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, 1998
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 (973) 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, 1998: 733,667,804
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Amounts in millions, except per share figures)
Three Months
Ended
March 31
1998 1997
Sales . . . . . . . . . . . . . $1,908 $1,568
Costs and expenses:
Cost of sales. . . . . . . . . 380 289
Selling, general
and administrative. . . . . . 712 594
Research and development . . . 224 179
Other, net . . . . . . . . . . (4) 9
1,312 1,071
Income before income taxes. . . 596 497
Income taxes. . . . . . . . . . 146 122
Net Income. . . . . . . . . . . $ 450 $ 375
Basic earnings per common share $ .61 $ .51
Diluted earnings per common share $ .61 $ .51
Dividends per common share. . . $ .19 $ .165
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)
March 31, December 31,
1998 1997
Assets
Cash and cash equivalents . . . . . . . . $ 622 $ 714
Accounts receivable, net. . . . . . . . . 794 645
Inventories . . . . . . . . . . . . . . . 721 713
Prepaid expenses, deferred income
taxes and other current assets . . . . . 898 848
Total current assets. . . . . . . . . 3,035 2,920
Property, plant and equipment . . . . . . 3,765 3,750
Less accumulated depreciation . . . . . . 1,260 1,224
Property, net . . . . . . . . . . . . 2,505 2,526
Intangible assets, net. . . . . . . . . . 481 481
Other assets. . . . . . . . . . . . . . . 630 580
$6,651 $6,507
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 786 $ 803
Short-term borrowings and current
portion of long-term debt. . . . . . . . 449 581
Other accrued liabilities . . . . . . . . 1,449 1,507
Total current liabilities . . . . . . 2,684 2,891
Long-term debt. . . . . . . . . . . . . . 46 46
Other long-term liabilities . . . . . . . 773 749
Shareholders' Equity:
Preferred shares - $1 par value
each; issued - none. . . . . . . . . . . - -
Common shares - $1 par value;
issued - 1998, 1,015; 1997, 1,015 . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . 161 96
Retained earnings . . . . . . . . . . . . 5,984 5,673
Accumulated other comprehensive income. . (250) (244)
Total . . . . . . . . . . . . . . . . 6,910 6,540
Less treasury shares, at cost -
1998, 281 shares; 1997, 282 shares . . . 3,762 3,719
Total shareholders' equity. . . . . . 3,148 2,821
$6,651 $6,507
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(Amounts in millions)
1998 1997
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $450 $375
Depreciation and amortization . . . . . . 56 47
Accounts receivable . . . . . . . . . . . (166) (238)
Inventories . . . . . . . . . . . . . . . (14) (5)
Prepaid expenses and other assets . . . . (66) (64)
Accounts payable and other liabilities . 62 74
Net cash provided by operating activities 322 189
Investing Activities:
Capital expenditures and purchased
software . . . . . . . . . . . . . . . . (41) (62)
Reduction of investments. . . . . . . . . - 28
Purchases of investments. . . . . . . . . (26) (31)
Other, net. . . . . . . . . . . . . . . . (4) (1)
Net cash used for investing
activities . . . . . . . . . . . . . . . (71) (66)
Financing Activities:
Short-term borrowings, net. . . . . . . . (128) 206
Common shares repurchased . . . . . . . . (34) (3)
Dividends paid to common shareholders . . (140) (121)
Other, net. . . . . . . . . . . . . . . . (40) 18
Net cash provided by (used for) financing
activities . . . . . . . . . . . . . . . (342) 100
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (1) (1)
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . (92) 222
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 714 535
Cash and cash equivalents, end of period . $622 $757
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts 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 1997
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
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows (number of
shares in millions):
Three Months
Ended March 31,
1998 1997
Average shares outstanding for
basic earnings per share . . . . . 733 731
Dilutive effect of options and
deferred stock units . . . . . . . 10 7
Average shares outstanding for
diluted earnings per share . . . . 743 738
As of March 31, 1998 and 1997, there were 5.1 million and 4.2
million options outstanding, respectively, with exercise prices
higher than the average price of the Company's common stock
during the first quarter of 1998 and 1997, respectively.
Accordingly, these options are not included in the dilutive
effects indicated above.
Comprehensive Income and Segments
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." Comprehensive income is
defined as the total change in shareholders' equity during the
period other than from transactions with shareholders. For the
Company, comprehensive income is comprised of net income, the net
change in the accumulated foreign currency translation adjustment
account and the net change in unrealized gains and losses on
securities classified for SFAS No. 115 purposes as held available
for sale. Total comprehensive income for the three months ended
March 31, 1998 and 1997 was $444 and $338, respectively.
In 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." As required by the
standard, the Company will begin reporting under SFAS No. 131 in
its 1998 Annual Report.
