UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (201) 822-7000
(telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of March 31, 1996: 368,425,332
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Dollars in millions, except per share figures)
Three Months
Ended
March 31
1996 1995
Sales . . . . . . . . . . . . . . $1,382.7 $1,224.2
Costs and expenses:
Cost of sales. . . . . . . . . . 262.7 235.8
Selling, general
and administrative. . . . . . . 503.3 455.8
Research and development . . . . 162.9 147.2
Other expense, net . . . . . . . 21.2 8.0
950.1 846.8
Income before income taxes. . . . 432.6 377.4
Income taxes. . . . . . . . . . . 106.0 92.5
Income from continuing operations 326.6 284.9
Loss from discontinued operations - (6.3)
Net income. . . . . . . . . . . . $ 326.6 $ 278.6
Earnings per share:
Continuing operations. . . . . . $ .89 $ .77
Discontinued operations. . . . . - (.02)
Earnings per common share . . . . $ .89 $ .75
Dividends per common share. . . . $ .29 $ .255
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in millions, except per share figures)
March 31, December 31,
1996 1995
Assets
Cash and cash equivalents . . . . . . . . $ 356.8 $ 321.4
Accounts receivable, net. . . . . . . . . 712.1 569.3
Inventories . . . . . . . . . . . . . . . 522.1 502.0
Prepaid expenses, deferred income
taxes and other current assets . . . . . 607.2 563.6
Total current assets. . . . . . . . . 2,198.2 1,956.3
Property, plant and equipment . . . . . . 3,156.5 3,136.0
Less accumulated depreciation . . . . . . 1,054.2 1,037.1
Property, net . . . . . . . . . . . . 2,102.3 2,098.9
Other assets. . . . . . . . . . . . . . . 677.0 609.4
$4,977.5 $4,664.6
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 321.7 $ 374.2
Short-term borrowings and current
portion of long-term debt. . . . . . . . 733.7 841.3
Other accrued liabilities . . . . . . . . 1,329.7 1,146.6
Total current liabilities . . . . . . 2,385.1 2,362.1
Long-term debt. . . . . . . . . . . . . . 87.0 87.1
Other long-term liabilities . . . . . . . 600.6 592.5
Shareholders' Equity:
Preferred shares - $1 par value
each; issued - none. . . . . . . . . . . - -
Common shares - $1 par value each; shares
issued: 1996 - 506,640,813
1995 - 502,965,382 . . . . . . . . . . . 506.6 503.0
Paid-in capital . . . . . . . . . . . . . 118.2 49.5
Retained earnings . . . . . . . . . . . . 4,562.6 4,341.8
Foreign currency translation
adjustment and other . . . . . . . . . . (117.2) (103.9)
Total . . . . . . . . . . . . . . . . 5,070.2 4,790.4
Less treasury shares, at cost -
1996, 138,215,481 shares;
1995, 138,796,653 shares . . . . . . . . 3,165.4 3,167.5
Total shareholders' equity. . . . . . 1,904.8 1,622.9
$4,977.5 $4,664.6
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(Dollars in millions)
1996 1995
Operating Activities:
Income from continuing operations . . . . $ 326.6 $ 284.9
Depreciation and amortization . . . . . . 42.3 39.4
Working capital changes - source (use):
Accounts receivable. . . . . . . . . . . (149.9) (142.4)
Inventories. . . . . . . . . . . . . . . (27.9) (7.2)
Other current assets . . . . . . . . . . (45.2) (24.8)
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . . 134.7 (16.5)
Other, net. . . . . . . . . . . . . . . . 2.3 (26.7)
Net cash provided by operating
activities . . . . . . . . . . . . . . . 282.9 106.7
Investing Activities:
Reduction of investments. . . . . . . . . .4 43.0
Purchases of investments. . . . . . . . . (7.4) (7.2)
Capital expenditures. . . . . . . . . . . (48.9) (47.9)
Other, net. . . . . . . . . . . . . . . . 2.4 (2.3)
Net cash used for investing
activities . . . . . . . . . . . . . . . (53.5) (14.4)
Financing Activities:
Short-term borrowings, net. . . . . . . . (106.5) 27.6
Long-term borrowings, net . . . . . . . . - .1
Common shares repurchased . . . . . . . . - (13.8)
Dividends paid to common shareholders . . (105.9) (94.9)
Proceeds from other equity
transactions . . . . . . . . . . . . . . 18.5 8.5
Net cash used for financing
activities . . . . . . . . . . . . . . . (193.9) (72.5)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (.1) (1.1)
Net Cash Flow from Continuing Operations . 35.4 18.7
Net Cash Flow from Discontinued Operations - (8.1)
Net increase in cash and cash equivalents . 35.4 10.6
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 321.4 115.6
Cash and cash equivalents, end of period . $ 356.8 $ 126.2
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be
read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1995
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
Earnings Per Common Share
Earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding. Shares
issuable through the exercise of stock options and warrants and
under deferred delivery agreements are not considered in the
calculation, as they do not have a material effect on the
determination of earnings per common share. The weighted-average
number of shares used in the computation of earnings per common
share for the three months ended March 31, 1996 and 1995 were
365,708,883 and 372,038,104, respectively.
