Wednesday, July 22, 2009

Additional Thoughts -- Non-GAAP EPS Figures (and Unicorns!) -- Especially Pre-Merger. . . .

I think a large portion of Schering-Plough's NYSE stock price-performance, of yesterday, was simply Merck tugging it along, via the coming exchange-ratio.

Some of it was also, in fairness, the Street's reaction to Schering-Plough's non-GAAP EPS figures. But these non-GAAP figures should be viewed with an earnestly-questioning eye -- especially in the quarters right before a "bust-up/wipe-out" merger is slated to close. These EPS figures are a little like reports of unicorn sightings: they should be viewed with significant skepticism.

In this regard, note particularly Merck CEO Clark's new disclosure, of yesterday -- that even Consumer Health Care may "need a partner". That's financial/accounting Pig Latin for Merck may need to take a lot of charges in that business franchise, once it assumes control. And in those charges are where the non-GAAP EPS measures hide, and/or later find, their "unicorns". [It is no mere coincidence than CEO Hassan doesn't want the merger-execution-process to cross any fiscal year-end. But to be abundantly clear, here -- I am accusing no one of fraud. Each of these matters involves the exercise of a significant amount of professional judgment, along with business accumen. That said, if nothing else has been established over the last two years at Schering-Plough, it is that the judgment of many executives and professionals employed by Schering-Plough (especially at the highest levels) is questionable, at best.]

And so, any talk of "beating" such Non-GAAP EPS estimates sounds decidedly like talking about those "unicorns, out there, in the woods". Perhaps sales revenue is the only truly verifiable number, in these settings.

Consider that Schering-Plough will likely no longer exist, at all (by late 2010): so CEO Fred Hassan may, fairly safely, post any non-GAAP number he thinks Merck CEO Dick Clark will be able to reasonably swallow, into a series of merger reserves and charge-offs, post close. Moreover, as to the various "canopic jars" for these coming charges -- it is certain that either Intervet, or Merial will be gone from the Animal Health franchises (and, perhaps most of both!): Charge 1; it is (after yesterday) likely that Consumer Health Care will be decimated, or sold off: Charge 2; and it is likely that a good chunk of the profit on Remicade/Simponi will revert back to Centocor/J&J's control: Charge 3. And then, there is the more-general "costs of merger" canopic-jar: Charge 4. I forgot -- there is probably still at least some open reserve/charge amount related to the Organon acquisition, of 2007: Charge 5.

Good luck finding where any of the "purported variances" went, after allocation, re-allocation, among these four five canopic-jars.

Unfortunate -- but likely, more than a little truth resides there.

Now -- in an alternate Universe (one not driven solely by greed, nor overrun by such unicorns!) -- let's just suppose, for a moment, that CEO Hassan hadn't promised Wall Street "the moon -- and a herd of unicorns, to boot!" during the period 2003, to 2007 -- regarding Schering's coming fortunes.

Suppose he had said "we will run the company for slower, but sustainable, earnings growth". Suppose he had said we will focus on good science, not quick marketing kills. Suppose he had said that he would put science, and human health first. Oh, wait -- he did say all of those things. He Just. Didn't. Do. Any. Of. Them.

Instead, he lined his pockets (and the pockets of his top five, and fellow EMT members), drove what will end up being perhaps 30,000 people out of their jobs, and careers -- and caused a 120 year-old company to wink out of existence, entirely. Did that benefit the American economy, net-net? No. Did it even benefit most long-term shareholders? Again, no.

It only benefitted CEO Hassan, and his close-and-craven executive team.

So, I ask -- was it really a good idea -- in the larger, macro-economic, sense -- for Hassan to extract perhaps $300 million, personally, all-in, over these last six or seven years, to simply kill this once-proud company? Why does our system reward that sort of behavior? Isn't such a system broken, in a fundamental sense?

And just to forestall the obvious retort, here -- I don't agree, by the way, that Schering-Plough "was going to die, anyway, one way or another". It could have continued on independently, albeit in a smaller form, doing good -- where it could. But it was an easy mark for the Hassan/Cox "shell game" -- the same one they allegedly played at Pharmacia -- only super-sized, this time.

I am really interested in an intelligent response to why we as a body-politic think, collectively, this was a good idea. I, for one, remain puzzled about that.

[Discuss among yourselves, over at Whitehouse Station, and Kenilworth.]


Anonymous said...

While no fan of Fred, nor the EMT, the real culprits in all of this is the Board. They hired him, they permitted him and they rewarded him.

All on the back of the employees of S/P.

Condor said...

Indeed. But it is the shareholders that vote for or against the directors, of course.

My comments, such as they are, are intended to provoke thought, among that dispersed group.

But yes, Hans Becherer, and C. Robert Kidder, among many others, should answer for the above state of affairs.

Thanks for the thoughts -- do stop back!


Anonymous said...

Let's not forget the patients who may be harmed from SP drugs Fred may have championed inappropriately and the larger costs to society from disabilities they may incur.

Condor said...


Thanks -- Namaste.

Anonymous said...

I too think that Hassan and his minions are crooks but Schering science and drugs should not be characterized as "harming patients" or "large costs to society from disabilities they incur."
Fred is not smart enough to be a scientist nor accomplish what the research teams have accomplished.
Are we so spoiled in this country that we cannot see that many lives have been extended and saved with Schering drugs. Come on now - disabilities? Poppycock!

Condor said...

I think the crux of it, here, is there is truth -- in both sets of statements. Neither statement is meant to be heard as an absolute -- each is true -- in certain cases.

For, example, many patients with debilitating Hep C have seen sustained SVR on the existing cocktail of Schering-Plough's FDA approved drugs. They have been effectively cured.

On the other hand. . . .

Have some (many?) patients with high cholesterol levels and correspondingly-high CV risks either worsened their conditions, or actually suffered more heart attacks and strokes, because they were taking a Schering-Plough/Merck medicine (Zetia/Vytorin), a medicine which nominally-reduced their lipid numbers -- but in a fashion that had no effect on outcomes -- instead of taking the far cheaper, and proven-to-be-effective generic statins? I think so.

In addition, Fred Hassan, in THEORY, grew up as a science guy -- his Imperial College, London undergraduate work was focused on ChemE, or chemical engineering. So, I do think he is very smart -- I think he lacks a moral compass.

I do think Schering-Plough's science teams are (and were) first-rate. The science people at most big pharma companies are the solution -- not the problem. The trick, IMO, is finding an executive team that will support "good science, first".

I just think most of the S/P science teams will look, post merger, nothing like they did, pre-merger. But that's just my opinion. And seriously, thanks for the comments.

Um sheesh -- "Can't we all just get along?"

Heh -- Namaste.