10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For transition period
from to
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Commission file number 1-6571
SCHERING-PLOUGH
CORPORATION
(Exact name of registrant as
specified in its charter)
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New Jersey
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22-1918501
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2000 Galloping Hill Road, Kenilworth, NJ
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07033
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code:
(908) 298-4000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares, $.50 par value
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New York Stock Exchange
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Mandatory Convertible Preferred Stock
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New York Stock Exchange
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Preferred Share Purchase Rights*
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New York Stock Exchange
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* |
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At the time of filing, the Rights were not traded separately
from the Common Shares. |
Securities
registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check One):
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Large Accelerated
Filer þ
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Accelerated
Filer o
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Non-accelerated
Filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of
June 30, 2007 (the last business day of the
registrants most recently completed second fiscal
quarter): $45,516,213,799
Common Shares outstanding as of January 31, 2008:
1,621,353,851
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Part of Form 10-K
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Documents Incorporated by Reference
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Incorporated into
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Schering-Plough Corporation Proxy Statement for the
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Part III
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Annual Meeting of Shareholders on May 16, 2008
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Part I
Overview
of the Business
Schering-Plough refers to Schering-Plough Corporation and its
subsidiaries, except as otherwise indicated by the context.
Schering Corporation, a predecessor company, was incorporated in
New York in 1928 and New Jersey in 1935. The trademarks
indicated by CAPITAL LETTERS in this
10-K are the
property of, licensed to, promoted or distributed by
Schering-Plough Corporation, its subsidiaries or related
companies.
Schering-Plough is an innovation-driven, science-centered global
health care company. Through its own biopharmaceutical research
and collaborations with partners, Schering-Plough creates
therapies that help save and improve lives around the world.
Schering-Plough applies its
research-and-development
platform to human prescription, animal health and consumer
products. Schering-Ploughs vision is to Earn Trust,
Every Day with the doctors, patients, customers,
shareholders, employees and other stakeholders. Schering-Plough
is based in Kenilworth, N.J., and its Web site is
www.schering-plough.com.
In April 2003, the Board of Directors recruited Fred Hassan to
join Schering-Plough as the new Chairman of the Board and Chief
Executive Officer. With support from the Board, soon after he
arrived in 2003, Hassan installed a new senior executive
management team and initiated a strategic plan, with the goal of
stabilizing, repairing and turning around Schering-Plough in
order to build long-term shareholder value. That strategic plan,
the Action Agenda, is a six- to eight-year, five-phase plan.
In 2007 and in the four years since Hassan and the new
management team arrived, Schering-Plough made substantial
progress. During 2007, in the fourth phase of the Action
Agenda Build the Base Schering-Plough
grew and broadened the base of marketed products, expanded the
late stage research and development project pipeline and closed
the transformative acquisition of Organon BioSciences N.V. (OBS)
from Akzo Nobel. In acquiring OBS, Schering-Plough gained both
the Organon human prescription business and the Intervet animal
health business.
This additional strength is key for Schering-Plough in the
current environment. The pharmaceutical industry continues to be
subject to ever-more critical scrutiny, where challenges can
arise in presenting scientific data in an objective manner.
Schering-Plough believes that new scientific data are best
presented and discussed at appropriate scientific and medical
forums.
As explained in more detail later in this
10-K, in
early 2008, Schering-Plough encountered such a challenge when
results of a Merck/Schering-Plough Pharmaceuticals (the
Merck/Schering-Plough
cholesterol joint venture) clinical trial, called ENHANCE,
and joint venture products ZETIA and VYTORIN became the subject
of much media scrutiny prior to presentation of the trial
results in appropriate medical forums. Results are scheduled to
be presented at an American College of Cardiology meeting on
March 30, 2008. While the trial failed to show a
statistically significant difference between treatment groups
for the primary endpoint the mean change in the
intima-media thickness measured at three sites in the carotid
arteries (the right and left common carotid, internal carotid
and carotid bulb) in patients with Heterozygous Familial
Hypercholesterolemia the trial did demonstrate
VYTORINs effectiveness compared to simvastatin at lowering
LDL cholesterol (often known as bad cholesterol).
Medical experts and health advisory groups have long recognized
high LDL cholesterol as a significant cardiovascular risk factor
and recommended increasingly aggressive treatment of high
cholesterol for certain patients. Lowering LDL cholesterol,
along with a healthy diet and lifestyle changes, remains the
cornerstone of lipid treatment for patients at risk for heart
disease. Clinical studies have demonstrated that VYTORIN lowers
patients LDL cholesterol more than rosuvastatin,
atorvastatin and simvastatin at the doses studied and was able
to get more patients to their LDL cholesterol goals (as defined
by ATP III). While it is too early to tell the impact of the
joint ventures ENHANCE trial results on the joint
ventures cholesterol business, Schering-Ploughs
diversified group of products and geographic areas, as well as
its highly experienced executive team, gives Schering-Plough
additional strength that will be helpful in weathering this
situation.
3
Segment
Information
Schering-Plough has three reportable segments: Human
Prescription Pharmaceuticals, Animal Health and Consumer Health
Care. The segment sales and (loss)/profit data that follow are
consistent with Schering-Ploughs current management
reporting structure.
Human
Prescription Pharmaceuticals
The Human Prescription Pharmaceuticals segment discovers,
develops, manufactures and markets human pharmaceutical
products. Within the Human Prescription Pharmaceutical segment,
Schering-Plough has a broad range of research projects and
marketed products in six therapeutic areas: Cardiovascular,
Central Nervous System, Immunology and Infectious Disease,
Oncology, Respiratory and Womens Health. The Human
Prescription Pharmaceuticals segment also includes Nobilon, a
human vaccine development unit and Diosynth, a third-party
manufacturing unit. Marketed products include the following:
Cardiovascular Disease: VYTORIN, a
cholesterol-lowering tablet combining the dual action of ZETIA
and Merck & Co., Inc.s statin Zocor
(simvastatin); ZETIA, a novel cholesterol-absorption inhibitor
discovered by Schering-Plough scientists, for use as monotherapy
or in combination with either statins or fenofibrate to lower
cholesterol; INTEGRILIN Injection, a platelet receptor GP
IIb/IIIa inhibitor for the treatment of patients with acute
coronary syndrome and those undergoing percutaneous coronary
intervention in the United States, as well as for the prevention
of early myocardial infarction in patients with acute coronary
syndrome in most countries; and ORGARAN, a non-heparin
antithrombotic.
Central Nervous System: REMERON, an
antidepressant; ESMERON/ZEMURON, a muscle relaxant used in
surgical procedures; SUBUTEX, a sublingual tablet formulation of
buprenorphine; SUBOXONE, a sublingual tablet combination of
buprenorphine and naloxone, marketed by Schering-Plough in
certain countries outside the United States for the treatment of
opiate addiction; and NORCURON, a muscle relaxant.
Immunology and Infectious Disease: REMICADE,
an anti-TNF antibody marketed by Schering-Plough outside of the
United States, Japan and certain Asian markets for the treatment
of inflammatory diseases such as rheumatoid arthritis, early
rheumatoid arthritis, psoriatic arthritis, Crohns disease,
ankylosing spondylitis, plaque psoriasis and ulcerative colitis;
PEGINTRON Powder for Injection, a pegylated interferon product
for chronic hepatitis C; AVELOX, which is only marketed in
the U.S., a broad-spectrum fluoroquinolone antibiotic for
certain respiratory and skin infections; and NOXAFIL Oral
Suspension, for prophylaxis (prevention) of invasive fungal
infections in high-risk patients and the treatment of
oropharyngeal candidiasis. It is also approved for the treatment
of invasive fungal infections in markets outside the U.S.
Oncology: TEMODAR/TEMODAL Capsules for certain
types of brain tumors, including newly diagnosed glioblastoma
multiforme; CAELYX, a long-circulating pegylated liposomal
formulation of the cancer drug doxorubicin marketed by
Schering-Plough outside the United States for the treatment of
certain ovarian cancers, Kaposis sarcoma and metastatic
breast cancer; and INTRON A Injection, marketed for chronic
hepatitis B and C and numerous anticancer indications worldwide,
including as adjuvant therapy for malignant melanoma.
Respiratory: NASONEX, a once-daily,
nasal-inhaled steroid for nasal allergy symptoms, including
congestion, and for the treatment of nasal polyps in patients
18 years of age and older; CLARINEX/AERIUS, a non-sedating
antihistamine for the treatment of allergic rhinitis; FORADIL
AEROLIZER, a long-acting beta2-agonist marketed by
Schering-Plough in the United States for the maintenance
treatment of asthma and chronic obstructive pulmonary disease,
and for the acute prevention of exercise-induced bronchospasm;
ASMANEX TWISTHALER, an oral dry-powder corticosteroid inhaler
for first-line maintenance treatment of asthma; and PROVENTIL
HFA (albuterol) Inhalation Solution, for the relief of
bronchospasm in patients 12 years or older.
Womens Health: FOLLISTIM/PUREGON, a
fertility treatment; NUVARING, a vaginal contraceptive ring;
LIVIAL, a menopausal therapy; MARVELON/DESOGEN, a low-dose
combined oral contraceptive; MERCILON, a low-dose combined oral
contraceptive; and IMPLANON, a single-rod subdermal
contraceptive implant.
4
Animal
Health
The Animal Health segment discovers, develops, manufactures and
markets animal health products including vaccines. Principal
marketed products in this segment include:
Livestock Products: NUFLOR bovine and swine
antibiotic; BOVILIS/VISTA vaccine lines for infectious diseases
in cattle; BANAMINE bovine and swine anti-inflammatory;
TRI-MERIT, data management tool for cattle; REGUMATE/MATRIX
fertility management for swine and horses; RESFLOR combination
broad-spectrum antibiotic and non-steroidal anti-inflammatory
drug for bovine respiratory disease; M+PAC swine pneumonia
vaccine and PORCILIS vaccine line for infectious diseases in
swine.
Poultry Products: NOBILIS/INNOVAX vaccine
lines for poultry; PARACOX and COCCIVAC coccidiosis vaccines for
poultry.
Companion Animal
Products: GALAXY/QUANTUM/PROCYON/ECLIPSE/INTRA-TRAC
vaccine line for dogs and cats, NOBIVAC/CONTINUUM vaccine lines
for flexible dog and cat vaccination; OTOMAX/MOMETAMAX canine
otic ointments for acute and chronic otitis;
CANINSULIN/VETSULIN, diabetes mellitus treatment for dogs and
cats; PANACUR/SAFEGUARD broad-spectrum anthelmintic (de-wormer)
for use in many animals, SCALIBOR/EXSPOT, dog collar/spot on
protecting against bites from fleas, ticks, mosquitoes and
sandflies; HOMEAGAIN proactive U.S. pet recovery network;
and ZUBRIN, an anti-inflammatory/analgesic for dogs.
Aquaculture Products: NORVAX/MINOVA vaccines
against bacterial and viral disease in fish, SLICE parasiticide
for sea lice in salmon and AQUAFLOR antibiotic for farm-raised
fish.
Consumer
Health Care
The Consumer Health Care segment develops, manufactures and
markets OTC, foot care and sun care products. Principal products
in this segment include:
Over-the-Counter (OTC) Products: CLARITIN
non-sedating antihistamines; MIRALAX treatment for occasional
constipation; CORICIDIN HBP decongestant-free cold/flu medicine
for people with high blood pressure; DRIXORAL cold and allergy,
allergy sinus, flu and nasal decongestant tablets; AFRIN nasal
decongestant spray; and CORRECTOL laxative tablets.
Foot Care: DR. SCHOLLS foot care
products; LOTRIMIN topical antifungal products; and TINACTIN
topical antifungal products and foot and sneaker odor/wetness
products.
Sun Care: COPPERTONE sun care lotions, sprays,
dry oils and lip-protection products and sunless tanning
products; and SOLARCAINE sunburn relief products.
Net
sales by segment
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Year Ended December 31,
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2007
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2006
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2005
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(Dollars in millions)
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Human Prescription Pharmaceuticals
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$
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10,173
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$
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8,561
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$
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7,564
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Animal Health
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1,251
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910
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851
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Consumer Health Care
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1,266
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1,123
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1,093
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Consolidated net sales
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$
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12,690
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$
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10,594
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$
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9,508
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5
(Loss)/Profit
by segment
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Year Ended December 31,
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2007(1)
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2006
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2005
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(Dollars in millions)
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Human Prescription Pharmaceuticals
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$
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(1,206
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)
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$
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1,394
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$
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733
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Animal Health
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(582
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)
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120
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120
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Consumer Health Care
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275
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228
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235
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Corporate and other (including net interest income of
$150 million, $125 million and $13 million in
2007, 2006 and 2005, respectively
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298
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(259
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)
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(591
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)
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Consolidated (loss)/profit before tax and cumulative effect of a
change in accounting principle
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$
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(1,215
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)
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$
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1,483
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$
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497
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(1) |
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In 2007, the Human Prescription Pharmaceuticals segments
loss includes $3.4 billion of purchase accounting items,
including acquired in-process research and development of
$3.2 billion. In 2007, the Animal Health segments
loss includes $721 million of purchase accounting items,
including acquired in-process research and development of
$600 million. |
Schering-Ploughs net sales do not include sales of VYTORIN
and ZETIA which are managed in the joint venture with Merck, as
Schering-Plough accounts for this joint venture under the equity
method of accounting (see Note 4, Equity
Income, under Item 8, Financial Statements and
Supplementary Data, for additional information). Equity
income from the Merck/Schering-Plough joint venture is included
in the Human Prescription Pharmaceuticals segment.
Corporate and other includes interest income and
expense, foreign exchange gains and losses, currency option
gains, headquarters expenses, special and acquisition related
charges and other miscellaneous items. The accounting policies
used for segment reporting are the same as those described in
Note 1, Summary of Significant Accounting
Policies, under Item 8, Financial Statements
and Supplementary Data.
In 2007, Corporate and other includes special and
acquisition related charges of $84 million, comprised of
$61 million of integration-related costs for the OBS
acquisition and $23 million of severance charges as part of
integration activities. It is estimated the charges relate to
the reportable segments as follows: Human Prescription
Pharmaceuticals $27 million, Animal
Health $11 million and Corporate and
other $46 million.
In 2006, Corporate and other includes special
charges of $102 million primarily related to changes to
Schering-Ploughs manufacturing operations in the
U.S. and Puerto Rico announced in June 2006, all of which
related to the Human Prescription Pharmaceuticals segment.
Included in 2006 cost of sales were charges of approximately
$146 million from the manufacturing streamlining actions
which were primarily related to the Human Prescription
Pharmaceuticals segment.
In 2005, Corporate and other includes special
charges of $294 million, including $28 million of
employee termination costs, $16 million of asset impairment
and other charges, and an increase in litigation reserves by
$250 million resulting in a total reserve of approximately
$500 million representing Schering-Ploughs then
current estimate to resolve the Massachusetts investigation as
well as the investigations and the state litigation disclosed
under AWP Litigation and Investigations, in
Note 20, Legal, Environmental and Regulatory
Matters, in Item 8, Financial Statements and
Supplementary Data. It is estimated that the charges
relate to the reportable segments as follows: Human Prescription
Pharmaceuticals $289 million, Consumer Health
Care $2 million, Animal Health
$1 million and Corporate and other
$2 million.
See Note 3, Special and Acquisition Related Charges
and Manufacturing Streamlining, under Item 8,
Financial Statements and Supplementary Data, for
additional information.
6
Information
About the Merck/Schering-Plough Joint Venture
In May 2000, Schering-Plough and Merck & Co., Inc.
(Merck) entered into two separate sets of agreements to jointly
develop and manage certain products in the U.S., including
(1) two cholesterol-lowering drugs and (2) an
allergy/asthma drug. In December 2001, the cholesterol
agreements were expanded to include all countries of the world
except Japan. In general, the companies agreed that the
collaborative activities under these agreements would operate in
a virtual joint venture to the maximum degree possible by
relying on the respective infrastructures of the two companies.
These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by
each company.
The cholesterol agreements provide for Schering-Plough and Merck
to jointly develop and commercialize ezetimibe in the
cholesterol management field:
i. as a once-daily monotherapy (marketed as ZETIA in the
U.S. and Asia and EZETROL in Europe);
ii. in co-administration with various approved statin
drugs; and
iii. as a fixed-combination tablet of ezetimibe and
simvastatin (Zocor), Mercks cholesterol-modifying
medicine. This combination medication (ezetimibe/simvastatin) is
marketed as VYTORIN in the U.S. and as INEGY in many
international countries.
ZETIA/EZETROL (ezetimibe) and VYTORIN/INEGY (the combination of
ezetimibe/simvastatin) are approved for use in the U.S. and
have been launched in several international markets.
Schering-Plough utilizes the equity method of accounting in
recording its share of activity from the Merck/Schering-Plough
joint venture. See Note 4, Equity Income, under
Item 8, Financial Statements and Supplemental
Data, for additional information regarding the profits and
costs sharing and accounting as provided by the agreements.
The allergy/asthma agreements provide for the joint development
and marketing by the companies of a once-daily,
fixed-combination tablet containing CLARITIN and Singulair.
Singulair is Mercks once-daily leukotriene receptor
antagonist for the treatment of asthma and seasonal allergic
rhinitis. In 2007, a New Drug Application filing for this
combination tablet had been accepted by the U.S. Food and
Drug Administration (FDA) for standard review.
During 2007, Schering-Plough announced that it had agreed with
Merck to commence development of a single-tablet combination of
ezetimibe and atorvastatin as a treatment for elevated
cholesterol levels.
Information
About the Centocor Licenses
REMICADE is licensed from and manufactured by Centocor, Inc., a
Johnson & Johnson company. During 2005,
Schering-Plough exercised an option under its contract with
Centocor for license rights to develop and commercialize
golimumab, a fully human monoclonal antibody currently in
Phase III trials. Schering-Plough has exclusive marketing
rights to both products outside of the U.S., Japan and certain
Asian markets. In December 2007, Schering-Plough and Centocor
revised their distribution agreement regarding the development,
commercialization and distribution of both REMICADE and
golimumab, extending Schering-Ploughs rights to
exclusively market REMICADE to match the duration of
Schering-Ploughs exclusive marketing rights for golimumab.
Effective upon regulatory approval of golimumab in the EU,
Schering-Ploughs marketing rights for both products will
now extend for 15 years after the first commercial sale of
golimumab within the EU. Centocor will receive a progressively
increased share of profits on Schering-Ploughs
distribution of both products in the Schering-Plough marketing
territory between 2010 and 2014, and the share of profits will
remain fixed thereafter for the remainder of the term. The
changes to the duration of REMICADE marketing rights and the
profit sharing arrangement for the products are all conditioned
on approval of golimumab being granted prior to
September 1, 2014. Schering-Plough may independently
develop and market golimumab for a Crohns disease
indication in its territories, with an option for Centocor to
participate.
7
Global
Operations
A majority of Schering-Ploughs operations are outside the
U.S. With the acquisition of OBS in late 2007,
Schering-Ploughs global operations in Human Prescription
Pharmaceuticals and Animal Health increased.
Non-U.S. activities
are carried out primarily through wholly-owned subsidiaries
wherever market potential is adequate and circumstances permit.
In addition, Schering-Plough is represented in some markets
through licensees or other distribution arrangements.
Currently, Schering-Plough has business operations in more than
140 countries.
For additional information on global operations, see
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and the
segment information described above in this
10-K.
Net
sales by geographic area
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2007
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2006
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2005
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(Dollars in millions)
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United States
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$
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4,597
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$
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4,192
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$
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3,589
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Europe and Canada
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5,500
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4,403
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4,040
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Latin America
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1,359
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|
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990
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|
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884
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Pacific Area and Asia
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|
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1,234
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|
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1,009
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|
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995
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|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
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$
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12,690
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$
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10,594
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$
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9,508
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|
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|
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|
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Schering-Plough has subsidiaries in more than 55 countries
outside the U.S. Net sales are presented in the geographic
area in which Schering-Ploughs customers are located. The
following countries accounted for 5 percent or more of
consolidated net sales during any of the past three years:
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2007
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2006
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2005
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% of
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% of
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% of
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Consolidated
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Net
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|
Consolidated
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|
Net
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|
|
Consolidated
|
|
|
|
Net Sales
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|
Net Sales
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|
Sales
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|
|
Net Sales
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|
|
Sales
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|
|
Net Sales
|
|
|
|
(Dollars in millions)
|
|
|
Total International net sales
|
|
$
|
8,093
|
|
|
|
64
|
%
|
|
$
|
6,402
|
|
|
|
60
|
%
|
|
$
|
5,919
|
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
France
|
|
|
965
|
|
|
|
8
|
%
|
|
|
809
|
|
|
|
8
|
%
|
|
|
771
|
|
|
|
8
|
%
|
Japan
|
|
|
709
|
|
|
|
6
|
%
|
|
|
669
|
|
|
|
6
|
%
|
|
|
687
|
|
|
|
7
|
%
|
Canada
|
|
|
578
|
|
|
|
5
|
%
|
|
|
478
|
|
|
|
5
|
%
|
|
|
418
|
|
|
|
4
|
%
|
Italy
|
|
|
498
|
|
|
|
4
|
%
|
|
|
441
|
|
|
|
4
|
%
|
|
|
457
|
|
|
|
5
|
%
|
Net
sales by customer
Sales to a single customer that accounted for 10 percent or
more of Schering-Ploughs consolidated net sales during any
of the past three years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Consolidated
|
|
|
Net
|
|
|
Consolidated
|
|
|
Net
|
|
|
Consolidated
|
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Sales
|
|
|
Net Sales
|
|
|
Sales
|
|
|
Net Sales
|
|
|
|
(Dollars in millions)
|
|
|
McKesson Corporation
|
|
$
|
1,526
|
|
|
|
12
|
%
|
|
$
|
1,159
|
|
|
|
11
|
%
|
|
$
|
1,073
|
|
|
|
11
|
%
|
Cardinal Health
|
|
|
1,196
|
|
|
|
9
|
%
|
|
|
1,019
|
|
|
|
10
|
%
|
|
|
841
|
|
|
|
9
|
%
|
8
Supplemental
sales information
Sales of products comprising 10 percent or more of
Schering-Ploughs U.S. or international sales for the
year ended December 31, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(Dollars in millions)
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
NASONEX
|
|
$
|
667
|
|
|
|
15
|
%
|
OTC CLARITIN
|
|
|
445
|
|
|
|
10
|
%
|
International
|
|
|
|
|
|
|
|
|
REMICADE
|
|
$
|
1,648
|
|
|
|
20
|
%
|
Schering-Ploughs net sales do not include sales of VYTORIN
and ZETIA which are managed in the joint venture with Merck, as
Schering-Plough accounts for this joint venture under the equity
method of accounting.
Long-lived
assets by geographic location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
United States
|
|
$
|
4,310
|
|
|
$
|
2,547
|
|
|
$
|
2,538
|
|
Netherlands
|
|
|
7,057
|
|
|
|
1
|
|
|
|
1
|
|
Ireland
|
|
|
3,414
|
|
|
|
488
|
|
|
|
486
|
|
Singapore
|
|
|
678
|
|
|
|
824
|
|
|
|
840
|
|
Other
|
|
|
1,823
|
|
|
|
804
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,282
|
|
|
$
|
4,664
|
|
|
$
|
4,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets shown by geographic location are primarily
intangibles and property. The significant increase in long-lived
assets as of December 31, 2007 is due to the OBS
acquisition.
Schering-Plough does not disaggregate assets on a segment basis
for internal management reporting and, therefore, such
information is not presented.
Research
and Development
Schering-Ploughs research activities are primarily aimed
at discovering and developing new prescription products and
enhancements to existing human prescription products of medical
and commercial significance. However, Schering-Ploughs
research and development platform also supports its Animal
Health and Consumer Health Care products, and often a research
and development project will have application in more than one
product segment.
Company-sponsored research and development expenditures were
$2.9 billion, $2.2 billion, and $1.9 billion in
2007, 2006, and 2005, respectively. As a percentage of
consolidated net sales, research and development expenditures
represented approximately 23 percent, 21 percent and
20 percent in 2007, 2006 and 2005, respectively.