During the first quarter, the Company issued approximately 1.0
million shares of common stock in connection with the acquisition
of Canji, Inc., a gene therapy company (accounted for using the
purchase method of accounting). During the first quarter, the
Company also issued approximately 2.6 million shares of common
stock in exchange and settlement for warrants to purchase 10.6
million shares of common stock.
Inventories
Inventories consisted of:
March 31, December 31,
1996 1995
Finished products . . . . . . . $ 210.7 $ 213.2
Goods in process. . . . . . . . 220.6 179.4
Raw materials and supplies. . . 90.8 109.4
Total inventories . . . . . . $ 522.1 $ 502.0
Sales
Segment sales for the three months ended March 31, 1996 and 1995
were as follows:
1996 1995
Pharmaceutical products . . . . $1,197.9 $1,030.3
Health care products. . . . . . 184.8 193.9
Consolidated sales. . . . . . $1,382.7 $1,224.2
Legal and Environmental Matters
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including
environmental matters and product liability cases. The recorded
liabilities for these matters at March 31, 1996 were not
material. Management believes that, except for the matters
discussed in the following paragraph, it is remote that any
material liability in excess of the amounts accrued will be
incurred.
The Company is a defendant in more than 150 antitrust actions
commenced 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 alleging a price-fixing conspiracy. The Company
had agreed, subject to court approval, to settle the federal
class action for a total of $22.1 payable over three years. On
April 4, 1996, the United States District Court for the Northern
District of Illinois refused to approve the proposed settlement
of the federal class action due to a lack of any change in the
opportunity the class would have to obtain prices similar to
those the Company extends to managed care purchasers. The court
also denied all motions of defendant manufacturers for summary
judgment. On April 11, 1996, the court voided a May 7, 1996
trial date and all pre-trial preparation to allow for
consideration of requests to certify certain pre-trial rulings to
the appellate court. On May 6, 1996, the Company entered into an
amendment to the proposed settlement to resolve the federal class
action. The amendment 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 financial terms of the
proposed settlement are unchanged. The amended settlement is
subject to court approval. A fairness hearing is scheduled for
June 11, 1996. Three of the state cases have been certified as
class actions. One is a class action on behalf of certain
retail pharmacies in California, and the other two are class
actions in California and Alabama, respectively, on behalf of
certain consumers of prescription medicine. Plaintiffs seek
treble damages in an unspecified amount and an injunction against
the allegedly unlawful conduct. The Company believes that all
these actions are without merit and is defending itself
vigorously against all such claims.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three months ended March 31, 1996
compared with the corresponding period in 1995.
Consolidated sales for the first quarter increased $158.5 million
or 13 percent compared with the same period in 1995. Excluding
the effect of foreign currency exchange rate fluctuations,
consolidated sales grew 12 percent.
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions and government agencies seek
price discounts. In most international markets, the Company
operates in an environment of government-mandated cost
containment programs. Several governments have placed
restrictions on physician prescription levels and patient
reimbursements, emphasized greater use of generic drugs and
enacted across-the-board price cuts as methods of cost control.
