[UPDATED -- Schering-Plough will need about 16 billion Russian Roubles of income, or 48 billion Russian Roubles of sales, to meet "Fred's Folly", below. . . .]
In one of those truly-priceless CNBC "twinning" moments, yesterday afternoon, while the markets were melting before our very eyes, Schering-Plough CEO Fred Hassan appeared on not just one, but two video segments. In the second, he served as a "guest TV-journalist" (What?!), questioning officials about the State of California's ovetures for a federal loan -- should it experience an instant liquidity crunch.
Tellingly, Mr. Hassan opined that the markets are literally "awash in cash" -- that liquidity is no problem -- and that California ought to look to "pare its balance sheet", before borrowing, or seeking to otherwise raise capital (can one own stock in California? I think not. And even if one could, why would one want to? -- I wonder). Well now, that's interesting advice, coming from a guy who tapped the debt and equity markets extensively last Fall (September 2007) to acquire Organon, while his balance sheet was breaking out with a case of increasingly-doubtful-asset "chicken pox" (think Vytorin/Zetia and "no good news" from ENHANCE). But I digress.
Mr. Hassan's other interview is the one most-relevant here. In it, Mr. Hassan opined that Russia would be the engine (CNBC video link) to cover what was assumed-but-unstated as Schering's United States market shortfalls in 2008. One Hassan soundbite:
. . . .We are seeing good growth in Russia, and we are increasingly able to get reimbursement for our products, there. . . .
Okay. Let us decode that decidely cheerful-sounding talking point, into its four far less-than-cheerful actual component-truths:
(1) Mr. Hassan's use of the word "reimbursement" means Schering is not running a "cash on delivery" drug business in Russia, but is applying for -- and waiting on -- Russian government payments for all the drugs it provides -- in many cases, wating more than 180 days, before it gets "paid". . . . so it is short funds, out-of-pocket, during that gap period.
(2) The word "paid" is in quotes above, because the Russian government certainly pays for those long-ago delivered Schering-Plough drugs in local currency -- Roubles, not United States dollars. We already know that Schering is increasingly exposed to currency volatility, given that it chose to go largely "unhedged" -- back when it was easier, and cheaper, to purchase such currency hedges (prior to the present crisis).(3) While Mr. Hassan flatly states he is seeing "good growth" in Russian sales -- he neglects to mention that given the extreme weakness of the Rouble, vis-a-vis the Dollar (or even the euro), Schering may actually report declining sales in Russia, overall, on a constant currency basis, this year. Without hedges, applicable GAAP rules will require Schering -- when it consolidates its worldwide results at year-end -- to value these Russian sales at a assumed (not a "spot") conversion rate.
(4) That nominal-accrual/currency-exchange-rate is very-likely to reflect the weakness of the Russian currency, as compared to the dollar. Thus, it is highly likely that Mr. Hassan effectively "gave away" a very substantial portion of his pricey drug inventory to the Russian markets -- once all is reconciled, and expensed on the 2008 year-end income statement -- taking into account the US GAAP-required currency conversions.
So -- all I can say is "You're doin' a heckuva' job, there, Fred!" Here's how the "rubber meets the (Russian) road" -- on this folly:
Said another way, he'll need between 48 and 43 billion Roubles of new sales in Russia, to generate the above equity income levels:
Two words, here: "No way!" -- and, "No how".
Mark this day -- October 6, 2008 -- on CNBC, Fred Hassan told the investing public to look for real growth -- on Schering's 2008 bottom-line -- from Russia.
Mark also, now, my prediction -- it will actually look like like "bottom line contraction", once the inevitable delays in payment, relative-dearth of protective hedges, and erosive currency conversions are all factored in. Schering just engaged, unwittingly, in a drug product "giveaway" in Russia.
Are you plaintiffs' lawyers taking notes, here? I hope so. This would seem to be an ongoing-securities count, for your to-be amended class-action complaints.
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