rate. 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.

In July 2007, Schering-Plough made a payment of $98 million to the IRS pertaining to the 1997-2002 examination.

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, pending acquisitions, 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.


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

During the nine months ended September 30, 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 foreign currency option contracts to mitigate its exposure in the event there was a significant strengthening in the Euro as compared to the U.S. Dollar. At September 30, 2007, Schering-Plough had an option to purchase Euro 7.7 billion at $1.38 per Euro expiring on December 31, 2007 and an option to purchase Euro 238 million at $1.3884 per Euro expiring November 1, 2007. As of September 30, 2007, a five percent decrease in value of the U.S. dollar as compared to the Euro would have resulted in an additional unrealized gain of approximately $528 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 $344 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 for three, five and ten-year periods with Schering-Plough paying fixed rates and receiving floating rates based on individual notional amounts of Euro 750 million each, aggregating Euro 2.25 billion. The objective of the swaps was to hedge the interest rate payments to be made on future issuances of debt. As such, the swaps were designated as cash flow hedges of future interest payments, and in accordance with SFAS 133, “Accounting for Derivative Instruments and 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. In connection with the euro denominated debt issuances as described in Note 14, “Borrowings,” and Note 19, “Subsequent Events,” under Item 1, “Financial Statements,” portions of the swaps were deemed ineffective during the third quarter and Schering-Plough recognized a $7 million loss in the Statement of Condensed Consolidated Operations during the three and nine month periods ended September 30, 2007. The effective portion of the swaps of $12 million was recorded in other comprehensive income and will be recognized as interest expense over the life of the related debt.

Refer to “Management’s Discussion and Analysis” in Schering-Plough’s 2006 10-K for further discussion of market risks.


Item 4.	*Controls and Procedures*

Management, including the chief executive officer and the chief financial officer, has evaluated Schering-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 nine months of 2007 is the replacement of Schering-Plough’s system for consolidation and reporting.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

There were no material legal proceedings, other than ordinary routine litigation incidental to the business, to which Schering-Plough, or any of its subsidiaries, became a party during the quarter ended September 30, 2007, or subsequent thereto, but before the filing of this report, other than as described in Item 3, “Legal Proceedings,” of the 2006 10-K and Part II, Item 1, “Legal Proceedings,” in the second quarter 2007 10-Q.

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:


	•	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;

	•	in March 2007, Schering-Plough and an entity jointly owned with Merck filed a patent infringement action against companies seeking approval of a generic version of ZETIA; and

	•	in September 2006, Schering-Plough filed patent infringement actions against companies seeking approval of generic versions of Clarinex Tablets, Clarinex Reditabs and Clarinex D12.


Item 1A.	*Risk Factors*

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. In addition, on October 4, 2007, the FDA announced a public meeting to solicit comment on making certain prescription drugs available “behind-the-counter” without a prescription. Although the FDA did not indicate what drugs might be included this category, if the FDA approved behind-the-counter sales of products that compete with products of Schering-Plough or the Merck/Schering-Plough cholesterol joint venture, such competition could have an adverse result on sales and profitability.

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:


	•	findings of ineffectiveness, superior safety or efficacy of competing products, or harmful side effects in clinical or pre-clinical testing;

	•	failure to receive the necessary regulatory approvals, including delays in the approval of new products and new indications;

	•	lack of economic feasibility due to manufacturing costs or other factors; and

	•	preclusion from commercialization by the proprietary rights of others.

Intellectual property protection for innovation is an important contributor to Schering-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 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.

Market forces continue to evolve and can impact Schering-Plough’s ability to sell products or the price Schering-Plough can charge for products.

A number of intermediaries are involved between drug manufacturers, such as Schering-Plough, and patients who use the drugs. These intermediaries impact the patient’s ability, and their precribers’s ability, to choose and pay for a particular drug. These intermediaries include health care providers, such as hospitals and clinics; payors and their representatives, such as employers, insurers, managed care organizations and governments; and others in the supply chain, such as pharmacists and wholesalers. Examples include: payors that require a patient to first fail on a generic drug before reimbursing for a more effective, branded product that is more expensive; hospitals that stock and administer only a generic product to in-patients; managed care organizations who may penalize doctors who prescribe outside approved formularies which may not include branded products when a generic is available; and pharmacists who receive a higher profit when they dispense a generic drug over a branded drug. These issues are more pressing because the intermediaries are not required to routinely provide transparent data to patients comparing the effectiveness of generic and branded products or to disclose their own economic benefits that are tied to steering patients toward, or requiring patients to use, generic products rather than branded products.