Since the Company is unable to predict the final form and timing
of any future domestic and international governmental or other
health care initiatives, their effect on future operations and
cash flows cannot be reasonably estimated.
Sales
Domestic prescription pharmaceutical sales advanced 29 percent
for the first three months of 1996. Sales of respiratory products
increased 23 percent, due to continued strong growth of the
CLARITIN brand of nonsedating antihistamines and the VANCERIL
line of asthma products.
The respiratory sales gain also reflected a moderate decline in
sales of the PROVENTIL (albuterol) line of asthma products, due
to increased generic competition. Sales of the PROVENTIL line
totaled $117 million for the quarter, and metered-dose inhalers
contributed approximately 70 percent of this amount. The
PROVENTIL formulations of solution, syrup and tablets have been
subject to generic competition, and in December 1995 generic
metered-dose inhalers entered the market. In response, the
Company's generic pharmaceutical marketing subsidiary, Warrick
Pharmaceuticals, launched its own version of a generic inhaler.
While the generic inhalers have significantly reduced branded
PROVENTIL inhaler sales, the Warrick inhaler largely offset the
sales decline. Competition from generic metered-dose inhalers
will, however, negatively affect future sales and profitability
of the PROVENTIL (albuterol) line of asthma products.
U.S. sales of anti-infective and anticancer products rose 56
percent compared with 1995, due to the launch of CEDAX, a third-
generation cephalosporin antibiotic, in the quarter. Also,
INTRON A, the Company's alpha interferon anticancer and antiviral
agent, achieved significant gains due to increased utilization
for both hepatitis and oncology.
Domestic cardiovascular product sales grew 37 percent for the
quarter, reflecting market share gains for IMDUR, a once-daily
oral nitrate, and K-DUR potassium supplements. Sales of
dermatological products advanced 17 percent for the quarter, due
to higher sales of LOTRISONE, an antifungal/anti-inflammatory
cream.
International ethical pharmaceutical product sales increased 6
percent for the first three months of 1996. Excluding the impact
of foreign exchange rate fluctuations, sales would have risen 4
percent. Sales of anti-infective and anticancer products grew 10
percent for the quarter, due to gains for INTRON A and CEDAX.
Sales of INTRON A reflect a stabilization in Japan, along with
increases occurring in most major European markets.
International dermatological product sales advanced 8 percent in
the quarter, primarily reflecting gains for ELOCON, a mid-potency
topical corticosteroid. Sales of cardiovascular products rose 11
percent, mainly the result of higher sales of NITRO-DUR
transdermal nitroglycerin patches. Respiratory product sales
advanced 1 percent for the quarter, as CLARITIN growth was
tempered by a decline in sales of other allergy products in
Japan. Sales growth for the quarter was also aided by continued
gains for LOSEC, an anti-ulcer treatment licensed from AB Astra.
Worldwide sales of animal health products declined by 7 percent,
excluding foreign exchange rate fluctuations. The sales declines
occurred in the U.S. due to unfavorable market conditions for
food-producing animals. International animal health sales,
however, posted gains for most products.
Sales of health care products declined 5 percent in the first
quarter. Over-the-counter product sales declined 17 percent,
primarily due to aggressive private-label competition for
allergy/cold and female health products. Foot care product sales
declined modestly, while sales of sun care products rose
moderately.
Income before income taxes from continuing operations increased
15 percent for the quarter as compared with 1995, and represented
31.3 percent of sales versus 30.8 percent last year.
Cost of sales as a percentage of sales decreased slightly to 19.0
percent from 19.3 percent in 1995, principally the result of a
favorable sales mix of higher margin pharmaceutical products.
Selling, general and administrative expenses represented 36.4
percent of sales in the first quarter compared with 37.2 percent
last year. The decrease in the ratio was the result of cost
containment efforts in areas not affected by sales volume.
Research and development spending rose 11 percent in the quarter,
representing 11.8 percent of sales compared with 12.0 percent a
year ago. The higher spending reflects the Company's funding of
both internal research efforts and research collaborations with
various partners to develop a steady flow of innovative products
and line extensions.
The effective tax rate for continuing operations was 24.5 percent
in the first three months of both 1996 and 1995.
