Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
NET SALES
Consolidated net sales in 1999 totaled $9.2 billion, an
increase of 14 percent over 1998, due to volume growth
of 13 percent and price increases of 1 percent.
Foreign exchange had a less than 1 percent impact on
the sales increase. Net sales in the United States
increased 14 percent versus 1998 and advanced 13
percent internationally. Foreign exchange negatively
impacted the international sales growth by 1 percent.
Consolidated 1998 net sales of $8.1 billion advanced 19
percent over 1997, reflecting volume growth of 19
percent and price increases of 2 percent, tempered by
unfavorable foreign exchange of 2 percent. The
acquisition of the Mallinckrodt Inc. animal health
business in June 1997 favorably impacted sales growth
by 3 percent. The sales of this business were included
for only half the year in 1997 and for the full year in
1998.
Net sales by major therapeutic category for the years
ended 1999, 1998 and 1997 were as follows ($ in
millions):
% Increase (Decrease)
1999 1998 1997 1999/98 1998/97
Allergy & Respiratory $3,850 $3,375 $2,708 14% 25 %
Anti-infective & Anticancer 1,738 1,263 1,156 38 9
Dermatologicals 682 619 571 10 8
Cardiovasculars 673 750 637 (10) 18
Other Pharmaceuticals 792 688 649 16 6
Animal Health 678 647 389 5 66
Foot Care 348 336 300 3 12
Over-the-Counter (OTC) 221 218 220 1 (1)
Sun Care 194 181 148 7 22
Consolidated net sales $9,176 $8,077 $6,778 14% 19 %
Worldwide net sales of allergy and respiratory products
increased 14 percent in 1999 and 25 percent in 1998,
due to continued strong market growth for the CLARITIN
line of nonsedating antihistamines. Worldwide net
sales of the CLARITIN brand totaled $2.7 billion in
1999, $2.3 billion in 1998 and $1.7 billion in 1997.
Franchise sales of nasal inhaled steroid products,
which include VANCENASE allergy products and NASONEX, a
once-daily corticosteroid for allergic rhinitis,
increased in 1999 and 1998 due to market expansion in
the United States and the launch of NASONEX in several
international markets. Sales of VANCERIL, an orally
inhaled steroid for asthma, declined $14 million in
1999 due to manufacturing issues and branded
competition.
Net sales of worldwide anti-infective and anticancer
products rose 38 percent compared with 1998. Growth was
led by combined worldwide sales of INTRON A (interferon
alfa-2b) and REBETRON Combination Therapy, containing
REBETOL (ribavirin) Capsules and INTRON A Injection,
which totaled $1.1 billion, up 56 percent from 1998.
Sales of these products grew because of increased use
in the treatment of chronic hepatitis C. The U.S. and
international launches of TEMODAR, a chemotherapy agent
for treating certain types of brain tumors, also
contributed to the increase in this therapeutic
category's sales in 1999. These sales increases were
moderated by lower sales of EULEXIN, a prostate cancer
therapy, due to generic and branded competition. In
1998, worldwide net sales of anti-infective and
anticancer products increased 9 percent due to INTRON A
and the mid-year 1998 introduction of REBETRON
Combination Therapy in the United States. This
increase was moderated by lower sales of EULEXIN due to
generic and branded competition.
Dermatological products' worldwide net sales increased
10 percent in 1999 and 8 percent in 1998, due to higher
sales of LOTRISONE, an antifungal/anti-inflammatory
cream, and ELOCON, a medium-potency topical steroid.
Worldwide net sales of cardiovascular products declined
10 percent in 1999, due to generic competition in the
United States against IMDUR, an oral nitrate for
angina, and NORMODYNE, an alpha-beta blocker for
hypertension. Partially offsetting these declines were
higher U.S. sales of INTEGRILIN, a platelet receptor
glycoprotein IIb/IIIa inhibitor, due to increased
market penetration following its launch in the second
quarter of 1998. Sales of K-DUR, a sustained-release
potassium chloride supplement, increased in 1999 due to
market share growth. In 1998, worldwide net sales of
cardiovascular products advanced 18 percent, reflecting
U.S. market expansion and market share growth for IMDUR
and K-DUR.
Other pharmaceuticals consist of products that do not
fit into the Company's major therapeutic categories,
such as SUBUTEX, a treatment for opiate addiction, and
revenues received from Novo Nordisk related to the
Company's co-promotion agreement for PRANDIN, an oral
antidiabetic agent.
Worldwide sales of animal health products increased 5
percent in 1999. Sales growth was driven by NUFLOR, a
broad-spectrum, multi-species antibiotic, and BANAMINE,
a non-steroidal anti-inflammatory agent. Sales of
animal health products in 1998 increased 66 percent
over 1997. Adjusting for the 1997 acquisition of the
Mallinckrodt animal health business, 1998 sales would
have increased 12 percent. Sales growth in 1998 was
again driven by BANAMINE and NUFLOR.
Foot care product sales rose 3 percent in 1999 led by
increases in the DR. SCHOLL'S insoles product line due
to new product introductions and line extensions.
Sales grew 12 percent in 1998, reflecting increases in
the DR. SCHOLL'S and antifungal product lines.
Over-the-counter (OTC) product sales increased 1
percent in 1999 due to a strong spring cough/cold
season. OTC product sales decreased slightly in 1998.
Sun care sales were up 7 percent in 1999 primarily due
to market growth. In 1998, sales grew 22 percent due to
early 1999 season purchases.
SUMMARY OF COSTS AND EXPENSES:
(Dollars in millions)
% Increase
1999 1998 1997 1999/98 1998/97
Cost of sales . . . . . . $1,800 $1,601 $1,308 12 % 22 %
% of net sales. . . . . . 19.6 % 19.8 % 19.3 %
Selling, general and
administrative . . .. . $3,434 $3,141 $2,664 9 % 18 %
% of net sales. . . . . . 37.4 % 38.9 % 39.3 %
Research and development. $1,191 $1,007 $ 847 18 % 19 %
% of net sales. . . . . . 13.0 % 12.5 % 12.5 %
Cost of sales as a percentage of net sales in 1999
decreased slightly versus 1998, due to favorable sales
mix. The increase of 1998 cost of sales as a
percentage of net sales versus 1997 reflects higher
royalties and the inclusion of Mallinckrodt animal
health products, which generally have lower gross
margins.
Selling, general and administrative expenses in 1999
and 1998 decreased as a percentage of sales as sales
growth outpaced expansion of the field force and
increased promotional and selling-related spending.
Research and development expenses grew 18 percent to
$1.2 billion and represented 13.0 percent of sales in
1999. In 1998, research and development expenses
increased 19 percent over 1997 and represented 12.5
percent of sales. The higher spending in both years
reflects the Company's funding of both internal
research efforts and research collaborations with
various partners to develop a steady flow of innovative
products. The Company expects research and development
spending for 2000 to increase by approximately 15
percent.
INCOME BEFORE INCOME TAXES
Income before income taxes totaled $2.8 billion in
1999, an increase of 20 percent over 1998. In 1998,
income before income taxes was $2.3 billion, up 22
percent over $1.9 billion in 1997.
INCOME TAXES
The Company's effective tax rate was 24.5 percent for
the years 1999, 1998 and 1997. The effective tax rate
for each period was lower than the U.S. statutory
income tax rate principally due to tax incentives in
certain jurisdictions where manufacturing facilities
are located. For additional information, see "Income
Taxes" in the Notes to Consolidated Financial
Statements.
NET INCOME
Net income in 1999 increased 20 percent to $2.1
billion. Net income in 1998 increased 22 percent over
1997. Differences in year-to-year exchange rates had a
less than 1 percent impact on net income growth in
1999. After eliminating exchange differences in 1998,
net income would have risen approximately 24 percent.
EARNINGS PER COMMON SHARE
Diluted earnings per common share rose 20 percent in
1999 to $1.42 and 22 percent in 1998 to $1.18. Foreign
currency exchange had no impact on 1999 diluted
earnings per common share. The strengthening of the
U.S. dollar against most foreign currencies decreased
growth in earnings per common share in 1998. Excluding
the impact of exchange rate fluctuations, diluted
earnings per common share would have increased
approximately 24 percent in 1998. Basic earnings per
common share increased 20 percent in 1999 to $1.44 and
22 percent in 1998 to $1.20.
Under existing share repurchase programs authorized by
the Board of Directors, approximately 18 million common
shares were repurchased during 1999, 1998 and 1997. A
$1 billion program was authorized in September 1997 and
commenced in January 1998. At December 31, 1999,
approximately 13.3 million shares had been acquired
under the 1997 authorization and the program was
approximately 65 percent complete.