Government investigations 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.

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:


	•	the re-review of products that are already marketed;

	•	new scientific information and evolution of scientific theories;

	•	the recall or loss of marketing approval of products that are already marketed;

	•	uncertainties concerning safety labeling changes; and

	•	greater scrutiny in advertising and promotion.

In the past several years, clinical trials and post-marketing surveillance of certain marketed drugs of competitors within the industry have raised safety concerns that have led to recalls, withdrawals or adverse labeling of marketed products. 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.

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 joint venture. In addition, it is possible that doctors, patients and providers may favor those products offered by competitors due to safety, efficacy, pricing or reimbursement characteristics, and as a result Schering-Plough will be unable to maintain its sales for such products.

Competition from third parties may make it difficult for Schering-Plough to acquire or license new products or product candidates (regardless of stage of development) or to enter into such transactions on terms that permit Schering-Plough to generate a positive financial impact.

Schering-Plough depends on acquisition and in-licensing arrangements as a source for new products. Opportunities for obtaining or licensing new products are limited, however, and securing rights to them typically requires substantial amounts of funding or substantial resource commitments. Schering-Plough competes for these opportunities against many other companies and third parties that have greater financial resources and greater ability to make other resource commitments. Schering-Plough may not be able to acquire or license new products, which could adversely impact Schering-Plough and its prospects. Schering-Plough may also have difficulty acquiring or licensing new products on acceptable terms. To secure rights to new products, Schering-Plough may have to make substantial financial or other resource commitments that could limit its ability to produce a positive financial impact from such transactions.

Schering-Plough relies on third-party relationships for its key products, and the conduct and changing circumstances of such third parties may adversely impact the business.

Schering-Plough has several relationships with third parties on which Schering-Plough depends for many of its key products. Very often these third parties compete with Schering-Plough or have interests that are not aligned with the interests of Schering-Plough. Notwithstanding any contracts Schering-Plough has with these third parties, Schering-Plough may not be able to control or influence the conduct of these parties, or the circumstances that affect them, either of which could adversely impact Schering-Plough.

The relationships are long-standing and, as the third party’s work and Schering-Plough’s work evolves, priorities and alignments also change. At times new issues develop, that were not anticipated at the time contracts were negotiated. These new issues, and related uncertainties in the contracts, also can adversely impact Schering-Plough.

Schering-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:


	•	changes in medical reimbursement policies and programs and pricing restrictions in key markets;

	•	multiple regulatory requirements that could restrict Schering-Plough’s ability to manufacture and sell its products in key markets;

	•	trade protection measures and import or export licensing requirements;

	•	diminished protection of intellectual property in some countries; and

	•	possible nationalization and expropriation.

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.

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 two foreign currency options to partially mitigate the currency exchange rate risk on the Euro purchase price of the Organon BioSciences acquisition. 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 third 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

July 1, 2007 through July 31, 2007

8,924

(1)

31.88

N/A

August 1, 2007 through August 31, 2007

18,223

(1)

29.43

N/A

September 1, 2007 through September 30, 2007

10,115

(1)

30.64

N/A

Total July 1, 2007 through September 30, 2007

37,262

(1)

30.34

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.


Item 6.	*Exhibits*


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 September 18, 2007
4(c)(vi)	Third Supplemental Indenture	Incorporated by reference to Exhibit 4.1 to Schering-Plough’s 8-K filed September 17, 2007
4(c)(vii)	Fourth Supplemental Indenture	Incorporated by reference to Exhibit 4.1 to Schering-Plough’s 8-K filed October 2, 2007
10(w)	Share Purchase Agreement	Incorporated by reference to Exhibit 10.1 to Schering-Plough’s 8-K filed October 2, 2007
12	Computation of Ratio of Earnings to Fixed Charges	Attached
15	Awareness letter	Attached
31.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.	Attached
31.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.	Attached
32.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.	Attached
32.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.	Attached