Earnings per common share from continuing operations advanced 16
percent in the first quarter to $.89 from $.77 in 1995. Changes
in foreign currency exchange rates had no effect on earnings per
common share from continuing operations.
Liquidity and financial resources - three months ended March 31,
1996
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, additions to
property, shareholder dividends and common share repurchases.
Cash provided from operations totaled $282.9 million for the
first three months of 1996. This cash funded the spending of
$105.9 million for shareholder dividends and $48.9 million for
capital expenditures, as well as provided for the $106.5 million
reduction in short-term borrowings.
In June 1995, the Board of Directors authorized the purchase of
$500 million of common shares. As of March 31, 1996 this program
was approximately 96 percent complete.
In April 1996, the Board of Directors increased the quarterly
dividend 14 percent to $.33 per share from $.29.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The first paragraph of Item 3, Legal Proceedings of Part I
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, relating to certain product liability
actions pending against the Company, is incorporated herein by
reference and should be replaced in its entirety by this
paragraph. Subsidiaries of the Company are defendants in
lawsuits involving approximately 390 plaintiffs arising out of
the use of synthetic estrogens by the mothers of the plaintiffs.
The courts in New York and Ohio, where most of these lawsuits are
pending, have recently required plaintiffs to file individual
lawsuits rather than remain part of multi-plaintiff actions. In
virtually all of these lawsuits, one being an alleged class
action, many other pharmaceutical companies are also named
defendants. The female plaintiffs claim various injuries,
including cancerous or precancerous lesions of the vagina and
cervix and a multiplicity of pregnancy problems. A number of
suits involve infants with birth defects born to daughters whose
mother took the drug. The total amount claimed against all
defendants in all the suits amounts to more than $2 billion.
While it is not possible to precisely predict the outcome of
these proceedings, it is management's opinion that it is remote
that any material liability in excess of the amount accrued will
be incurred.
The final paragraph of Item 3, Legal Proceedings of Part I
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, relating to certain antitrust actions
pending against the Company, is incorporated herein by reference.
On April 4, 1996, the United States District Court for the
Northern District of Illinois refused to approve the proposed
settlement of the federal class action due to a lack of any
change in the opportunity the class would have to obtain prices
similar to those the Company extends to managed care purchasers.
The court also denied all motions of defendant manufacturers for
summary judgment. On April 11, 1996, the court voided a May 7,
1996 trial date and all pre-trial preparation to allow for
consideration of requests to certify certain pre-trial rulings to
the appellate court. On May 6, 1996, the Company entered into an
amendment to the proposed settlement to resolve the federal class
action. The amendment 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 financial terms of the
proposed settlement are unchanged. The amended settlement is
subject to court approval. A fairness hearing is scheduled for
June 11, 1996. It is not possible to predict the outcome of the
federal class action or the other antitrust proceedings.
On March 13, 1996, the Company was notified that the United
States Federal Trade Commission is investigating whether the
Company, along with other pharmaceutical companies, conspired to
fix prescription drug prices. The Company vigorously denies that
it has engaged in any price-fixing conspiracy.
Item 4. Submission of Matter to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 23,
1996.
(b) Not applicable.
(c) The designation by the Board of Directors of Deloitte &
Touche LLP to audit the books and accounts of the
Corporation for the year ended December 31, 1996 was
ratified by a vote of shares as follows:
FOR AGAINST ABSTAIN
318,042,399 773,679 804,926
All of the nominees for director were elected by a vote
of shares, as follows:
TERM (YEARS) FOR WITHHELD
Carl E. Mundy, Jr. 1 315,458,335 4,162,669
Patricia F. Russo 1 315,589,109 4,031,895
Hans W. Becherer 3 316,399,080 3,221,924
Regina E. Herzlinger 3 316,247,049 3,373,955
Robert F. W. van Oordt 3 316,346,081 3,274,923
James Wood 3 316,335,094 3,285,910
(d) None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
99 - Cautionary Statements Regarding Safe Harbor
b) Reports on Form 8-K:
No report has been filed during the three months ended March
31, 1996.
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Schering-Plough Corporation
(Registrant)
Date May 10, 1996 /s/ Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller