Tuesday, April 22, 2008

Live-blogging the Schering-Plough Q1 Earnings Release


▲ Schering CEO Fred Hassan just reiterated the line that "unwarranted confusion" is what is challenging the Vytorin/Zetia Joint Venture's results. This flies in the face of his deciding to take an incremental $1 billion charge to resolve the issues -- going out to 2012. How is it possible that he needs four years of charges and restructuring to address an "unwarranted confusion"?

This simply doesn't meet the "straight-face" test.

▲ The claim was just made, on the call, that "a dozen" studies indicate lowering LDL is better for patients. That is true -- but there is no evidence that the WAY Vytorin/Zetia lowers LDL improves any cardiac outcome. Those studies involve liver mechanisms, not gut-mechanisms. We won't know until 2012 (IMPROVE-IT) whether the gut-mechanism improves outcomes.

▲ Without currency "tailwinds", Schering Q1 sales would only be up 5 percent, even after excluding all the Organon items -- a morass of back-and-forth, put-and-take, accounting.

▲ Over 80 percent of Vytorin/Zetia sales occur inside the US for the cholesterol franchise, so the growth of non-US is far less important than CFO Bob Bertonlini just implied.

▲ CFO Bob Bertolini flat-out admitted that the Q1 trends just discussed -- will not persist through the rest of 2008. "Likely to be lower. . . ."

Again, how can it be that "unwarranted confusion" cannot be cleared up? This is simply hard-to-swallow.

▲ The claim is being made that Vytorin/Zetia "efficacy" is identical to lower LDL-levels. There is simply no proof that this is "efficacy" as to outcomes.

To claim the gut-mechanism is identical to LDL "efficacy" is at best ambiguous -- and is, perhaps, misleading.

▲ EVP Carrie Smith-Cox said that most patients who switch are going to the generic Zocor. . . . [that is at about one-tenth the cost of Schering's drugs.]

▲ EVP Carrie Smith-Cox claimed that Pro Cordaptive (Merck's niacin product) is a "niche" only product -- not likely to impact the franchise. We'll see about that -- it will likely be FDA-approved next-week.

▲ EVP Carrie Smith-Cox said the resumption of "direct to consumer" (DTC) advertising for the franchise will resume when the company, and FDA, agree on it. Remember that FDA wants promotional materials changed over by April 24, 2008 -- tomorrow. It must all mean that Schering is still in negotiations with FDA about those advertising-literature, and Television-spot changes.

▲ The Morgan Stanley analyst just flat-out got stiff-armed, by CEO Fred Hassan, at the very end of the call -- she asked Schering to help "quantify the Vytorin/Zetia equity income declines," now expected for 2008 -- and specifically mentioned Merck's owning up to a $700 million loss of income, here.

Well, Fred essentially hung up on her.

He said "we really have no model for this scenario". That is simply false -- from Schering's own '34 Act filing (read: "carries liability for material misstatements/fraud") with the SEC, of yesterday, Schering said otherwise.

Yep, just yesterday, Schering filed a Form 8-K with the SEC indicating that its joint venture entity (shared 50/50 with Merck) had made a "range of estimates" for the equity income fall-off, in 2008. Applicable SEC literature requires disclosure of that range.

"No model", indeed. Fred -- what are you thinking? Did you even look at that Form 8-K, yesterday, before your lawyers filed it?

[End of Call @ 9:05 a.m., EDT.]

[Call transcript from seekingalpha is now up.]


Tomorrow morning, before NYSE open, I'll be live-blogging the Schering-Plough first quarter earnings conference call -- we should learn more about Vytorin and Zetia 'script-trends -- and the status of any write-downs to be taken inside the Schering/Merck Joint Venture, as well at Schering-Plough, proper. We will hope for an update on the status of the pending Congressional, and governmental, investigations and all the 115 pieces of litigation.

This link should anchor directly to a log-in for a Windows Media feed of the call on Wednesday.

It will likely go "live" -- at Schering -- around 7:50 a.m., EDT.


First, for the past few months, I've been guessing that Schering-Plough's share-equivalents for 2008, fully-diluted, would rise to about 1.62 billion shares. My estimate was too low -- Schering shows fully diluted Q1 share equivalents at 1.637 billion shares, making all my 2008 EPS guesses (of declines, here) slightly too conservative -- too small. Wow.

Schering will henceforth have quite a few more shares that it needs to "cover" with earnings. This is due to the decline in common stock prices, rendering the 6% Convertible Preferred. . . . dilutive, in share counts, henceforth.

Now, an a GAAP-basis, Schering missed -- $0.15 v. $0.37 expected, at the EPS line, according to FirstCall.

At the revenue line, FirstCall reported an expected range of revenue of between $4.16 and $4.80 billion -- Schering's actual Q1 was $4.7 billion, slightly above the median estimate. Net income is the story, though.

Net income available to common, at Schering, for the first quarter was $243 million (GAAP), and $543 million (Non-GAAP). HOLD ON A SECOND!! -- that means that Joint Venture Equity Income was about 95 percent of all Schering-Plough's Non-GAAP net income in the first quater.

NINETY-FIVE PERCENT!?! YIKES! [I'll go verify that those are apples to apples numbers, now -- Wow!]

Almost as importantly, Equity Income from the Vytorin/Zetia Joint Venture, on a sequential quarterly-basis, is down 9.5 percent.

That is bad. The First Quarter was over (by all but one day), by the time the ACC met, so Q2 simply must be significantly worse -- and yet, the Q1 Equity Income share for Schering was only $517 million. The Fourth Quarter 2007 Equity Income was $566 million. And there are now declines, overall, admitted to by Schering now, not just in the US market.

Remember, Merck has already admitted that its share of this equity income fall-off will be off at least $700 million for the full year.

By my rough estimates, if Schering's equity income line is off more like $900 million for the year 2008, it will cost them $0.55 per share of 2008 EPS. That may be offset, in part, by about $400 million of savings, or $0.25, on a per chare basis, from the 2008 Productivity Transformation Program, to be acheived in 2008 (total $1.5 billion through 2012) -- but that still leaves SGP with about a $0.30 per share "hole" in 2008 EPS.

Next point -- Schering is making the "As Adjusted" figures for the quarter, due almost exclusively to the purchase accounting adjustment/write-off of $688 million in total -- of which $551 million is a write -down of inventory(!) -- from the Organon acquisiton of last fall, pre-tax. Schering then shows an increase of $600 million on an after-tax basis, for having written this off. The plain implication here is that much is being buried in the Organon numbers, both historical, and pro-forma.

More soon.

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