YEAR 2000
Many computer systems ("IT systems") and equipment and
instruments with embedded microprocessors ("non-IT
systems") had been designed to recognize only the last
two digits of a calendar year. As previously reported,
the Company undertook an extensive project to remediate
or replace its date-sensitive IT and non-IT systems.
These systems have functioned properly since the first
of the year and management believes that future
operations will be unaffected by these matters. The
Company did not experience any significant increase in
product sales as a result of Year 2000 concerns.
As of December 31, 1999, the Company spent $66 million
on the Year 2000 remediation/replacement project; $20
million has been capitalized and $46 million has been
expensed. The expense for 1999 was $17 million, which
is approximately 10 percent of the Company's overall
annual information systems budget. Additional costs to
repair or replace non-critical, non-IT equipment will
continue into the year 2000, but the costs are not
expected to be significant.
The estimates and conclusions in this description of
the Year 2000 issue contain forward-looking statements
and are based on management's estimates of future
events.
EURO
On January 1, 1999, certain member countries of the
European Union established a new common currency, the
euro. Also on January 1, 1999, the participating
countries fixed the rate of exchange between their
existing legacy currencies and the euro. The new euro
currency will eventually replace the legacy currencies
currently in use in each of the participating
countries. Euro bills and coins will not be issued
until January 1, 2002.
Companies operating within the participating countries
may, at their discretion, choose to operate in either
legacy currencies or the euro until January 1, 2002.
The Company expects the majority of its affected
subsidiaries to continue to operate in their respective
legacy currencies during the next two years. The
Company can, however, accommodate transactions for
customers and suppliers operating in either legacy
currency or euros.
The Company believes that the creation of the euro will
not significantly change its market risk with respect
to foreign exchange. Having a common European currency
may result in certain changes to competitive practices,
product pricing and marketing strategies. Although we
are unable to quantify these effects, if any,
management at this time does not believe the creation
of the euro will have a material effect on the Company.
ACQUISITION
In June 1997, the Company acquired the worldwide animal
health operations of Mallinckrodt Inc. for
approximately $490 million, which includes the
assumption of debt and direct costs of the acquisition.
The addition of the Mallinckrodt operations has created
broader product lines and expanded geographic
distribution capabilities for our animal health
products. For additional information, see
"Acquisition" in the Notes to Consolidated Financial
Statements.
ENVIRONMENTAL MATTERS
The Company has obligations for environmental clean-up
under various state, local and federal laws, including
the Comprehensive Environmental Response, Compensation
and Liability Act, commonly known as Superfund.
Environmental expenditures have not had and, based on
information currently available, are not anticipated to
have a material impact on the Company. For additional
information, see "Legal and Environmental Matters" in
the Notes to Consolidated Financial Statements.
ADDITIONAL FACTORS INFLUENCING OPERATIONS
In the United States, many of the Company's
pharmaceutical products are subject to increasingly
competitive pricing as managed care groups,
institutions, government agencies and other buying
groups seek price discounts. In most international
markets, the Company operates in an environment of
government-mandated cost-containment programs. Several
governments have placed restrictions on physician
prescription levels and patient reimbursements,
emphasized greater use of generic drugs and enacted
across-the-board price cuts as methods to control
costs.
Since the Company is unable to predict the final form
and timing of any future domestic and international
governmental or other health care initiatives, their
effect on operations and cash flows cannot be
reasonably estimated. Similarly, the effect on
operations and cash flows of decisions of managed care
groups and other buying groups concerning formularies,
pharmaceutical reimbursement policies and availability
of the Company's pharmaceutical products cannot be
reasonably estimated.
The market for pharmaceutical products is competitive.
The Company's operations may be affected by
technological advances of competitors, industry
consolidation, patents granted to competitors, new
products of competitors and generic competition as the
Company's products mature. In addition, patent
positions are increasingly being challenged by
competitors, and the outcome can be highly uncertain.
An adverse result in a patent dispute can preclude
commercialization of products or negatively affect
sales of existing products. The effect on operations
of competitive factors and patent disputes cannot be
predicted.
Uncertainties inherent in government regulatory
approval processes, including, among other things,
delays in approval of new products, may also affect the
Company's operations. The effect on operations of
regulatory approval processes cannot be predicted.
The Company is subject to the jurisdiction of various
national, state and local regulatory agencies and is,
therefore, subject to potential administrative actions.
Of particular importance is the Food and Drug
Administration (FDA) in the United States. It has
jurisdiction over all the Company's businesses and
administers requirements covering the testing, safety,
effectiveness, approval, manufacturing, labeling and
marketing of the Company's products. From time to
time, agencies, including the FDA, may require the
Company to address various manufacturing, advertising,
labeling or other regulatory issues. Failure to comply
with governmental regulations can result in delays in
the release of products, seizure or recall of products,
suspension or revocation of the authority necessary for
the production and sale of products, fines and other
civil or criminal sanctions.
From time to time, the Company has received Warning
Letters from the FDA pertaining to various
manufacturing issues. Among these, the Company has
received a Warning Letter from the FDA relating
specifically to manufacturing issues identified during
FDA inspections of the Company's aerosol products
(albuterol and VANCERIL) manufacturing facilities in
New Jersey. The Company is implementing remedial
actions at these facilities. The Company has met with
the FDA on several occasions to apprise the agency of
the scope and status of these activities. An FDA
inspection of the Company's New Jersey manufacturing
facilities is ongoing. The Company cannot predict
whether its remedial actions will resolve the FDA's
concerns, whether the FDA will take any further action
or the effect of this matter on the Company's
operations.
Under certain circumstances, the Company may deem it
advisable to initiate product recalls. In 1999, the
Company voluntarily chose to initiate several recalls,
including a recall of certain shipments of albuterol
and VANCERIL manufactured at its New Jersey facilities.
LIQUIDITY AND FINANCIAL RESOURCES
Cash generated from operations continues to be the
Company's major source of funds to finance working
capital, capital expenditures, acquisitions,
shareholder dividends and common share repurchases.
Cash provided by operating activities totaled $1,893
million in 1999, $2,026 million in 1998 and $1,845
million in 1997. Year-to-year changes in cash provided
by operating activities result from the timing of
receipts and disbursements as well as from an overall
net investment in working capital necessitated by the
growth in the business.
Capital expenditures amounted to $543 million in 1999,
$389 million in 1998 and $405 million in 1997.
Commitments for future capital expenditures totaled
$179 million at December 31, 1999.
Cash flow related to financing activities included
equity proceeds as well as proceeds from short-term
borrowings. Common shares repurchased in 1999
totaled 9.9 million shares at a cost of $504 million.
In 1998, 3.4 million shares were repurchased for $141
million and, in 1997, 4.8 million shares were
repurchased at a cost of $132 million.
Dividend payments of $716 million were made in 1999,
compared with $627 million in 1998 and $542 million in
1997. Dividends per common share were $0.485 in 1999,
up from $0.425 in 1998 and $0.368 in 1997.
Cash and cash equivalents totaled $1,876 million,
$1,259 million and $714 million at December 31, 1999,
1998 and 1997, respectively. Short-term borrowings and
current portion of long-term debt totaled $728 million
at year-end 1999, $558 million in 1998 and $581 million
in 1997.
The Company's ratio of debt to total capital remained
at 12 percent in 1999. The Company's liquidity and
financial resources continued to be sufficient to meet
its operating needs. As of December 31, 1999, the
Company had $1.2 billion in unused lines of credit,
including $876 million available under the $1 billion
multi-currency unsecured revolving credit facility
expiring in 2001. The Company had A-1+ and P-1 ratings
for its commercial paper, and AA and Aa2 general bond
ratings from Standard & Poor's and Moody's,
respectively, as of December 31, 1999.
MARKET RISK DISCLOSURES
The Company is exposed to market risk primarily from
changes in foreign currency exchange rates and, to a
lesser extent, from interest rates. The following
describes the nature of the risks and demonstrates
that, in general, such market risk is not material to
the Company.
Foreign Currency Exchange Risk
The Company operates in more than 40 countries
worldwide. In 1999, sales outside the United States
accounted for approximately 36 percent of worldwide
sales. Virtually all these sales were denominated in
currencies of the local country. As such, the
Company's reported profits and cash flows are exposed
to changing exchange rates. In 1999, changes in
foreign exchange rates reduced sales by less than 1
percent and had no impact on 1999 diluted earnings per
common share.