Schering-Ploughs research activities are concentrated in
the six therapeutic areas of focus: Cardiovascular, Central
Nervous System, Immunology and Infectious Disease, Oncology,
Respiratory and Womens Health. Schering-Plough also has
substantial efforts directed toward biotechnology, vaccine
development and immunology. Research activities include
expenditures for both internal research efforts and research
collaborations with various partners.
While several pharmaceutical compounds are in varying stages of
development, it cannot be predicted when or if these compounds
will become available for commercial sale.
Schering-Ploughs product pipeline lists significant
products in development and is available on
Schering-Ploughs website at www.schering-plough.com. Due
to the nature of the development and approval
process as well as the fact that human
9
health is involved and the science of human health is constantly
evolving the status of any compounds in development
is subject to change. Schering-Plough does not assume any duty
to update this information.
Schering-Plough has several research and development projects
which have been granted fast-track designation by the FDA
including: a novel thrombin receptor antagonist for acute
coronary syndrome and secondary prevention of subsequent
cardiovascular events; boceprevir (a protease inhibitor
compound) for hepatitis C; vicriviroc (a CCR5 receptor
antagonist) for the treatment of HIV; and an A2a Adenosine
receptor antagonist for the treatment of Parkinsons
disease. Of these products, two are in Phase III clinical
testing phase: thrombin receptor antagonist, and vicriviroc.
Significant expenditures would be required to progress these
through development, due to the large number of patients
necessary for Phase III trials.
Research and development expenses are expected to continue to
increase over the next several years. The primary reason is that
Schering-Ploughs pipeline is larger because the new
management team has focused on making research and development
more productive and because additional pipeline projects were
added in the OBS acquisition. Other reasons include the need for
larger clinical trials, more frequent clinical trials and longer
clinical trials in the current global regulatory environment.
Research and development activities typically continue after a
product has been marketed. One reason is to learn of new
indications for the product. Another reason is to respond to any
safety or effectiveness benefits or risks that may become known
as more people use a product for a longer period of time.
Patents,
Trademarks and Other Intellectual Property Rights
Overview
Intellectual property protection is critical to
Schering-Ploughs ability to successfully commercialize its
product innovations. Schering-Plough owns, has applied for, or
has licensed rights to, a large number of patents, both in the
U.S. and in other countries, relating to compounds,
formulations and uses, and manufacturing processes. There is no
assurance that the patents Schering-Plough is seeking will be
granted or that the patents Schering-Plough has been granted
would be found valid if challenged. Moreover, patents relating
to particular formulations, uses, or processes do not preclude
other manufacturers from employing alternative processes or from
marketing alternative formulations or uses that might
successfully compete with Schering-Ploughs patented
products.
Outside the U.S., the standard of intellectual property
protection for pharmaceuticals varies widely. While many
countries have reasonably strong patent laws, other countries
currently provide little or no effective protection for
inventions or other intellectual property rights. Under the
Trade-Related Aspects of Intellectual Property Agreement (TRIPs)
administered by the World Trade Organization (WTO), more than
140 countries have now agreed to provide non-discriminatory
protection for most pharmaceutical inventions and to assure that
adequate and effective rights are available to all patent
owners. It is possible that changes to this agreement will be
made in the future that will diminish or further delay its
implementation in developing countries. It is too soon to assess
how much, if at all, Schering-Plough will be impacted
commercially from these changes.
When a product patent expires, the patent holder often loses
effective market exclusivity for the product. This can result in
a rapid, sharp and material decline in sales of the formerly
patented product, particularly in the U.S. However, in some
cases the innovator company can obtain additional commercial
benefits through manufacturing trade secrets; later-expiring
patents on processes, uses, or formulations; trademark use; or
exclusivity that may be available under pharmaceutical
regulatory laws.
Schering-Ploughs
Intellectual Property Portfolio
Patent protection for certain Schering-Plough compounds,
formulations, processes and uses are important to
Schering-Ploughs business and financial results. For many
of Schering-Ploughs products, in addition to patents on
the compound, Schering-Plough holds other patents on
manufacturing processes, formulations, or uses that may extend
exclusivity beyond the expiration of the compound patent.
10
Schering-Ploughs subsidiaries own (or have licensed rights
under) a number of patents and patent applications, both in the
U.S. and abroad. Patents and patent applications relating
to Schering-Ploughs significant products, including,
without limitation, VYTORIN, ZETIA, REMICADE, NASONEX,
FOLLISTIM/PUREGON, NUVARING, TEMODAR, PEGINTRON and CLARINEX,
are of material importance to Schering-Plough.
Worldwide, Schering-Plough sells all major products under
trademarks that also are material in the aggregate to its
business and financial results. Trademark protection varies
throughout the world, with protection continuing in some
countries as long as the mark is used and in other countries as
long as it is registered. Registrations are normally for fixed
but renewable terms.
Patent
Challenges Under the Hatch-Waxman Act
The Drug Price Competition and Patent Term Restoration Act of
1984, commonly known as Hatch-Waxman, made a complex set of
changes to both patent and new drug approval laws in the
U.S. Before Hatch-Waxman, no drug could be approved without
providing the U.S. Food and Drug Administration (FDA)
complete safety and efficacy studies, known as a complete New
Drug Application (NDA). Hatch-Waxman authorized the FDA to
approve generic versions of innovative medicines without such
information upon the filing of an Abbreviated New Drug
Application (ANDA). In an ANDA, the generic manufacturer must
demonstrate only bioequivalence between the generic version and
the NDA-approved drug not safety and efficacy.
Hatch-Waxman provides for limited patent term restoration to
partially make up for patent term lost during the time an
NDA-approved drug is in regulatory review. NDA-approved drugs
also receive a limited period of data exclusivity which prevents
the approval of ANDA applications for specific time periods
after approval of the NDA-approved drug.
Absent a successful patent challenge, the FDA cannot approve an
ANDA until after the innovators patents expire. However, a
generic manufacturer may file an ANDA seeking approval after the
expiration of the applicable data exclusivity, and alleging that
one or more of the patents listed in the innovators NDA
are invalid or not infringed. This allegation is commonly known
as a Paragraph IV certification. The innovator must then
file suit against the generic manufacturer to protect its
patents. If one or more of the NDA-listed patents are
successfully challenged, the first filer of a Paragraph IV
certification may be entitled to a
180-day
period of market exclusivity over all other generic
manufacturers. In recent years, generic manufacturers have used
Paragraph IV certifications extensively to challenge
patents on a wide array of innovative pharmaceuticals, and it is
anticipated that this trend will continue.
Schering-Ploughs 10-Ks and 10-Qs include a
listing of Hatch-Waxman Act challenges to its patents in the
Legal Proceedings section.
Marketing
Activities and Competition
Schering-Plough, through its trained professional sales
representatives, introduces and makes known its prescription
drugs to physicians, pharmacists, hospitals, managed care
organizations and buying groups. Schering-Plough sells
prescription drugs to hospitals, certain managed care
organizations, wholesale distributors and retail pharmacists.
Schering-Plough also introduces and makes known its prescription
products through journal advertising, direct mail advertising,
the distribution of samples to physicians and through
television, radio, Internet, print and other advertising media.
Schering-Plough, through its trained professional sales
representatives, promotes its animal health products to
veterinarians, distributors and animal producers.
Schering-Plough sells over-the-counter (OTC), foot care and sun
care products through wholesale and retail drug, food chain and
mass merchandiser outlets. Schering-Plough promotes directly to
the consumer through television, radio, Internet, print and
other advertising media.
The pharmaceutical industry is highly competitive and includes
other large companies, some significantly larger than
Schering-Plough, with substantial resources for research,
product development, advertising, promotion and field selling
support.
11
There are numerous domestic and international competitors in
this industry. Some of the principal competitive techniques used
by Schering-Plough for its products include research and
development of new and improved products, varied dosage forms
and strengths and switching prescription products to
non-prescription status. In the U.S., many of
Schering-Ploughs products are subject to increasingly
competitive pricing as managed care groups, institutions,
federal and state government entities and agencies and buying
groups seek price discounts and rebates. Governmental,
third-party payers, practices of U.S. pharmacists and other
pressures toward the dispensing of generic products may
significantly reduce the sales of certain products when they, or
competing products in the same therapeutic category, are no
longer protected by patents or exclusivity available under
pharmaceutical regulatory laws.
Schering-Plough operates primarily in the prescription
pharmaceutical marketplace. However, where appropriate,
Schering-Plough seeks regulatory approval to switch prescription
products to over-the-counter status as a means of extending a
products life cycle. In this way, the OTC marketplace is
another means of maximizing the return on investments in
discovery and development.
Government
Regulation
Each of Schering-Ploughs major business segments is
subject to significant regulation in multiple jurisdictions.
This section describes the general regulatory framework.
Additional information about the cost of regulatory compliance
and specific impacts on Schering-Ploughs business and
financial condition are described under the heading
Regulatory And Competitive Environment In Which
Schering-Plough Operates in Managements Discussion
and Analysis later in this
10-K.
Additional information about other regulatory matters can be
found in Note 20, Legal, Environmental and Regulatory
Matters, under Item 8, Financial Statements and
Supplementary Data.
In the prescription drug segment, regulations apply at all
phases of the business, including:
|
|
|
|
|
regulatory requirements to conduct, and standards for, clinical
trials (for example, requiring the use of Good Clinical
Practices or GCPs), which apply at the research and development
stage;
|
|
|
|
regulatory requirements to conduct, and standards for,
post-approval clinical trials;
|
|
|
|
required regulatory approval to begin marketing a new drug or to
market an existing drug product for new indications;
|
|
|
|
regulations prescribing the manner in which drugs are
manufactured, packaged, labeled, advertised, marketed and
distributed;
|
|
|
|
regulations impacting the pricing of drugs;
|
|
|
|
regulatory requirements to assess and report adverse impacts and
side effects of drugs used in clinical trials, as well as
marketed drugs, called pharmacovigilance; and
|
|
|
|
the ability of regulatory authorities to remove a product from
the market or recall certain batches of products.
|
In the U.S., the national regulation of all phases of the
prescription drug business except pricing is centralized at the
Food and Drug Administration (FDA). The FDA is responsible for
protecting the U.S. public health by assuring the safety,
efficacy, and security of human and veterinary drugs, biological
products and medical devices. Generally, there is free market
pricing in the U.S., although the Centers for Medicare and
Medicaid Services (CMS) and Medicare Part B and D include
provisions about pricing drugs for the elderly, disabled and
indigent who receive federal prescription benefits.
Schering-Plough is also committed to complying with voluntary
best practices of the Pharmaceutical Research and Manufacturers
of America (PhRMA), a trade industry group of which it is a
member, regarding marketing and advertising practices.
In the EU, including Schering-Ploughs key markets in the
United Kingdom, France, Germany and Italy, there is regulation
at the local country level and additional regulation at the EU
level, through the European Medicines Agency (EMEA).
Pharmaceutical products are regulated at both of these levels
through various national, mutual recognition or centralized
regulatory procedures. The EMEA coordinates the evaluation and
12
supervision of medicinal products throughout the EU. There is no
pan-EU market pricing system; however, individual member states
have various systems/agencies that regulate price at a local
level.
In Japan, there is regulation through the Pharmaceuticals and
Medical Device Agency (PMDA). The PMDA regulates pharmaceuticals
and medical devices from development through post-marketing use.
The Japanese government regulates the pricing/reimbursement of
pharmaceutical products in Japan through a complicated pricing
process that includes benchmarks with prices in other western
countries such as the United States, Canada and select EU
countries.
As all of the major countries have some influence over pricing,
even with the CMS in the United States, there is increasing
pressure on the pharmaceutical industry to bring products to
market that provide differentiation versus existing products.
This can lead to more expensive and scientifically challenging
clinical trials in order to generate this type of data for new
products versus marketed comparators.
Raw
Materials
Raw materials essential to Schering-Ploughs operations are
available in adequate quantities from a number of potential
suppliers. Energy is expected to be available to Schering-Plough
in sufficient quantities to meet its operating requirements.
Seasonality
Certain of Schering-Ploughs products, particularly the
respiratory and sun care products, are seasonal in nature.
Seasonal patterns do not have a pronounced effect on the
consolidated operations of Schering-Plough.
Environment
To date, compliance with federal, state and local laws regarding
discharge of materials into the environment, or protection of
the environment, have not had a material effect on
Schering-Ploughs operations or financial position.
Employees
At December 31, 2007, Schering-Plough employed
approximately 55,000 people worldwide.
Available
Information
Schering-Ploughs
10-Ks,
10-Qs,
8-Ks and
amendments to those reports that are filed with or furnished to
the SEC are available free of charge on Schering-Ploughs
website as soon as reasonably practicable after such materials
are electronically filed with the SEC. Schering-Ploughs
internet address is www.schering-plough.com. Since
Schering-Plough began this practice in the third quarter of
2002, each such report has been available on
Schering-Ploughs website within 24 hours of filing.
Reports filed by Schering-Plough with the SEC may be read and
copied at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. Information on
the operation of the Public Reference Room may be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site at www.sec.gov that
contains reports, proxies and information statements and other
information regarding issuers that file electronically with the
SEC.
Schering-Ploughs future operating results and cash flows
may differ materially from the results described in this
10-K due to
risks and uncertainties related to Schering-Ploughs
business, including those discussed below. In addition, these
factors represent risks and uncertainties that could cause
actual results to differ materially from those implied by
forward-looking statements contained in this report.
13
Key
Schering-Plough products generate a significant amount of
Schering-Ploughs profits and cash flows, and any events
that adversely affect the markets for its leading products could
have a material and negative impact on results of operations and
cash flows.
Schering-Ploughs ability to generate profits and operating
cash flow depends largely upon the continued profitability of
Schering-Ploughs cholesterol franchise, consisting of
VYTORIN and ZETIA. In addition, other key products such as
REMICADE, NASONEX, PEGINTRON, TEMODAR, CLARINEX, and AVELOX
account for a material portion of revenues. As a result of
Schering-Ploughs dependence on key products, any events
that adversely affects the markets for these products could have
a significant impact on results of operations. These events
include loss of patent protection, increased costs associated
with manufacturing, generic or OTC availability of
Schering-Ploughs product or a competitive product, the
discovery of previously unknown side effects, increased
competition from the introduction of new, more effective
treatments and discontinuation or removal from the market of the
product for any reason.
For example, the profitability of Schering-Ploughs
cholesterol franchise may be adversely affected by competition
from multiple generic cholesterol products. The FDA has held a
public meeting to solicit comment on making certain prescription
drugs available behind-the-counter without a
prescription and continues to study this scenario. Although the
FDA did not indicate what drugs might be included this category,
if the FDA approved behind-the-counter sales of products that
compete with products of Schering-Plough or the
Merck/Schering-Plough cholesterol joint venture, such
competition could have an adverse result on sales and
profitability.
There
is a high risk that funds invested in research will not generate
financial returns because the development of novel drugs
requires significant expenditures with a low probability of
success.
There is a high rate of failure inherent in the research to
develop new drugs to treat diseases. As a result, there is a
high risk that funds invested in research programs will not
generate financial returns. This risk profile is compounded by
the fact that this research has a long investment cycle. To
bring a pharmaceutical compound from the discovery phase to
market may take a decade or more and failure can occur at any
point in the process, including later in the process after
significant funds have been invested.
Schering-Ploughs
success is dependent on the successful development and marketing
of new products, which are subject to substantial
risks.
Products that appear promising in development may fail to reach
market for numerous reasons, including the following:
|
|
|
|
|
findings of ineffectiveness, superior safety or efficacy of
competing products, or harmful side effects in clinical or
pre-clinical testing;
|
|
|
|
failure to receive the necessary regulatory approvals, including
delays in the approval of new products and new indications;
|
|
|
|
lack of economic feasibility due to manufacturing costs or other
factors; and
|
|
|
|
preclusion from commercialization by the proprietary rights of
others.
|
Intellectual
property protection for innovation is an important contributor
to Schering-Ploughs profitability. Generic forms of
Schering-Ploughs products may be introduced to the market
as a result of the expiration of patents covering
Schering-Ploughs products, a successful challenge to
Schering-Ploughs patents, or the at-risk launch of a
generic version of a Schering-Plough product, which may have a
material and negative effect on results of
operations.
Intellectual property protection is critical to
Schering-Ploughs ability to successfully commercialize its
products. U.S. patents relating to Schering-Ploughs
significant products are of material importance to
Schering-Plough. Upon the expiration or the successful challenge
of Schering-Ploughs patents covering a
14
product, competitors may introduce lower-priced generic or
similar branded versions of that product, which may include
Schering-Ploughs well-established products.
A generic manufacturer may file an Abbreviated New Drug
Application seeking approval after the expiration of the
applicable data exclusivity and alleging that one or more of the
patents listed in the innovators New Drug Application are
invalid, not infringed or unenforceable. This allegation is
commonly known as a Paragraph IV certification. The
innovator then has the ability to file suit against the generic
manufacturer to enforce its patents. Generic manufacturers have
used Paragraph IV certifications extensively to challenge
patents on a wide array of innovative pharmaceuticals, and it is
anticipated that this trend will continue. In recent years, some
generic manufacturers have launched generic versions of products
before the ultimate resolution of patent litigation (commonly
known as at-risk product launches). Generic entry
may result in the loss of a significant portion of sales or
downward pressures on the prices at which Schering-Plough offers
formerly patented products. Please refer to Legal
Proceedings in Schering-Ploughs
10-K and
10-Qs for
descriptions of pending intellectual property litigation.
Additionally, certain foreign governments have indicated that
compulsory licenses to patents may be granted in the case of
national emergencies, which could diminish or eliminate sales
and profits from those regions and negatively affect
Schering-Ploughs results of operations. Further, recent
court decisions relating to other companies patents in the
U.S., potential U.S. legislation relating to patent reform,
as well as regulatory initiatives may result in further erosion
of intellectual property protection.
Patent
disputes can be costly to prosecute and defend and adverse
judgments could result in damage awards, increased royalties and
other similar payments and decreased sales.
Patent positions can be highly uncertain and patent disputes in
the pharmaceutical industry are not unusual. An adverse result
in a patent dispute involving Schering-Ploughs patents, or
the patents of its collaborators, may lead to a determination by
a court that the patent is not infringed, invalid,
and/or
unenforceable. Such an adverse determination could lead to a
loss of market exclusivity. An adverse result in a patent
dispute involving patents held by a third party may lead to a
determination by a court that the patent is infringed, valid,
and enforceable. Such an adverse determination may preclude the
commercialization of Schering-Ploughs products through
injunctive relief,
and/or may
lead to significant financial damages for past and ongoing
infringement. Due to the uncertainty surrounding patent
litigation, parties may settle patent disputes by obtaining a
license under mutually agreeable terms in order to decrease risk
of an interruption in manufacturing
and/or
marketing of its products.
The potential for litigation regarding Schering-Ploughs
intellectual property rights always exists and may be initiated
by third parties attempting to abridge Schering-Ploughs
rights. Even if Schering-Plough is ultimately successful in a
particular dispute, Schering-Plough may incur substantial costs
in defending its patents and other intellectual property rights.
See Patent Challenges Under the Hatch-Waxman Act in
Item 3, Legal Proceedings for a list of current
Paragraph IV certifications for Schering-Plough products.
Multi-jurisdictional
regulations, including those establishing Schering-Ploughs
ability to price products, may negatively affect
Schering-Ploughs sales and profit margins.
Schering-Plough faces increased pricing pressure globally from
managed care organizations, institutions and government agencies
and programs that could negatively affect Schering-Ploughs
sales and profit margins. For example, in the U.S., the Medicare
Prescription Drug Improvement and Modernization Act of 2003
contains a prescription drug benefit for individuals who are
eligible for Medicare. The prescription drug benefit became
effective on January 1, 2006 and has resulted in increased
use of generics and increased purchasing power of those
negotiating on behalf of Medicare recipients.
In addition to legislation concerning price controls, other
trends could affect Schering-Ploughs business. These
trends include legislative or regulatory action relating to
pharmaceutical pricing and reimbursement, health care reform
initiatives and drug importation legislation and involuntary
approval of medicines for OTC use. These trends also include
non-governmental initiatives and practices such as consolidation
among customers, managed care practices and health care costs
containment. Increasingly, market approval,
15
reimbursement of products, prescribers practices and
policies of third party payors may be influenced by health
technology assessments by the National Institute for Health and
Clinical Excellence in the UK and other such organizations.
In the U.S., as a result of the governments efforts to
reduce Medicaid expenses, managed care organizations continue to
grow in influence, and Schering-Plough faces increased pricing
pressure as managed care organizations continue to seek price
discounts with respect to Schering-Ploughs products.
In other countries, many governmental agencies strictly control,
directly or indirectly, the prices at which pharmaceutical
products are sold. In these markets, cost control methods
including restrictions on physician prescription levels and
patient reimbursements; emphasis on greater use of generic
drugs; and across-the-board price cuts may decrease revenues
internationally.
Through
the acquisition of OBS, Schering-Plough acquired marketed
products and pipeline projects in therapeutic areas not
currently covered by Schering-Ploughs existing marketed
products portfolio and pipeline projects, including womens
health and fertility, anesthesia, and neuroscience, each of
which carry unique risks and uncertainties which could have a
negative impact on future results of operations.
With its acquisition of OBS, Schering-Plough acquired products
in additional therapeutic areas. Each therapeutic area presents
a different risk profile, including different benefits and
safety issues that must be balanced by Schering-Plough and the
regulators as various R&D and marketing decisions are made;
unique product liability risks; different patient and prescriber
priorities; and different societal pressures. While adding new
therapeutic areas may strengthen the business by increasing
sales and profits; making the combined company more relevant to
patients and prescribers; and diversifying enterprise risk
across more areas, such positives may not outweigh the
additional risk in a particular therapeutic area or could result
in unanticipated costs that could be material.
Market
forces continue to evolve and can impact Schering-Ploughs
ability to sell products or the price Schering-Plough can charge
for products.
A number of intermediaries are involved between drug
manufacturers, such as Schering-Plough, and patients who use the
drugs. These intermediaries impact the patients ability,
and their prescribers ability, to choose and pay for a
particular drug. These intermediaries include health care
providers, such as hospitals and clinics; payors and their
representatives, such as employers, insurers, managed care
organizations and governments; and others in the supply chain,
such as pharmacists and wholesalers. Examples include: payors
that require a patient to first fail on a generic drug before
reimbursing for a more effective, branded product that is more
expensive; hospitals that stock and administer only a generic
product to in-patients; managed care organizations that may
penalize doctors who prescribe outside approved formularies
which may not include branded products when a generic is
available; and pharmacists who receive larger revenues when they
dispense a generic drug over a branded drug. Further, the
intermediaries are not required to routinely provide transparent
data to patients comparing the effectiveness of generic and
branded products or to disclose their own economic benefits that
are tied to steering patients toward, or requiring patients to
use, generic products rather than branded products.
Government
investigations against Schering-Plough could lead to the
commencement of civil and/or criminal proceedings involving the
imposition of substantial fines, penalties and injunctive or
administrative remedies, including exclusion from government
reimbursement programs, which could give rise to other
investigations or litigation by government entities or private
parties.
Schering-Plough cannot predict whether future or pending
investigations to which it may become subject would lead to a
judgment or settlement involving a significant monetary award or
restrictions on its operations.
The pricing, sales and marketing programs and arrangements and
related business practices of Schering-Plough and other
participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities. These entities
include the Department of
16
Justice and its U.S. Attorneys Offices, the Office of
Inspector General of the Department of Health and Human
Services, the FDA, the Federal Trade Commission and various
state Attorneys General offices. Many of the health care laws
under which certain of these governmental entities operate,
including the federal and state anti-kickback statutes and
statutory and common law false claims laws, have been construed
broadly by the courts and permit the government entities to
exercise significant discretion. In the event that any of those
governmental entities believes that wrongdoing has occurred, one
or more of them could institute civil or criminal proceedings
which, if resolved unfavorably, could subject Schering-Plough to
substantial fines, penalties and injunctive or administrative
remedies, including exclusion from government reimbursement
programs. In addition, an adverse outcome to a government
investigation could prompt other government entities to commence
investigations of Schering-Plough or cause those entities or
private parties to bring civil claims against it.
