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 September 30, 1999 	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 September 30, 1999: 1,469,074,987 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 Nine Months Ended Ended September 30 September 30 1999 1998 1999 1998 Net Sales . . . . . . . . . . . $2,236 $1,986 $6,873 $6,018 Costs and expenses: Cost of sales. . . . . . . . . 438 394 1,342 1,197 Selling, general and administrative. . . . . . 814 762 2,571 2,302 Research and development . . . 305 257 864 742 Other, net . . . . . . . . . . (7) 1 (29) 6 1,550 1,414 4,748 4,247 Income before income taxes. . . 686 572 2,125 1,771 Income taxes. . . . . . . . . . 168 140 521 434 Net Income. . . . . . . . . . . $ 518 $ 432 $1,604 $1,337 Basic earnings per common share $ .35 $ .29 $ 1.09 $ .91 Diluted earnings per common share $ .35 $ .29 $ 1.08 $ .90 Dividends per common share. . . $ .125 $ .11 $ .36 $ .315 See notes to consolidated financial statements. SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in millions, except per share figures) September 30, December 31, 1999 1998 Assets Cash and cash equivalents . . . . . . . . $ 1,665 $ 1,259 Accounts receivable, net. . . . . . . . . 1,068 704 Inventories . . . . . . . . . . . . . . . 965 841 Prepaid expenses, deferred income taxes and other current assets . . . . . 1,092 1,154 Total current assets. . . . . . . . . 4,790 3,958 Property, plant and equipment . . . . . . 4,277 4,068 Less accumulated depreciation . . . . . . 1,451 1,393 Property, net . . . . . . . . . . . . 2,826 2,675 Intangible assets, net. . . . . . . . . . 570 565 Other assets. . . . . . . . . . . . . . . 874 642 $ 9,060 $ 7,840 Liabilities and Shareholders' Equity Accounts payable. . . . . . . . . . . . . $ 954 $ 1,003 Short-term borrowings and current portion of long-term debt. . . . . . . . 695 558 Other accrued liabilities . . . . . . . . 1,661 1,471 Total current liabilities . . . . . . 3,310 3,032 Long-term liabilities . . . . . . . . . . 1,010 806 Shareholders' Equity: Preferred shares - $1 par value; Issued: none . . . . . . . . . . . . . . - - Common shares - $.50 par value; Issued: 1999 and 1998 - 2,030. . . . . . 1,015 1,015 Paid-in capital . . . . . . . . . . . . . 540 365 Retained earnings . . . . . . . . . . . . 7,875 6,802 Accumulated other comprehensive income. . (262) (238) Total . . . . . . . . . . . . . . . . 9,168 7,944 Less treasury shares, at cost - 1999 - 561 shares; 1998 - 558 shares .. . . 4,428 3,942 Total shareholders' equity. . . . . . 4,740 4,002 $ 9,060 $ 7,840 See notes to consolidated financial statements. </table SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30 (UNAUDITED) (Amounts in millions) 1999 1998 Operating Activities: Net Income. . . . . . . . . . . . . . . . $ 1,604 $ 1,337 Depreciation and amortization . . . . . . 193 172 Accounts receivable . . . . . . . . . . . (393) (61) Inventories . . . . . . . . . . . . . . . (146) (73) Prepaid expenses and other assets . . . . (122) (205) Accounts payable and other liabilities . 188 358 Net cash provided by operating activities . . . . . . . . . . . . . . . 1,324 1,528 Investing Activities: Capital expenditures . . . . . . . . . . (338) (227) Reduction of investments. . . . . . . . . 204 - Purchases of investments. . . . . . . . . (288) (103) Other, net. . . . . . . . . . . . . . . . 2 (3) Net cash used for investing activities. . (420) (333) Financing Activities: Dividends paid to common shareholders . . (532) (465) Common shares repurchased . . . . . . . . (475) (109) Short-term borrowings, net. . . . . . . . 152 (433) Other, net, primarily equity proceeds . . 359 37 Net cash used for financing activities . . . . . . . . . . . . . . . (496) (970) Effect of exchange rates on cash and cash equivalents. . . . . . . . . . . . . (2) (2) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . 406 223 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 1,259 714 Cash and cash equivalents, end of period . $ 1,665 $ 937 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. These statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 1998 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: Three Months Nine Months Ended Ended September 30, September 30, 1999 1998 1999 1998 Average shares outstanding for basic earnings per share . . 1,469 1,469 1,470 1,467 Dilutive effect of options and deferred stock units . . . . 15 21 17 20 Average shares outstanding for diluted earnings per share . 1,484 1,490 1,487 1,487 As of September 30, 1999, there were 9 million options outstanding with exercise prices higher than the average price of the Company's common stock during the third quarter of 1999. Accordingly, these options are not included in the dilutive effects indicated above. Inventories Inventories consisted of: September 30, December 31, 1999 1998 Finished products . . . . . . . $398 $483 Goods in process. . . . . . . . 328 174 Raw materials and supplies. . . 239 184 Total inventories . . . . . . $965 $841 Segment Reporting 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 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 will report as one segment. Previously, the Company was organized into two business units: pharmaceuticals and healthcare. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, requires adoption no later than January 1, 2001; the Company plans to adopt the new standard at that time. This statement is not expected to materially impact the Company's financial statements because management has not engaged in a formula-based program using derivative instruments to hedge market risks. Comprehensive Income Comprehensive income for the three months ended September 30, 1999 and 1998 was $532 and $436, respectively. Comprehensive income for the nine months ended September 30, 1999 and 1998 was $1,580 and $1,312, respectively. Legal and Environmental Matters The Company has responsibilities for environmental clean-up 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 clean-up 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 clean-up 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 be reasonably estimated. Consistent with trends in the pharmaceutical industry, the Company is self-insured for certain events. The recorded liabilities for the above matters at September 30, 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 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 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 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. 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. Three 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 is a class action in the District of Columbia, on behalf of consumers of prescription medicine. The Company has settled the retailer class action in Wisconsin and an alleged class action in Minnesota. The settlements of the state antitrust cases in Wisconsin and Minnesota have been approved by the respective courts. The settlement amounts were not significant. 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. Also, in August 1998, a class action was brought in Tennessee purportedly on behalf of consumers in Tennessee and several other states. The court has conditionally certified a class of consumers, but has stayed the case pending the resolution of an earlier-filed Tennessee case, which the Company has settled in principle. In April - June 1999, state consumer cases were filed in state courts in North Dakota, West Virginia and New Mexico. The Company has also recently settled the state consumer cases in all of the states except Alabama, Tennessee, North Dakota, West Virginia and New Mexico. Court approval of those settlements has been obtained. The settlement amounts were not material to the Company. In June 1999, the Alabama Supreme Court reversed the denial of a motion for judgment on the pleadings in one of the Alabama retailer cases. The court held that the Alabama antitrust law did not apply to conspiracies alleged to be in interstate commerce. The Company believes that this ruling should result in the dismissal of all of the Alabama state court cases. Plaintiffs in these antitrust actions generally seek treble damages in an unspecified amount and an injunction against the allegedly unlawful conduct. 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. In April 1999, the Company settled federal antitrust cases brought by independent pharmacists and small pharmacy chains comprising about 2% of the prescription drug retail market. The settlement amounts were not material to the Company. 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 all the antitrust actions are 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. 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 complaint also alleged that the defendants defamed the wholesaler and interfered with its business. There are related actions pending in the Delaware bankruptcy proceedings of the wholesaler and certain of the plaintiff's claims against the Company have been dismissed. The Company believes that this action is without merit and is defending itself vigorously against all claims. 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. Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc. (Teva) and Novex Pharma (Novex) notified the Company in February, April and June 1999, respectively, that each had submitted an ANDA to the FDA seeking to market a generic form of CLARITIN Syrup in the United States before the expiration of certain of the Company's patents. Each has alleged that one of those patents is invalid and unenforceable. In March 1999, the Company filed suit in federal court seeking a ruling that Copley's ANDA submission and proposed marketing of a generic syrup constitute willful infringement of the Company's patent and that its challenge to the patent is without merit. The Company also sued Teva in June 1999 asking for the same relief. The Company has filed a similar suit in federal court concerning the Novex ANDA submission. In May 1999, the Company received notice from Zenith Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA to the FDA for generic CLARITIN tablets. In June 1999, the Company filed suit in federal court in New Jersey seeking a ruling that Zenith's ANDA submission and proposed marketing of a generic tablet constitute willful infringement of the Company's patent and that Zenith's challenge to the patent is without merit. 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. The Company is a party to an arbitration filed by Biogen, Inc. (Biogen) in a dispute over the method used by Biogen 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 will prevail in this arbitration. However, there can be no assurance that the Company will prevail. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - three and nine months ended September 30, 1999 compared with the corresponding periods in 1998. Net Sales Consolidated net sales for the third quarter advanced $250 million or 13 percent compared with the same period in 1998. For the nine months, net sales rose $855 million or 14 percent over 1998. Exchange rate fluctuations had no impact on the net sales for the three or nine-month periods. Net sales by major therapeutic category for the third quarter and nine months were as follows ($ in millions): Third Quarter Nine Months 1999 1998 % 1999 1998 % Allergy & Respiratory $ 980 $ 864 13 $2,970 $2,579 15 Anti-infectives & Anticancer 413 319 29 1,243 902 38 Dermatologicals 186 134 38 497 463 7 Cardiovasculars 161 175 (8) 493 556 (11) Other Pharmaceuticals 171 171 3 576 461 26 Animal Health 161 161 0 486 475 2 Foot Care 93 93 (1) 276 264 5 OTC 60 57 5 165 161 2 Sun Care 11 12 (2) 167 157 6 Consolidated Net Sales $2,236 $1,986 13 $6,873 $6,018 14 Worldwide net sales of allergy and respiratory products advanced 13 percent in the quarter and 15 percent for the nine-month period due to continued strong market growth of the CLARITIN line of nonsedating antihistamines. Worldwide net sales of the CLARITIN brand totaled $716 million and $2,100 million for the quarter and nine months, respectively, compared with $635 million and $1,758 million for the corresponding periods in 1998. Franchise sales of nasal inhaled steroid products, which include VANCENASE allergy products and NASONEX, a once-daily corticosteroid for allergies, increased in the quarter and year- to-date due to market expansion in the U.S. and international markets. Net sales of anti-infective and anticancer products worldwide increased 29 percent in the quarter and 38 percent for the nine months, primarily due to the 1998 U.S. introduction of REBETRON Combination Therapy containing REBETOL Capsules and INTRON A Injection for the treatment of chronic hepatitis C in both relapsed and previously untreated (naive) patients. International sales of INTRON A (including combination therapy with REBETOL) also contributed to the sales increase in the third quarter and nine months due to the 1998 launch of INTRON A solution in a multidose pen in several European markets and the 1999 launch of REBETOL in certain markets. Dermatological products' worldwide net sales rose 38 percent in the quarter due to timing of trade buying and 7 percent for the first nine months due to market share growth. Worldwide sales of cardiovascular products decreased 8 percent for the quarter and 11 percent for the nine months primarily in the U.S. due to generic competition for IMDUR, an oral nitrate for angina and NORMODYNE, an alpha-beta blocker for hypertension. Partially offsetting these declines in both periods were higher U.S. sales of INTEGRILIN injection, a platelet receptor glycoprotein inhibitor, following its launch in the second quarter of 1998 and K-DUR, a sustained-release potassium supplement, due to stronger script demand. Other pharmaceuticals consist of products that do not fit into the Company's major therapeutic categories and include contract manufacturing and alliance revenues. Costs and Expenses Cost of sales as a percentage of sales decreased slightly to 19.6 percent in the quarter and 19.5 percent for the first nine months from 19.9 percent in both periods of 1998. The slight decrease in the overall rate is primarily due to better product mix. Selling, general and administrative expenses represented 36.4 percent of sales in the third quarter of 1999, a decrease when compared with 38.4 percent last year. For the nine-month period, the ratio decreased to 37.4 percent versus 38.3 percent in 1998. The decrease was primarily driven by the timing of promotional spending. Research and development spending rose 19 percent in the third quarter representing 13.6 percent of sales compared with 12.9 percent in 1998. For the first nine months of 1999 spending increased 16 percent and represented 12.6 percent of sales, compared to 12.3 percent in 1998. The higher spending in 1999 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 1999 to increase more than 15 percent over prior year spending. The effective tax rate was 24.5 percent in the three and nine month periods of both 1999 and 1998. Diluted earnings per common share grew 21 percent in the third quarter to $.35 from $.29 in 1998. For the nine-month period, diluted earnings per common share increased 20 percent from $.90 last year to $1.08. Basic earnings per common share advanced 21 percent in the quarter and 20 percent in the nine-month period. Foreign currency exchange rate changes had no impact on basic or diluted earnings per common share for the third quarter of 1999. Excluding exchange, diluted earnings per share for the first nine months of 1999 would have increased 19 percent when compared to the same period in 1998. 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. Liquidity and financial resources - nine months ended September 30, 1999 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 $1,324 million for the first nine months of 1999, a decrease of $204 million from 1998. The decrease in 1999 is primarily due to increases in accounts receivable because of timing of collections and an increase in inventories because of specific actions to stockpile certain products. Cash flow related to financing activities included equity proceeds as well as proceeds from short-term borrowings. In October 1997, the Board of Directors authorized the repurchase of $1 billion of the Company's common shares. As of September 30, 1999 this program was approximately 62 percent complete. In April 1999, the Board of Directors increased the quarterly dividend by 14 percent to $.125 from $.11 per common share. In September 1998, the Board of Directors authorized a 2-for-1 stock split of the Company's common shares. The distribution of the split shares was made on December 2, 1998, to the shareholders of record at the close of business on November 6, 1998. Certain 1998 amounts have been restated to reflect this stock split. The Company's liquidity and financial resources continue to be sufficient to meet its operating needs. Year 2000 Historically, many computer systems ("IT systems") and equipment and instruments with embedded microprocessors ("non-IT systems") were designed to recognize only the last two digits of a calendar year. Without remediation, these systems and microprocessors could, in the near future, encounter operating problems due to their inability to distinguish years after 1999 from years preceding 1999. As a result, the Company undertook an extensive project to remediate or replace its date-sensitive IT systems and non-IT systems. The project involves four phases: (1) compiling an inventory of IT and non-IT systems; (2) distinguishing "critical" systems from "non-critical" systems; (3) remediating or replacing IT and non- IT systems; and (4) testing the remediated or replaced IT and non-IT systems. "Critical" systems for this purpose include systems that may affect health and safety, product manufacturing, product distribution, customer service and certain research systems. The following chart indicates the estimated state of completion of each phase of this project as of September 30, 1999: IT Systems Non-IT Systems Inventory systems 100% 100% Identify critical and non-critical systems 100% 100% Remediate or replace systems 100% 99% Testing systems 100% 99% The last two lines of the preceding table exclude non-critical, non-IT equipment used in our research operations because the Company has concluded that any failure of such equipment will not adversely affect the Company's operations. Repairs or replacements of this non-critical, non-IT equipment will continue into the year 2000. The Company expects to complete all phases of this project for all critical, non-IT systems by December 31, 1999. The estimated maximum cost of the Year 2000 project is approximately $95 million. Approximately 55 percent of the $95 million will be of an expense nature and 45 percent will be for capitalizable replacements. As of September 30, 1999, $62 million of the $95 million has been incurred; $18 million has been capitalized and $44 million has been expensed. This $95 million cost estimate includes the estimated cost to repair or replace non-critical, non-IT equipment some of which will be spent in the year 2000. No other significant information systems projects have been deferred as a result of the Company's Year 2000 project. The book value of computers, software and equipment that will need to be written-off as a result of not being Year 2000 compliant is immaterial. The Company's internal auditors have regularly reviewed progress on the Year 2000 project and provided evaluations of the Company's readiness to senior management. Management believes that the Year 2000 issue will not have a material adverse effect on the Company's internal operating systems. However, the Company's operations may be impacted in the event that computer disruption is encountered by third parties with whom the Company conducts significant business. These third parties include wholesalers, distributors, managed care organizations, hospitals, suppliers, clinical researchers, research partners and government agencies. The Company has been communicating with these third parties concerning their state of readiness. However, the Company can provide no assurance that these third parties will not experience business disruption. The Company currently believes that the most reasonably likely worst case scenario concerning the Year 2000 involves potential business disruption among the third parties with whom it conducts significant business. If a number of these third parties (including, in particular, wholesalers, managed care organizations and clinical researchers) experience business disruption due to a Year 2000 computer problem, the Company's results of operations and cash flows could be materially adversely affected. The Company has developed contingency plans to address potential business disruptions at these third parties. Contingency planning includes increased inventory levels, establishing secondary sources of supply and manufacturing and maintaining backup lines of communications with our customers. However, it is unlikely that any contingency plan can fully mitigate the impact of significant business disruptions among these third parties. Certain third parties, such as retail pharmacies and wholesalers, may order extra inventory as part of their contingency planning. The impact to the Company of such contingency planning by third parties cannot be predicted. 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. Risks to completing the Year 2000 project include the continued availability of resources and qualified information systems personnel. 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, 1998, 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. Item 3. Market Risk Disclosures As discussed in the 1998 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. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to an arbitration filed by Biogen, Inc. (Biogen) in a dispute over the method used by Biogen 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 will prevail in this arbitration. However, there can be no assurance that the Company will prevail. Item 6. Exhibits and Reports on Form 8-K a) Exhibits - The following Exhibits are filed with this document: Exhibit Number Description 10(a) - Form of amendment to form of employment agreement between the Company and its executive officers effective upon a change of control 10(b) - Amended and Restated Directors' Deferred Compensation Plan 10(c) - Amended and Restated Directors' Stock Award Plan 10(d) - Amended and Restated Directors' Deferred Stock Equivalency Program 27 - Financial Data Schedule 99 - Company Statement Relating to Forward Looking Information b) Reports on Form 8-K: No report was filed during the three months ended September 30, 1999. 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 November 11, 1999 /s/Thomas H. Kelly Thomas H. Kelly Vice President and Controller S:\2188\3rd qtr 99 10 Q.doc		11/11/99 10:38 AM S:\2188\3rd qtr 99 10 Q.doc						11/11/99 10:38 AM - 3 - S:\2188\3rd qtr 99 10 Q.doc						11/11/99 10:38 AM - 14 -