To date, management has not deemed it cost-effective to
engage in a formula-based program of hedging the
profits and cash flows of foreign operations using
derivative financial instruments. Because the
Company's foreign subsidiaries purchase significant
quantities of inventory payable in U.S. dollars,
managing the level of inventory and related payables
and the rate of inventory turnover provides a level of
protection against adverse changes in exchange rates.
In addition, the risk of adverse exchange rate change
is mitigated by the fact that the Company's foreign
operations are widespread. The widespread nature of
the Company's foreign operations is the primary reason
that the overall economic weakness in certain Latin
American countries is not expected to significantly
impact future operations of the Company.
In addition, at any point in time, the Company's
foreign subsidiaries hold financial assets and
liabilities that are denominated in currencies other
than U.S. dollars. These financial assets and
liabilities consist primarily of short-term, third-
party and intercompany receivables and payables.
Changes in exchange rates affect these financial assets
and liabilities. For the most part, however, gains or
losses arise from translation and, as such, do not
significantly affect net income.
On occasion, the Company has used derivatives to hedge
specific short-term risk situations involving foreign
currency exposures. However, these derivative
transactions have not been material.
Interest Rate and Equity Price Risk
The financial assets of the Company that are exposed to
changes in interest rates and equity prices include
debt and equity securities held in non-qualified trusts
for employee benefits and equity securities acquired in
connection with in-licensing arrangements. The trust
investments totaled approximately $185 million at
December 31, 1999. Due to the long-term nature of the
liabilities that these assets fund, the Company's
exposure to market risk is low. A decline in market
value of these investments would not necessitate any
near-term funding of the trusts. In connection with
certain research and development in- licensing
arrangements, on occasion the Company acquires equity
securities of the licensee company. These investments
are generally accounted for as available-for-sale and,
as such, carried at market value. The total market
value of these investments at December 31, 1999, was
$119 million. See "Financial Instruments" in the Notes
to Consolidated Financial Statements for additional
information. The other financial assets of the Company
do not give rise to significant interest rate risk due
to their short duration.
The financial obligations of the Company that are
exposed to changes in interest rates are generally
limited to short-term borrowings and a $200 million
equity-type security issued in 1999. All other
borrowings are not significant. Although the
borrowings are, for the most part, floating rate
obligations, the interest rate risk posed by these
borrowings is low because the amount of this obligation
is small in relation to annual cash flow. The Company
has the ability to pay off these borrowings quickly if
interest rates were to increase significantly.
Interest Rate Swaps
In 1991 and 1992, the Company utilized interest rate
swaps as part of its international cash management
strategy. For additional information, see "Financial
Instruments" in the Notes to Consolidated Financial
Statements. These swaps subject the Company to a
moderate degree of market risk. The Company accounts
for these swaps using fair value accounting, with
changes in the fair value recorded in earnings. The
fair value of these swaps was an asset of $1 million at
December 31, 1999. The fair value of these swaps at
December 31, 1998, was less than $100 thousand. It is
estimated that a 10 percent change in interest rate
structure could change the fair value of the swaps by
approximately $2 million.
During 1999, the Company purchased a $200 million
variable rate, three-month time deposit. The Company
intends to roll over this time deposit every three
months until November 2003. To hedge the future
variable interest receipts on this time deposit, the
Company entered into an interest rate swap that matures
in November 2003. Under this swap, the Company
receives a fixed rate and pays a three-month variable
rate. The fair value of this swap was a $6 million
liability at December 31, 1999. It is estimated that a
10 percent change in interest rate structure could
change the fair value of the swap by approximately $5
million.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report and other written reports and oral
statements made from time to time by the Company may
contain so-called "forward-looking statements," all of
which are subject to risks and uncertainties. One can
identify these forward-looking statements by the use of
such words as "expects," "plans," "will," "estimates,"
"forecasts," "projects," "believes" and other words of
similar meaning. One also can identify them by the
fact that they do not relate strictly to historical or
current facts. These statements are likely to address
the Company's growth strategy, financial results,
regulatory issues, product approvals, development
programs, litigation and investigations. One must
carefully consider any such statement and should
understand that many factors could cause actual results
to differ from the Company'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. No forward-looking statement can be
guaranteed, and actual future results may vary
materially.
The Company does not assume the obligation to update
any forward-looking statement. One should carefully
evaluate such statements in light of factors described
in the Company's filings with the Securities and
Exchange Commission, especially on Forms 10-K, 10-Q and
8-K (if any). In Item 1 of the Company's annual report
on Form 10-K for the year ended December 31, 1999, the
Company discusses in more detail various important
factors that could cause actual results to differ from
expected or historic results. The Company notes these
factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. One should
understand that it is not possible to predict or
identify all such factors. Consequently, the reader
should not consider any such list to be a complete
statement of all potential risks or uncertainties.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Amounts in millions, except per share figures)
For the Years Ended December 31, 1999 1998 1997
Net sales . . . . . . . . . . . . . . . . . . . $9,176 $8,077 $6,778
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . 1,800 1,601 1,308
Selling, general and administrative. . . . . 3,434 3,141 2,664
Research and development . . . . . . . . . . 1,191 1,007 847
Other (income) expense, net. . . . . . . . . (44) 2 46
Total costs and expenses . . . . . . . . . . 6,381 5,751 4,865
Income before income taxes . . . . . . . . . . 2,795 2,326 1,913
Income taxes . . . . . . . . . . . . . . 685 570 469
Net income. . . . . . . . . . . . . . . . . . . $2,110 $1,756 $1,444
Diluted earnings per common share . . . . . . . $1.42 $ 1.18 $.97
Basic earnings per common share . . . . . . . . $1.44 $ 1.20 $.98
See Notes to Consolidated Financial Statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Amounts in millions)
For the Years Ended December 31, 1999 1998 1997
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . $2,110 $1,756 $1,444
Depreciation and amortization . . . . . . . . . 264 238 200
Accounts receivable . . . . . . . . . . . . . . (352) (67) (40)
Inventories . . . . . . . . . . . . . . . . . . (150) (102) (43)
Prepaid expenses and other assets. . . . . . . . (76) (116) (127)
Accounts payable and other liabilities . . . . . 97 317 411
Net cash provided by operating activities . . . 1,893 2,026 1,845
Investing Activities:
Capital expenditures . . . . . . . . . . . . . . (543) (389) (405)
Purchases of investments . . . . . . . . . . . . (338) (319) (77)
Reduction of investments . . . . . . . . . . . . 215 - 36
Purchase of business, net of cash acquired . . . - - (354)
Other, net . . . . . . . . . . . . . . . . . . . 3 - (8)
Net cash used for investing activities . . . . . (663) (708) (808)
Financing Activities:
Cash dividends paid to common shareholders . . . (716) (627) (542)
Common shares repurchased . . . . . . . . . . . (504) (141) (132)
Net change in short-term borrowings . . . . . . 187 (19) (290)
Repayment of long-term debt . . . . . . . . . . (2) (42) (1)
Other, net, primarily equity proceeds. . . . . . 424 57 116
Net cash used for financing activities . . . . . (611) (772) (849)
Effect of exchange rates on cash and cash equivalents (2) (1) (9)
Net increase in cash and cash equivalents . . . . 617 545 179
Cash and cash equivalents, beginning of year . . . 1,259 714 535
Cash and cash equivalents, end of year . . . . . . $1,876 $1,259 $ 714
See Notes to Consolidated Financial Statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share figures)
At December 31, 1999 1998
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . $1,876 $1,259
Accounts receivable, less allowances:
1999, $92; 1998, $98 . . . . . . . . . . 1,022 704
Inventories . . . . . . . . . . . . . . 958 841
Prepaid expenses, deferred income taxes
and other current assets . . . . . . . . 1,053 1,154
Total current assets . . . . . . . . . . 4,909 3,958
Property, at cost:
Land . . . . . . . . . . . . . . . . . 50 48
Buildings and improvements . . . . . . . 1,922 1,836
Equipment . . . . . . . . . . . . . . . . 1,760 1,677
Construction in progress . . . . . . . . 654 507
Total . . . . . . . . . . . . . . . . . . 4,386 4,068
Less accumulated depreciation . . . . . . 1,447 1,393
Property, net . . . . . . . . . . . . . . 2,939 2,675
Intangible assets, net . . . . . . . . . . . . 588 565
Other assets . . . . . . . . . . . . . . . . . 939 642
$9,375 $7,840
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 966 $1,003