Schering-Plough also cannot predict whether any investigations
will affect its marketing practices or sales. Any such result
could have a material adverse impact on Schering-Ploughs
results of operations, cash flows, financial condition, or its
business.
Congress and certain states have initiated investigations into
the timing and disclosure of the ENHANCE clinical trial and
related events, as well as the timing of certain stock sales by
one executive officer, Carrie Cox.
Regardless of the merits or outcomes of any investigation,
government investigations are costly, divert managements
attention from Schering-Ploughs business and may result in
substantial damage to Schering-Ploughs reputation.
There
are other legal matters in which adverse outcomes could
negatively affect Schering-Ploughs business.
Unfavorable outcomes in other pending litigation matters, or in
future litigation, including litigation concerning product
pricing, securities law violations, product liability claims,
ERISA matters, patent and intellectual property disputes, and
antitrust matters could preclude the commercialization of
products, negatively affect the profitability of existing
products and could subject Schering-Plough to substantial fines,
penalties and injunctive or administrative remedies, including
exclusion from government reimbursement programs. Any such
result could materially and adversely affect
Schering-Ploughs results of operations, cash flows,
financial condition, or its business.
Please refer to Legal Proceedings in Item 3 of
this 10-K
for descriptions of significant pending litigation.
Issues
concerning the Merck/Schering-Plough Cholesterol Joint
Ventures ENHANCE clinical trial could have a material
adverse effect on the joint ventures sales of VYTORIN and
ZETIA, which in turn could have a material adverse impact on
Schering-Ploughs financial condition.
See Item 3, Legal Proceedings
ENHANCE Matter for background information about the
Merck/Schering-Plough cholesterol join ventures ENHANCE
clinical trial and related matters.
These issues concerning the Merck/Schering-Plough cholesterol
joint ventures ENHANCE clinical trial could have a
material adverse effect on the Merck/Schering-Plough cholesterol
joint ventures sales of VYTORIN and ZETIA. There
was significant negative media surrounding the release of the
top-line results. To date in 2008, IMS data shows that
prescriptions for VYTORIN and ZETIA have declined. If sales of
such products continue to trend down further or remain at
current levels for a prolonged period, Schering-Ploughs
business, cash flow, results of operations, financial position
and prospects could also be materially adversely affected. In
addition, unfavorable outcomes resulting from the government
investigations or the litigation concerning the sale and
promotion of these products could have a material adverse effect
on Schering-Ploughs financial position, liquidity and
results of operations.
17
Schering-Plough
is subject to governmental regulations, and the failure to
comply with, as well as the costs of compliance with, these
regulations may adversely affect Schering-Ploughs
financial position and results of operations.
Schering-Ploughs manufacturing facilities and
clinical/research practices must meet stringent regulatory
standards and are subject to regular inspections. The cost of
regulatory compliance, including that associated with compliance
failures, can materially affect Schering-Ploughs financial
position, cash flows and results of operations. Failure to
comply with regulations, which include pharmacovigilance
reporting requirements and standards relating to clinical,
laboratory and manufacturing practices, can result in delays in
the approval of drugs, seizure or recalls of drugs, suspension
or revocation of the authority necessary for the production and
sale of drugs, fines and other civil or criminal sanctions.
Schering-Plough also is subject to other regulations, including
environmental, health and safety, and labor regulations.
Developments
following regulatory approval may adversely affect sales of
Schering-Ploughs products.
Even after a product reaches market, certain developments
following regulatory approval, including results in
post-marketing Phase IV trials, may decrease demand for
Schering-Ploughs products, including the following:
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the re-review of products that are already marketed;
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new scientific information and evolution of scientific theories;
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the recall or loss of marketing approval of products that are
already marketed;
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uncertainties concerning safety labeling changes; and
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greater scrutiny in advertising and promotion.
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In the past several years, clinical trials and post-marketing
surveillance of certain marketed drugs of competitors within the
industry have raised safety concerns that have led to recalls,
withdrawals or adverse labeling of marketed products. These
situations also have raised concerns among some prescribers and
patients relating to the safety and efficacy of pharmaceutical
products in general, which have negatively affected the sales of
such products. In addition, increased scrutiny of the outcomes
of clinical trials have lead to increase volatility in market
reaction.
In addition, following the wake of recent product withdrawals of
other companies and other significant safety issues, health
authorities such as the FDA, the European Medicines Agency and
the Pharmaceuticals and Medicines Device Agency have increased
their focus on safety when assessing the benefit/risk balance of
drugs. Some health authorities appear to have become more
cautious when making decisions about approvability of new
products or indications and are re-reviewing select products
that are already marketed, adding further to the uncertainties
in the regulatory processes. There is also greater regulatory
scrutiny, especially in the U.S., on advertising and promotion
and in particular, direct-to-consumer advertising.
If previously unknown side effects are discovered or if there is
an increase in the prevalence of negative publicity regarding
known side effects of any of Schering-Ploughs products, it
could significantly reduce demand for the product or may require
Schering-Plough to remove the product from the market. Further,
in the current environment in which all pharmaceutical companies
operate, Schering-Plough is at risk for product liability claims
for its products.
New
products and technological advances developed by
Schering-Ploughs competitors may negatively affect
sales.
Schering-Plough operates in a highly competitive industry.
Schering-Plough competes with a large number of multinational
pharmaceutical companies, biotechnology companies and generic
pharmaceutical companies. Many of Schering-Ploughs
competitors have been conducting research and development in
areas served both by Schering-Ploughs current products and
by those products Schering-Plough is in the process of
18
developing. Competitive developments that may impact
Schering-Plough include technological advances by, patents
granted to, and new products developed by competitors or new and
existing generic, prescription
and/or OTC
products that compete with products of Schering-Plough or the
Merck/Schering-Plough cholesterol joint venture. In addition, it
is possible that doctors, patients and providers may favor those
products offered by competitors due to safety, efficacy, pricing
or reimbursement characteristics, and as a result
Schering-Plough will be unable to maintain its sales for such
products.
Competition
from third parties may make it difficult for Schering-Plough to
acquire or license new products or product candidates
(regardless of stage of development) or to enter into such
transactions on terms that permit Schering-Plough to generate a
positive financial impact.
Schering-Plough depends on acquisition and in-licensing
arrangements as a source for new products. Opportunities for
obtaining or licensing new products are limited, however, and
securing rights to them typically requires substantial amounts
of funding or substantial resource commitments. Schering-Plough
competes for these opportunities against many other companies
and third parties that have greater financial resources and
greater ability to make other resource commitments.
Schering-Plough may not be able to acquire or license new
products, which could adversely impact Schering-Plough and its
prospects. Schering-Plough may also have difficulty acquiring or
licensing new products on acceptable terms. To secure rights to
new products, Schering-Plough may have to make substantial
financial or other resource commitments that could limit its
ability to produce a positive financial impact from such
transactions.
Schering-Plough
relies on third-party relationships for its key products, and
the conduct and changing circumstances of such third parties may
adversely impact the business.
Schering-Plough has several relationships with third parties on
which Schering-Plough depends for many of its key products. Very
often these third parties compete with Schering-Plough or have
interests that are not aligned with the interests of
Schering-Plough. Notwithstanding any contracts Schering-Plough
has with these third parties, Schering-Plough may not be able to
control or influence the conduct of these parties, or the
circumstances that affect them, either of which could adversely
impact Schering-Plough.
The relationships are long-standing and, as the third
partys work and Schering-Ploughs work evolves,
priorities and alignments also change. At times new issues
develop that were not anticipated at the time contracts were
negotiated. These new issues, and related uncertainties in the
contracts, also can adversely impact Schering-Plough.
Schering-Ploughs
global operations expose Schering-Plough to additional risks,
and any adverse event could have a material negative impact on
results of operations.
A majority of Schering-Ploughs operations are outside the
U.S. With the acquisition of OBS in late 2007,
Schering-Ploughs global operations in Human Prescription
Pharmaceuticals and Animal Health increased. Acquisitions, such
as the recently completed purchase of OBS, further expanded the
size, scale and scope of its global operations. Risks inherent
in conducting a global business include:
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changes in medical reimbursement policies and programs and
pricing restrictions in key markets;
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multiple regulatory requirements that could restrict
Schering-Ploughs ability to manufacture and sell its
products in key markets;
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trade protection measures and import or export licensing
requirements;
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diminished protection of intellectual property in some
countries; and
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possible nationalization and expropriation.
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In addition, there may be changes to Schering-Ploughs
business and political position if there is instability,
disruption or destruction in a significant geographic region,
regardless of cause, including war, terrorism, riot, civil
insurrection or social unrest; and natural or man-made
disasters, including famine, flood, fire, earthquake, storm or
disease.
19
The
integration of the businesses of Schering-Plough and OBS to
create a combined company is a complex process and may be
subject to unforeseen developments, which could impact
anticipated cost savings from synergies, expected accretion to
earnings and results of future operations.
As the two companies are combined, the workforces of
Schering-Plough and OBS will continue to face uncertainties
until the completion of the integration phase. Although
substantial efforts are being made to complete the integration
phase as quickly as possible, it is difficult to predict how
long the integration phase will last.
The workforces of both companies are learning to use new
processes as work is integrated and streamlined. Further, for
those employees of the new combined company who have not in the
past worked for a
U.S.-based
global company, the applicable regulatory requirements are
different in a number of respects. While substantial efforts are
being made to facilitate smooth execution of integration
including thorough training and transparent and motivational
employee communications there may be an increased
risk of slower execution of various work processes, repeated
execution to achieve quality standards and reputational harm in
the event of a compliance failure with new and complex
regulatory requirements, even if such a failure were
inadvertent. Any such events could have an adverse impact on
anticipated cost savings from synergies, anticipated accretion
to earnings from the transaction and the results of future
operations.
The
acquisition of OBS expanded Schering-Ploughs animal health
business worldwide, which increases the risk that negative
events in the animal health industry could have a negative
impact on future results of operations.
Through the acquisition of OBS animal health businesses,
Schering-Ploughs global animal health business is now a
more significant business segment. The combined companys
future sales of key animal health products could be adversely
impacted by a number of risk factors including certain that are
specific to the animal health business. For example, the
outbreak of disease carried by animals, such as Bovine
Spongiform Encephalopathy (BSE) or mad cow disease,
could lead to their widespread death and precautionary
destruction as well as the reduced consumption and demand for
animals, which could adversely impact Schering-Ploughs
results of operations. Also, the outbreak of any highly
contagious diseases near Schering-Ploughs main production
sites could require Schering-Plough to immediately halt
production of vaccines at such sites or force Schering-Plough to
incur substantial expenses in procuring raw materials or
vaccines elsewhere. As the animal health segment of
Schering-Ploughs business becomes more significant, the
impact of any such events on future results of operations would
also become more significant.
The
acquisition of OBS increased Schering-Ploughs biologics
human and animal health product offerings, including animal
health vaccines. Biologics carry unique risks and uncertainties,
which could have a negative impact on future results of
operations.
The successful development, testing, manufacturing and
commercialization of biologics, particularly human and animal
health vaccines, is a long, expensive and uncertain process.
There are unique risks and uncertainties with biologics,
including:
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There may be limited access to and supply of normal and diseased
tissue samples, cell lines, pathogens, bacteria, viral strains
and other biological materials. In addition, government
regulations in multiple jurisdictions such as the U.S. and
European states within the EU, could result in restricted access
to, or transport or use of, such materials. If Schering-Plough
loses access to sufficient sources of such materials, or if
tighter restrictions are imposed on the use of such materials,
Schering-Plough may not be able to conduct research activities
as planned and may incur additional development costs.
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The development, manufacturing and marketing of biologics are
subject to regulation by the FDA, the European Medicines Agency
and other regulatory bodies. These regulations are often more
complex and extensive than the regulations applicable to other
pharmaceutical products. For example, in the U.S., a Biologics
License Application, including both preclinical and clinical
trial data and extensive data regarding the manufacturing
procedures, is required for human vaccine candidates and FDA
approval for the release of each manufactured lot.
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Manufacturing biologics, especially in large quantities, is
sometimes complex and may require the use of innovative
technologies to handle living micro-organisms. Manufacturing
biologics requires facilities specifically designed for and
validated for this purpose, and sophisticated quality assurance
and quality control procedures are necessary. Slight deviations
anywhere in the manufacturing process, including filling,
labeling, packaging, storage and shipping and quality control
and testing, may result in lot failures, product recalls or
spoilage.
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Biologics are frequently costly to manufacture because
production ingredients are derived from living animal or plant
material, and most biologics cannot be made synthetically. In
particular, keeping up with the demand for vaccines may be
difficult due to the complexity of producing vaccines.
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The use of biologically derived ingredients can lead to
allegations of harm, including infections or allergic reactions,
or closure of product facilities due to possible contamination.
Any of these events could result in substantial costs.
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Schering-Plough
is exposed to market risk from fluctuations in currency exchange
rates and interest rates.
Schering-Plough operates in multiple jurisdictions and, as such,
virtually all sales are denominated in currencies of the local
jurisdiction. Additionally, Schering-Plough has entered and will
enter into acquisition, licensing, borrowings or other financial
transactions that may give rise to currency and interest rate
exposure. Since Schering-Plough cannot, with certainty, foresee
and mitigate against such adverse fluctuations, fluctuations in
currency exchange rates and interest rates could negatively
affect Schering-Ploughs results of operations
and/or cash
flows.
In order to mitigate against the adverse impact of these market
fluctuations, Schering-Plough will from time to time enter into
hedging agreements. While hedging agreements, such as currency
options and interest rate swaps, limit some of the exposure to
exchange rate and interest rate fluctuations, such attempts to
mitigate these risks are costly and not always successful.
Insurance
coverage for product liability may be limited, cost prohibitive
or unavailable.
Schering-Plough maintains insurance coverage with such
deductibles and self-insurance to reflect market conditions
(including cost and availability) existing at the time it is
written, and the relationship of insurance coverage to
self-insurance varies accordingly. For certain products,
third-party insurance may be cost prohibitive, available on
limited terms or unavailable.
Schering-Plough
is subject to evolving and complex tax laws, which may result in
additional liabilities that may affect results of
operations.
Schering-Plough is subject to evolving and complex tax laws in
its jurisdictions. Significant judgment is required for
determining Schering-Ploughs tax liabilities, and
Schering-Ploughs tax returns are periodically examined by
various tax authorities. Schering-Ploughs
1997-2007
tax returns remain open for examination by the IRS.
Schering-Plough may be challenged by the IRS and other tax
authorities on positions it has taken in its income tax returns.
Although Schering-Plough believes that its accrual for tax
contingencies is adequate for all open years, based on past
experience, interpretations of tax law, and judgments about
potential actions by tax authorities, due to the complexity of
tax contingencies, the ultimate resolution of any tax matters
may result in payments greater or less than amounts accrued.
With the acquisition of OBSs Organon (human
pharmaceutical) and Intervet (animal health) businesses, the
main tax risks are correspondingly centered in the Netherlands,
where management, intellectual property, and beneficial rights
as well as product liability have been predominantly centered.
The tax position for both Organon and Intervet in the
Netherlands has been closed through 2005.
In addition, Schering-Plough may be impacted by changes in tax
laws including tax rate changes, changes to the laws related to
the remittance of foreign earnings, new tax laws and revised tax
law interpretations in domestic and foreign jurisdictions.
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Item 1B.
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Unresolved
Staff Comments
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None.
Schering-Ploughs corporate and global human pharmaceutical
headquarters are located in Kenilworth, New Jersey. The Animal
Health global headquarters is located in Boxmeer, Netherlands.
Principal U.S. research facilities are located in
Kenilworth, Union and Summit, New Jersey; Palo Alto, California;
and Nebraska (Animal Health). Principal research facilities
outside the U.S. are located in the Netherlands and
Scotland. Principal manufacturing facilities are as follows:
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Location
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Product Type
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Belgium
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Pharmaceuticals
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Brazil
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Pharmaceuticals, Animal Health
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Cleveland, Tennessee, U.S.A.
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Consumer Products
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France
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Pharmaceuticals
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Ireland
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Pharmaceuticals, Consumer Products, Animal Health
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Kenilworth, New Jersey, U.S.A.
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Pharmaceuticals, Consumer Products
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Mexico
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Pharmaceuticals
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Millsboro, Delaware, U.S.A.
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Animal Health
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Netherlands
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Pharmaceuticals, Animal Health
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Omaha, Nebraska, U.S.A.
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Animal Health
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Puerto Rico
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Pharmaceuticals
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Research Triangle Park, North Carolina, U.S.A.
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Pharmaceuticals
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Singapore
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Pharmaceuticals
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Schering-Plough owns the majority of its properties. In general,
the properties are adequately maintained and suitable for their
purposes. As discussed in more detail in Part II of this
10-K,
certain of Schering-Ploughs manufacturing sites operate
below capacity.
Schering-Plough is currently in the process of building a
U.S. pharmaceutical sciences center in New Jersey. Capital
expenditures of approximately $50 million and
$40 million were made in 2007 and 2006, respectively,
related to this center. Additional capital expenditures of
approximately $175 million are expected over the next two
years.
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Item 3.
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Legal
Proceedings
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Material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which Schering-Plough
Corporation or any of its subsidiaries or to which any of their
property is subject, are disclosed below.
Additional information on legal proceedings, including important
financial information, can be found in the Litigation Charges
discussion in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and Note 3, Special and Acquisition
Related Charges and Manufacturing Streamlining, and
Note 20, Legal, Environmental and Regulatory
Matters, contained in Item 8, Financial
Statements and Supplementary Data.
ENHANCE
Matter
Background. The Merck/Schering-Plough
cholesterol joint venture markets ZETIA and VYTORIN (a
combination of Mercks Zocor (simvastatin) and
Schering-Ploughs Zetia (ezetimibe)).
The Merck/Schering-Plough cholesterol joint ventures
ENHANCE (Effect of Combination Ezetimibe and High-Dose
Simvastatin vs. Simvastatin Alone on the Atherosclerotic Process
in Patients with Heterozygous Familial Hypercholesterolemia)
clinical trial was a surrogate endpoint trial, conducted in
720 patients with
22
Heterozygous Familial Hypercholesterolemia, a rare condition
that affects approximately 0.2% of the population. The primary
endpoint was the mean change in the intima-media thickness
measured at three sites in the carotid arteries (the right and
left common carotid, internal carotid and carotid bulb) between
patients treated with ezetimibe/simvastatin 10/80 mg versus
patients treated with simvastatin 80 mg alone over a
two-year period. There was no statistically significant
difference between the treatment groups for the primary endpoint
and for each of the components of the primary endpoint,
including the common carotid artery. Key secondary imaging
endpoints also showed no statistical difference between
treatment groups.
On January 14, 2008, the Merck/Schering-Plough cholesterol
joint venture announced the top-line results of the ENHANCE
clinical trial. There will be fuller discussions of the results
of the ENHANCE clinical trial in medical scientific forums, as
is customary. A discussion is scheduled for the American College
of Cardiology meeting on March 30, 2008.
Technical difficulties in analyzing sometimes fuzzy ultrasound
images had consumed a long time period since the last patient
was scanned in April 2006 until December 31, 2007, when
data from ultrasound images were first unblinded to scientists
of the Merck/Schering-Plough cholesterol joint venture. After
analysis of the results the summary findings were released by
the joint venture on January 14, 2008. In 2008, there has
been media speculation about the length of time needed to
analyze the ultrasound images and media confusion about the
meaning of the trial results.
Medical experts and health advisory groups have long recognized
high LDL cholesterol as a significant cardiovascular risk factor
and recommended increasingly aggressive treatment of high
cholesterol for certain patients. Lowering LDL cholesterol,
along with healthy diet and lifestyle changes, remains the
cornerstone of lipid treatment for patients at risk for heart
disease.
Clinical studies prior to ENHANCE have demonstrated that VYTORIN
lowered patients LDL cholesterol more than rosuvastatin,
atorvastatin and simvastatin at the doses studied and was able
to get more patients to their LDL cholesterol goals (as defined
by ATP III). The findings from the Merck/Schering-Plough
cholesterol joint ventures ENHANCE clinical trial further
confirmed VYTORINs effectiveness, compared to simvastatin,
at lowering LDL cholesterol. Specifically, there was a
significant difference in low-density lipoprotein, or LDL
cholesterol lowering seen between the treatment
groups 58% LDL cholesterol lowering at
24 months on ezetimibe/simvastatin as compared to 41% at
24 months on simvastatin alone.
The ENHANCE surrogate endpoint study was not powered nor
designed to assess cardiovascular clinical event outcomes, such
as the effectiveness of the drugs at lowering the risk of heart
attack and stroke. The Merck/Schering-Plough cholesterol joint
venture is currently conducting the IMPROVE-IT trial, a large
clinical trial comparing VYTORIN (ezetimibe/simvastatin) and
simvastatin in more than 10,000 patients. The results of
the IMPROVE-IT trial will compare the effectiveness of VYTORIN
to simvastatin alone in reducing heart attacks
and/or
strokes.
Schering-Ploughs stock price declined significantly in
early 2008, from $26.64 (closing price) on December 31,
2007 to a 2008 low of $19.02 (closing price) on January 25,
2008 to $21.97 (closing price) on February 28, 2008, the
day before this
10-K was
filed.
Investigations. Through the date of filing
this 10-K,
Schering-Plough, the joint venture and/or its joint venture
partner, Merck & Co., Inc. (Merck), have
received:
|
|
|
|
|
several letters from Congress, including the House Committee on
Energy and Commerce, the House 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 Merck/Schering-Plough cholesterol joint
ventures ENHANCE clinical trial, the companies sale
and promotion of VYTORIN, as well as sales of stock by the
|
23
companies corporate officers (including one executive of
Schering-Plough who was named in one of the letters, Carrie Cox)
since April 2006; and
|
|
|
|
|
several subpoenas from state officials (such as the State
Attorney General or State Department of Justice) in several
states, including Connecticut, New York and Oregon, seeking
similar information and documents.
|
Schering-Plough is cooperating with these investigations and
working with Merck to respond to the inquiries.
Litigation. In addition, since mid-January
2008, Schering-Plough has become aware of or been served with
litigation, including civil class action lawsuits alleging
common law and state consumer fraud claims in connection with
Schering-Ploughs sale and promotion of the
Merck/Schering-Plough joint-venture products VYTORIN and
ZETIA; several putative shareholder securities class action
lawsuits (where several officers are also named defendants)
alleging false and misleading statements and omissions by
Schering-Plough and its representatives related to the timing of
disclosures concerning the ENHANCE results, allegedly in
violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934; a Shareholder Derivative Action alleging
that the Board of Directors breached its fiduciary obligations
relating to the timing of the release of the ENHANCE results;
and a letter on behalf of a single shareholder requesting that
the Board of Directors investigate the allegations of the
putative securities class actions and, if warranted, bring any
appropriate legal action on behalf of Schering-Plough.
Schering-Plough is cooperating fully in the government
investigations and intends to vigorously defend the lawsuits
that have been filed relating to the ENHANCE study.
Patent
Matters
As described in Patents, Trademarks, and Other
Intellectual Property Rights under Item 1, Business,
of this
10-K,
intellectual property protection is critical to
Schering-Ploughs ability to successfully commercialize its
product innovations. The potential for litigation regarding
Schering-Ploughs intellectual property rights always
exists and may be initiated by third parties attempting to
abridge Schering-Ploughs rights, as well as by
Schering-Plough in protecting its rights. Patent matters
described below have a potential material effect on
Schering-Plough.
On July 26, 2004, OraSure Technologies filed an action in
the U.S. District Court for the Eastern District of
Pennsylvania alleging patent infringement by Schering-Plough
Healthcare Products by its sale of DR. SCHOLLS FREEZE AWAY
wart removal product. This matter was settled with no material
impact on Schering-Ploughs financial statements and a
stipulation dismissing the action was filed by the parties on
February 15, 2008.
