Schering-Plough Q2 Conference Call Tuesday -- Vytorin/Zetia "off only 5%"? I think not.

In a Wall Street Journal article posted overnight, by Val Brickates Kennedy (do go read it all, right here), Cowen & Co. analysts are quoted as seeing only an additional five percent decline in Vytorin/Zetia sales (presumably as compared to Q2 2008):

. . . .Of particular interest will be how well sales of cholesterol-controlling drugs Vytorin and Zetia are faring in the global downturn. The products, which are jointly marketed by Merck and Schering-Plough, have been hurt by continued concerns that they might not be as effective as some cheaper rival medications.

According to Cowen and Co., sales of Zetia will probably come in 5% lower at $550 million, while Vytorin sales will be 4% lower at $565 million. . . .

I think that guess is too-optimistic. I expect at least a new 10 percent decline, as compared to Q2 2008. Moreover, I think the more-relevant measure will be where Schering-Plough's share of the Equity Income from the Cholesterol Franchise, for the quarter, lands.

Last year, in Q2, Schering's share of the Equity Income was $493 million, but $64 million of that was a termination payment for the Merck-Schering-Plough Respiratory Venture -- so it won't repeat, and shouldn't be in the "base", for comparison's sake. Thus, Q2 2008 Equity Income, less the respiratory payment was $429 million. That income level was achieved on quarterly sales of $556 million, or a margin of 77 percent of sales.

Just last quarter however, in Q1 2009, Schering-Plough reported $367 million of Equity Income, similarly derived, on Q1 sales of $466 million, or about a 79 percent "margin". Remember, though, that Schering-Plough (per its own most-recent quarterly supplemental sales disclosures, at page 4) gets to keep most of the first $300 million in US sales of Zetia, each year, from the franchise: ". . . .In the U.S. market, Schering-Plough receives a greater share of profits on the first $300 million of annual Zetia sales. As such, Schering-Plough's share of operating income from the joint venture in the first fiscal quarter is generally higher than subsequent quarters. . . ." So, that may mean the above Q1 2009 79 percent "margin" will erode in Q2 2009 -- solely due to the split of profits going back to 50-50 -- in quarters two through four, 2009.

Even so, let's guess that Schering-Plough is doing a pretty good job of controlling expenses -- as this franchise continues its swoon -- so the 79 percent margin may still be pretty achievable, given that Schering is likely already eliminating duplicative expenses, ones that are also being incurred over on the Merck side, at Whitehouse Station, for the franchise. CEO Hassan likely figures some of the longer-term, "softer-dollar" support and institutional promotional expenses need no longer be incurred, as soon enough (he believes), Schering-Plough will be New Merck -- and only one set of payments like those need be made, each quarter, going forward (if at all).

So -- bottom line: I'd look for Schering-Plough's share of the Q2 2009 sales to be $410 million, or down 12 percent, from Q1 2009, and down 26 percent from last year's Q2 -- 2008. I expect Schering-Plough's share of the Q2 2009 Equity Income to be around $380 million, reflecting an "improved" margin of about 85 percent, due to cost cutting in the franchise. But we all know that can't last.

Finally, all my figures are before the continuing foreign currency headwinds -- those will likely take an additional 10 percent out of the sales line, and perhaps 5 percent out of the equity income line (based on that background link, and more recently, on analogies to J&J's Q2 2009 as-reported currency swings, here):



I will not offer bottom-line guesses, as to after currencies figures -- as those are really only ballpark guesses. Before currency headwinds, though, I bet Q2 2009 sales will be no more than $410 million, and equity income will be no more than $380 million.