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . . . 728 558
U.S., foreign and state income taxes . . . . . . . 502 505
Accrued compensation . . . . . . . . . . . . . . . 301 279
Other accrued liabilities . . . . . . . . . . . . . 712 687
Total current liabilities . . . . . . . . . . . . . 3,209 3,032
Long-term Liabilities:
Deferred income taxes . . . . . . . . . . . . . . . 284 291
Other long-term liabilities . . . . . . . . . . . . 717 515
Total long-term liabilities . . . . . . . . . . . . 1,001 806
Shareholders' Equity:
Preferred shares - authorized shares: 50,
$1 par value; issued: none . . . . . . . . . . . . - -
Common shares - authorized shares:
2,400, $.50 par value; issued: 2,030 . . . . . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . . . . . . 675 365
Retained earnings . . . . . . . . . . . . . . . . . 8,196 6,802
Accumulated other comprehensive income . . . . . . (233) (238)
Total . . . . . . . . . . . . . . . . . . . . . . . 9,653 7,944
Less treasury shares: 558, at cost . . . . . . . . 4,488 3,942
Total shareholders' equity . . . . . . . . . . . . 5,165 4,002
$9,375 $7,840
See Notes to Consolidated Financial Statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Amounts in millions)
Accumulated
Other Total
Compre- Share-
Common Paid-in Retained Treasury hensive holders'
Shares Capital Earnings Shares Income Equity
Balance December 31, 1996 $507 $172 $5,081 $(3,560) $(140) $2,060
Comprehensive income:
Net income 1,444 1,444
Foreign currency translation,
net of tax (101) (101)
Unrealized gain (loss) on
investments held available
for sale, net (3) (3)
Total comprehensive income 1,340
Cash dividends on common
shares (542) (542)
Stock incentive plans 122 (27) 95
Common shares repurchased (132) (132)
Effect of 2-for-1 stock split 508 (198) (310)
Balance December 31, 1997 1,015 96 5,673 (3,719) (244) 2,821
Comprehensive income:
Net income 1,756 1,756
Foreign currency translation,
net of tax 5 5
Unrealized gain (loss) on
investments held available
for sale, net 1 1
Total comprehensive income 1,762
Cash dividends on common
shares (627) (627)
Stock incentive plans 269 (82) 187
Common shares repurchased (141) (141)
Balance December 31, 1998 1,015 365 6,802 (3,942) (238) 4,002
Comprehensive income:
Net income 2,110 2,110
Foreign currency translation,
net of tax (54) (54)
Unrealized gain (loss) on
investments held available
for sale, net 59 59
Total comprehensive income 2,115
Cash dividends on common
shares (716) (716)
Stock incentive plans 310 (42) 268
Common shares repurchased (504) (504)
Balance December 31, 1999 $1,015 $675 $8,196 $(4,488) $ (233) $5,165
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share figures)
ACCOUNTING POLICIES
Principles of Consolidation - The consolidated
financial statements include Schering-Plough
Corporation and its subsidiaries. Intercompany
balances and transactions are eliminated. Certain
prior year amounts have been reclassified to conform to
the current year presentation.
Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and use assumptions that affect certain
reported amounts and disclosures; actual amounts may
differ.
Cash and Cash Equivalents - Cash and cash equivalents
include operating cash and highly liquid investments,
generally with maturities of three months or less.
Inventories - Inventories are valued at the lower of
cost or market. Cost is determined by using the last-
in, first-out method for a substantial portion of
inventories located in the United States. The cost of
all other inventories is determined by the first-in,
first-out method.
Depreciation - Depreciation is provided over the
estimated useful lives of the properties, generally by
use of the straight-line method. Average useful lives
are 50 years for buildings, 25 years for building
improvements and 12 years for equipment. Depreciation
expense was $208, $191 and $166 in 1999, 1998 and 1997,
respectively.
Intangible Assets - Intangible assets principally
include goodwill, licenses, patents and trademarks.
Intangible assets are recorded at cost and amortized on
the straight-line method over periods not exceeding 40
years. Accumulated amortization of intangible assets
was $188 and $138 at December 31, 1999 and 1998,
respectively. Intangible assets are periodically
reviewed to determine recoverability by comparing their
carrying values to undiscounted expected future cash
flows.
Foreign Currency Translation - The net assets of most
of the Company's foreign subsidiaries are translated
into U.S. dollars using current exchange rates. The
U.S. dollar effects that arise from translating the
net assets of these subsidiaries at changing rates are
recorded in the foreign currency translation adjustment
account, which is included in other comprehensive
income. For the remaining foreign subsidiaries,
non-monetary assets and liabilities are translated
using historical rates, while monetary assets and
liabilities are translated at current rates, with the
U.S. dollar effects of rate changes included in income.
Exchange gains and losses arising from translating
intercompany balances of a long-term investment nature
are recorded in the foreign currency translation
adjustment account. Other exchange gains and losses
are included in income.
Net foreign exchange losses included in income were $6,
$2 and $6 in 1999, 1998 and 1997, respectively.
Accumulated Other Comprehensive Income - Accumulated
other comprehensive income consists of the accumulated
foreign currency translation adjustment account and
accumulated unrealized gains and losses on securities
classified for Statement of Financial Accounting
Standards (SFAS) No. 115 purposes as held available for
sale. At December 31, 1999 and 1998, the accumulated
foreign currency translation adjustment account, net of
tax, totaled $301 and $247, respectively.
Revenue Recognition - Revenues from the sale of
products are recorded at the time goods are shipped to
customers.
Earnings Per Common Share - Diluted earnings per
common share are computed by dividing income by the sum
of the weighted-average number of common shares
outstanding plus the dilutive effect of shares issuable
through deferred stock units and the exercise of stock
options. Basic earnings per common share are computed
by dividing income by the weighted-average number of
common shares outstanding.
The shares used to calculate basic earnings per common
share and diluted earnings per common share are
reconciled as follows:
(shares in millions)
1999 1998 1997
Average shares outstanding
for basic earnings per share . . . . 1,470 1,468 1,464
Dilutive effect of options
and deferred stock units . . . . . . 16 20 16
Average shares outstanding
for diluted earnings per share . . . 1,486 1,488 1,480
As of December 31, 1999, there were 9 million options
outstanding with exercise prices higher than the
average price of the Company's common stock during
1999. Accordingly, these options are not included in
the dilutive effects indicated above.
Recently Issued Accounting Standard - In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137, requires adoption by the Company no later than
January 1, 2001. The Company plans to adopt SFAS No.
133 at that time. This statement is not expected to
materially impact the Company's financial statements
because the Company makes limited use of derivative
financial instruments.
ACQUISITION
On June 30, 1997, the Company acquired the worldwide
animal health business of Mallinckrodt Inc. for
approximately $490, which includes the assumption of
debt and direct costs of the acquisition. The
acquisition was recorded under the purchase method of
accounting. The excess of the purchase price over the
fair value of identifiable net assets acquired is
included in intangible assets, net. The results of
operations of the purchased animal health business have
been included in the Company's Statements of
Consolidated Income from the date of acquisition. Pro
forma results of the Company, assuming the acquisition
had been made at the beginning of each period
presented, would not be materially different from the
results reported.
FINANCIAL INSTRUMENTS
The table below presents the carrying values and
estimated fair values for the Company's financial
instruments, including derivative financial
instruments. Estimated fair values were determined
based on market prices, where available, or dealer
quotes.
December 31, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
ASSETS:
Cash and cash equivalents $1,876 $1,876 $1,259 $1,259
Debt and equity investments 532 532 213 213
Interest rate swap contracts 6 (6) - -
LIABILITIES:
Short-term borrowings and
current portion of long-
term debt 728 728 558 558
Long-term debt 6 6 4 4
Other financing instruments 208 193 - -
Credit and Market Risk
Most financial instruments expose the holder to credit
risk for non-performance and to market risk for changes
in interest and currency rates. The Company mitigates
credit risk on derivative instruments by dealing only
with financially sound counterparties. Accordingly,
the Company does not anticipate loss for non-
performance. The Company does not enter into
derivative instruments to generate trading profits.
Refer to "Market Risk Disclosures" in Management's
Discussion and Analysis of Operations and Financial
Condition for a discussion regarding the market risk of
the Company's financial instruments.
Debt and Equity Investments
Investments, which are primarily included in other non-
current assets, consist of a time deposit, equity
securities of licensee companies and debt and equity
securities held in non-qualified trusts to fund benefit
obligations. Investments are primarily classified as
available for sale and are carried at fair value, with
unrealized gains and losses, net of tax, reported in
other comprehensive income. Gross unrealized gains in
1999 were $59; gross unrealized losses in 1999 were not
material. Gross unrealized gains and losses in 1998 and
1997 were not material.
Interest Rate Swap Contracts
In 1991 and 1992, the Company utilized interest rate
swaps as part of its international cash management
strategy. The notional principal of the 1991
arrangement is $650 and the notional principal of the
1992 arrangement is $950. Both arrangements have 20-
year terms. At December 31, 1999, the arrangements
provide for the payment of interest based upon LIBOR
and the receipt of interest based upon an annual
election of various floating rates. As a result, the
Company remains subject to a moderate degree of market
risk through maturity of the swaps. These interest
rate swaps are recorded at fair value, with changes in
fair value recorded in earnings. Annual net cash flows
for payments and receipts under these interest rate
swap contracts are not material. The net asset or
liability under these interest rate swaps is recorded
in other current assets or other accrued liabilities,
as applicable.
To hedge future variable interest receipts on a $200
time deposit purchased in 1999, the Company entered
into an interest rate swap that matures in November
2003. Under the swap, the Company will receive 5.6
percent on a notional principal of $200 and will pay
three-month LIBOR. The differential paid or earned on
this interest rate swap has been designated as a hedge
and is reflected as an adjustment to interest income
over the life of the swap.
COMMITMENTS
Total rent expense amounted to $65 in 1999, $58 in 1998
and $44 in 1997. Future minimum rental commitments on
non-cancelable operating leases as of December 31,
1999, range from $31 in 2000 to $7 in 2004, with
aggregate minimum lease obligations of $20 due
thereafter. The Company has commitments related to
future capital expenditures totaling $179 as of
December 31, 1999.
BORROWINGS
The Company has a $1 billion committed, multi-currency
unsecured revolving credit facility expiring in 2001
from a syndicate of financial institutions. This
facility is available for general corporate purposes
and is considered as support for the Company's
commercial paper borrowings. This line of credit does
not require compensating balances; however, a nominal
commitment fee is paid. At December 31, 1999, $124 had
been drawn down under this facility. In addition, the
Company's foreign subsidiaries had available $314 in
unused lines of credit from various financial
institutions at December 31, 1999. Generally, these
foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option
of the Company or the financial institutions.
Short-term borrowings consist of commercial paper
issued in the United States, bank loans, notes payable
and amounts drawn down under the revolving credit
facility. Commercial paper outstanding at December 31,
1999 and 1998 was $495 and $339, respectively. The
weighted-average interest rate for short-term
borrowings at December 31, 1999 and 1998 was 6.9
percent and 5.7 percent, respectively.
The Company has a shelf registration statement on file
with the Securities and Exchange Commission covering
the issuance of up to $200 of debt securities. The
terms of these securities will be determined at the
time of sale. As of December 31, 1999, no debt
securities have been issued pursuant to this
registration.
FINANCING
During 1999, a subsidiary of the Company issued $200 of
equity-type securities. The securities bear a LIBOR-
based yield that is substantially fixed through
November 28, 2003; thereafter, the Company can elect to
reset the rate annually or substantially fix the rate
for the next five years. At December 31, 1999, the rate
was 5.6 percent. The Company can call the securities
at any time after November 30, 2004, or earlier under
certain circumstances. The holders can put the
securities back to the Company at any time after
November 30, 2027, or earlier under certain
circumstances. Because of the put and call features,
this obligation is included in other long-term
liabilities.
INTEREST COSTS AND INCOME
Interest costs were as follows:
1999 1998 1997
Interest cost incurred . . . . . . . . $41 $28 $55
Less: amount capitalized on
construction . . . . . . . . . 12 9 15
Interest expense . . . . . . . . . . . $29 $19 $40
Cash paid for interest, net of
amount capitalized . . . . . . . . $28 $19 $37
Interest income for 1999, 1998 and 1997 was $103, $59
and $56, respectively. Interest income and interest
expense are included in other (income) expense, net.
SHAREHOLDERS' EQUITY
On September 22, 1998, the Board of Directors voted to
increase the number of authorized common shares from
1.2 billion to 2.4 billion and approved a 2-for-1 stock
split. Distribution of the split shares was made on
December 2, 1998. On April 22, 1997, the Board of
Directors voted to increase the number of authorized
common shares from 600 million to 1.2 billion and
approved a 2-for-1 stock split. Distribution of these
split shares was made on June 3, 1997. All per share
amounts herein have been adjusted to reflect both stock
splits.
A summary of treasury share transactions follows
(shares in millions):
1999 1998 1997
Share balance at January 1 558 282 142
Shares issued under stock
incentive plans (10) (9) (4)
Purchase of treasury shares 10 3 2
Effect of 2-for-1 stock split - 282 142
Share balance at December 31 558 558 282
The Company has Preferred Share Purchase Rights
outstanding that are attached to, and presently only
trade with, the Company's common shares and are not
exercisable. The rights will become exercisable only
if a person or group acquires 20 percent or more of the
Company's common stock or announces a tender offer
which, if completed, would result in ownership by a
person or group of 20 percent or more of the Company's
common stock. Should a person or group acquire 20
percent or more of the Company's outstanding common
stock through a merger or other business combination
transaction, each right will entitle its holder (other
than such acquirer) to purchase common shares of
Schering-Plough having a market value of twice the
exercise price of the right. The exercise price of the
rights is $100.
Following the acquisition by a person or group of
beneficial ownership of 20 percent or more but less
than 50 percent of the Company's common stock, the
Board of Directors may call for the exchange of the
rights (other than rights owned by such acquirer), in
whole or in part, at an exchange ratio of one common
share or one two-hundredth of a share of Series A
Junior Participating Preferred Stock, per right. Also,
prior to the acquisition by a person or group of
beneficial ownership of 20 percent or more of the
Company's common stock, the rights are redeemable for
$.005 per right at the option of the Board of
Directors. The rights will expire on July 10, 2007,
unless earlier redeemed or exchanged. The Board of
Directors is also authorized to reduce the 20 percent
thresholds referred to above to not less than the
greater of (i) the sum of .001 percent and the largest
percentage of the outstanding shares of common stock
then known to the Company to be beneficially owned by
any person or group of affiliated or associated persons
and (ii) 10 percent, except that following the
acquisition by a person or group of beneficial
ownership of 20 percent or more of the Company's common
stock no such reduction may adversely affect the
interests of the holders of the rights.
STOCK INCENTIVE PLANS
Under the terms of the Company's 1997 Stock Incentive
Plan, 72 million of the Company's common shares may be
granted as stock options or awarded as deferred stock
units to officers and certain employees of the Company
through December 2002. Option exercise prices equal
the market price of the common shares at their grant
dates. Options expire not later than 10 years after
the date of grant. Standard options granted generally
have a one-year vesting term. Other options granted
vest 20 percent per year for five years starting five
years after the date of grant. Deferred stock units
are payable in an equivalent number of common shares;
the shares are distributable in a single installment or
in five equal annual installments generally commencing
one year from the date of the award.
The following table summarizes stock option activity
over the past three years under the current and prior
plans (number of options in millions):
1999 1998 1997
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
Of Exercise of Exercise of Exercise
Options Price Options Price Options Price
Outstanding at
January 1. . . . 42 $19.31 42 $12.20 41 $ 9.57
Granted . . . . 9 52.86 11 39.06 9 20.57
Exercised . . . (8) 13.96 (10) 10.47 (8) 7.76
Canceled
or expired. . . (1) 32.79 (1) 30.87 - -
Outstanding at
December 31 . . 42 $27.34 42 $19.31 42 $12.20
Options exercisable
at December 31 . 27 $21.16 25 $12.02 26 $ 9.28
The Company accounts for its stock compensation
arrangements using the intrinsic value method. If the
fair value method of accounting was applied as defined
in SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net income would
have been $2,044, $1,704 and $1,421 for 1999, 1998 and
1997, respectively. Pro forma diluted earnings per
share would have been $1.38, $1.15 and $.96 for 1999,
1998 and 1997, respectively, and pro forma basic
earnings per share would have been $1.39, $1.16 and
$.97 for 1999, 1998 and 1997, respectively.
The weighted-average fair value per option granted in
1999, 1998 and 1997 was $12.38, $9.24 and $4.60,
respectively. The fair values were estimated using the
Black-Scholes option pricing model based on the
following assumptions:
1999 1998 1997
Dividend yield 2.2% 2.4% 2.6%
Volatility 23% 24% 20%
Risk-free interest rate 5.1% 5.5% 6.1%
Expected term of options (in years) 5 5 5
In 1999, 1998 and 1997, the Company awarded deferred
stock units totaling 2.4 million, 2.5 million and 3.0
million, respectively. The expense recorded in 1999,
1998 and 1997 for deferred stock units was $61, $45 and
$32, respectively.