Patent
Challenges Under the Hatch-Waxman Act
While Schering-Plough does not currently believe that any
pending Paragraph IV certification proceeding under the
Hatch-Waxman Act is material, because there is frequently media
and investor interest in such proceedings, Schering-Plough is
listing the pending proceedings each quarter. Currently, the
following are pending:
|
|
|
|
|
in July, 2007, Schering-Plough and its licensor, Cancer Research
Technologies, Limited, filed a patent infringement action
against companies seeking approval of a generic version of
certain strengths of TEMODAR capsules;
|
|
|
|
in March 2007, Schering-Plough and an entity jointly owned with
Merck filed a patent infringement action against companies
seeking approval of a generic version of ZETIA; and
|
|
|
|
in September 2006 and dates thereafter, Schering-Plough filed
patent infringement actions against companies seeking approval
of generic versions of CLARINEX Tablets, CLARINEX Reditabs,
CLARINEX D24, and CLARINEX D12.
|
24
AWP
Litigation and Investigations
Schering-Plough continues to respond to existing and new
litigation by certain states and private payors and
investigations by the Department of Health and Human Services,
the Department of Justice and several states into industry and
Schering-Plough practices regarding average wholesale price
(AWP). Schering-Plough is cooperating with these investigations.
These litigations and investigations relate to whether the AWP
used by pharmaceutical companies for certain drugs improperly
exceeds the average prices paid by providers and, as a
consequence, results in unlawful inflation of certain
reimbursements for drugs by state programs and private payors
that are based on AWP. The complaints allege violations of
federal and state law, including fraud, Medicaid fraud and
consumer protection violations, among other claims. In the
majority of cases, the plaintiffs are seeking class
certifications. In some cases, classes have been certified. The
outcome of these litigations and investigations could include
substantial damages, the imposition of substantial fines,
penalties and injunctive or administrative remedies.
Securities
and Class Action Litigation
Federal
Securities Litigation
Following Schering-Ploughs announcement that the FDA had
been conducting inspections of Schering-Ploughs
manufacturing facilities in New Jersey and Puerto Rico and had
issued reports citing deficiencies concerning compliance with
current Good Manufacturing Practices, several lawsuits were
filed against Schering-Plough and certain named officers. These
lawsuits allege that the defendants violated the federal
securities law by allegedly failing to disclose material
information and making material misstatements. Specifically,
they allege that Schering-Plough failed to disclose an alleged
serious risk that a new drug application for CLARINEX would be
delayed as a result of these manufacturing issues, and they
allege that Schering-Plough failed to disclose the alleged depth
and severity of its manufacturing issues. These complaints were
consolidated into one action in the U.S. District Court for
the District of New Jersey, and a consolidated amended complaint
was filed on October 11, 2001, purporting to represent a
class of shareholders who purchased shares of Schering-Plough
stock from May 9, 2000 through February 15, 2001. The
complaint seeks compensatory damages on behalf of the class. The
Court certified the shareholder class on October 10, 2003.
Notice of pendency of the class action was sent to members of
that class in July 2007. Discovery has been completed, and
motions for summary judgment have been briefed and are pending.
ERISA
Litigation
On March 31, 2003, Schering-Plough was served with a
putative class action complaint filed in the U.S. District
Court in New Jersey alleging that Schering-Plough, retired
Chairman, CEO and President Richard Jay Kogan,
Schering-Ploughs Employee Savings Plan (Plan)
administrator, several current and former directors, and certain
corporate officers (Messrs. LaRosa and Moore) breached
their fiduciary obligations to certain participants in the Plan.
The complaint seeks damages in the amount of losses allegedly
suffered by the Plan. The complaint was dismissed on
June 29, 2004. The plaintiffs appealed. On August 19,
2005 the U.S. Court of Appeals for the Third Circuit
reversed the dismissal by the District Court and the matter has
been remanded back to the District Court for further proceedings.
K-DUR
Antitrust Litigation
Schering-Plough had settled patent litigation with Upsher-Smith,
Inc. (Upsher-Smith) and ESI Lederle, Inc. (Lederle) relating to
generic versions of K-DUR, Schering-Ploughs long-acting
potassium chloride product supplement used by cardiac patients,
for which Lederle and Upsher Smith had filed Abbreviated New
Drug Applications. Following the commencement of an FTC
administrative proceeding alleging anti-competitive effects from
those settlements (which has been resolved in
Schering-Ploughs favor), alleged class action suits were
filed in federal and state courts on behalf of direct and
indirect purchasers of K-DUR against Schering-Plough,
Upsher-Smith and Lederle. These suits claim violations of
federal and state antitrust laws, as
25
well as other state statutory and common law causes of action.
These suits seek unspecified damages. Discovery is ongoing.
Third-party
Payor Actions
Several purported class action litigations have been filed
following the announcement of the settlement of the
Massachusetts Investigation. Plaintiffs in these actions seek
damages on behalf of third-party payors resulting from the
allegations of off-label promotion and improper payments to
physicians that were at issue in the Massachusetts Investigation.
Tax
Matters
In October 2001, IRS auditors asserted that two interest rate
swaps that Schering-Plough entered into with an unrelated party
should be recharacterized as loans from affiliated companies,
resulting in additional tax liability for the 1991 and 1992 tax
years. In September 2004, Schering-Plough made payments to the
IRS in the amount of $194 million for income tax and
$279 million for interest. Schering-Plough filed refund
claims for the tax and interest with the IRS in December 2004.
Following the IRSs denial of Schering-Ploughs claims
for a refund, Schering-Plough filed suit in May 2005 in the
U.S. District Court for the District of New Jersey for
refund of the full amount of the tax and interest. This refund
litigation is currently being tried in Newark District court.
Schering-Ploughs tax reserves were adequate to cover the
above-mentioned payments.
Pending
Administrative Obligations
In connection with the settlement of an investigation with the
U.S. Department of Justice and the
U.S. Attorneys Office for the Eastern District of
Pennsylvania, Schering-Plough entered into a five-year corporate
integrity agreement (CIA). The CIA was amended in August of 2006
in connection with the settlement of the Massachusetts
Investigation, commencing a new five-year term. Failure to
comply with the obligations under the CIA could result in
financial penalties.
Other
Matters
Products
Liability
Beginning in May of 2007, a number of complaints have been filed
in various jurisdictions asserting claims against Organon USA,
Inc., Organon Pharmaceuticals USA, Inc.,
and/or
Organon International (Organon) arising from
Schering-Ploughs marketing and sale of NUVARING, a
combined hormonal contraceptive vaginal ring. The plaintiffs
contend that Organon failed to adequately warn of the alleged
increased risk of venous thromboembolism (VTE) posed
by NUVARING,
and/or
downplayed the risk of VTE. The plaintiffs seek damages, heart
attacks and strokes. The majority of the cases are currently
pending in the United States District Court for District of New
Jersey. Other cases are pending in Wisconsin, Missouri, New York
and Georgia.
French
Matter
Based on a complaint to the French competition authority from a
competitor in France and pursuant to a court order, the French
competition authority has obtained documents from a French
subsidiary of Schering-Plough relating to SUBUTEX, one of the
products that the subsidiary markets and sells. Any resolution
of this matter adverse to the French subsidiary could result in
the imposition of civil fines and injunctive or administrative
remedies. On July 17, 2007, the Juge des Libertés et
de la Détention ordered the annulment of the search and
seizure on procedural grounds. On July 19, 2007, the French
authority appealed the order to the French Supreme Court.
In April 2007, the competitor also requested interim relief, a
portion of which was granted by the French competition authority
in December 2007. The interim relief required
Schering-Ploughs French subsidiary to publish in two
specialized newspapers information including that the generic
has the same quantitative and qualitative composition and the
same pharmaceutical form as, and is substitutable for, SUBUTEX.
In February 2008, the Paris Court of Appeal confirmed the
decision of the French competition authority.
26
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
Executive
Officers of the Registrant
Listed below are the executive officers and corporate officers
of Schering-Plough as February 29, 2008. Unless otherwise
indicated, each has held the position indicated for the past
five years. Officers serve for one year and until their
successors have been duly appointed.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Age
|
|
|
Robert J. Bertolini*
|
|
Executive Vice President and Chief Financial Officer(1)
|
|
|
46
|
|
John M. Carroll
|
|
Vice President, Global Internal Audits(2)
|
|
|
47
|
|
C. Ron Cheeley*
|
|
Senior Vice President, Global Human Resources(3)
|
|
|
57
|
|
Carrie S. Cox*
|
|
Executive Vice President and President, Global Pharmaceuticals(4)
|
|
|
50
|
|
William J. Creelman
|
|
Vice President, Tax(5)
|
|
|
53
|
|
Fred Hassan*
|
|
Chairman and Chief Executive Officer(6)
|
|
|
62
|
|
Steven H. Koehler*
|
|
Vice President and Controller(7)
|
|
|
57
|
|
Thomas P. Koestler, Ph.D*
|
|
Executive Vice President and President, Schering-Plough Research
Institute(8)
|
|
|
56
|
|
Raul E. Kohan*
|
|
Senior Vice President, Corporate Excellence
|
|
|
55
|
|
Joseph J. LaRosa
|
|
Vice President, Legal Affairs(9)
|
|
|
49
|
|
Ian A.T. McInnes
|
|
Senior Vice President and President, Global Supply Chain(10)
|
|
|
55
|
|
E. Kevin Moore
|
|
Vice President and Treasurer
|
|
|
55
|
|
Lori Queisser*
|
|
Senior Vice President, Global Compliance and Business
Practices(11)
|
|
|
47
|
|
Thomas J. Sabatino, Jr.*
|
|
Executive Vice President and General Counsel(12)
|
|
|
49
|
|
Karl Salnoske
|
|
Vice President and Chief Information Officer(13)
|
|
|
54
|
|
Brent Saunders*
|
|
Senior Vice President and President, Consumer Health Care(14)
|
|
|
38
|
|
Susan Ellen Wolf
|
|
Corporate Secretary, Associate General Counsel and Vice
President, Corporate Governance(15)
|
|
|
53
|
|
|
|
|
* |
|
Officers as defined in
Rule 16a-1(f)
under the Securities Exchange Act of 1934. |
|
(1) |
|
Mr. Bertolini joined Schering-Plough in 2003 as Executive
Vice President and Chief Financial Officer. Mr. Bertolini
was a partner at PricewaterhouseCoopers from 1993 to 2003. |
|
(2) |
|
Mr. Carroll joined Schering-Plough in 2006 as Vice
President, Global Internal Audits. Mr. Carroll was Vice
President and General Auditor of American Standard Companies
from 2005 to 2006, General Auditor of American Standard
Companies from 2002 to 2005 and Assistant Treasurer of
Bristol-Myers Squibb from 2000 to 2002. |
|
(3) |
|
Mr. Cheeley joined Schering-Plough in 2003 as Senior Vice
President, Global Human Resources. Mr. Cheeley was Group
Vice President, Global Compensation and Benefits of Pharmacia
Corporation from 1998 to 2003. |
|
(4) |
|
Ms. Cox joined Schering-Plough in 2003 as Executive Vice
President and President, Global Pharmaceuticals. Ms. Cox
was Executive Vice President and President, Global Prescription
Business of Pharmacia Corporation from 1999 to 2003. |
|
(5) |
|
Mr. Creelman joined Schering-Plough in 2004 as Vice
President, Tax. Mr. Creelman was Senior Tax Counsel of
Pfizer from 2003 to 2004. Mr. Creelman was Assistant Vice
President International Tax of CIGNA Corporation
from 2002 to 2003. |
27
|
|
|
(6) |
|
Mr. Hassan joined Schering-Plough in 2003 as Chairman of
the Board and Chief Executive Officer. Mr. Hassan was
Chairman of the Board and Chief Executive Officer of Pharmacia
Corporation from 2001 to 2003. |
|
(7) |
|
Mr. Koehler joined Schering-Plough in 2006 as Vice
President and Controller. Mr. Koehler was Senior Vice
President, Chief Financial Officer and Treasurer from 2004 to
2006, and Vice President, Chief Financial Officer, Treasurer and
Corporate Secretary from 2002 to 2004 of The Medicines Company. |
|
(8) |
|
Dr. Koestler was named Executive President and President of
Schering-Plough Research Institute in September of 2006.
Dr. Koestler was Executive Vice President, Global
Development of Schering-Plough Research Institute from 2005 to
September of 2006; Executive Vice President of Schering-Plough
Research Institute from 2003 to 2005, and Senior Vice President,
Global Regulatory Affairs of Pharmacia Corporation from 2001 to
2003. |
|
(9) |
|
Mr. LaRosa became Vice President, Legal Affairs in 2004.
Mr. LaRosa was Staff Vice President, Secretary and
Associate General Counsel from 2001 to 2004. |
|
(10) |
|
Dr. McInnes joined Schering-Plough in 2004 as Senior Vice
President, Global Supply Chain. Dr. McInnes was Senior Vice
President, Global Supply Chain of Pharmacia Corporation from
1994 to 2003 and Executive Vice President, Supply Chain, Watson
Pharmaceuticals, Inc. from 2003 to 2004. |
|
(11) |
|
Ms. Queisser joined Schering-Plough in February of 2007 as
Senior Vice President, Global Compliance and Business Practices.
Ms. Queisser was Vice President, Chief Compliance Officer
from October 2002 to February 2007, and Executive Director and
General Auditor from March 2002 to October 2002 of Eli Lilly
Company. |
|
(12) |
|
Mr. Sabatino joined Schering-Plough in 2004 as Executive
Vice President and General Counsel. Mr. Sabatino was Senior
Vice President and General Counsel of Baxter International, Inc.
from 2001 to 2004. |
|
(13) |
|
Mr. Salnoske joined Schering-Plough in 2004 as Vice
President and Chief Information Officer. Mr. Salnoske was
CEO of Adaptive Trade from 2001 to 2004. |
|
(14) |
|
Mr. Saunders joined Schering-Plough in 2003 as Senior Vice
President, Global Compliance and Business Practices.
Mr. Saunders was a partner at PricewaterhouseCoopers from
2000 to 2003. |
|
(15) |
|
Ms. Wolf was named Vice President, Corporate Secretary and
Associate General Counsel in 2004. She held various positions in
Schering-Ploughs Law Department from 2002 to 2004. |
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity and Related Stockholder
Matters
|
The principal market for Schering-Ploughs common stock is
the New York Stock Exchange. Additional information required by
this Item is incorporated by reference from the table captioned
Quarterly Data (unaudited) under Item 8,
Financial Statements and Supplementary Data.
28
The following table provides information with respect to
purchases by Schering-Plough of its common shares during the
fourth quarter of 2007.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares that May
|
|
|
|
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1, 2007 through October 31, 2007
|
|
|
11,863
|
(1)
|
|
$
|
32.06
|
|
|
|
N/A
|
|
|
|
N/A
|
|
November 1, 2007 through November 30, 2007
|
|
|
12,799
|
(1)
|
|
|
29.12
|
|
|
|
N/A
|
|
|
|
N/A
|
|
December 1, 2007 through December 31, 2007
|
|
|
108,624
|
(1)
|
|
|
30.80
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total October 1, 2007 through December 31, 2007
|
|
|
133,286
|
(1)
|
|
|
30.75
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
All of the shares included in the table above were repurchased
pursuant to Schering-Ploughs stock incentive program and
represent shares delivered to Schering-Plough by option holders
for payment of the exercise price and tax withholding
obligations in connection with stock options and stock awards. |
Performance
Graph
Comparison
of Cumulative Total Return
For the Five Years Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Schering-Plough Corporation
|
|
|
100
|
|
|
|
81
|
|
|
|
98
|
|
|
|
99
|
|
|
|
114
|
|
|
|
129
|
|
Composite Peer Group
|
|
|
100
|
|
|
|
108
|
|
|
|
100
|
|
|
|
96
|
|
|
|
112
|
|
|
|
118
|
|
S&P 500 Index
|
|
|
100
|
|
|
|
128
|
|
|
|
142
|
|
|
|
149
|
|
|
|
172
|
|
|
|
182
|
|
The graph above assumes a $100 investment on December 31,
2002, and reinvestment of all dividends, in each of
Schering-Ploughs Common Shares, the S&P 500 Index,
and a composite peer group of the major
U.S.-based
pharmaceutical companies, which are: Abbott Laboratories,
Bristol-Myers Squibb Company, Johnson & Johnson, Eli
Lilly and Company, Merck & Co., Inc., Pfizer Inc. and
Wyeth.
29
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per share figures and percentages)
|
|
|
Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
12,690
|
|
|
$
|
10,594
|
|
|
$
|
9,508
|
|
|
$
|
8,272
|
|
|
$
|
8,334
|
|
Equity (income)
|
|
|
(2,049
|
)
|
|
|
(1,459
|
)
|
|
|
(873
|
)
|
|
|
(347
|
)
|
|
|
(54
|
)
|
(Loss)/income before income taxes(2)
|
|
|
(1,215
|
)
|
|
|
1,483
|
|
|
|
497
|
|
|
|
(168
|
)
|
|
|
(46
|
)
|
Net (loss)/income(2)
|
|
|
(1,473
|
)
|
|
|
1,143
|
|
|
|
269
|
|
|
|
(947
|
)
|
|
|
(92
|
)
|
Net (loss)/income available to common shareholders(2)
|
|
|
(1,591
|
)
|
|
|
1,057
|
|
|
|
183
|
|
|
|
(981
|
)
|
|
|
(92
|
)
|
Diluted (loss)/earnings per common share(2)
|
|
|
(1.04
|
)
|
|
|
0.71
|
|
|
|
0.12
|
|
|
|
(0.67
|
)
|
|
|
(0.06
|
)
|
Basic (loss)/earnings per common share(2)
|
|
|
(1.04
|
)
|
|
|
0.71
|
|
|
|
0.12
|
|
|
|
(0.67
|
)
|
|
|
(0.06
|
)
|
Research and development expenses
|
|
|
2,926
|
|
|
|
2,188
|
|
|
|
1,865
|
|
|
|
1,607
|
|
|
|
1,469
|
|
Acquired in-process research and development
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
|
861
|
|
|
|
568
|
|
|
|
486
|
|
|
|
453
|
|
|
|
417
|
|
Financial Position and Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
$
|
7,016
|
|
|
$
|
4,365
|
|
|
$
|
4,487
|
|
|
$
|
4,593
|
|
|
$
|
4,527
|
|
Total assets
|
|
|
29,156
|
|
|
|
16,071
|
|
|
|
15,469
|
|
|
|
15,911
|
|
|
|
15,271
|
|
Long-term debt(3)
|
|
|
9,019
|
|
|
|
2,414
|
|
|
|
2,399
|
|
|
|
2,392
|
|
|
|
2,410
|
|
Shareholders equity
|
|
|
10,385
|
|
|
|
7,908
|
|
|
|
7,387
|
|
|
|
7,556
|
|
|
|
7,337
|
|
Capital expenditures
|
|
|
618
|
|
|
|
458
|
|
|
|
478
|
|
|
|
489
|
|
|
|
711
|
|
Financial Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income as a percent of net sales
|
|
|
(11.6
|
)%
|
|
|
10.8
|
%
|
|
|
2.8
|
%
|
|
|
(11.4
|
)%
|
|
|
(1.1
|
)%
|
Return on average shareholders equity
|
|
|
(16.1
|
)%
|
|
|
14.9
|
%
|
|
|
3.6
|
%
|
|
|
(12.7
|
)%
|
|
|
(1.2
|
)%
|
Net book value per common share(4)
|
|
$
|
6.07
|
|
|
$
|
5.10
|
|
|
$
|
4.77
|
|
|
$
|
4.91
|
|
|
$
|
4.99
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.565
|
|
Cash dividends paid on common shares
|
|
|
382
|
|
|
|
326
|
|
|
|
324
|
|
|
|
324
|
|
|
|
830
|
|
Cash dividends on preferred shares
|
|
|
99
|
|
|
|
86
|
|
|
|
86
|
|
|
|
30
|
|
|
|
|
|
Average shares outstanding used in calculating diluted
earnings/(loss) per common share
|
|
|
1,536
|
|
|
|
1,491
|
|
|
|
1,484
|
|
|
|
1,472
|
|
|
|
1,469
|
|
Average shares outstanding used in calculating basic
earnings/(loss) per common share
|
|
|
1,536
|
|
|
|
1,482
|
|
|
|
1,476
|
|
|
|
1,472
|
|
|
|
1,469
|
|
Common shares outstanding at year-end
|
|
|
1,621
|
|
|
|
1,487
|
|
|
|
1,479
|
|
|
|
1,474
|
|
|
|
1,471
|
|
|
|
|
(1) |
|
Operating results and other financial information reflects the
closing of the OBS acquisition on November 19, 2007,
including the impacts of purchase accounting in accordance with
SFAS No. 141, Business Combinations. |
|
(2) |
|
2007, 2006, 2005, 2004, and 2003 include special and acquisition
related charges and manufacturing streamlining costs of $84,
$248, $294, $153, and $599, respectively. See Note 3,
Special and Acquisition Related Charges and Manufacturing
Streamlining, for additional information on these charges
that were incurred in 2007, 2006, and 2005. The special charges
incurred in 2004 included $119 million of employee
termination costs and $34 million for asset impairment and
related charges. Special charges in 2003 included the increases
in litigation reserves of $350 million that resulted from
the investigations into Schering-Ploughs sales and
marketing practices, approximately $179 million of employee
termination costs related to the Voluntary Early Retirement
Program announced in August 2003 and $70 million of asset
impairment and other charges. |
|
(3) |
|
The increase in long-term debt during 2007 primarily reflects
the financing of the OBS acquisition. |
30
|
|
|
(4) |
|
Assumes conversion of all 2007 mandatory convertible preferred
stock into approximately 91 million common shares in 2007.
Assumes conversion of all 2004 mandatory convertible preferred
stock into approximately 65 million common shares in 2006,
69 million common shares in 2005 and 65 million common
shares in 2004. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
EXECUTIVE
SUMMARY
Overview
of Schering-Plough
Schering-Plough is an innovation-driven science-centered global
health care company. Schering-Plough discovers, develops and
manufactures pharmaceuticals for three customer
markets human prescription, animal health, and
consumer. While most of the research and development activity is
directed toward prescription products, there are important
applications of this central research and development platform
into the animal health products and the consumer health care
products. Schering-Plough also accesses external innovation via
partnering, in-licensing and acquisition for all three customer
markets.
Strategy
Focused on Science
Earlier this decade, Schering-Plough experienced a number of
business, regulatory, and legal challenges. In April 2003, the
Board of Directors named Fred Hassan as the new Chairman of the
Board and Chief Executive Officer of Schering-Plough
Corporation. With support from the Board, he initiated a
strategic plan, with the goal of stabilizing, repairing and
turning around Schering-Plough in order to build long-term
shareholder value. He also installed a new senior executive
team. That strategic plan, the Action Agenda, is a six- to
eight-year, five-phase plan. Schering-Plough is currently in the
fourth phase of the Action Agenda Build the Base.
During the Build the Base phase, Schering-Plough continues to
focus on its strategy of value creation across a broad front,
and believes the Organon BioSciences N.V. (OBS) acquisition was
a major, transformative accomplishment in this regard. The OBS
acquisition added further diversification of marketed products,
including two new therapeutic areas (Womens Health and
Central Nervous System), as well as significant strength in
Animal Health products and pipeline. Other accomplishments in
2007 include:
|
|
|
|
|
growing the business, for example there was double digit sales
growth in all three product groups, Human Pharmaceuticals,
Animal Health and Consumer Health Care;
|
|
|
|
penetrating new markets, including China, Brazil and Russia;
|
|
|
|
expanding the product portfolio for Schering-Ploughs three
customer groups human pharmaceutical, animal health
and consumer health care; and
|
|
|
|
discovering and developing or acquiring new products.
|
A key component of the Action Agenda is applying science to meet
unmet medical needs. Research and development activities focus
on mechanisms to treat serious diseases. As a result, a core
strategy of Schering-Plough is to invest substantial funds in
scientific research with the goal of creating therapies and
treatments that address important unmet medical needs and also
have commercial value. Schering-Plough has been successful in
advancing its pipeline into several late-stage projects that
will require sizable resources to complete. Consistent with this
core strategy, Schering-Plough is increasing its investment in
research and development. As Schering-Plough continues to
develop the later phase growth-drivers of the pipeline (e.g.,
sugammadex, thrombin receptor antagonist, golimumab, vicriviroc,
boceprevir and asenapine), it anticipates higher spending on
clinical trial activities. Schering-Ploughs progressing
early pipeline includes drug candidates across a wide range of
therapeutic areas with more than 20 compounds now approaching or
in Phase I development.