Inventories
Inventories consisted of: March 31, December 31,
1998 1997
Finished products . . . . . . . $331 $334
Goods in process. . . . . . . . 214 191
Raw materials and supplies. . . 176 188
Total inventories . . . . . . $721 $713
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, 1998 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 160 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 has
agreed to settle the federal class action for a total of $22
payable over three years. 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
on June 21, 1996. In June 1997, the Seventh Circuit Court of
Appeals dismissed all appeals from that settlement, and it is not
subject to further review. In addition, in August 1997, the
Seventh Circuit ruled that there was sufficient evidence of
participation in the alleged conspiracy by certain wholesalers to
require them to proceed to trial.
Four of the state antitrust cases have been certified as class
actions. Two are class actions on behalf of certain retail
pharmacies in California and Wisconsin, and the other two are
class actions in California and the District of Columbia, on
behalf of consumers of prescription medicine. In addition, an
action has been brought in Alabama purportedly on behalf of
consumers in Alabama and several other states. Plaintiffs are
seeking to maintain the action as a class action. The Company
has settled the retailer class action in Wisconsin and the
alleged class action in Minnesota, subject to Court approval; the
settlement amounts were not significant. Plaintiffs generally
seek treble damages in an unspecified amount and an injunction
against the allegedly unlawful conduct. The Company believes
that all of the antitrust actions are without merit and is
defending itself vigorously.
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 believes the
action is without merit and is defending itself vigorously.
On March 13, 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 vigorously denies that it has engaged in any price-
fixing conspiracy.
The Company is a defendant in a state court action in Texas
brought by Foxmeyer Health Corporation, the parent of a
pharmaceutical wholesaler that filed for bankruptcy in August
1996, which has now been removed to Federal Bankruptcy Court in
Dallas. The case is against another pharmaceutical wholesaler
and 11 pharmaceutical companies, and alleges that the defendants
conspired to drive the plaintiff's wholesaler subsidiary out of
business. The plaintiff is seeking damages in the amount of
$400. Motions for summary judgment are pending in the Delaware
bankruptcy of the bankrupt wholesaler.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three months ended March 31, 1998
compared with the corresponding period in 1997.
Sales
Consolidated sales for the first quarter increased $340 million
or 22 percent compared with the same period in 1997. Excluding
the effect of foreign exchange rate fluctuations, consolidated
sales grew 25 percent. Excluding the June 1997 acquisition of the
worldwide animal health business of Mallinckrodt Inc., which
contributed sales of $91 million, sales would have increased 16
percent. This performance reflects worldwide CLARITIN brand sales
of $436 million in the first quarter, compared with $353 million
in 1997.
Domestic prescription pharmaceutical sales advanced 27 percent
for the first three months of 1998. Sales of allergy/respiratory
products increased 26 percent, due to continued strong growth of
the CLARITIN brand of nonsedating antihistamines. Sales of
VANCERIL asthma products increased in the quarter reflecting
market share growth. NASONEX, a once-daily corticosteroid for
allergic rhinitis, launched in the first quarter, also
contributed to sales growth.
U.S. sales of cardiovascular products rose 35 percent in the
quarter, reflecting market share gains for IMDUR, a once-daily
oral nitrate for angina and K-DUR, a sustained-release potassium
supplement.
Domestic sales of anti-infective and anticancer products rose 48
percent compared with 1997, primarily due to increased
utilization of INTRON A, the Company's alpha interferon
anticancer and antiviral agent, for malignant melanoma and
hepatitis C.
U.S. sales of dermatological products increased 35 percent for
the quarter, primarily due to higher sales of LOTRISONE, a
topical antifungal/anti-inflammatory cream, ELOCON a medium-
potency topical steroid and DIPROLENE, a high potency topical
steroid.
International ethical pharmaceutical product sales increased 4
percent for the first three months of 1998. Excluding the impact
of foreign currency exchange rate fluctuations, sales would have
risen 13 percent. Sales of allergy/respiratory products advanced
13 percent for the quarter, led by CLARITIN in most world
markets.
International dermatological product sales grew 16 percent, led
by ELOCON and DIPROSONE, a high potency topical steroid.
Cardiovascular product sales grew 34 percent driven by higher
sales of NITRO-DUR, a transdermal nitroglycerin patch for angina.
International sales of anti-infective and anticancer products
declined 1 percent in the quarter, due to lower sales for INTRON
reflecting a decline in the alpha-interferon market in Japan and
a decrease in sales for EULEXIN, a prostate cancer therapy, due
to generic and branded competition. International sales
benefited from higher sales of LOSEC, an anti-ulcer treatment
licensed from AB Astra.
Worldwide sales of animal health products rose 182 percent in the
first quarter, excluding foreign exchange rate fluctuations. On
June 30, 1997, the Company completed the acquisition of the
worldwide animal health business of Mallinckrodt Inc. which
contributed sales of $91 million in the quarter. Excluding
Mallinckrodt, sales would have increased 7 percent versus prior
year.