INVENTORIES
Year-end inventories consisted of the following:
1999 1998
Finished products. . . . . . . . . . . . . . $437 $483
Goods in process . . . . . . . . . . . . . . 267 174
Raw materials and supplies . . . . . . . . . 254 184
Total inventories . . . . . . . . . . . . . $958 $841
Inventories valued on a last-in, first-out basis
comprised approximately 31 percent and 28 percent of
total inventories at December 31, 1999 and 1998,
respectively. The estimated replacement cost of total
inventories at December 31, 1999 and 1998 was $972 and
$864, respectively.
RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
The Company has defined benefit pension plans covering
eligible employees in the United States and certain
foreign countries, and the Company provides post-
retirement health care benefits to its eligible U.S.
retirees and their dependents.
The components of net pension and other post-retirement
benefit (income) expense were as follows:
Post-retirement
Health Care
Retirement Plans Benefits
1999 1998 1997 1999 1998 1997
Service cost $42 $41 $37 $5 $5 $4
Interest cost 62 59 54 11 11 11
Expected return on plan assets (101) (89) (81) (18) (17) (15)
Amortization, net (5) (6) (5) (2) (1) (1)
Net $(2) $5 $5 $(4) $(2) $(1)
The components of the changes in the benefit
obligations were as follows:
Post-retirement
Health Care
Retirement Plans Benefits
1999 1998 1999 1998
Benefit obligations at January 1. . . . $987 $867 $177 $162
Service cost . . . . . . . . . . . . . 42 41 5 5
Interest cost . . . . . . . . . . . . . 62 59 11 11
Assumption changes. . . . . . . . . . . (101) 51 (20) 10
Effects of exchange rate changes. . . . (9) 5 - -
Benefits paid . . . . . . . . . . . . . (41) (62) (11) (8)
Actuarial (gains) and losses . . . . . 22 22 8 (3)
Plan amendments . . . . . . . . . . . . 6 4 - -
Benefit obligations at December 31. . . $968 $987 $170 $177
Benefit obligations of overfunded plans $740 $790 $170 $177
Benefit obligations of underfunded plans 228 197
The components of the changes in plan assets were as
follows:
Post-retirement
Health Care
Retirement Plans Benefits
1999 1998 1999 1998
Fair value of plan assets, primarily
stocks and bonds, at January 1 . . . . $1,145 $1,039 $228 $210
Actual return on plan assets . . . . . 188 135 42 26
Contributions . . . . . . . . . . . . . 14 13 - -
Effects of exchange rate changes . . . (9) - - -
Benefits paid . . . . . . . . . . . . (39) (42) (11) (8)
Fair value of plan assets at December 31 $1,299 $1,145 $259 $228
Plan assets of overfunded plans $1,219 $1,086 $259 $228
Plan assets of underfunded plans 80 59
In addition to the plan assets indicated above, at
December 31, 1999 and 1998, securities of $79 and $70,
respectively, were held in non-qualified trusts
designated to provide pension benefits for certain
underfunded plans.
The following is a reconciliation of the funded status
of the plans to the Company's balance sheet at December
31:
Post-retirement
Health Care
Retirement Plans Benefits
1999 1998 1999 1998
Plan assets in excess of benefit
obligations . . . . . . . . . . . . . $331 $158 $89 $51
Unrecognized net transition asset . . . (37) (45) - -
Unrecognized prior service costs. . . . 16 12 (5) (6)
Unrecognized net actuarial (gain) . . . (189) (14) (85) (51)
Net asset (liability) . . . . . . . . . $121 $111 $(1) $(6)
The weighted-average assumptions employed at December
31, 1999 and 1998 were:
Post-retirement
Health Care
Retirement Plans Benefits
1999 1998 1999 1998
Discount rate 7.0% 6.6% 7.5% 6.5%
Long-term expected rate of return on
plan assets 9.5% 9.9% 9.0% 9.0%
Rate of increase in future compensation 3.9% 4.1%
The weighted-average assumed health care cost trend
rates used for post-retirement measurement purposes
were 6.6 percent for 2000, trending down to 5.0 percent
by 2002. A 1 percent increase or decrease in the
assumed health care cost trend rate would increase or
decrease combined post-retirement service and interest
cost by $3 and the post-retirement benefit obligation
by $24.
The Company has a defined contribution profit-sharing
plan covering substantially all its full-time domestic
employees who have completed one year of service. The
annual contribution is determined by a formula based on
the Company's income, shareholders' equity and
participants' compensation. Profit-sharing expense
totaled $74, $66 and $58 in 1999, 1998 and 1997,
respectively.
INCOME TAXES
U.S. and foreign operations contributed to income
before income taxes as follows:
1999 1998 1997
United States . . . . . . . . . . . . . . . . $2,031 $1,609 $1,349
Foreign . . . . . . . . . . . . . . . . . . . 764 717 564
Total income before income taxes. . . . . . . $2,795 $2,326 $1,913
The components of income tax expense were as follows:
1999 1998 1997
Current:
Federal. . . . . . . . . . . . . . . . . $464 $442 $306
Foreign . . . . . . . . . . . . . . . . 185 184 160
State. . . . . . . . . . . . . . . . . . 13 14 10
Total current. . . . . . . . . . . . . . 662 640 476
Deferred:
Federal and state. . . . . . . . . . . . 46 (19) 30
Foreign. . . . . . . . . . . . . . . . . (23) (51) (37)
Total deferred . . . . . . . . . . . . . 23 (70) (7)
Total income tax expense . . . . . . . . . $685 $570 $469
The difference between the U.S. statutory tax rate and
the Company's effective tax rate was due to the
following:
1999 1998 1997
U.S. statutory tax rate. . . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting
from:
Lower rates in other jurisdictions,
net . . . . . . . . . . . . . . . . . . (10.5) (10.6) (10.0)
Research tax credit . . . . . . . . . . (.8) (.8) (.6)
All other, net . . . . . . . . . . . . . .8 .9 .1
Effective tax rate . . . . . . . . . . . . 24.5% 24.5% 24.5%
The lower rates in other jurisdictions, net, are
primarily attributable to certain employment and
capital investment actions taken by the Company. As a
result, income from manufacturing activities in these
jurisdictions is subject to lower tax rates through
2018.
As of December 31, 1999 and 1998, the Company had total
deferred tax assets of $733 and $741, respectively, and
deferred tax liabilities of $521 and $506,
respectively. Valuation allowances are not
significant. Significant deferred tax assets at
December 31, 1999 and 1998 were for operating costs not
currently deductible for tax purposes and totaled $389
and $425, respectively. Significant deferred tax
liabilities at December 31, 1999 and 1998 were for
depreciation differences, $222 and $233, respectively,
and retirement plans, $67 and $61, respectively. Other
current assets include deferred income taxes of $507
and $521 at December 31, 1999 and 1998, respectively.
Deferred taxes are not provided on undistributed
earnings of foreign subsidiaries (considered to be
permanent investments), which at December 31, 1999,
approximated $5,020. Determining the tax liability
that would arise if these earnings were remitted is not
practicable.
As of December 31, 1999, the U.S. Internal Revenue
Service has completed its examination of the Company's
tax returns for all years through 1988, and there are
no unresolved issues outstanding for those years.
Total income tax payments during 1999, 1998 and 1997
were $502, $458 and $368, respectively.
LEGAL AND ENVIRONMENTAL MATTERS
The Company has responsibilities for environmental
cleanup under various state, local and federal laws,
including the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as
Superfund. At several Superfund sites (or equivalent
sites under state law), the Company is alleged to be a
potentially responsible party (PRP). The Company
estimates its obligations for cleanup costs for
Superfund sites based on information obtained from the
federal Environmental Protection Agency, an equivalent
state agency, and/or studies prepared by independent
engineers, and on the probable costs to be paid by
other PRPs. The Company records a liability for
environmental assessments and/or cleanup when it is
probable a loss has been incurred and the amount can
reasonably be estimated.
The Company is also involved in various other claims
and legal proceedings of a nature considered normal to
its business, including product liability cases. The
estimated costs the Company expects to pay in these
cases are accrued when the liability is considered
probable and the amount can reasonably be estimated.
Consistent with trends in the pharmaceutical industry,
the Company is self-insured for certain events.
The recorded liabilities for the above matters at
December 31, 1999 and 1998 and the related expenses
incurred during the three years ended December 31,
1999, were not material. Expected insurance recoveries
have not been considered in determining the costs for
environmental-related liabilities. Management believes
that, except for the matters discussed in the following
paragraphs, it is remote that any material liability in
excess of the amounts accrued will be incurred.