As part of the Action Agenda, Schering-Plough continues to work
to enhance infrastructure, upgrade processes and systems and
strengthen talent both the recruitment of talented
individuals and the development of key employees. While these
efforts are being implemented on a companywide basis,
Schering-Plough is focusing especially on research and
development to support Schering-Ploughs science-based
business.
31
Further, with the integration of the OBS employees into
Schering-Plough much new talent has been added. In addition, as
part of the integration of OBS, Schering-Plough has also
announced that there will be some workforce reduction to
eliminate redundancies.
2007
Results Highlights of Schering-Ploughs
performance in 2007 are as follows:
|
|
|
|
|
Closed the acquisition of OBS on November 19, 2007 for a
purchase price of approximately Euro 11 billion.
|
|
|
|
Schering-Ploughs net sales in 2007 were
$12.7 billion, an increase of $2.1 billion, or
20 percent, as compared to the 2006 period. 2007 net
sales included $626 million of sales of products acquired
as part of the OBS acquisition.
|
|
|
|
Net loss available to common shareholders in 2007 was
$1.6 billion, as compared to net income available to common
shareholders of $1.1 billion in 2006. Included in the
2007 net loss is approximately $4.0 billion of charges
related to purchase accounting for the OBS acquisition,
including a $3.8 billion acquired in-process research and
development charge. Cash flow provided by operating activities
was $2.6 billion in 2007.
|
|
|
|
Global sales of Schering-Ploughs cholesterol franchise
products, VYTORIN and ZETIA, made by the cholesterol joint
venture with Merck & Company, Inc. (Merck) continued
to grow in 2007 and contributed significantly to
Schering-Ploughs improved operating results and cash flow
(see note below about 2008 developments). In addition, increased
sales of pharmaceutical products such as REMICADE, TEMODAR and
NASONEX also contributed favorably to Schering-Ploughs
overall operating results and cash flow.
|
The additional strength that Schering-Plough developed, in 2007
and during the four years since Mr. Hassan and the new
management team began the Action Agenda, is key for
Schering-Plough in the current environment. The pharmaceutical
industry continues to be subject to ever-more critical scrutiny,
where events can be mischaracterized and drive amplified
reactions. Schering-Plough believes that new scientific data are
best presented and discussed at appropriate scientific and
medical forums.
Early
2008 Developments Relating to the Cholesterol
Franchise
As explained in more detail in Part I, Item 3,
Legal Proceedings, ENHANCE Matter, in
early 2008, Schering-Plough encountered such a challenge when
results of a Merck/Schering-Plough cholesterol joint venture
clinical trial, called ENHANCE, and joint venture products ZETIA
and VYTORIN, became the subject of much media scrutiny prior to
fuller discussions of the trial results at appropriate medical
forums. A discussion is scheduled for the American College of
Cardiology meeting on March 30, 2008.
Medical experts and health advisory groups have long recognized
high LDL cholesterol (often known as bad
cholesterol) as a significant cardiovascular risk factor
and recommended increasingly aggressive treatment of high
cholesterol for certain patients. Lowering LDL cholesterol,
along with a healthy diet and lifestyle changes, remains the
cornerstone of lipid treatment for patients at risk for heart
disease. Clinical studies, including ENHANCE, have demonstrated
that VYTORIN lowers patients LDL cholesterol more than
rosuvastatin, atorvastatin and simvastatin at the doses studied
and was able to get more patients to their LDL cholesterol goals
(as defined by ATP III).
While it is too early to tell the impact of the joint
ventures ENHANCE trial results on the joint ventures
cholesterol business, Schering-Ploughs diversified group
of products and geographic areas, as well as its highly
experienced executive team, gives Schering-Plough additional
strength that will be helpful in weathering this situation.
Strategic
Alliances
As is typical in the pharmaceutical industry, Schering-Plough
licenses manufacturing, marketing
and/or
distribution rights to certain products to others, and also
manufactures, markets
and/or
distributes products
32
owned by others pursuant to licensing and joint venture
arrangements. Any time that third parties are involved, there
are additional factors relating to the third party and outside
the control of Schering-Plough that may create positive or
negative impacts on Schering-Plough. VYTORIN, ZETIA and REMICADE
are subject to such arrangements and are key to
Schering-Ploughs current business and financial
performance.
In addition, any potential strategic alternatives may be
impacted by the change of control provisions in those
arrangements, which could result in VYTORIN and ZETIA being
acquired by Merck or REMICADE reverting back to Centocor. The
change in control provision relating to VYTORIN and ZETIA is
included in the contract with Merck, filed as Exhibit 10(r)
to Schering-Ploughs
10-K, and
the change of control provision relating to REMICADE is
contained in the contract with Centocor, filed as
Exhibit 10(v) to Schering-Ploughs
10-K.
Cholesterol
Franchise
Schering-Ploughs cholesterol franchise products, VYTORIN
and ZETIA, are managed through a joint venture between
Schering-Plough and Merck for the treatment of elevated
cholesterol levels in all markets outside of Japan. ZETIA is
Schering-Ploughs novel cholesterol absorption inhibitor.
VYTORIN is the combination of ZETIA and Zocor (simvastatin), a
statin medication developed by Merck. The financial commitment
to compete in the cholesterol reduction market is shared with
Merck, and profits from the sales of VYTORIN and ZETIA are also
shared with Merck. The operating results of the joint venture
with Merck are recorded using the equity method of accounting.
The cholesterol-reduction market is the single largest
pharmaceutical category in the world. VYTORIN and ZETIA are
competing in this market, and on a combined basis, these
products continued to grow in terms of sales and market share
during 2007 (see note above about 2008 developments). A material
change in the sales or market share of Schering-Ploughs
cholesterol franchise would have a significant impact on
Schering-Ploughs consolidated results of operations and
cash flows. In order to maintain and enhance its infrastructure
and business, Schering-Plough must continue to increase profits.
This increased profitability is largely dependent upon the
performance of Schering-Ploughs cholesterol franchise.
Japan is not included in the joint venture with Merck. In the
Japanese market, Bayer Healthcare is co-marketing
Schering-Ploughs cholesterol-absorption inhibitor, ZETIA,
which was approved in Japan in April 2007 as a monotherapy and
co-administered with a statin for use in patients with
hypercholesterolemia, familial hypercholesterolemia or
homozygous sitosterolemia. ZETIA was launched in Japan during
June 2007. Schering-Ploughs sales of ZETIA in Japan under
the co-marketing agreement with Bayer Healthcare are recognized
in net sales.
License
Arrangements with Centocor
REMICADE is prescribed for the treatment of inflammatory
diseases such as rheumatoid arthritis, early rheumatoid
arthritis, psoriatic arthritis, Crohns disease, ankylosing
spondylitis, plaque psoriasis and ulcerative colitis. REMICADE
is Schering-Ploughs second largest marketed pharmaceutical
product line (after the cholesterol franchise). REMICADE is
licensed from and manufactured by Centocor, Inc., a
Johnson & Johnson company. During 2005,
Schering-Plough exercised an option under its contract with
Centocor for license rights to develop and commercialize
golimumab, a fully human monoclonal antibody currently in
Phase III trials. Schering-Plough has exclusive marketing
rights to both products outside of the U.S., Japan and certain
Asian markets. In December 2007, Schering-Plough and Centocor
revised their distribution agreement regarding the development,
commercialization and distribution of both REMICADE and
golimumab, extending Schering-Ploughs rights to
exclusively market REMICADE to match the duration of
Schering-Ploughs exclusive marketing rights for golimumab.
Effective upon regulatory approval of golimumab in the EU,
Schering-Ploughs marketing rights for both products will
now extend for 15 years after the first commercial sale of
golimumab within the EU. Centocor will receive a progressively
increased share of profits on Schering-Ploughs
distribution of both products in the Schering-Plough marketing
territory between 2010 and 2014, and the share of profits will
remain fixed thereafter for the remainder of the term. The
changes to the duration of REMICADE marketing rights and the
profit sharing arrangement for the products are all conditioned
on approval of golimumab being granted prior to
September 1, 2014. Schering-Plough may independently
develop
33
and market golimumab for a Crohns disease indication in
its territories, with an option for Centocor to participate. In
addition, Schering-Plough and Centocor agreed to utilize an
autoinjector device in the commercialization of golimumab and
further agreed to share its development costs. For the rights to
this device, Schering-Plough made an upfront payment of
$21 million, which is included in research and development
expenses for the year ended December 31, 2007.
Manufacturing,
Sales and Marketing
Schering-Plough supports commercialized products with
manufacturing, sales and marketing efforts. Schering-Plough is
also moving forward with additional investments to enhance its
infrastructure and business, including capital expenditures for
the drug development process (where products are moved from the
drug discovery pipeline to markets), information technology
systems, and post-marketing studies and monitoring.
Schering-Plough continually reviews the business, including
manufacturing operations, to identify actions that will enhance
long-term competitiveness. However, Schering-Ploughs
manufacturing cost base is relatively fixed, and actions to
significantly reduce Schering-Ploughs manufacturing
infrastructure, including OBS manufacturing operations
acquired during 2007, involve complex issues. As a result,
shifting products between manufacturing plants can take many
years due to construction and regulatory requirements, including
revalidation and registration requirements. From time to time,
actions are taken to enhance Schering-Ploughs overall
manufacturing efficiency. For example, during 2006,
Schering-Plough closed a manufacturing plant in Puerto Rico and
in 2007 began the process of closing a small manufacturing
facility in the Asia Pacific region. Schering-Plough continues
to review the carrying value of manufacturing assets for
indications of impairment. Future events and decisions may lead
to additional asset impairments or related costs.
Regulatory
and Competitive Environment
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. Regulatory
compliance is complex and costly, impacting the timing needed to
bring new drugs to market and to market drugs for new
indications.
Schering-Plough engages in clinical trial research in many
countries around the world. Research activities must comply with
stringent regulatory standards and are subject to inspection by
U.S., the EU, and local country regulatory authorities.
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. Clinical
trials and post-marketing surveillance of certain marketed drugs
of competitors within the industry have raised safety concerns
that have led to recalls, withdrawals or adverse labeling of
marketed products.
A number of intermediaries are involved between drug
manufacturers, such as Schering-Plough, and patients who use the
drugs. These intermediaries impact the patients ability,
and their precriberss ability, to choose and pay for a
particular drug. These intermediaries include health care
providers, such as hospitals and clinics; payors and their
representatives, such as employers, insurers, managed care
organizations and governments; and others in the supply chain,
such as pharmacists and wholesalers. Further, in the U.S., many
of Schering-Ploughs pharmaceutical products are subject to
increasingly competitive pricing as certain of the
intermediaries (including managed care groups, institutions and
government agencies) seek price discounts. In most international
markets, Schering-Plough operates in an environment of
government mandated cost-containment programs. Also, the
pricing, sales and marketing programs and arrangements, and
related business practices of Schering-Plough and other
participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities.
The market for pharmaceutical products is competitive.
Schering-Ploughs operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, loss of patent protection due to
challenges by competitors, competitive combination products, new
products of competitors, new information from clinical trials of
marketed products or post-marketing surveillance and generic
competition as Schering-Ploughs products mature.
34
OBS
Acquisition
On November 19, 2007, Schering-Plough acquired OBS for a
purchase price of approximately Euro 11 billion in
cash, or approximately $16.1 billion.
Commencing from the acquisition date, OBS assets acquired
and liabilities assumed, as well as the results of OBS
operations, are included in Schering-Ploughs consolidated
financial statements. There were approximately one and one-half
months of results of operations relating to OBS included in
Schering-Ploughs Statement of Consolidated Operations for
the year ended December 31, 2007.
The impact of purchase accounting, based on a preliminary
valuation, resulted in the following non-cash charges in 2007:
|
|
|
|
|
Acquired In-Process Research and Development (IPR&D), which
was a one-time charge of approximately $3.8 billion.
|
|
|
|
Amortization of inventory adjusted to fair value, of which
approximately $1.1 billion will be charged to Cost of Sales
($258 million in 2007) approximately over a one year
period from the acquisition date.
|
|
|
|
Amortization of acquired intangible assets adjusted to fair
value, of which $6.8 billion will be amortized over a
weighted average life of 15 years to Cost of Sales
($65 million in 2007).
|
|
|
|
Incremental depreciation relating to the adjustment in fair
value on property, plant and equipment of $885 million that
will be depreciated primarily to Cost of Sales over the lives of
the applicable property ($3 million in 2007).
|
The $3.8 billion acquired IPR&D charge was associated
with research projects in the womens health, central
nervous system and anesthesia therapeutic areas of human health
as well as research projects in animal health. The amount was
determined by using discounted cash flow projections of
identified research projects for which technological feasibility
had not been established and for which there was no alternative
future use. The discount rates used ranged from 14 percent
to 18 percent. The projected launch dates following FDA or
other regulatory approval are years 2008 through 2013, at which
time Schering-Plough expects these projects to begin to generate
cash flows. All of the research and development projects
considered in the valuation are subject to the normal risks and
uncertainties associated with demonstrating the safety and
efficacy required to obtain FDA or other regulatory approvals.
DISCUSSION
OF OPERATING RESULTS
The results of operations in 2007 discussed below include
OBS product sales and expenses as well as certain non-cash
charges relating to purchase accounting associated with the OBS
acquisition.
Net
Sales
A significant portion of net sales is made to major
pharmaceutical and health care product distributors and major
retail chains in the U.S. Consequently, net sales and
quarterly growth comparisons may be affected by fluctuations in
the buying patterns of major distributors, retail chains and
other trade buyers. These fluctuations may result from
seasonality, pricing, wholesaler, retail and trade buying
decisions, changes in overall demand factors or other factors.
In addition to these fluctuations, sales of many pharmaceutical
products in the U.S. are subject to increased pricing
pressure from managed care groups, institutions, government
agencies, and other groups seeking discounts. Schering-Plough
and other pharmaceutical manufacturers in the U.S. market
are also required to provide statutorily defined rebates to
various government agencies in order to participate in the
Medicaid program, the veterans health care program, and other
government-funded programs. The Medicare Prescription Drug
Improvement and Modernization Act of 2003 contains a
prescription drug benefit for individuals who are eligible for
Medicare. This prescription drug benefit became effective on
January 1, 2006 and is resulting in increased use of
generics and increased purchasing power of those negotiating on
behalf of Medicare recipients. In most international markets,
Schering-Plough operates in an environment where governments may
and have mandated cost-containment
35
programs, placed restrictions on physician prescription levels
and patient reimbursements, emphasized greater use of generic
drugs and enacted across-the-board price cuts as methods to
control costs.
Consolidated net sales in 2007 were $12.7 billion, an
increase of $2.1 billion or 20 percent as compared to
2006. Consolidated net sales in 2007 included $626 million
of OBS net sales related to the period subsequent to the
acquisition. The increase also reflects the growth in sale
volumes of REMICADE, TEMODAR, NASONEX and AVELOX as well as
contributions from Animal Health and Consumer Health Care and a
favorable impact of 4 percent from foreign exchange.
Consolidated net sales in 2006 were $10.6 billion, an
increase of $1.1 billion or 11 percent compared to
2005. The increase primarily reflected the growth in sale
volumes of REMICADE, NASONEX, PEGINTRON and TEMODAR. This
increase also reflected an unfavorable impact of 1 percent
from foreign exchange.
Net sales for the years ended December 31, 2007, 2006, and
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
HUMAN PRESCRIPTION PHARMACEUTICALS
|
|
$
|
10,173
|
|
|
$
|
8,561
|
|
|
$
|
7,564
|
|
|
|
19
|
%
|
|
|
13
|
%
|
REMICADE
|
|
|
1,648
|
|
|
|
1,240
|
|
|
|
942
|
|
|
|
33
|
|
|
|
32
|
|
NASONEX
|
|
|
1,092
|
|
|
|
944
|
|
|
|
737
|
|
|
|
16
|
|
|
|
28
|
|
PEGINTRON
|
|
|
911
|
|
|
|
837
|
|
|
|
751
|
|
|
|
9
|
|
|
|
11
|
|
TEMODAR
|
|
|
861
|
|
|
|
703
|
|
|
|
588
|
|
|
|
22
|
|
|
|
20
|
|
CLARINEX/AERIUS
|
|
|
799
|
|
|
|
722
|
|
|
|
646
|
|
|
|
11
|
|
|
|
12
|
|
CLARITIN Rx
|
|
|
391
|
|
|
|
356
|
|
|
|
371
|
|
|
|
10
|
|
|
|
(4
|
)
|
AVELOX
|
|
|
384
|
|
|
|
304
|
|
|
|
228
|
|
|
|
26
|
|
|
|
34
|
|
INTEGRILIN
|
|
|
332
|
|
|
|
329
|
|
|
|
315
|
|
|
|
1
|
|
|
|
5
|
|
REBETOL
|
|
|
277
|
|
|
|
311
|
|
|
|
331
|
|
|
|
(11
|
)
|
|
|
(6
|
)
|
CAELYX
|
|
|
257
|
|
|
|
206
|
|
|
|
181
|
|
|
|
25
|
|
|
|
13
|
|
INTRON A
|
|
|
233
|
|
|
|
237
|
|
|
|
287
|
|
|
|
(2
|
)
|
|
|
(17
|
)
|
SUBUTEX/SUBOXONE
|
|
|
220
|
|
|
|
203
|
|
|
|
197
|
|
|
|
8
|
|
|
|
3
|
|
ASMANEX
|
|
|
162
|
|
|
|
103
|
|
|
|
11
|
|
|
|
57
|
|
|
|
N/M
|
|
Other Pharmaceutical
|
|
|
2,606
|
|
|
|
2,066
|
|
|
|
1,979
|
|
|
|
26
|
|
|
|
44
|
|
ANIMAL HEALTH
|
|
|
1,251
|
|
|
|
910
|
|
|
|
851
|
|
|
|
37
|
|
|
|
7
|
|
CONSUMER HEALTH CARE
|
|
|
1,266
|
|
|
|
1,123
|
|
|
|
1,093
|
|
|
|
13
|
|
|
|
3
|
|
OTC
|
|
|
682
|
|
|
|
558
|
|
|
|
556
|
|
|
|
22
|
|
|
|
N/M
|
|
Foot Care
|
|
|
345
|
|
|
|
343
|
|
|
|
333
|
|
|
|
1
|
|
|
|
3
|
|
Sun Care
|
|
|
239
|
|
|
|
222
|
|
|
|
204
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED NET SALES
|
|
$
|
12,690
|
|
|
$
|
10,594
|
|
|
$
|
9,508
|
|
|
|
20
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M Not a meaningful percentage.
Sales of Human Prescription Pharmaceuticals in 2007 totaled
$10.2 billion, a $1.6 billion or 19% increase compared
to 2006. Included in 2007 are $409 million of net sales
related to Organon, the human health business of OBS. Sales of
Human Prescription Pharmaceuticals in 2006 totaled
$8.6 billion, a $1.0 billion or 13% increase compared
to 2005.
International net sales of REMICADE, a drug for the treatment of
immune-mediated inflammatory disorders such as rheumatoid
arthritis, early rheumatoid arthritis, psoriatic arthritis,
Crohns disease, ankylosing spondylitis, plaque psoriasis,
and ulcerative colitis, were up 33 percent to
$1.6 billion in 2007 as compared to 2006 driven by
continued market growth, expanded use across indications and a
favorable impact from foreign
36
exchange. Global net sales increased 32 percent in 2006 to
$1.2 billion as compared to 2005, due to greater demand,
expanded indications and continued market growth. Competitive
products for the indications referred to above have been
introduced during 2006 and 2007.
Global net sales of NASONEX Nasal Spray, a once-daily
corticosteroid nasal spray for allergies, rose 16 percent
to $1.1 billion in 2007 as compared to 2006 due to
increased sales across all geographic regions, and
28 percent to $944 million in 2006 as compared to
2005, as the product captured greater U.S. and
international market share in 2006. Competitive products have
been introduced in 2007.
Global net sales of PEGINTRON Powder for Injection, a pegylated
interferon product for treating hepatitis C, increased
9 percent to $911 million in 2007 as compared to 2006
due to higher sales in Latin America and emerging markets across
Europe, and tempered by lower sales in Japan due to increased
competition and a decrease in the U.S. market size. Global
net sales increased 11 percent to $837 million in 2006
as compared to 2005 reflecting higher sales volume in Japan and
the U.S. In Japan, sales in 2005 benefited from a
significant number of patients who were waiting for approval of
PEGINTRON before beginning treatment.
Global net sales of TEMODAR Capsules, a treatment for certain
types of brain tumors, increased 22 percent to
$861 million in 2007 as compared to 2006 due to increased
sales across geographic markets, including Japan, where the
product was launched in September 2006. Global net sales
increased 20 percent to $703 million in 2006 as
compared to 2005 due to the increased utilization for new
indications.
Global net sales of CLARINEX (marketed as AERIUS in many
countries outside the U.S.), for the treatment of seasonal
outdoor allergies and year-round indoor allergies, in 2007
increased 11 percent to $799 million as compared to
2006 primarily due to higher sales in international markets.
Global net sales in 2006 increased 12 percent to
$722 million as compared to 2005 due to increased demand in
Europe and Latin America as well as increased sales in the
U.S. despite slightly declining market share.
International net sales of prescription CLARITIN increased
10 percent to $391 million in 2007 as compared to 2006
reflecting growth in Latin America, Asia Pacific and Japan.
Sales in 2006 decreased 4 percent to $356 million as
compared to 2005.
Net sales of AVELOX, a fluoroquinolone antibiotic for the
treatment of certain respiratory and skin infections, sold
primarily in the U.S. by Schering-Plough as a result of its
license agreement with Bayer, increased 26 percent to
$384 million in 2007 as compared to 2006 primarily as a
result of increased market share. Net sales in 2006 increased
34 percent to $304 million in 2006 as compared to
$228 million in 2005 due to share growth and new
indications.
Global net sales of INTEGRILIN Injection, a glycoprotein
platelet aggregation inhibitor for the treatment of patients
with acute coronary syndrome, which is sold primarily in the
U.S. by Schering-Plough, increased 1 percent to
$332 million in 2007 as compared to 2006. During 2006,
sales increased 5 percent to $329 million as compared
to 2005.
Global 2007 net sales of REBETOL Capsules, for use in
combination with PEGINTRON or INTRON A for treating
hepatitis C, decreased 11 percent to $277 million
as compared to 2006 due to lower patient enrollment in Japan and
increased generic competition. Global net sales in 2006
decreased 6 percent to $311 million as compared to
2005 due to lower sales in Europe and increased competition. In
Japan, sales in 2005 benefited from the significant number of
patients who were waiting for approval of PEGINTRON before
beginning hepatitis C treatment.
International net sales of CAELYX, for the treatment of ovarian
cancer, metastatic breast cancer and Kaposis sarcoma,
increased 25 percent to $257 million in 2007 as
compared to 2006 primarily due to increased sales in Latin
America and a favorable impact from foreign exchange. Sales in
2006 increased 13 percent to $206 million as compared
to 2005 primarily due to an expanding market for this product.
Global net sales of INTRON A Injection, for chronic hepatitis B
and C and other antiviral and anticancer indications, decreased
2 percent to $233 million in 2007 as compared to 2006,
and 17 percent in 2006 to
37
$237 million as compared to 2005. The decrease in both 2007
and 2006 were due to the conversion to PEGINTRON for treating
hepatitis C in Japan.
International net sales of SUBUTEX/SUBOXONE, for the treatment
of opiate addiction, increased 8 percent to
$220 million in 2007 as compared to 2006 as a result of a
benefit from foreign exchange. Sales increased 3 percent to
$203 million in 2006 as compared to 2005 due to increased
market share. In October 2006, SUBOXONE was approved by the EU,
including the 25 member states as well as Iceland and Norway,
for the treatment of opioid dependence.
Global net sales of ASMANEX, an orally inhaled steroid for
asthma, were up 57 percent to $162 million in 2007 as
compared to 2006 primarily due to market share growth in the
U.S. Sales increased to $103 million in 2006 as
compared to 2005 due to the ASMANEX launch commencing in late
2005.
