[This is an update to an earlier, longer post.
It seems Fred Hassan doesn't believe this estimated range/model exists.]
From Merck's First Quarter 2008 Earnings Release:
". . . .The $700 million decrease in equity income guidance [for the full year 2008] is solely attributable to the loweranticipated contribution from the Merck/Schering-Plough joint venture. . . ."."
Editorial -- Wow! So, take at least $700 million out of Schering's 2008 expected profitability!
Schering's share of the Joint Venture downturn may be greater than a 50/50 split, though, as Schering picks up more of the expenses from the venture, and -- if certain levels of profitability are acheived, then Merck & Co. reimburses those expenses, fully.
Remember, the new 2008 Schering cost-cutting program will likely bring only $400 million "back into" Schering's 2008 EPS (only 40 percent of the incremental $1 billion will be completed/realized in 2008).
So -- I still see, at a mininum, a $500 million reduction to Schering's profitability.
We'll know much more on Wednesday, but on 1.62 billion share-equivalents outstanding, that will drop 2008 EPS, on a net-net basis, by at least $0.30 per share -- which means the new low 2008 EPS estimate ought to be closer to $1.10, for all of 2008. At 14 times $1.10 2008 EPS, Schering is worth $15.40. And, a multiple of 14 is very generous, in a market where Merck can only muster 1 percent sales growth. At a 13 multiple, Schering is worth $14.30 per share, today.
Yikes.
More from the press release:
. . . . .Combined worldwide sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), as reported by the Merck/Schering-Plough joint venture, were $1.2 billion for the first quarter of 2008, representing a 6 percent increase compared with the first quarter of 2007. Worldwide sales of ZETIA, marketed as EZETROL outside the United States, were $582 million in the first quarter of 2008, an increase of 7 percent compared with the previous year's first quarter. First-quarter 2008 worldwide sales of VYTORIN, marketed outside the United States as INEGY, were $651 million, an increase of 4 percent compared with the first quarter of 2007. The Company records the results from its interest in the Merck/Schering-Plough joint venture, which totaled $393 million in the first quarter of 2008 compared with $347 million in the same quarter a year earlier, in equity income from affiliates. . . ."
Remember three important facts not stated above: (1) ACC didn't happen until the last day of Q1 -- so this is all pre-ACC -- modest growth from Q1 2007 to Q1 2008 -- but, overall, compared to Q4 2007 -- the LAST quarter, sequentially, J/V sales are off 30 percent -- $1.5 billion v. $1.2 billion. (2) And even that "modest growth" is quite a far fall from the "up 30 percent" expected at the end of 2007. And, (3) the Street expected sales of $6.1 billion from Merck for Q1 -- Merck missed on the sales line this morning. It was only able to muster a 1 percent sales gain (even with the benefit of foreign currency "tailwinds"!), overall -- or $5.82 billion, up 1 percent from $5.77 billion in the first three months of 2007.
Now to the truly ugly:
ENHANCE Study Litigation Update
". . . .As previously disclosed, since December 2007, the Company and its joint-venture partner, Schering-Plough, have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations, and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sales and promotion of VYTORIN, as well as sales of stock by corporate officers. On Jan. 25, 2008, the companies and the Merck/Schering-Plough Partnership (MSP Partnership) each received two subpoenas from the New York State Attorney General's Office seeking similar information and documents. Merck and Schering-Plough have also each received a letter from the Office of the Connecticut Attorney General dated Feb. 1, 2008 requesting documents related to the marketing and sales of VYTORIN and ZETIA and the timing of disclosures of the results of ENHANCE. Merck and Schering-Plough also recently received subpoenas dated April 4, 2008 from the Office of the New Jersey Attorney General seeking documents related to the ENHANCE trial and the sales and marketing of VYTORIN. The Company is cooperating with these investigations and is working with Schering-Plough to respond to the inquiries. In addition, since mid-January 2008, the Company has become aware of or been served with approximately 115 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the MSP Partnership's sales and promotion of VYTORIN and ZETIA. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. Also, on April 3, 2008, a Merck shareholder filed a putative class action lawsuit alleging that Merck and its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities laws. . . ."
115 Suits. Wow.
Now we wait for the call, and the analysts' questioning of Clark. My sense of all of the conversations is that Merck is very lucky to be twice as large as Schering, at the revenue line, and to have the AstraZeneca partnership distribution to effectively fill the now-admitted "~ $700 million hole" that the ENHANCE results have recently-revealed, at Merck's J/V equity income line.
Schering, plainly, will have no such luck -- it has no other relationship on any remotely comparable scale, to back-fill with. As I type this, more than 55 percent of Schering's 2008 profitability hinges on the Joint Venture with Merck. So, the question becomes, is that newly-announced $1.5 billion cost cutting going to be enough to fill Schering's "~ $900 million hole" in 2008 profits? I -- for one -- strongly doubt it.
Next up, Schering's Q1 call, on Wednesday.
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