The Company is a defendant in more than 110 antitrust
actions commenced (starting in 1993) in state and
federal courts by independent retail pharmacies, chain
retail pharmacies and consumers. The plaintiffs allege
price discrimination and/or conspiracy between the
Company and other defendants to restrain trade by
jointly refusing to sell prescription drugs at
discounted prices to the plaintiffs.
One of the federal cases is a class action on behalf of
approximately two-thirds of all retail pharmacies in
the United States and alleges a price-fixing
conspiracy. The Company agreed to settle the federal
class action for a total of $22, which has been paid in
full. The settlement provides, among other things,
that the Company shall not refuse to grant discounts on
brand-name prescription drugs to a retailer based
solely on its status as a retailer and that, to the
extent a retailer can demonstrate its ability to affect
market share of a Company brand-name prescription drug
in the same manner as a managed care organization with
which the retailer competes, it will be entitled to
negotiate similar incentives subject to the rights,
obligations, exemptions and defenses of the Robinson-
Patman Act and other laws and regulations. The United
States District Court in Illinois approved the
settlement of the federal class action in June 1996.
In June 1997, the Seventh Circuit Court of Appeals
dismissed all appeals from that settlement, and it is
not subject to further review. The defendants that did
not settle the class action proceeded to trial in
September 1998. The trial ended in November 1998 with
a directed verdict in the defendants' favor.
In April 1997, certain of the plaintiffs in the federal
class action commenced another purported class action
in United States District Court in Illinois against the
Company and the other defendants who settled the
previous federal class action. The complaint alleges
that the defendants conspired not to implement the
settlement commitments following the settlement
discussed above. The District Court has denied the
plaintiffs' motion for a preliminary injunction
hearing.
The Company has settled all of the state retailer
actions, except California and Alabama. The settlement
amounts were not material to the Company. In addition,
in June 1999, the Alabama Supreme Court reversed the
denial of a motion for judgment on the pleadings in the
Alabama retailer case. The court held that the Alabama
antitrust law did not apply to conspiracies alleged to
be in interstate commerce. Based on that ruling, the
Alabama retailer case has been dismissed.
The Company has settled all of the state consumer
cases, except Alabama, North Dakota, South Dakota, West
Virginia and New Mexico. The settlement amounts were
not material to the Company. A motion is pending to
dismiss the Alabama consumer case based on the Alabama
Supreme Court decision in the retailer case.
In May 1998, the Company settled six of the federal
antitrust cases brought by 26 food and drug chain
retailers and several independent retail stores.
Plaintiffs in these cases comprise collectively
approximately one-fifth of the prescription drug retail
market. Also in 1999, the Company settled federal
antitrust cases brought by independent pharmacists and
small pharmacy chains comprising about 2 percent of the
prescription drug retail market. The settlement
amounts were not material to the Company.
Plaintiffs in these antitrust actions generally seek
treble damages in an unspecified amount and an
injunction against the allegedly unlawful conduct.
The Company believes all the antitrust actions are
without merit and is defending itself vigorously.
In March 1996, the Company was notified that the United
States Federal Trade Commission (FTC) is investigating
whether the Company, along with other pharmaceutical
companies, conspired to fix prescription drug prices.
The investigation is ongoing. The Company believes
that its actions have been lawful and proper and is
cooperating in the investigation. However, it is not
possible to predict the outcome of the investigation,
which could result in the imposition of fines,
penalties and injunctive or administrative remedies.
In October 1999, the Company received a subpoena from
the U.S. Attorney's Office for the Eastern District of
Pennsylvania, pursuant to the Health Insurance
Portability and Accountability Act of 1996, concerning
the Company's contracts with pharmacy benefit managers
(PBMs) and managed care organizations to provide
disease management services in connection with the
marketing of its pharmaceutical products. It appears
that the subpoena is one of a number addressed to
industry participants including PBMs, managed care
organizations and manufacturers as a part of an inquiry
into, among other things, marketing practices. The
government's inquiry appears to focus on whether the
Company's disease management and other marketing
programs comply with federal health care laws and
whether the value of its disease management programs
should have been included in the calculation of rebates
to the government. The Company believes that its
disease management and other marketing programs have
been designed to comply with the law and that its
rebate calculations have properly excluded the value of
its disease management programs. The Company is
cooperating in the investigation. However, it is not
possible to predict the outcome of the investigation,
which could include the imposition of fines, penalties
and injunctive or administrative remedies. Nor can the
Company predict whether the investigation will affect
its marketing practices or sales.
The Company is a party to an arbitration filed by
Biogen, Inc. (Biogen) in a dispute over the method used
by the Company to determine the amount of royalties
payable to Biogen on sales of REBETRON Combination
Therapy containing REBETOL Capsules and INTRON A
Injection. The Company believes that it should prevail
in this arbitration. However, there can be no
assurance that the Company will prevail.
In February 1998, Geneva Pharmaceuticals, Inc. (Geneva)
submitted an Abbreviated New Drug Application (ANDA) to
the U.S. Food and Drug Administration (FDA) seeking to
market a generic form of CLARITIN in the United States
several years before the expiration of the Company's
patents. Geneva has alleged that certain of the
Company's U.S. CLARITIN patents are invalid and
unenforceable. The CLARITIN patents are material to
the Company's business. In March 1998, the Company
filed suit in federal court seeking a ruling that
Geneva's ANDA submission constitutes willful
infringement of the Company's patents and that its
challenge to the Company's patents is without merit.
The Company believes that it should prevail in the
suit. However, as with any litigation, there can be no
assurance that the Company will prevail.
During 1999, Copley Pharmaceutical, Inc., Teva
Pharmaceuticals, Inc., Novex Pharma and Zenith Goldline
Pharmaceuticals individually notified the Company that
each had submitted an ANDA to the FDA seeking to market
certain generic forms of CLARITIN in the United States
before the expiration of certain of the Company's
patents, and in 2000 Andrx Pharmaceuticals, L.L.C.
(Andrx) made a similar submission relating to CLARITIN-
D 24 Hour tablets. Each has alleged that one or more
of those patents are invalid and unenforceable. In
each case, except Andrx, the Company has filed suit in
federal court seeking a ruling that the applicable ANDA
submission and proposed marketing of a generic product
constitute willful infringement of the Company's patent
and that the challenge to the patent is without merit.
The Company will file a similar suit against Andrx in
federal court. The Company believes that it should
prevail in these suits. However, as with any
litigation, there can be no assurance that the Company
will prevail.
In January 2000, Hoffman-La Roche Inc. filed actions
against the Company in United States District Court in
New Jersey and in France alleging that the Company's
PEG-INTRON (peginterferon alfa-2b) infringes Hoffman-La
Roche Inc.'s patents on certain pegylated interferons.
The Company believes that it should prevail in these
suits. However, as with any litigation, there can be
no assurance that the Company will prevail.
QUARTERLY DATA (UNAUDITED)
Three Months Ended March 31, June 30, September 30, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
Net sales . . . . $2,186 $1,908 $2,451 $2,124 $2,236 $1,986 $2,303 $2,059
Cost of sales. . . 432 380 472 423 438 394 458 404
Gross profit . . . 1,754 1,528 1,979 1,701 1,798 1,592 1,845 1,655
Selling, general
and
administrative . . 794 712 963 828 814 762 863 839
Research and
development . . 262 224 297 261 305 257 327 265
Other (income)
expense, net . . (15) (4) (7) 9 (7) 1 (15) (4)
Income before
income taxes . . 713 596 726 603 686 572 670 555
Income taxes . . 174 146 179 148 168 140 164 136
Net income. . . . $ 539 $ 450 $ 547 $ 455 $ 518 $ 432 $ 506 $419
Diluted earnings
per common share . $ .36 $ .30 $ .37 $ .31 $ .35 $ .29 $ .34 $.28
Basic earnings per
common share . . .37 .31 .37 .31 .35 .29 .35 .29
Dividends per
common share . . .11 .095 .125 .11 .125 .11 .125 .11
Common share prices:
High . . . . . 58 7/8 42 3/4 60 3/4 46 11/16 56 53 17/32 56 7/8 57 1/2
Low . . . . . 51 1/8 30 27/32 43 5/16 39 1/16 41 9/16 43 40 3/4 45 13/16
Average shares
outstanding for
diluted EPS
(in millions) . . 1,491 1,485 1,486 1,488 1,484 1,490 1,483 1,489
Average shares
outstanding for
basic EPS
(in millions) . . 1,472 1,466 1,470 1,467 1,469 1,469 1,470 1,470
The Company's common shares are listed and principally
traded on the New York Stock Exchange. The approximate
number of holders of record of common shares as of
December 31, 1999, was 46,000.
SEGMENT INFORMATION
Schering-Plough is a worldwide research-based
pharmaceutical company engaged in the discovery,
development, manufacturing and marketing of
pharmaceutical products. Discovery and development
efforts target the field of human health. However,
application in the field of animal health can result
from these efforts. The Company views animal health
applications as a means to maximize the return on
investments in discovery and development. The Company
operates primarily in the prescription pharmaceutical
marketplace. However, the Company historically has
sought regulatory approval to switch prescription
products to over-the-counter (OTC) status as a means of
extending a product's life cycle. In this way, the OTC
marketplace is yet another means of maximizing the
return on investments in discovery and development.
Effective January 1, 1999, the Company changed the
structure of its internal organization to reflect this
focus on pharmaceutical research and development. As a
result, the Company reports as one segment.
Previously, the Company was organized into two business
units: pharmaceuticals and health care. Prior year
information has been restated on this basis.
Net Sales by Major Therapeutic Category
1999 1998 1997
Allergy & Respiratory . . . . $3,850 $3,375 $2,708
Anti-infective & Anticancer . 1,738 1,263 1,156
Dermatologicals . . . . . . . 682 619 571
Cardiovasculars . . . . . . . 673 750 637
Other Pharmaceuticals . . . . 792 688 649
Animal Health . . . . . . . . 678 647 389
Foot Care . . . . . . . . . . 348 336 300
OTC . . . . . . . . . . . . . 221 218 220
Sun Care. . . . . . . . . . . 194 181 148
Consolidated net sales. . . . $9,176 $8,077 $6,778
Consolidated income
before income taxes. . $2,795 $2,326 $1,913
The Company operates in more than 40 countries outside
the United States. Sales outside the United States
comprised 36 percent, 37 percent and 39 percent of
consolidated net sales in 1999, 1998 and 1997,
respectively. No single foreign country accounted for
more than 5 percent of consolidated net sales during
the past three years.
Net Sales by Geographic Area
1999 1998 1997
United States. . . . . . . . . . . . $5,835 $5,113 $4,151
Europe and Canada. . . . . . . . . . 2,157 1,889 1,620
Latin America. . . . . . . . . . . . 614 578 453
Pacific Area and Asia. . . . . . . . 570 497 554
Consolidated net sales . . . . . . . $9,176 $8,077 $6,778
Net sales are presented in the geographic area in which
the Company's customers are located. During 1999 and
1998, 12 percent and 11 percent, respectively, of
consolidated net sales were made to McKesson HBOC,
Inc., a major pharmaceutical and health care products
distributor. During 1997, no single customer accounted
for more than 10 percent of consolidated net sales.
Long-lived Assets by Geographic Location
1999 1998 1997
United States. . . . . . . . . . . . $1,738 $1,516 $1,348
Ireland. . . . . . . . . . . . . . . 340 338 340
Singapore. . . . . . . . . . . . . . 260 268 271
Puerto Rico. . . . . . . . . . . . . 173 160 161
Other . . . . . . . . . . . . . . . 621 598 606
Total. . . . . . . . . . . . . . . . $3,132 $2,880 $2,726
Long-lived assets shown by geographic location are
primarily property.
REPORT BY MANAGEMENT
Management is responsible for the preparation and the
integrity of the accompanying financial statements.
These statements are prepared in accordance with
generally accepted accounting principles and require
the use of estimates and assumptions that affect the
reported amounts of assets, liabilities, sales and
expenses. In management's opinion, the consolidated
financial statements present fairly the Company's
results of operations, financial position and cash
flows. All financial information in this Annual Report
is consistent with the financial statements.
The Company maintains, and management relies on, a
system of internal accounting controls and related
policies and procedures that provide reasonable
assurance of the integrity and reliability of the
financial statements. The system provides, at
appropriate cost and within the inherent limitations of
all internal control systems, that transactions are
executed in accordance with management's authorization,
are properly recorded and reported in the financial
statements and that assets are safeguarded. The
Company's internal accounting control system provides
for careful selection and training of supervisory and
management personnel and requires appropriate
segregation of responsibilities and delegation of
authority. In addition, the Company maintains a
corporate code of conduct for purposes of determining
possible conflicts of interest, compliance with laws
and confidentiality of proprietary information.
The Company's independent auditors, Deloitte & Touche
LLP, audit the annual consolidated financial
statements. They evaluate the Company's internal
accounting controls and perform tests of procedures and
accounting records to enable them to express their
opinion on the fairness of these statements. In
addition, the Company has an internal audit function
that regularly performs audits using programs designed
to test compliance with Company policies and
procedures, and to verify the adequacy of internal
accounting controls and other financial policies. The
internal auditors' and independent auditors'
recommendations concerning the Company's system of
internal accounting controls have been considered and
appropriate action has been taken with respect to those
recommendations.
The Finance, Compliance and Audit Committee of the
Board of Directors consists solely of non-employee
directors. The Committee meets periodically with
management, the internal auditors and the independent
auditors to review audit results, financial reporting,
internal accounting controls and other financial
matters. Both the independent auditors and internal
auditors have full and free access to the Committee.
/S/ Richard Jay Kogan /S/Jack L. Wyszomierski /S/Thomas H. Kelly
Chairman Executive Vice President Vice President
of the Board and and Chief Financial and Controller
Chief Executive Officer
Officer
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE
Schering-Plough Corporation, its Directors and
Shareholders:
We have audited the accompanying consolidated balance
sheets of Schering-Plough Corporation and subsidiaries
as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the
period ended December 31, 1999. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of Schering-Plough Corporation and
subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for
each of the three years in the period ended December
31, 1999, in conformity with generally accepted
accounting principles.
/S/DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 11, 2000
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
SIX-YEAR SELECTED FINANCIAL & STATISTICAL DATA
(Dollars in millions, except per share figures)
1999 1998 1997 1996 1995 1994
Operating Results
Net Sales . . . . . . . . . . . $9,176 $8,077 $6,778 $5,656 $5,104 $4,537
Income before income taxes. . . . 2,795 2,326 1,913 1,606 1,395 1,227
Income from continuing operations 2,110 1,756 1,444 1,213 1,053 926
Discontinued operations . . . . . - - - - (166) (4)
Net income. . . . . . . . . . . . 2,110 1,756 1,444 1,213 887 922
Diluted earnings per common share
from continuing operations . . 1.42 1.18 .97 .82 .70 .60
Diluted earnings per common share 1.42 1.18 .97 .82 .59 .60
Basic earnings per common share
from continuing operations. . . 1.44 1.20 .98 .82 .71 .61
Discontinued operations . . . . - - - - (.11) (.01)
Basic earnings per common share . 1.44 1.20 .98 .82 .60 .60
Investments
Research and development. . . . .$1,191 $1,007 $ 847 $ 723 $ 657 $ 610
Capital expenditures. . . . . . . 543 389 405 336 304 286
Financial Condition
Property, net . . . . . . . . . .$2,939 $2,675 $2,526 $2,246 $2,099 $2,082
Total assets. . . . . . . . . . . 9,375 7,840 6,507 5,398 4,665 4,326
Long-term debt. . . . . . . . . . 6 4 46 46 87 186
Shareholders' equity. . . . . . . 5,165 4,002 2,821 2,060 1,623 1,574
Net book value per common share . 3.51 2.72 1.93 1.41 1.11 1.06
Financial Statistics
Income from continuing operations
as a percent of sales. . . . . . 23.0% 21.7% 21.3% 21.4% 20.6% 20.4%
Net income as a percent of sales. 23.0% 21.7% 21.3% 21.4% 17.4% 20.3%
Return on average shareholders'
equity. . . . . . . . . . . . . 46.0% 51.5% 59.2% 65.9% 55.5% 58.4%
Effective tax rate. . . . . . . . 24.5% 24.5% 24.5% 24.5% 24.5% 24.5%
Other Data
Cash dividends per common share .$ .485 $ .425 $ .368 $ .32 $ .281 $ .248
Cash dividends on common shares . 716 627 542 474 416 379
Depreciation and amortization . . 264 238 200 173 157 145
Number of employees . . . . . . .26,500 25,100 22,700 20,600 20,100 20,000
Average shares outstanding
for diluted earnings per common
share (in millions) . . . . . . 1,486 1,488 1,480 1,487 1,498 1,547
Average shares outstanding
for basic earnings per common
share (in millions) . . . . . . 1,470 1,468 1,464 1,471 1,479 1,530
Common shares outstanding
at year-end (in millions) . . . 1,472 1,472 1,465 1,461 1,457 1,488