Other pharmaceutical net sales include all net sales of Organon
from the date of the acquisition through December 31, 2007
and a large number of lower sales volume human prescription
pharmaceutical products. Net sales of Organon were
$409 million in 2007 and included $57 million for
FOLLISTIM/PUREGON, a fertility treatment, and $45 million
for NUVARING, a contraception product. Also included in other
pharmaceutical sales are several lower volume products which are
often sold in limited markets outside the U.S., and many are
multiple source products no longer protected by patents. These
products include treatments for respiratory, cardiovascular,
dermatological, infectious, oncological and other diseases.
Included in other pharmaceutical sales is sales of
Schering-Ploughs albuterol products. In 2005, the FDA
issued a Final Rule that requires all CFC albuterol products,
including Schering-Ploughs PROVENTIL CFC, be removed from
the market no later than December 31, 2008.
Schering-Ploughs transition to albuterol HFA (PROVENTIL
HFA) is complete. Schering-Plough no longer manufactures the CFC
product and all remaining CFC inventories have been sold during
2007. Schering-Plough is uncertain as to the ultimate impact on
Schering-Ploughs overall future sales of PROVENTIL HFA,
due to the complexities and multiple external factors
influencing this transition, including competing albuterol HFA
products.
Global net sales of Animal Health products increased
37 percent to $1.3 billion in 2007 as compared to
2006. Included in global Animal Health net sales are
$217 million related to Intervet, the animal health
business of OBS, for the period subsequent to the acquisition.
Global net sales in 2007 also benefited from solid growth in all
geographic areas, led by the cattle and companion animal product
lines, coupled with a positive impact from foreign currency
exchange rates. Global net sales increased 7 percent in
2006 to $910 million as compared to 2005, reflecting strong
growth of core brands across most geographic and species areas
led by higher sales of companion animal products. The Animal
Health segments sales growth rate is impacted by intense
competition and the frequent introduction of generic products.
Global net sales of Consumer Health Care products, which include
OTC, foot care and sun care products, increased 13 percent
or $143 million as compared to 2006. The increase in 2007
was primarily due to the sales of MiraLAX, which was launched in
February 2007 as the first Rx-to-OTC switch in the laxative
category in more than 30 years, and higher sales of OTC
CLARITIN. Global net sales in 2006 increased 3 percent or
$30 million as compared to 2005 reflecting an increase in
sales of sun care products and DR. SCHOLLS and other foot
care products. Sales of OTC CLARITIN increased 18 percent
to $462 million in 2007 as compared to 2006 due to sales
growth across all product forms. OTC CLARITIN sales decreased
1 percent in 2006 as compared to 2005 as a result of the
restrictions on the retail sale of OTC products containing
pseudoephedrine (PSE). In addition, OTC CLARITIN continues to
face competition from private labels and branded loratadine, and
a competing prescription antihistamine was launched for OTC sale
in early 2008. Net sales of sun care products increased
$17 million or 8 percent in 2007 as compared to 2006
due to COPPERTONE CONTINUOUS SPRAY line extensions, and
$18 million or 9 percent in 2006 as compared to 2005,
primarily due to the success of new COPPERTONE CONTINUOUS SPRAY
products launched in 2005. Future sales in the Consumer Health
Care segment are difficult to predict because the consumer
health care market is highly competitive, with heavy advertising
to consumers and frequent competitive product introductions.
38
Costs,
Expenses and Equity Income
A summary of costs, expenses and equity income for the years
ended December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007/2006
|
|
|
2006/2005
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
65.3
|
%
|
|
|
65.1
|
%
|
|
|
64.8
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
Selling, general and administrative (SG&A)
|
|
$
|
5,468
|
|
|
$
|
4,718
|
|
|
$
|
4,374
|
|
|
|
15.9
|
%
|
|
|
7.9
|
%
|
Research and development (R&D)
|
|
|
2,926
|
|
|
|
2,188
|
|
|
|
1,865
|
|
|
|
33.7
|
%
|
|
|
17.3
|
%
|
Acquired in-process research and development (IPR&D)
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Other (income)/expense, net
|
|
|
(683
|
)
|
|
|
(135
|
)
|
|
|
5
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Special and acquisition-related charges
|
|
|
84
|
|
|
|
102
|
|
|
|
294
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Equity income
|
|
|
(2,049
|
)
|
|
|
(1,459
|
)
|
|
|
(873
|
)
|
|
|
40.4
|
%
|
|
|
N/M
|
|
N/M Not a meaningful percentage
Substantially all the sales of cholesterol products are not
included in Schering-Ploughs net sales. The results of
these sales are reflected in equity income. In addition, due to
the virtual nature of the joint venture, Schering-Plough incurs
substantial selling, general and administrative expenses that
are not captured in equity income but are included in
Schering-Ploughs Statements of Consolidated Operations. As
a result, Schering-Ploughs gross margin, and ratios of
SG&A expenses and R&D expenses as a percentage of net
sales do not reflect the benefit of the impact of the joint
ventures operating results.
Gross
margin
Gross margin was 65.3 percent in 2007 as compared to
65.1 percent in 2006. Gross margin in 2007 was unfavorably
impacted by $326 million of purchase accounting adjustments
included in cost of sales. These purchase accounting adjustments
were a result of the amortization of fair values of certain
assets acquired as part of the OBS acquisition. Gross margin in
2007, when compared to 2006, benefited from realized cost
savings of approximately $100 million from manufacturing
streamlining in 2006, the non-recurrence of $146 million of
charges associated with the aforementioned manufacturing
streamlining actions and favorable product mix.
Despite negative impacts on cost of sales from the costs
resulting from Schering-Ploughs actions to streamline its
manufacturing operations during 2006, gross margin increased to
65.1 percent in 2006 from 64.8 percent in 2005. This
improvement in gross margin was primarily due to increased sales
of higher margin products and process improvements within
Schering-Ploughs supply chain, including cost savings from
the manufacturing streamlining activities completed during 2006.
In 2006, cost of sales included charges totaling
$146 million associated with Schering-Ploughs actions
to streamline its manufacturing operations, offset by savings of
approximately $30 million as a result of these actions. See
Note 3, Special and Acquisition Related Charges and
Manufacturing Streamlining, under Item 8,
Financial Statements and Supplemental Data, for
additional information.
Selling,
general and administrative
Selling, general and administrative expenses (SG&A)
increased 16 percent to $5.5 billion in 2007 as
compared to 2006. Included in SG&A in 2007 were
$227 million from OBS. In addition, the increase in
SG&A reflects higher promotion spending, ongoing
investments in emerging markets and an unfavorable impact from
foreign exchange.
SG&A increased 8 percent to $4.7 billion in 2006
as compared to 2005, reflecting ongoing investments in emerging
markets and field support for product launches as well as higher
promotional spending.
39
Research
and development
Research and development (R&D) spending increased
34 percent to $2.9 billion in 2007 as compared to the
2006 period. Included in R&D in 2007 were $111 million
from OBS. Also included in R&D were upfront payments of
$197 million mainly related to certain licensing
transactions. The increase in R&D spending versus 2006 also
reflects higher spending for clinical trials and related
activities and investments to build greater breadth and capacity
to support the continued expansion of Schering-Ploughs
pipeline. In 2006, R&D spending increased 17 percent
to $2.2 billion as compared to the 2005 period. The 2006
increase was due to higher costs associated with clinical trials
as well as building greater breadth and capacity to support
Schering-Ploughs progressing pipeline. Generally, changes
in R&D spending reflect the timing of
Schering-Ploughs funding of both internal research efforts
and research collaborations with various partners to discover
and develop a steady flow of innovative products.
To maximize Schering-Ploughs chances for the successful
development of new products, Schering-Plough began a Development
Excellence initiative in 2005 to build talent and critical mass,
create a uniform level of excellence and deliver on
high-priority programs within R&D. In 2006, Schering-Plough
began a Global Clinical Harmonization Program to maximize and
globalize the quality of clinical trial execution,
pharmacovigilance and regulatory processes. In 2007, certain
aspects of the Global Clinical Harmonization Program have been
implemented.
Acquired
in-process research and development
The acquired in-process research and development charge of
$3.8 billion in 2007 was a result of the OBS acquisition
and represents the immediate expense recognition of the fair
value of acquired research projects for which technological
feasibility has not been established and for which there is no
alternative future use.
Other
(income)/expense, net
Schering-Plough had other income, net, of $683 million in
2007 compared to $135 million of other income, net, in 2006
and other expense, net, of $5 million in 2005. Other
income, net, in 2007 included net realized gains on foreign
currency options of $510 million related to the OBS
acquisition. The increase in other income, net, in 2007 also
reflected higher interest income due to higher balances of cash
equivalents and short-term investments partially offset by
higher interest expense due to the issuance of new debt.
Special
and acquisition related charges and manufacturing
streamlining
2007
special and acquisition related charges
During the year ended December 31, 2007, Schering-Plough
incurred $84 million of special and acquisition-related
charges, comprised of $61 million of integration-related
costs for the OBS acquisition and $23 million of severance
charges as part of integration activities.
2006
manufacturing streamlining
During 2006, Schering-Plough implemented changes to its
manufacturing operations in Puerto Rico and New Jersey that have
streamlined its global supply chain and further enhanced
Schering-Ploughs long-term competitiveness. These changes
resulted in the phase-out and closure of Schering-Ploughs
manufacturing operations in Manati, Puerto Rico, and additional
workforce reductions in Las Piedras, Puerto Rico, and New
Jersey. In total, these actions resulted in the elimination of
over 1,000 positions. Schering-Plough expects these actions to
yield an annualized cost savings of approximately
$100 million.
Special charges: Special charges in 2006
related to the changes in Schering-Ploughs manufacturing
operations totaled $102 million. These charges consisted of
approximately $47 million of severance and $55 million
of fixed asset impairments.
Cost of Sales: Included in 2006 cost of sales
was approximately $146 million consisting of
$93 million of accelerated depreciation, $46 million
of inventory write-offs, and $7 million of other charges
related to the closure of Schering-Ploughs manufacturing
facilities in Manati, Puerto Rico.
40
The following table summarizes activities reflected in the
consolidated financial statements related to changes to
Schering-Ploughs manufacturing operations which were
completed in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in
|
|
|
Special
|
|
|
Total
|
|
|
Cash
|
|
|
Non-cash
|
|
|
Accrued
|
|
|
|
Cost of sales
|
|
|
charges
|
|
|
charges
|
|
|
payments
|
|
|
charges
|
|
|
Liability
|
|
|
|
(Dollars in millions)
|
|
|
Accrued liability at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Severance
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
47
|
|
|
$
|
(35
|
)
|
|
$
|
|
|
|
|
12
|
|
Asset impairments
|
|
|
|
|
|
|
55
|
|
|
|
55
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
Accelerated depreciation
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
|
|
Inventory write-offs
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
Other
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146
|
|
|
$
|
102
|
|
|
$
|
248
|
|
|
$
|
(37
|
)
|
|
$
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
2005
special charge activities
Special charges incurred in 2005 are as follows:
|
|
|
|
|
|
|
2005
|
|
|
|
(Dollars in Millions)
|
|
|
Litigation charges
|
|
$
|
250
|
|
Employee termination costs
|
|
|
28
|
|
Asset impairment and other charges
|
|
|
16
|
|
|
|
|
|
|
|
|
$
|
294
|
|
|
|
|
|
|
Litigation Charges: In 2005, litigation
reserves were increased by $250 million. This increase
resulted in a total reserve of $500 million for the
Massachusetts Investigation, as well as the investigations and
the state litigation disclosed under AWP Litigation and
Investigations in Note 20, Legal, Environmental
and Regulatory Matters, representing
Schering-Ploughs then current estimate to resolve this
matter. On August 29, 2006, Schering-Plough announced it
had reached an agreement with the U.S. Attorneys
Office for the District of Massachusetts and the
U.S. Department of Justice to settle the Massachusetts
Investigation for an aggregate amount of $435 million plus
interest. This settlement amount relates only to the
Massachusetts Investigation. The AWP investigations and
litigation are ongoing. During 2007, Schering-Plough made
payments totaling $435 million related to this settlement.
Employee termination costs: Employee
termination costs in 2005 consisted of $7 million
associated with a Voluntary Early Retirement Program (VERP) in
the U.S. during 2003 and $21 million of other employee
termination costs.
Asset impairment and other charges: For the
year ended December 31, 2005, Schering-Plough recognized
asset impairment and other charges of $16 million related
primarily to the consolidation of Schering-Ploughs
U.S. biotechnology organizations.
Equity
income
Sales of the Merck/Schering-Plough cholesterol joint venture
totaled $5.2 billion, $3.9 billion, and
$2.4 billion in 2007, 2006, and 2005, respectively. The
sales growth in 2007 was due primarily to higher market share
and market growth in the U.S. and continued expansion into
international markets. The sales growth in 2006 was due
primarily to an increase in market share.
41
The companies bear the costs of their own general sales forces
and commercial overhead in marketing joint venture products
around the world. In the U.S., Canada and Puerto Rico, the
cholesterol agreements provide for a reimbursement to each
company for physician details that are set on annual basis, and
in Italy, a contractual amount is included in the profit sharing
calculation that is not reimbursed. In the U.S., Canada and
Puerto Rico, this amount is equal to each companys
physician details multiplied by a contractual fixed fee.
Schering-Plough reports these amounts as part of equity income.
These amounts do not represent a reimbursement of specific,
incremental and identifiable costs for Schering-Ploughs
detailing of the cholesterol products in these markets. In
addition, these amounts are not reflective of
Schering-Ploughs sales effort related to the joint
venture, as Schering-Ploughs sales force and related costs
associated with the joint venture are generally estimated to be
higher.
Costs of the joint venture that the companies contractually
share are a portion of manufacturing costs, specifically
identified promotion costs (including direct-to-consumer
advertising and direct and identifiable out-of-pocket promotion)
and other agreed upon costs for specific services such as market
support, market research, market expansion, a specialty sales
force and physician education programs.
Certain specified research and development expenses are
generally shared equally by Schering-Plough and Merck. Under
certain conditions, as specified in the joint venture agreements
with Merck, Schering-Plough could be entitled to receive
reimbursements of its future research and development expenses
of up to $105 million. Additional information regarding the
joint venture with Merck is also included in Note 4,
Equity Income, under Item 8, Financial
Statements and Supplementary Data.
Equity income from the Merck/Schering-Plough joint venture
totaled $2.0 billion, $1.5 billion, and
$873 million in 2007, 2006, and 2005, respectively. The
increase in 2007 equity income as compared to 2006 reflected
higher market share in the U.S. and international sales
growth. The increase in 2006 equity income as compared to 2005
reflected continued strong sales of VYTORIN and ZETIA.
During 2005, Schering-Plough recognized milestones from Merck of
$20 million related to certain European approvals of
VYTORIN (ezetimibe/simvastatin) in 2005.
It should be noted that Schering-Plough incurs substantial
selling, general and administrative and other costs, which are
not reflected in equity income and instead are included in the
overall cost structure of Schering-Plough.
Provision
for income taxes
Tax expense was $258 million, $362 million, and
$228 million in 2007, 2006, and 2005, respectively. The
2007 tax provision included tax benefits of $89 million
related to the amortization of fair values of certain assets
acquired as part of the OBS acquisition. The 2006 income tax
provision primarily relates to foreign taxes. The 2005 tax
provision includes a benefit of $46 million related to an
IRS Notice issued in August 2005, which resulted in a reduction
of the previously accrued tax liability attributable to
repatriations under the American Jobs Creation Act of 2004
(AJCA). The tax provisions in 2007, 2006 and 2005 do not include
any benefit related to U.S. operating losses. During 2004,
Schering-Plough established a valuation allowance on its
net U.S. deferred tax assets, including the benefit of
U.S. operating losses, as management concluded that it is
not more likely than not that the benefit of the U.S. net
deferred tax assets can be realized. At December 31, 2007,
Schering-Plough continues to maintain a valuation allowance
against its U.S. net deferred tax assets. Schering-Plough
expects to report a U.S. Net Operating Loss (NOL)
carryforward of $1.7 billion on its tax return for the year
ended December 31, 2007. This U.S. NOL carryforward
could be materially reduced after examination of
Schering-Ploughs income tax returns by the Internal
Revenue Service (IRS).
In 2007, Schering-Plough generated approximately
$980 million in U.S. losses including the impact of
purchase accounting, however, due to differences between
financial and tax reporting, Schering-Plough expects to report a
minimal increase in its NOL on its 2007 U.S. tax return.
Schering-Plough implemented the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48) as of January 1,
2007. As required by FIN 48, the cumulative effect of
applying the provisions of the Interpretation was reported as an
adjustment to Schering-Ploughs retained earnings
42
balance as of January 1, 2007. Schering-Plough reduced its
January 1, 2007 retained earnings by $259 million as a
result of the adoption of FIN 48.
Schering-Ploughs unrecognized tax benefits result
primarily from the varying application of statutes, regulations
and interpretations and include exposures on intercompany terms
of cross border arrangements and utilization of cash held by
foreign subsidiaries (investment in U.S. property) as well
as Schering-Ploughs tax matters litigation (see
Note 20, Legal, Environmental and Regulatory
Matters, under Item 8, Financial Statements and
Supplemental Data, for additional information). At
January 1, and December 31, 2007, the total amount of
unrecognized tax benefits was $924 million and
$859 million, respectively, which includes reductions to
deferred tax assets carrying a full valuation allowance,
potential refund claims and tax liabilities. At January 1,
and December 31, 2007, approximately $645 million and
$535 million, respectively, of total unrecognized tax
benefits, if recognized, would affect the effective tax rate.
Management believes it is reasonably possible that total
unrecognized tax benefits could decrease over the next
twelve-month period by up to $615 million. This decrease
would be primarily attributable to a decision in the tax matter
currently being litigated in Newark District Court, possible
final resolution of Schering-Ploughs 1997 2002
examination at IRS Appeals and possible resolutions of various
other matters. However, the timing of the ultimate resolution of
Schering-Ploughs tax matters and the payment
and/or
receipt of related cash is dependent on a number of factors,
many of which are outside Schering-Ploughs control.
Schering-Plough includes interest expense or income as well as
potential penalties related to tax positions as a component of
income tax expense in the Statement of Consolidated Operations.
The total amount of accrued interest related to tax positions at
January 1, and December 31, 2007 was $193 million
and $197 million, respectively, and is included in other
accrued liabilities.
During the second quarter of 2007, the IRS completed its
examination of Schering-Ploughs
1997-2002
federal income tax returns. Schering-Plough is seeking
resolution of an issue raised during this examination through
the IRS administrative appeals process. Schering-Plough remains
open with the IRS for the 1997 2007 tax years. For
most of its other significant tax jurisdictions (both
U.S. state and foreign), Schering-Ploughs income tax
returns are open for examination for the period 2000 through
2007.
Net
(loss)/income available to common shareholders
Schering-Plough had a net (loss)/income available to common
shareholders of $(1.6) billion, $1.1 billion and
$183 million for 2007, 2006 and 2005, respectively. Net
loss available to common shareholders for 2007 included
approximately $4.0 billion of charges related to purchase
accounting for the OBS acquisition, including a
$3.8 billion acquired in-process research and development
charge. Net loss available to common shareholders for 2007
included the deduction of preferred stock dividends of
$118 million related to the 2004 and 2007 Preferred Stock.
Net income available to common shareholders for 2006 and 2005
included the deduction of preferred stock dividends of
$86 million, in each period, related to the 2004 Preferred
Stock. Net (loss)/income available to common shareholders for
2007, 2006, and 2005 also included special and acquisition
related charges and manufacturing streamlining costs of
approximately $84 million, $248 million, and
$294 million, respectively. See Note 3, Special
and Acquisition Related Charges and Manufacturing
Streamlining, under Item 8, Financial
Statements and Supplementary Data, for additional
information.
LIQUIDITY
AND FINANCIAL RESOURCES
Discussion
of Cash Flow
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Cash flow from operating activities
|
|
$
|
2,630
|
|
|
$
|
2,161
|
|
|
$
|
882
|
|
Cash flow from investing activities
|
|
|
(13,156
|
)
|
|
|
(2,908
|
)
|
|
|
(454
|
)
|
Cash flow from financing activities
|
|
|
10,089
|
|
|
|
(1,361
|
)
|
|
|
(633
|
)
|
43
Operating
Activities
In 2007, operating activities provided $2.6 billion of
cash, compared with net cash provided by operations of
$2.2 billion in 2006. The increase was primarily due to a
net realized gain of $510 million from foreign currency
options relating to the OBS acquisition, higher net sales and
equity income, partially offset by payments of $435 million
for the settlement of the Massachusetts Investigation and
$98 million for tax and interest due in connection with an
examination by the IRS of Schering-Ploughs
1997-2002
federal income tax returns.
During 2007, as part of an overall risk management strategy and
in consideration of various preliminary financing scenarios
associated with the acquisition of OBS, Schering-Plough
purchased euro-denominated currency options (derivatives) for
aggregate premiums of approximately $165 million and
received proceeds of $675 million upon the termination of
these options, resulting in a net realized gain of
$510 million. These derivatives were short-term (trading)
in nature and did not hedge a specific financing or investment
transaction. Accordingly, the cash impacts of these derivatives
have been classified as operating cash flows in the Statement of
Consolidated Cash Flows.
In 2006, net cash provided by operating activities was
$2.2 billion, an increase of $1.3 billion as compared
to 2005. The increase primarily resulted from higher net income
and the timing of operating cash payments and receipts. In 2005,
operating activities generated $882 million of cash
including payments of approximately $375 million to tax
authorities for tax liabilities related to the repatriation of
foreign earnings under the AJCA; and tax payments of
$239 million related to the settlement of certain tax
contingencies for the tax years 1993 through 1996.
Investing
Activities
Net cash used for investing activities during 2007 was
$13.2 billion, primarily consisting of $15.8 billion
of net cash used to purchase OBS. In addition, source of cash
for investing activities included a net reduction of short-term
investments of $3.3 billion partially offset by
$618 million of capital expenditures.
Net cash used for investing activities during 2006 was
$2.9 billion primarily related to the net purchases of
short-term investments of $2.4 billion previously invested
in cash equivalents and $458 million of capital
expenditures. Net cash used for investing activities during 2005
was $454 million, primarily related to $478 million of
capital expenditures and the purchase of intangible assets of
$51 million, partially offset by proceeds from sales of
property and equipment of $43 million and the net reduction
in short-term investments of $33 million.
Financing
Activities
Net cash provided by financing activities was $10.1 billion
for 2007, compared to cash used of $1.4 billion for the
same period in 2006. Net cash provided by financing activities
in 2007 included net proceeds on the issuance of common and
mandatory convertible preferred shares of approximately
$1.5 billion and $2.4 billion, respectively, and net
proceeds of approximately $6.4 billion on the issuance of
long-term debt. Net cash provided by financing activities also
included $225 million of proceeds from stock option
exercises offset by the payment of dividends on common and
preferred shares of $481 million.
Net cash used for financing activities during 2006 and 2005 was
$1.4 billion and $633 million, respectively. Uses of
cash for financing activities in 2006 and 2005 include the
payment of dividends on common and preferred shares of
$412 million and $410 million, respectively; the
repayment of $1.0 billion of bank debt and short-term
commercial paper borrowings in 2006; and $1.2 billion of
short-term commercial paper borrowings in 2005. Uses of cash for
financing activities in 2005 was partially offset by proceeds of
$900 million from bank debt incurred by a foreign
subsidiary related to funding of a portion of the repatriations
under the AJCA during 2005. This bank debt was fully repaid in
2006.
44
Other
Discussion of Cash Flows
Schering-Plough is moving forward with additional investments to
enhance its infrastructure and business and currently is in the
process of building a U.S. pharmaceutical sciences center
in New Jersey. Capital expenditures of approximately
$50 million and $40 million were made in 2007 and
2006, respectively, related to this center. Additional capital
expenditures of approximately $175 million are expected
over the next two years. This center will allow Schering-Plough
to streamline and integrate its drug development process, where
products are moved from the drug discovery pipeline to market.
There will be additional related expenditures to upgrade
equipment and staffing for this center.