Sales of health care products increased 10 percent in the first
quarter of 1998. The higher sales were recorded in all three
business units - footcare, suncare and over-the-counter (OTC)
products.
Income before income taxes increased 20 percent for the quarter
as compared with 1997, and represented 31.3 percent of sales
versus 31.7 percent last year.
Cost of sales as a percentage of sales increased to 19.9 percent
in the quarter from 18.4 percent in 1997, principally driven by
the inclusion of Mallinckrodt products which have lower margins.
Selling, general and administrative expenses represented 37.3
percent of sales in the first quarter compared with 37.8 percent
last year. The decrease in the ratio was the result of timing
related spending for promotional and selling activities.
Research and development spending rose 25 percent in the quarter,
representing 11.7 percent of sales compared with 11.4 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 was 24.5 percent in the first three months
of both 1998 and 1997.
Basic and diluted earnings per common share advanced 20 percent
in the first quarter to $.61 from $.51 in 1997. Excluding the
impact of fluctuations in foreign currency exchange rates, basic
and diluted earnings per common share would have increased
approximately 24 percent in the quarter.
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. In an effort to contain
medical costs, several governments have placed restrictions on
physician prescribing levels and patient reimbursements,
emphasized greater use of generic drugs and enacted across-the-
board price cuts.
Since the Company is unable to predict the final form and timing
of any future health care initiatives, their effect on operations
and cash flows cannot be reasonably estimated.
The market for pharmaceutical products is competitive. The
Company's operations may be affected by technological advances of
competitors, patents granted to competitors, new products of
competitors and generic competition as the Company's products
mature. In addition, patent positions can be highly uncertain
and 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.
Liquidity and financial resources - three months ended March 31,
1998
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 was
$322 million. Cash was used to reduce short-term borrowings by
$128 million, pay shareholder dividends of $140 million, fund
capital expenditures of $39 million, repurchase shares for $34
million and purchase investments for $26 million.
In October 1997, the Board of Directors authorized the repurchase
of $1 billion of common shares. This program commenced in
January 1998 and as of March 31, 1998, this program was
approximately three percent complete.
In April 1998, the Board of Directors increased the quarterly
dividend by 16 percent to $.22 from $.19 per commmon share.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
Market Risk Disclosures
As discussed in the 1997 Annual Report to Shareholders, the
Company's exposure to market risk from changes in foreign
currency exchange rates and interest rates, in general, is not
material.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains
certain forward looking statements, including statements
regarding the Company's financial position and results of
operations. These forward looking statements are based on
current expectations. Certain factors have been identified by
the Company in Exhibit 99 of the Company's December 31, 1997,
Form 10-K filed with the Securities and Exchange Commission,
which could cause the Company's actual results to differ
materially from expected and historical results. Exhibit 99 from
the Form 10-K is incorporated by reference herein.
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, 1997, relating to certain lawsuits arising out
of the use of synthetic estrogens, is incorporated herein by
reference. The alleged class action has been dismissed.
The ninth 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, 1997, relating to a state court action in
Texas brought by Foxmeyer Health Corporation, is incorporated
herein by reference. The case has been removed to Federal
Bankruptcy Court in Dallas, and motions for summary judgment by
the defendants are pending in the Delaware bankruptcy of the
bankrupt wholesaler.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 28,
1998.
(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, 1998 was
ratified by a vote of shares as follows:
FOR AGAINST ABSTAIN
645,358,223 1,303,705 1,629,186
All of the nominees for director were elected for a three year
term by a vote of shares, as follows:
FOR WITHHELD
Hugh A. D'Andrade 642,341,485 5,949,629
Richard Jay Kogan 642,300,926 5,990,188
Donald L. Miller 641,855,251 6,435,863
Richard de J. Osborne 642,309,561 5,981,553
William A. Schreyer 642,068,772 6,222,342
(d) None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
10(a) - Third Amendment to the Employment Agreement
between the Company and Robert P. Luciano
10(b) - Fourth Amendment to the Employment Agreement
between the Company and Richard J. Kogan
10(c) - Third Amendment to the Employment Agreement
between the Company and Hugh A. D'Andrade
10(d) - Agreement between the Company and Robert P.
Luciano dated February 25, 1998
10(e) - Amended and Restated Supplemental Executive
Retirement Plan
10(f) - Amended and Restated Retirement Benefits
Equalization Plan
10(g) - Forms of Amendment to Split Dollar Agreement
between the Company and its executive
officers, Trust related thereto and related
Collateral Assignment Agreement
10(h) - Amendment to Directors Stock Award Plan
27 - Financial Data Schedule
99 - Company Statements Relating to Forward
Looking Information
b) Reports on Form 8-K:
No report was filed during the three months ended March 31,
1998.
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 7, 1998 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller