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 June 30, 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 June 30, 1998: 734,000,000
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 Six Months
Ended Ended
June 30 June 30
1998 1997 1998 1997
Sales . . . . . . . . . . . . . $2,124 $1,720 $4,032 $3,288
Costs and expenses:
Cost of sales. . . . . . . . . 423 330 803 619
Selling, general
and administrative. . . . . . 828 679 1,540 1,273
Research and development . . . 261 209 485 388
Other, net . . . . . . . . . . 9 8 5 17
1,521 1,226 2,833 2,297
Income before income taxes. . . 603 494 1,199 991
Income taxes. . . . . . . . . . 148 121 294 243
Net Income. . . . . . . . . . . $ 455 $ 373 $ 905 $ 748
Basic earnings per common
share. . . . . . . . . . . . . $ .62 $ .51 $ 1.23 $ 1.02
Diluted earnings per common
share . . . . . . . . . . . . $ .61 $ .50 $ 1.22 $ 1.01
Dividends per common share. . . $ .22 $ .19 $ .41 $ .355
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)
June 30, December 31,
1998 1997
Assets
Cash and cash equivalents . . . . . . . . $ 707 $ 714
Accounts receivable, net. . . . . . . . . 840 645
Inventories . . . . . . . . . . . . . . . 745 713
Prepaid expenses, deferred income
taxes and other current assets . . . . . 988 848
Total current assets. . . . . . . . . 3,280 2,920
Property, plant and equipment . . . . . . 3,835 3,750
Less accumulated depreciation . . . . . . 1,297 1,224
Property, net . . . . . . . . . . . . 2,538 2,526
Intangible assets, net. . . . . . . . . . 524 481
Other assets. . . . . . . . . . . . . . . 623 580
$6,965 $6,507
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 853 $ 803
Short-term borrowings and current
portion of long-term debt. . . . . . . . 316 581
Other accrued liabilities . . . . . . . . 1,586 1,507
Total current liabilities . . . . . . 2,755 2,891
Long-term debt. . . . . . . . . . . . . . 46 46
Other long-term liabilities . . . . . . . 763 749
Shareholders' Equity:
Preferred shares - $1 par value;
issued - none. . . . . . . . . . . . . . - -
Common shares - $1 par value;
issued - 1,015 . . . . . . . . . . . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . 195 96
Retained earnings . . . . . . . . . . . . 6,276 5,673
Accumulated other comprehensive income. . (273) (244)
Total . . . . . . . . . . . . . . . . 7,213 6,540
Less treasury shares, at cost -
1998, 281 shares; 1997, 282 shares . . . 3,812 3,719
Total shareholders' equity. . . . . . 3,401 2,821
$6,965 $6,507
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(Amounts in millions)
1998 1997
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $ 905 $ 748
Depreciation and amortization . . . . . . 114 95
Accounts receivable . . . . . . . . . . . (223) (177)
Inventories . . . . . . . . . . . . . . . (43) (19)
Prepaid expenses and other assets . . . . (174) (114)
Accounts payable and other liabilities . 262 187
Net cash provided by operating
activities . . . . . . . . . . . . . . . 841 720
Investing Activities:
Purchase of business, net of cash
acquired . . . . . . . . . . . . . . . . - (315)
Capital expenditures and purchased
software . . . . . . . . . . . . . . . . (127) (134)
Proceeds from sales of investments. . . . - 34
Purchases of investments. . . . . . . . . (69) (79)
Other, net. . . . . . . . . . . . . . . . (2) (5)
Net cash used for investing
activities . . . . . . . . . . . . . . . (198) (499)
Financing Activities:
Dividends paid to common shareholders . . (302) (260)
Common shares repurchased . . . . . . . . (85) (3)
Short-term borrowings, net. . . . . . . . (256) 164
Other net . . . . . . . . . . . . . . . . (6) 43
Net cash used for financing
activities . . . . . . . . . . . . . . . (649) (56)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (1) (1)
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . (7) 164
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 714 535
Cash and cash equivalents, end of period . $ 707 $ 699
<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 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 Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
Average shares outstanding for
basic earnings per share . . . . . 734 732 733 732
Dilutive effect of options and
deferred stock units . . . . . . . 10 8 10 7
Average shares outstanding for
diluted earnings per share . . . . 744 740 743 739
Comprehensive Income and Segments
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (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
June 30, 1998 and 1997 was $431 and $372, respectively. Total
comprehensive income for the six months ended June 30, 1998 and
1997 was $876 and $710, 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: June 30, December 31,
1998 1997
Finished products . . . . . . . $372 $334
Goods in process. . . . . . . . 187 191
Raw materials and supplies. . . 186 188
Total inventories . . . . . . $745 $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 June 30, 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.
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. The settlement amounts were not material to the
Company.
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 and those settlements have been
approved by their respective courts; the settlement amounts were
not significant. The Company has also recently settled in
principal the consumer cases in all of the states except Alabama
and California. Court approval of those settlements is currently
being sought; the settlement amounts are not material.
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 and six months ended June 30, 1998
compared with the corresponding periods in 1997.
Sales
Consolidated sales for the second quarter advanced $404 million
or 23 percent compared with the same period in 1997. For the six
months, sales rose $744 million or 23 percent over 1997.
Excluding the effect of foreign currency exchange rate
fluctuations, consolidated sales grew 26 percent in the quarter
and 25 percent for the six month period. Excluding the June 1997
acquisition of the worldwide animal health business of
Mallinckrodt Inc., which contributed sales of $121 million in the
quarter and $212 million in the first half of 1998, sales would
have increased 16 percent in both periods. This performance
reflects worldwide sales of the CLARITIN brand of $687 million
and $1,124 million for the quarter and first half, respectively,
compared with $536 million and $889 million for the corresponding
periods in 1997.
Domestic prescription pharmaceutical sales increased 25 percent
for the 1998 second quarter and 26 percent for the six-month
period. Sales of allergy/respiratory products increased 35
percent in the quarter and 31 percent for the first half, due to
continued strong growth of the CLARITIN brand of nonsedating
antihistamines. Franchise sales of nasal inhaled steroid products
including VANCENASE allergy products and NASONEX a once-daily
corticosteroid for allergic rhinitis, increased in the quarter
and year-to-date due to market expansion and market share growth.
Sales of VANCERIL asthma products advanced in both periods
primarily reflecting market growth.
U.S. sales of cardiovascular products rose 29 percent in the
quarter and 32 percent for the six months reflecting market share
gains for Imdur, a once-daily oral nitrate for angina and market
growth for K-Dur, a sustained-release potassium supplement.
Domestic sales of anti-infective and anticancer products
decreased 22 percent in the quarter primarily due to lower sales
of INTRON A, the Company's alpha interferon anticancer antiviral
agent for malignant melanoma and hepatitis C, following heavy
first quarter buying by the trade. For the six-month period
sales of anti-infectives and anticancer products increased 13
percent primarily due to increased utilization of INTRON A. Sales
of EULEXIN, a prostate cancer treatment, were also higher in both
periods.
U.S. sales of dermatological products increased 29 percent for
the quarter and 32 percent for the six months, primarily due to
higher sales of LOTRISONE, an antifungal/anti-inflammatory cream,
and ELOCON, a mid-potency topical corticosteroid.
International ethical pharmaceutical product sales increased 6
percent for the second quarter and 5 percent for the six-month
period. Excluding the impact of foreign exchange rate
fluctuations, sales would have risen 12 percent in both periods.
Sales of allergy/respiratory products advanced 8 percent for the
quarter and 11 percent for the first half, led by CLARITIN in
most world markets.
International dermatological product sales grew 10 percent in the
quarter and 13 percent for the six-month period, led by ELOCON.
Cardiovascular product sales grew 9 percent for the second
quarter and 20 percent for the six months, led by higher sales of
NITRO-DUR, a transdermal nitroglycerin patch for angina.
International sales of anti-infectives and anticancer products
increased 16 percent in the second quarter and 7 percent for the
six months. The growth was attributable to higher sales of
INTRON A in the quarter and six-month period.
Worldwide sales of animal health products increased 234 percent
in the quarter and 206 percent for the six months. On June 30,
1997, the Company completed the acquisition of the worldwide
animal health business of Mallinckrodt, Inc., which contributed
sales of $121 million in the quarter and $212 million for the
first six months of 1998. Excluding Mallinckrodt, sales were
essentially flat for the quarter and six month period.
Sales of health care products increased 13 percent for the second
quarter and 12 percent for the first six months of 1998. The
higher sales were recorded in foot care products and suncare
products for both periods, while sales of over-the-counter
products increased slightly for the six-month period.
Income before income taxes increased 22 percent for the quarter
compared with 1997, and represented 28.4 percent of sales versus
28.7 percent last year. For the six months, income before taxes
grew 21 percent over 1997, representing 29.7 percent of sales
compared with 30.1 percent of last year.
Cost of sales as a percentage of sales increased to 19.9 percent
in the quarter from 19.2 percent in 1997, and for the first six
months, the ratio increased to 19.9 percent from 18.8 percent in
1997 principally driven by the inclusion of Mallinckrodt products
which have lower margins.
Selling, general and administrative expenses represented 39.0
percent of sales in the second quarter compared with 39.5 percent
last year. For the six-month period, the ratio was 38.2 percent
versus 38.7 percent in 1997. The decreases in the ratios are the
result of timing related spending for promotional and selling
activities.
Research and development spending rose 25 percent in the quarter,
representing 12.3 percent of sales compared with 12.1 percent a
year ago. For the six-month period, spending grew 25 percent, and
represented 12.0 percent of sales versus 11.8 percent in 1997.
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 three- and six-
month periods of both 1998 and 1997.
Basic earnings per common share advanced 22 percent in the second
quarter to $.62 from $.51 in 1997. Diluted earnings per common
share advanced 22 percent to $.61 from $.50 for the same period.
For the six-month period, basic earnings per common share rose 21
percent to $1.23 from $1.02 in 1997, and diluted earnings per
common share rose 21 percent to $1.22 from $1.01 in 1997.
Excluding the impact of fluctuations in foreign currency exchange
rates, basic earnings per common share would have increased
approximately 25 percent for the quarter and six-month periods
and diluted earnings per common share would have increased
approximately 26 percent for the quarter and approximately 25
percent for the six-month period.
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 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 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.
The Company began implementing its plan to modify its computer
systems to enable the proper processing of transactions relating
to the Year 2000. The plan includes replacing and/or updating
existing systems in order to avoid business interruption. The
Company expects this project to be substantially completed by the
end of 1998. The estimated cost of these modifications, incurred
over the life of the project, is expected to be approximately $50
million.
Liquidity and financial resources - six months ended June 30,
1998
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 by operating activities was $841 million for the
first six months of 1998. Cash was used to pay shareholder
dividends of $302 million, reduce short-term borrowing by $256
million, fund capital expenditures and purchase software of $127
million, repurchase shares for $85 million and purchase
investments for $69 million.
In October 1997, the Board of Directors authorized the repurchase
of $1 billion of the Company's common shares. As of June 30,
1998 this program was approximately nine percent complete.
In April 1998, the Board of Directors increased the quarterly
dividend by 16 percent to $.22 from $.19 per common 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
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,
is incorporated by reference.
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. The settlement amounts were not material to the
Company. The Great Atlantic and Pacific Tea Company, Inc. (A&P)
was among the settling plaintiffs.
The settlements of the state antitrust cases in Wisconsin and
Minnesota have been approved by the respective courts. The
Company has also recently settled in principal the state consumer
cases in all of the states except Alabama and California. Court
approval of those settlements is currently being sought. The
settlement amounts were not material to the Company.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
10(a) - Agreement between the Company and Rodolfo C.
Bryce dated June 10, 1998.
27 - Financial Data Schedule
99 - Company Statement Relating to Forward
Looking Information
b) Reports on Form 8-K:
No report has been filed during the six months ended June
30, 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 August 10, 1998 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller
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