At December 31, 2007, Schering-Plough had net debt (total
debt less cash, cash equivalents, short-term investments and
marketable securities) of $7.1 billion. Cash generated from
operations, available cash and short-term investments and
available credit facilities are expected to provide
Schering-Plough with the ability to fund cash needs for the
intermediate term.
Borrowings
and Credit Facilities
On September 17, 2007, Schering-Plough issued
$1.0 billion aggregate principal amount of
6.00 percent senior unsecured notes due 2017 and
$1.0 billion aggregate principal amount of
6.55 percent senior unsecured notes due 2037. The net
proceeds from this offering were approximately
$2.0 billion. Interest on the notes is payable
semi-annually. The effective interest rate on the
6.00 percent senior unsecured notes and the
6.55 percent senior unsecured notes, which incorporates the
initial discount and debt issuance fees, is 6.13 percent
and 6.67 percent, respectively. The interest rate payable
on these notes is not subject to adjustment. The notes generally
restrict Schering-Plough from creating or assuming liens or
entering into sale and leaseback transactions unless the
aggregate outstanding indebtedness secured by any such liens and
related to any such sale and leaseback transactions does not
exceed 10 percent of consolidated net tangible assets.
These notes are redeemable in whole or in part, at
Schering-Ploughs option at any time, at a redemption price
equal to the greater of (1) 100 percent of the
principal amount of such notes and (2) the sum of the
present values of the remaining scheduled payments of principal
and interest discounted to the redemption date on a semiannual
basis using the rate of Treasury Notes with comparable remaining
terms plus 25 basis points for the 2017 notes or
30 basis points for the 2037 notes. If a change of control
triggering event occurs, as defined in the prospectus, holders
of the notes will have the right to require Schering-Plough to
repurchase all or any part of the notes for a cash payment equal
to 101 percent of the aggregate principal amount of the
notes repurchased plus accrued and unpaid interest, if any, to
the date of purchase.
On October 1, 2007, Schering-Plough issued
Euro 500 million aggregate principal amount of
5.00 percent senior unsecured euro-denominated notes due
2010 and Euro 1.5 billion aggregate principal amount
of 5.375 percent senior unsecured euro-denominated notes
due 2014. The net proceeds from this offering were approximately
$2.8 billion. Interest on the notes is payable annually.
The effective interest rate on the 5.00 percent senior
unsecured euro-denominated notes and the 5.375 percent
senior unsecured euro-denominated notes, which incorporates the
initial discount, debt issuance fees and the impact of interest
rate hedges, is 5.10 percent and 5.46 percent,
respectively. The interest rate payable on these notes is not
subject to adjustment. The notes generally restrict
Schering-Plough from creating or assuming liens or entering into
sale and leaseback transactions unless the aggregate outstanding
indebtedness secured by any such liens and related to any such
sale and leaseback transactions does not exceed 10 percent
of consolidated net tangible assets. These notes are redeemable
in whole or in part, at Schering-Ploughs option at any
time, at a redemption price specified in the prospectus. If a
change of control triggering event occurs, as defined in the
prospectus, holders of the notes will have the right to require
Schering-Plough to repurchase all or any part of the notes for a
cash payment equal to 101 percent of the aggregate
principal amount of the notes repurchased plus accrued and
unpaid interest, if any, to the date of purchase.
Schering-Plough used the net proceeds from these notes to fund a
portion of the purchase price for the OBS acquisition.
On October 24, 2007, Schering-Plough entered into a
five-year senior unsecured euro-denominated term loan facility
with a syndicate of banks. On October 31, 2007,
Schering-Plough drew Euro 1.1 billion
($1.6 billion) on this term loan to fund a portion of the
purchase price for the OBS acquisition. This new term
45
loan has a floating interest rate and requires Schering-Plough
to maintain a net debt to total capital ratio of no more than
65 percent through 2009 and 60 percent thereafter, in
which net debt equals total debt less cash, cash equivalents,
short-term investments and marketable securities and total
capital equals the sum of total debt and total
shareholders equity excluding the cumulative effect of
acquired in-process research and development in connection with
any acquisition consummated after the closing of the term loan.
The term loan also generally restricts Schering-Plough from
creating or assuming liens or entering into sale and leaseback
transactions unless the aggregate outstanding indebtedness
secured by any such liens and related to any such sale and
leaseback transactions does not exceed 12 percent of
consolidated net tangible assets.
The reported U.S. dollar amounts of the outstanding debt
balance and interest expense on the euro-denominated notes and
euro-denominated term loan will fluctuate due to the impact of
foreign currency translation.
On November 26, 2003, Schering-Plough issued
$1.25 billion aggregate principal amount of
5.3 percent senior unsecured notes due 2013 and
$1.15 billion aggregate principal amount of
6.5 percent senior unsecured notes due 2033. The interest
rates payable on the notes are subject to adjustment and, in
connection with ratings downgrades in 2004, on December 1,
2004, the interest rate payable on the notes due 2013 increased
from 5.3 percent to 5.55 percent, and the interest
rate payable on the notes due 2033 increased from
6.5 percent to 6.75 percent. The interest rate payable
on a particular series of notes will return to 5.3 percent
and 6.5 percent, respectively, and the rate adjustment
provisions will permanently cease to apply if, the notes are
subsequently rated above Baa1 by Moodys and BBB+ by
S&P. If the rating assigned to the notes by either
Moodys or S&P is downgraded below A3 or A-,
respectively, the interest rate payable on that series of notes
would increase. See Note 14, Borrowings and Other
Commitments, under Item 8, Financial Statements
and Supplementary Data, for additional information.
On August 9, 2007, Schering-Plough entered into a
$2.0 billion revolving credit agreement with a syndicate of
banks and terminated its $1.5 billion credit facility that
was due to mature in May 2009. This credit facility has a
floating interest rate, matures in August 2012 and requires
Schering-Plough to maintain a net debt to total capital ratio of
no more than 65 percent through 2009 and 60 percent
thereafter, in which net debt equals total debt less cash, cash
equivalents, short-term investments and marketable securities
and total capital equals the sum of total debt and total
shareholders equity excluding the cumulative effect of
acquired in-process research and development in connection with
any acquisition consummated after the closing of the credit
facility. The credit facility also generally restricts
Schering-Plough from creating or assuming liens or entering into
sale and leaseback transactions unless the aggregate outstanding
indebtedness secured by any such liens and related to any such
sale and leaseback transactions does not exceed 12 percent
of consolidated net tangible assets. This credit line is
available for general corporate purposes and is considered as
support to Schering-Ploughs commercial paper borrowings.
Borrowings under this credit facility may be drawn by the
U.S. parent company or by its wholly-owned international
subsidiaries when accompanied by a parent guarantee. This
facility does not require compensating balances, however, a
nominal commitment fee is paid. As of December 31, 2007, no
borrowings were outstanding under this facility.
As of December 31, 2007 and 2006, short-term borrowings,
including the credit facilities mentioned above, totaled
$451 million and $242 million, respectively, including
outstanding commercial paper of $149 million as of both
dates. The weighted-average interest rate for short-term
borrowings at December 31, 2007 and 2006 was
7.9 percent and 6.4 percent, respectively.
Schering-Ploughs senior unsecured euro-denominated notes
and euro-denominated term loan have been designated as, and are
effective as, economic hedges of the net investment in a foreign
operation. In accordance with SFAS No. 52, Foreign
Currency Translation (SFAS 52), the foreign currency
transaction gains or losses on these euro-denominated debt
instruments are included in foreign currency translation
adjustment within other comprehensive income.
46
Credit
Ratings
Schering-Ploughs current unsecured senior credit ratings
and outlook are as follows:
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|
|
|
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|
|
|
|
Long-Term
|
|
Senior Unsecured Credit Ratings
|
|
Long-term
|
|
|
Short-term
|
|
|
Review Status
|
|
|
Moodys Investors Service
|
|
|
Baa1
|
|
|
|
P-2
|
|
|
|
Stable
|
|
Standard and Poors
|
|
|
A−
|
|
|
|
A-2
|
|
|
|
Stable
|
|
Fitch Ratings
|
|
|
BBB+
|
|
|
|
F-2
|
|
|
|
Stable
|
|
The short-term ratings discussed above have not significantly
affected Schering-Ploughs ability to issue or rollover its
outstanding commercial paper borrowings at this time. However,
Schering-Plough believes the ability of commercial paper
issuers, such as Schering-Plough, with one or more short-term
credit ratings of
P-2 from
Moodys,
A-2 from
S&P
and/or F-2
from Fitch to issue or rollover outstanding commercial paper
can, at times, be less than that of companies with higher
short-term credit ratings. In addition, the total amount of
commercial paper capacity available to these issuers is
typically less than that of higher-rated companies.
Schering-Ploughs sizable lines of credit with commercial
banks as well as cash and short-term investments held by
U.S. and international subsidiaries serve as alternative
sources of liquidity and to support its commercial paper program.
Schering-Ploughs credit ratings could decline below their
current levels. The impact of such decline could reduce the
availability of commercial paper borrowing and would increase
the interest rate on a portion of Schering-Ploughs short
and long-term debt. As discussed above, Schering-Plough believes
that existing cash and short-term investments, available credit
facilities and cash generated from operations will allow
Schering-Plough to fund its cash needs for the intermediate term.
Mandatory
Convertible Preferred Stock
On August 15, 2007, Schering-Plough issued
10,000,000 shares of 6 percent Mandatory
Convertible Preferred Stock (the 2007 Preferred Stock) with a
face value of $2.5 billion. Net proceeds to Schering-Plough
were approximately $2.4 billion after deducting
commissions, discounts and other underwriting expenses.
Schering-Plough used the net proceeds from the sale of the 2007
Preferred Stock to fund a portion of the purchase price for the
OBS acquisition.
Each share of the 2007 Preferred Stock will automatically
convert into between 7.4206 and 9.0909 common shares of
Schering-Plough depending on the average closing price of
Schering-Ploughs common shares over the 20 trading day
period ending on the third trading day prior to the mandatory
conversion date of August 13, 2010, as defined in the
prospectus. The preferred shareholders may elect to convert at
any time prior to August 13, 2010, at the minimum
conversion ratio of 7.4206 common shares per share of the 2007
Preferred Stock. Additionally, if at any time prior to the
mandatory conversion date the closing price of
Schering-Ploughs common shares exceeds $50.53 (for at
least 20 trading days within a period of 30 consecutive trading
days), Schering-Plough may elect to cause the conversion of all,
but not less than all, of the 2007 Preferred Stock then
outstanding at the same minimum conversion ratio of 7.4206
common shares for each share of 2007 Preferred Stock.
The 2007 Preferred Stock accrues dividends at an annual rate of
6 percent on shares outstanding. The dividends are
cumulative from the date of issuance and, to the extent
Schering-Plough is legally permitted to pay dividends and the
Board of Directors declares a dividend payable, Schering-Plough
will pay dividends on each dividend payment date. The dividend
payment dates are February 15, May 15, August 15 and
November 15 of each year, with the first dividend to be paid on
November 15, 2007.
During the year ended December 31, 2007, all shares of
6 percent Mandatory Convertible Preferred Stock issued
on August 10, 2004 (the 2004 Preferred Stock) were
converted into 64,584,929 shares of Schering-Plough common
stock.
47
Equity
Issuance and Treasury Shares
On August 15, 2007, Schering-Plough issued 57,500,000
common shares from treasury shares at $27.50 per share. Net
proceeds to Schering-Plough were approximately $1.5 billion
after deducting commissions, discounts and other underwriting
expenses. Schering-Plough used the net proceeds from the sale of
the common shares to fund a portion of the purchase price for
the OBS acquisition. See Note 2, Acquisition,
under Item 8, Financial Statements and Supplementary
Data.
Contractual
Obligations and Off-Balance Sheet Arrangements
Schering-Plough has various contractual obligations that are
reported as liabilities in the Consolidated Balance Sheets and
others that are not required to be recognized as liabilities
such as certain purchase commitments and other executory
contracts. The following table summarizes payments due by period
under Schering-Ploughs known contractual obligations at
December 31, 2007.
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Payments Due by Period
|
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|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than
|
|
|
|
|
|
|
|
|
than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in millions)
|
|
|
Short-term borrowings and current portion of long-term debt
|
|
$
|
461
|
|
|
$
|
461
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Long-term debt obligations(1)
|
|
|
9,019
|
|
|
|
|
|
|
|
752
|
|
|
|
1,657
|
|
|
|
6,610
|
|
Operating lease obligations
|
|
|
907
|
|
|
|
338
|
|
|
|
330
|
|
|
|
168
|
|
|
|
71
|
|
Purchase obligations(2)
|
|
|
2,976
|
|
|
|
2,736
|
|
|
|
214
|
|
|
|
21
|
|
|
|
5
|
|
Deferred compensation plan obligations
|
|
|
192
|
|
|
|
50
|
|
|
|
23
|
|
|
|
63
|
|
|
|
56
|
|
Other obligations(3)
|
|
|
765
|
|
|
|
363
|
|
|
|
262
|
|
|
|
22
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,320
|
|
|
$
|
3,948
|
|
|
$
|
1,581
|
|
|
$
|
1,931
|
|
|
$
|
6,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations include the aggregate principal
amount of all long-term debt and excludes interest obligations.
See Note 14, Borrowings and Other Commitments,
under Item 8, Financial Statements and Supplementary
Data, for additional information. |
|
(2) |
|
Purchase obligations include advertising and research contracts,
capital expenditure commitments and other inventory and expense
items, and unless material research milestone payments are
likely to be paid do not include potential milestone payments
since such payments are contingent on the occurrence of certain
events. The table also excludes those research contracts that
are cancelable by Schering-Plough without penalty. Other
purchase obligations consist of both cancelable and
non-cancelable items. |
|
(3) |
|
This caption includes obligations, based on undiscounted
amounts, for estimated payments under certain of
Schering-Ploughs pension plans, preferred stock dividends,
managements estimate of the current portion of
unrecognized tax benefits and other contractual obligations. |
REGULATORY
AND COMPETITIVE ENVIRONMENT IN WHICH SCHERING-PLOUGH
OPERATES
Schering-Plough is subject to the jurisdiction of various
national, state and local regulatory agencies. These regulations
are described in more detail in Part I, Item I,
Business, of this
10-K.
Regulatory compliance is complex, as regulatory standards
(including Good Clinical Practices, Good Laboratory Practices
and Good Manufacturing Practices) vary by jurisdiction and are
constantly evolving. Regulatory compliance is also costly.
Regulatory compliance also impacts the timing needed to bring
new drugs to market and to market drugs for new indications.
Further, failure to comply with regulations can result in delays
in the approval of drugs, seizure or recall of drugs, suspension
or revocation of the authority necessary for the production and
sale of drugs, fines and other civil or criminal sanctions.
48
Regulatory compliance, and the cost of compliance failures, can
have a material impact on Schering-Ploughs results of
operations, its cash flows or financial condition.
Much is still unknown about the science of human health and with
every drug there are benefits and risks. Societal and government
pressures are constantly shifting between the demand for
innovation to meet urgent unmet medical needs and adversity to
risk. These pressures impact the regulatory environment and the
market for Schering-Ploughs products.
Regulatory
Compliance and Pharmacovigilance
Consent
Decree
On August 2, 2007, Schering-Plough announced the
dissolution of the Consent Decree by the U.S. District
Court for the District of New Jersey. See Note 19,
Consent Decree, under Item 1, Financial
Statements.
Regulatory
Inspections
Schering-Plough is subject to pharmacovigilance reporting
requirements in many countries and other jurisdictions,
including the U.S., the EU, and the EU member states. The
requirements differ from jurisdiction to jurisdiction, but all
include requirements for reporting adverse events that occur
while a patient is using a particular drug, in order to alert
the drugs manufacturer and the governmental agency to
potential problems.
During 2003, pharmacovigilance inspections by officials of the
British and French medicines agencies conducted at the request
of the European Medicines Agency (EMEA) cited serious
deficiencies in reporting processes. Schering-Plough has
continued to work on its long-term action plan to rectify the
deficiencies and has provided regular updates to the EMEA.
During the fourth quarter 2005, local UK and EMEA regulatory
authorities conducted a follow up inspection to assess
Schering-Ploughs implementation of its action plan. In the
first quarter of 2006, these authorities also inspected the
U.S.-based
components of Schering-Ploughs pharmacovigilance system.
The inspectors acknowledged that progress had been made since
2003, but also continued to note significant concerns with the
quality systems supporting Schering-Ploughs
pharmacovigilance processes. Similarly, in a follow up
inspection of Schering-Ploughs clinical trial practices in
the UK, inspectors identified issues with respect to
Schering-Ploughs management of clinical trials and related
pharmacovigilance practices.
In February 2006, Schering-Plough began the Global Clinical
Harmonization Program for building clinical excellence (in trial
design, execution and tracking), which will strengthen
Schering-Ploughs scientific and compliance rigor on a
global basis. In 2007, certain aspects of the Global Clinical
Harmonization Program were implemented and work is expected to
continue in 2008 and for several years. In addition, during the
fourth quarter 2007, the local UK regulatory authority conducted
a follow-up
inspection which confirmed that the corrective actions committed
to by Schering-Plough following the 2006 inspection of
Schering-Ploughs UK-based clinical trial operations had in
fact been completed. In early January 2008, the local UK
regulatory authority returned for a
follow-up
inspection of Schering-Ploughs UK-pharmacovigilance
operations. This inspection likewise confirmed that a number of
corrective actions had been completed since the last inspection
and noted the number of actions Schering-Plough had taken as set
forth in Schering-Ploughs periodic updates to the EMEA and
noted a limited number of observations which Schering-Plough is
addressing. Schering-Plough intends to continue upgrading
skills, processes and systems in clinical practices and
pharmacovigilance. Schering-Plough remains committed to
accomplish this work and to invest significant resources in this
area.
Schering-Plough does not know what action, if any, the EMEA or
national authorities will take in response to the inspections.
Possible actions include further inspections, demands for
improvements in reporting systems, criminal sanctions against
Schering- Plough
and/or
responsible individuals and changes in the conditions of
marketing authorizations for Schering-Ploughs products.
49
Regulatory
Compliance and Post-Marketing Surveillance
Schering-Plough engages in clinical trial research in many
countries around the world. These clinical trial research
activities must comply with stringent regulatory standards and
are subject to inspection by U.S., EU and local country
regulatory authorities. Failure to comply with current Good
Clinical Practices or other applicable laws or regulations can
result in delays in approval of clinical trials, suspension of
ongoing clinical trials, delays in approval of marketing
authorizations, criminal sanctions against Schering-Plough
and/or
responsible individuals, and changes in the conditions of
marketing authorizations for Schering-Ploughs products.
Clinical trials and post-marketing surveillance of certain
marketed drugs of competitors within the industry have raised
safety concerns that have led to recalls, withdrawals or adverse
labeling of marketed products. In addition, these situations
have raised concerns among some prescribers and patients
relating to the safety and efficacy of pharmaceutical products
in general. For the past several years, these occurrences have
increased. Recently media mischaracterization of early topline
results from the ENHANCE clinical trail led to some concerns
among patients and prescribers about ZETIA and VYTORIN (see
discussion under Early 2008 Developments in the
Executive Summary of this Management Discussion and Analysis of
Financial Condition and Results of Operations).
Schering-Ploughs personnel have regular, open dialogue
with the FDA and other regulators and review product labels and
other materials on a regular basis and as new information
becomes known.
Following this wave of recent product withdrawals by other
companies and other significant safety issues, health
authorities such as the FDA, the EMEA and the PMDA have
continued to increase their focus on safety when assessing the
benefit/risk balance of drugs. Some health authorities appear to
have become more cautious when making decisions about
approvability of new products or indications and are
re-reviewing select products which are already marketed, adding
further to the uncertainties in the regulatory processes. There
is also greater regulatory scrutiny, especially in the U.S., on
advertising and promotion and in particular direct-to-consumer
advertising.
Similarly, major health authorities, including the FDA, EMEA and
PMDA, have also increased collaboration amongst themselves,
especially with regard to the evaluation of safety and
benefit/risk information. Media attention has also increased. In
the current environment, a health authority regulatory action in
one market, such as a safety labeling change, may have
regulatory, prescribing and marketing implications in other
markets to an extent not previously seen.
Some health authorities, such as the PMDA in Japan, have
publicly acknowledged a significant backlog in workload due to
resource constraints within their agency. This backlog has
caused long regulatory review times for new indications and
products and has added to the uncertainty in predicting approval
timelines in these markets. While the PMDA has committed to
correcting the backlog and has made some progress over the last
year, it is expected to continue for the foreseeable future.
These and other uncertainties inherent in government regulatory
approval processes, including, among other things, delays in
approval of new products, formulations or indications, may also
affect Schering-Ploughs operations. The effect of
regulatory approval processes on operations cannot be predicted.
Schering-Plough has nevertheless achieved a significant number
of important regulatory approvals since 2004, including
approvals for VYTORIN, NOXAFIL, CLARINEX D-24, CLARINEX
REDITABS, CLARINEX D-12, SUBOXONE and new indications for
TEMODAR and NASONEX. Other significant approvals since 2004
include ASMANEX DPI (Dry Powder for Inhalation) in the U.S.,
PEGINTRON, ZETIA, TEMODAR and ESMERON/ESLAX in Japan, and new
indications for REMICADE. Schering-Plough also has a number of
significant regulatory submissions filed in major markets
awaiting approval.
Pricing
Pressures
As described more specifically in Note 20, Legal,
Environmental and Regulatory Matters, under Item 1,
Financial Statements, the pricing, sales and
marketing programs and arrangements, and related business
50
practices of Schering-Plough and other participants in the
health care industry are under increasing scrutiny from federal
and state regulatory, investigative, prosecutorial and
administrative entities. These entities include the Department
of Justice and its U.S. Attorneys Offices, the Office
of Inspector General of the Department of Health and Human
Services, the FDA, the Federal Trade Commission (FTC) and
various state Attorneys General offices. Many of the health care
laws under which certain of these governmental entities operate,
including the federal and state anti-kickback statutes and
statutory and common law false claims laws, have been construed
broadly by the courts and permit the government entities to
exercise significant discretion. In the event that any of those
governmental entities believes that wrongdoing has occurred, one
or more of them could institute civil or criminal proceedings,
which, if instituted and resolved unfavorably, could subject
Schering-Plough to substantial fines, penalties and injunctive
or administrative remedies, including exclusion from government
reimbursement programs. Schering-Plough also cannot predict
whether any investigations will affect its marketing practices
or sales. Any such result could have a material adverse impact
on Schering-Ploughs results of operations, cash flows,
financial condition, or its business.
In the U.S., many of Schering-Ploughs pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
groups seek price discounts. In the U.S. market,
Schering-Plough and other pharmaceutical manufacturers are
required to provide statutorily defined rebates to various
government agencies in order to participate in Medicaid, the
veterans health care program and other government-funded
programs. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 contains a prescription drug benefit
for individuals who are eligible for Medicare. This prescription
drug benefit became effective on January 1, 2006 and is
resulting in increased use of generics and increased purchasing
power of those negotiating on behalf of Medicare recipients.
In most international markets, Schering-Plough operates in an
environment of government mandated cost-containment programs.
Several governments have placed restrictions on physician
prescription levels and patient reimbursements; emphasized
greater use of generic drugs; and enacted across-the-board price
cuts as methods to control costs.
Since Schering-Plough is unable to predict the final form and
timing of any future domestic or international governmental or
other health care initiatives, including the passage of laws
permitting the importation of pharmaceuticals into the U.S.,
their effect on operations and cash flows cannot be reasonably
estimated. Similarly, the effect on operations and cash flows of
decisions of government entities, managed care groups and other
groups concerning formularies and pharmaceutical reimbursement
policies cannot be reasonably estimated.
Competition
The market for pharmaceutical products is competitive.
Schering-Ploughs operations may be affected by
technological advances of competitors, industry consolidation,
patents granted to competitors, competitive combination
products, new products of competitors, new information from
clinical trials of marketed products or post-marketing
surveillance and generic competition as Schering-Ploughs
products mature. In addition, patent positions are increasingly
being challenged by competitors, and the outcome can be highly
uncertain. An adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products. The effect on operations of competitive
factors and patent disputes cannot be predicted.
2008
OUTLOOK
Schering-Plough does not provide numeric guidance. However, the
following outlook may be helpful to readers in assessing future
prospects:
See the earlier discussion of matters relating to the
Merck/Schering-Plough cholesterol joint ventures ENHANCE
clinical trial. IMS prescription data (U.S.) shows that, to date
in 2008, prescriptions for VYTORIN and ZETIA have declined.
Although the prescription data has shown some early signs of
stabilization, there are limitations to this prescription data
and it is too early to discern any trends from this data. It is
likely that there will be weekly fluctuations in IMS reported
prescription volumes for VYTORIN and ZETIA before any
51
trend can be identified. Wholesalers, retail chains and other
trade buyers may respond to these fluctuations by changing their
buying patterns or reducing their inventory levels.
It is too early to determine the business and financial impact
of these lower prescription volumes for 2008 or longer-term.
However, first quarter 2008 Merck/Schering-Plough cholesterol
joint venture sales of VYTORIN and ZETIA in the U.S. will
likely be negatively impacted. Schering-Plough accounts for the
joint venture under the equity method.
Schering-Plough has been successful in advancing several
research and development projects into their late stage. These
projects will require sizable resources to complete. Research
and development expenses are expected to continue to increase
over the next several years as a result of the expanded
pipeline, the pipeline projects added through the OBS
acquisition and the need for larger, more frequent, and longer
clinical trials in the current global regulatory environment.
The risks described in Item 1A. Risk Factors
could cause actual results to differ materially from the
expectations provided in this section.
IMPACT OF
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. The standard defines fair
value, establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. The standard
codifies the definition of fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. The standard clarifies the principle that fair
value should be based on the assumptions market participants
would use when pricing the asset or liability and establishes a
fair value hierarchy that prioritizes the information used to
develop those assumptions. For calendar year companies the
standard is effective beginning January 1, 2008 except for
non-financial items measured on a non-recurring basis for which
it is effective beginning January 1, 2009. Based on
Schering-Ploughs current financial position the impact of
this standard on the consolidated financial statements is not
expected to be material.
In November 2006, the FASB issued Emerging Issues Task Force
Issue (EITF)
No. 06-10,
Accounting for Deferred Compensation and Postretirement
Benefits Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements, which is effective for calendar
year companies on January 1, 2008. The Task Force concluded
that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement in accordance with
either FASB Statement No. 106 or APB Opinion No. 12
based on the substantive agreement with the employee. The Task
Force also concluded that an employer should recognize and
measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement.
The impact of this standard on the consolidated financial
statements is not expected to be material.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement
No. 115 (SFAS 159), which permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS 159 also includes an amendment to
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, which applies to all
entities with available-for-sale and trading securities. This
statement is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007.
Based on Schering-Ploughs current financial position the
impact of this standard on the consolidated financial statements
is not expected to be material.
In June 2007, the FASB issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities, which is effective for calendar year companies
on January 1, 2008. The Task Force concluded that
nonrefundable advance payments for goods or services that will
be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
52
delivered or the services are performed, or when the goods or
services are no longer expected to be provided. The impact of
this standard on the consolidated financial statements is not
expected to be material.
In December 2007, the FASB issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements, which is
effective for calendar year companies on January 1, 2009.
The Task Force clarified the manner in which costs, revenues and
sharing payments made to, or received by a partner in a
collaborative arrangements should be presented in the income
statement and set forth certain disclosures that should be
required in the partners financial statements.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In December 2007, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB 110), which permits
entities, under certain circumstances, to continue to use the
simplified method of estimating the expected term of
plain vanilla options as discussed in SAB No. 107 and
in accordance with SFAS No. 123 (Revised 2004),
Share-Based Payment. The guidance in this release is
effective January 1, 2008. The impact of this standard on
the consolidated financial statements is not expected to be
material.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations. For calendar
year companies, the standard is applicable to new business
combinations occurring on or after January 1, 2009.
SFAS 141 (R) requires an acquiring entity to recognize
all the assets acquired and liabilities assumed in a transaction
at the acquisition-date fair value with limited exceptions. Most
significantly, SFAS 141 (R) will require that
acquisition costs generally be expensed as incurred, certain
acquired contingent liabilities will be recorded at fair value,
and acquired in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset
at the acquisition date. The standard will also impact certain
unresolved matters related to purchase transactions consummated
prior to the effective date of the standard. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
In December 2007, the FASB also issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51,
which is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15,
2008. The standard establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The following accounting policies and estimates are considered
significant because changes to certain judgments and assumptions
inherent in these policies could affect Schering-Ploughs
financial statements:
|
|
|
|
|
Revenue Recognition
|
|
|
|
Rebates, Discounts and Returns
|
|
|
|
Provision for Income Taxes
|
|
|
|
Acquisitions and Impairment of Goodwill, Intangible Assets and
Property
|
|
|
|
Accounting for Pensions and Post-retirement Benefit Plans
|
|
|
|
Accounting for Legal and Regulatory Matters
|
Revenue
Recognition
Schering-Ploughs pharmaceutical products are sold to
direct purchasers, which include wholesalers, retailers and
certain health maintenance organizations. Price discounts and
rebates on such sales are paid to federal and state agencies,
other indirect purchasers and other market participants such as
managed care organizations that indemnify beneficiaries of
health plans for their pharmaceutical costs and pharmacy benefit
managers.
53
Schering-Plough recognizes revenue when title and risk of loss
pass to the purchaser and when reliable estimates of the
following can be determined:
i. commercial discount and rebate arrangements;
ii. rebate obligations under certain federal and state
governmental programs; and
iii. sales returns in the normal course of business.
When recognizing revenue, Schering-Plough estimates and records
the applicable commercial and governmental discounts and rebates
as well as sales returns that have been or are expected to be
granted or made for products sold during the period. These
amounts are deducted from sales for that period. If reliable
estimates of these items cannot be made; Schering-Plough defers
the recognition of revenue. Estimates recorded in prior periods
are re-evaluated as part of this process.
Revenue recognition for new products is based on specific facts
and circumstances including estimated acceptance rates from
established products with similar marketing characteristics.
Absent the ability to make reliable estimates of rebates,
discounts and returns, Schering-Plough would defer revenue
recognition.
Product discounts granted are based on the terms of arrangements
with wholesalers, managed-care organizations and government
purchasers and certain other market conditions. Rebates are
estimated based on sales and contract terms, historical
experience, trend analysis and projected market conditions in
the various markets served. Schering-Plough evaluates market
conditions for products or groups of products primarily through
the analysis of third party demand and market research data as
well as internally generated information. Data and information
provided by purchasers and obtained from third parties are
subject to inherent limitations as to their accuracy and
validity.
Sales returns are estimated and recorded based on historical
sales and returns information, analysis of recent wholesale
purchase information, consideration of stocking levels at
wholesalers and forecasted demand amounts. Products that exhibit
unusual sales or return patterns due to dating, competition
including expected generic introductions, or other marketing
matters are specifically investigated and analyzed as part of
the formulation of return reserves.
Schering-Ploughs agreements with the major
U.S. pharmaceutical wholesalers address a number of
commercial issues, such as product returns, timing of payment,
processing of chargebacks and the quantity of inventory held by
these wholesalers. With respect to the quantity of inventory
held by these wholesalers, these agreements provide a financial
disincentive for these wholesalers to acquire quantities of
product in excess of what is necessary to meet current patient
demand. Through the use of these agreements, Schering-Plough
expects to avoid situations where Schering-Ploughs
shipments of product are not reflective of current demand.
Rebates,
Discounts and Returns
Schering-Ploughs rebate accruals for Federal and State
governmental programs, including Medicaid and Medicare
Part D, at December 31, 2007 and 2006 were
$114 million and $115 million, respectively.
Commercial discounts, returns, and other rebate accruals at
December 31, 2007 and 2006 were $412 million and
$371 million, respectively. These accruals are established
in the period the related revenue was recognized, resulting in a
reduction to sales and the establishment of liabilities, which
are included in total current liabilities, or in the case of
returns and other receivable adjustments, an allowance provided
against accounts receivable.
In the case of the governmental rebate programs,
Schering-Ploughs payments involve interpretations of
relevant statutes and regulations. These interpretations are
subject to challenges and changes in interpretive guidance by
governmental authorities. The result of such a challenge or
change could affect whether the estimated governmental rebate
amounts are ultimately sufficient to satisfy
Schering-Ploughs obligations. Additional information on
governmental inquiries focused in part on the calculation of
rebates is contained in Note 20, Legal, Environmental
and Regulatory Matters, under Item 8, Financial
Statements and Supplementary Data. In addition, it is
possible that, as a result of governmental challenges or changes
in interpretive guidance, actual rebates could materially exceed
amounts accrued.
54
The following summarizes the activity in the accounts related to
accrued rebates, sales returns and discounts:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006(1)
|
|
|
|
(Dollars in millions)
|
|
|
Accrued Rebates/Returns/Discounts, Beginning of Period
|
|
$
|
486
|
|
|
$
|
522
|
|
OBS accruals acquired November 19, 2007
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Rebates
|
|
|
609
|
|
|
|
474
|
|
Adjustment to prior-year estimates
|
|
|
(31
|
)
|
|
|
(56
|
)
|
Payments
|
|
|
(569
|
)
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Returns
|
|
|
142
|
|
|
|
124
|
|
Adjustment to prior-year estimates
|
|
|
(24
|
)
|
|
|
(8
|
)
|
Returns
|
|
|
(137
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Discounts
|
|
|
752
|
|
|
|
605
|
|
Adjustment to prior-year estimates
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Discounts granted
|
|
|
(763
|
)
|
|
|
(588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Accrued Rebates/Returns/Discounts, End of Period
|
|
$
|
526
|
|
|
$
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2006, the adjustment to
prior-year estimates for rebates includes $24 million
related to the reversal of previously accrued rebate amounts
recorded in 2005 and 2004 for the U.S. Governments TRICARE
Retail Pharmacy Program that a U.S. Federal Court ruled
pharmaceutical manufacturers were not obligated to pay. |
In formulating and recording the above accruals, management
utilizes assumptions and estimates that include historical
experience, wholesaler data, the projection of market
conditions, the estimated lag time between sale and payment of a
rebate, utilization estimates, and forecasted product demand
amounts as discussed under the critical accounting policy
entitled Revenue Recognition.
As part of its review of these accruals, management performs a
sensitivity analysis that considers differing assumptions, which
are most subject to judgment in its rebate accrual calculation.
Based upon Schering-Ploughs sensitivity analysis,
reasonably possible changes to assumptions related to rebate
accruals could favorably or unfavorably impact 2008 net
sales and income before taxes in an amount consistent with 2007.
Provision
for Income Taxes
Schering-Plough implemented the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48) as of January 1,
2007. As required by FIN 48, the cumulative effect of
applying the provisions of the Interpretation was reported as an
adjustment to Schering-Ploughs retained earnings balance
as of January 1, 2007. Schering-Plough reduced its
January 1, 2007 retained earnings by $259 million as a
result of the adoption of FIN 48.
Schering-Ploughs unrecognized tax benefits result
primarily from the varying application of statutes, regulations
and interpretations and include exposures on intercompany terms
of cross border arrangements and utilization of cash held by
foreign subsidiaries (investment in U.S. property) as well
as Schering-Ploughs tax matters litigation (see
Note 20, Legal, Environmental and Regulatory
Matters). At January 1, and December 31, 2007,
the total amount of unrecognized tax benefits was
$924 million and $859 million, respectively, which
includes reductions to deferred tax assets carrying a full
valuation allowance, potential refund claims and tax
liabilities. At January 1, and December 31, 2007,
approximately $645 million and $535 million,
respectively, of total unrecognized tax benefits, if recognized,
would affect the effective tax rate. Management believes it is
reasonably possible that total unrecognized tax benefits could
decrease over the
55
next twelve-month period by up to $615 million. This
decrease would be primarily attributable to a decision in the
tax matter currently being litigated in Newark District Court,
possible final resolution of the taxpayers
1997 2002 examination at IRS Appeals and possible
resolutions of various other matters. However, the timing of the
ultimate resolution of Schering-Ploughs tax matters and
the payment
and/or
receipt of related cash is dependent on a number of factors,
many of which are outside Schering-Ploughs control.
Schering-Plough includes interest expense or income as well as
potential penalties on uncertain tax positions as a component of
income tax expense in the Statement of Consolidated Operations.
The total amount of accrued interest related to uncertain tax
positions at January 1, and December 31, 2007 was
$193 million and $197 million, respectively, and is
included in other accrued liabilities.
Schering-Plough records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not
to be realized. Schering-Plough has considered ongoing prudent
and feasible tax planning strategies in assessing the need for a
valuation allowance. In the event Schering-Plough were to
determine that it would be able to realize all or an additional
portion of its net deferred tax assets, an adjustment to the
valuation allowance would increase income in the period such
determination is made. Likewise, should Schering-Plough
subsequently determine that it would not be able to realize all
or an additional portion of its remaining net deferred tax asset
in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Acquisitions
and Impairment of Goodwill, Intangible Assets and
Property
Schering-Plough accounts for acquired businesses using the
purchase method of accounting which requires that the assets
acquired and liabilities assumed be recorded at the date of
acquisition at their respective fair values. The consolidated
financial statements and results of operations reflect an
acquired business after the completion of the acquisition. The
cost to acquire a business, including transaction costs, is
allocated to the underlying net assets of the acquired business
based on their respective fair values. Any excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Amounts allocated to acquired
in-process research and development are expensed at the date of
acquisition. Intangible assets are amortized based on sales over
the expected life of the asset. The judgments made in
determining the estimated fair value assigned to each class of
assets acquired and liabilities assumed, as well as asset lives,
can materially impact results of operations. Useful lives are
determined based on the expected future period of benefit of the
asset, which considers various characteristics of the asset,
including projected cash flows.
Intangible assets representing the capitalized costs of
purchased goodwill, patents, licenses and other forms of
intellectual property totaled $9.9 billion at
December 31, 2007. Intangible assets and goodwill increased
significantly during 2007 due to the acquisition of OBS. Annual
amortization expense in each of the next five years is estimated
to be approximately $570 million per year based on the
intangible assets recorded as of December 31, 2007. The
value of these assets is subject to continuing scientific,
medical and marketplace uncertainty. For example, if a marketed
pharmaceutical product were to be withdrawn from the market for
safety reasons or if marketing of a product could only occur
with pronounced warnings, amounts capitalized for such a product
may need to be reduced due to impairment. Events giving rise to
impairment are an inherent risk in the pharmaceutical industry
and cannot be predicted. Management regularly reviews intangible
assets for possible impairment.
Certain of Schering-Ploughs manufacturing sites operate
below capacity. Overall costs of operating manufacturing sites
have significantly increased due to the Consent Decree and other
compliance activities. Schering-Ploughs manufacturing cost
base is relatively fixed. Actions on the part of management to
significantly reduce Schering-Ploughs manufacturing
infrastructure involve complex issues. As a result, shifting
products between manufacturing plants can take many years due to
construction and regulatory requirements, including revalidation
and registration requirements. Management continues to review
the carrying value of certain manufacturing assets for
indications of impairment. Future events and decisions may lead
to additional asset impairments
and/or
related costs.
56
Accounting
for Pension and Post-retirement Benefit Plans
Pension and other post-retirement benefit plan information for
financial reporting purposes is calculated using actuarial
assumptions. Schering-Plough assesses its pension and other
post-retirement benefit plan assumptions on a regular basis. In
evaluating these assumptions, Schering-Plough considers many
factors, including evaluation of the discount rate, expected
rate of return on plan assets, healthcare cost trend rate,
retirement age assumption, Schering-Ploughs historical
assumptions compared with actual results and analysis of current
market conditions and asset allocations (see Note 8,
Retirement Plans and Other Post-retirement Benefits,
under Item 8, Financial Statements and Supplementary
Data, for additional information).
Discount rates used for pension and other post-retirement
benefit plan calculations are evaluated annually and modified to
reflect the prevailing market rates at the measurement date of a
high-quality fixed income debt instrument portfolio that would
provide the future cash flows needed to pay the benefits
included in the benefit obligations as they come due. In
countries where debt instruments are thinly traded, estimates
are based on available market rates.
Actuarial assumptions are based upon managements best
estimates and judgment. With other assumptions held constant, an
increase of 50 basis points in the discount rate would have
an estimated favorable impact of $43 million on net pension
and post-retirement benefit cost and an increase of
50 basis points in the expected rate of return assumption
would have an estimated favorable impact of $17 million on
net pension and post-retirement benefit cost. With other
assumptions held constant, a decrease of 50 basis points in
the discount rate would have an estimated unfavorable impact of
$41 million on net pension and post-retirement benefit cost
and a decrease of 50 basis points in the expected rate of
return assumption would have an estimated unfavorable impact of
$17 million on net pension and post-retirement benefit
cost. These sensitivities are based on estimated net pension and
post-retirement benefit cost in 2008 which includes the annual
impact of OBS plans.
The expected rates of return for the pension and other
post-retirement benefit plans represent the average rates of
return to be earned on plan assets over the period during which
the benefits included in the benefit obligation are to be paid.
In developing the expected rate of return, Schering-Plough
determines expected returns for each of the major asset classes,
principally equities, fixed income and real estate. The return
expectations for these asset classes are based on assumptions
for economic growth and inflation, which are supported by
long-term historical data as well as Schering-Ploughs
actual experience of return on plan assets. The expected
portfolio performance also reflects the contribution of active
management as appropriate.
Unrecognized net loss amounts reflect experience differentials
primarily relating to differences between expected and actual
returns on plan assets as well as the effects of changes in
actuarial assumptions. Expected returns are based primarily on a
calculated market-related value of assets. Under this
methodology, asset gains/losses resulting from actual returns
that differ from Schering-Ploughs expected returns for the
majority of the assets are realized in the market-related value
of assets ratably over a five-year period. Total unrecognized
net loss amounts in excess of certain thresholds are amortized
into net pension and other post-retirement benefit cost over the
average remaining service life of employees.
The targeted investment portfolio of Schering-Ploughs
U.S. Retirement Plan is allocated 65 percent to
equities; 28 percent to fixed income investments; and
7 percent to real estate. The targeted investment portfolio
of Schering-Ploughs U.S. other post-retirement
benefit plan is allocated 70 percent to equities and
30 percent to fixed income investments. The
portfolios equity weightings are consistent with the
long-term nature of the plans benefit obligations. For
non-U.S. pension
plans, the targeted investment portfolio varies based on the
duration of pension liabilities and local governmental rules and
regulations.
Substantially all investments in equities and fixed income are
valued based on quoted public market values. All investments in
real estate are valued based on periodic appraisals.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132R. Effective
December 31, 2006, Schering-Plough accounts for its
retirement and other post-retirement benefit plans in accordance
with SFAS No. 158. Shareholders equity at
December 31, 2006, was reduced by
57
approximately 7 percent upon the adoption of
SFAS No. 158. See Note 8, Retirement Plans
and Other Post-Retirement Benefits, under Item 8,
Financial Statements and Supplemental Data, for
additional information. SFAS 158 allows an extended
adoption date for the requirement to have Schering-Ploughs
year-end date as the measurement date for all defined benefit
pension and other postretirement plans. For the plans which had
measurement dates other than year-end prior to the adoption of
SFAS 158, Schering-Plough adopted the year-end measurement
date effective with 2007. The impact on the consolidated
financial statements related to this measurement date change was
not material.
Accounting
for Legal and Regulatory Matters
Management judgments and estimates are required in the
accounting for legal and regulatory matters on an ongoing basis
including insurance coverages. Schering-Plough reviews the
status of all claims, investigations and legal proceedings on an
ongoing basis. From time to time, Schering-Plough may settle or
otherwise resolve these matters on terms and conditions
management believes are in the best interests of
Schering-Plough. Resolution of any or all claims, investigations
and legal proceedings, individually or in the aggregate, could
have a material adverse effect on Schering-Ploughs results
of operations, cash flows or financial condition.
MARKET
RISK DISCLOSURE
Schering-Plough is exposed to market risk primarily from changes
in foreign currency exchange rates and, to a lesser extent, from
interest rates and equity prices. The following describes the
nature of these risks.
Foreign
Currency Exchange Risk
Schering-Plough has subsidiaries in more than 55 countries. In
2007, sales outside the U.S. accounted for approximately
64 percent of global sales. Virtually all these sales were
denominated in currencies of the local country. As such,
Schering-Ploughs reported profits and cash flows are
exposed to changing exchange rates.
To date, management has not deemed it cost effective to engage
in a formula-based program of hedging the profits and cash flows
of international operations using derivative financial
instruments. Because Schering-Ploughs international
subsidiaries purchase significant quantities of inventory
payable in U.S. dollars, managing the level of inventory
and related payables and the rate of inventory turnover can
provide a level of protection against adverse changes in
exchange rates. The risk of adverse exchange rate change is also
mitigated by the fact that Schering-Ploughs international
operations are widespread.
In addition, at any point in time, Schering-Ploughs
international subsidiaries hold financial assets and liabilities
that are denominated in currencies other than U.S. dollars.
These financial assets and liabilities consist primarily of
short-term, third-party and intercompany receivables and
payables. Changes in exchange rates affect the translated value
of these financial assets and liabilities. Gains or losses that
arise from translation do not affect net income.
On occasion, Schering-Plough has used derivatives to hedge
specific foreign currency exposures. During 2007, as part of an
overall risk management strategy and in consideration of various
preliminary financing scenarios associated with the acquisition
of OBS, Schering-Plough purchased euro-denominated currency
options to mitigate its exposure in the event there was a
significant strengthening in the Euro as compared to the
U.S. Dollar. Schering-Plough purchased the options for
aggregate premiums of approximately $165 million and
received proceeds of $675 million upon the termination of
these options, resulting in a net realized gain of
$510 million. These derivatives did not qualify for hedge
accounting in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended (SFAS 133). Accordingly, the
gain on these derivatives was recognized in the Statement of
Consolidated Operations. As of December 31, 2007, there
were no open foreign currency option contracts.
Schering-Ploughs senior unsecured euro-denominated notes
and euro-denominated term loan have been designated as, and are
effective as, economic hedges of the net investment in a foreign
operation. In accordance with SFAS 52, the foreign currency
transaction gains or losses on these euro-denominated debt
instruments are included in foreign currency translation
adjustment within other comprehensive income.
58
Interest
Rate and Equity Price Risk
Financial assets exposed to changes in interest rates
and/or
equity prices are primarily cash equivalents, short-term
investments and the debt and equity securities held in qualified
and non-qualified trusts for employee benefits. These assets
totaled more than $2.3 billion at December 31, 2007.
For cash equivalents and short-term investments, a
10 percent decrease in interest rates would decrease
interest income by approximately $36 million. For
securities held in qualified and non-qualified trusts, due to
the long-term nature of the liabilities that these trust assets
will fund, Schering-Ploughs exposure to market risk is
deemed to be low.
Financial obligations exposed to variability in interest rates
are primarily short-term borrowings and the long-term
floating-rate euro-denominated term loan.
Schering-Plough has long-term fixed rate debt outstanding, on
which a 10 percent decrease in interest rates would
increase the fair value of the debt by approximately
$256 million.
During 2007, Schering-Plough executed a series of interest rate
swaps in anticipation of financing the acquisition of OBS. The
objective of the swaps was to hedge the interest rate payments
to be made on future issuances of debt. As such, the swaps were
designated as cash flow hedges of future interest payments, and
in accordance with SFAS 133, the effective portion of the
gains or losses on the hedges are reported in other
comprehensive income and any ineffective portion is reported in
operations. In connection with the euro-denominated debt
issuances as described in Note 14, Borrowings and
Other Commitments, under Item 8, Financial
Statements and Supplementary Data, portions of the swaps
were deemed ineffective and Schering-Plough recognized a
$7 million loss in the Statement of Consolidated
Operations. The effective portion of the swaps of
$12 million was recorded in other comprehensive income and
is being recognized as interest expense over the life of the
related debt. As of December 31, 2007, there were no open
interest rate swaps.
Disclosure
Notice
Cautionary
Statements Under the Private Securities Litigation Reform Act of
1995
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this report and
other written reports and oral statements made from time to time
by Schering-Plough may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements do not relate strictly to
historical or current facts and are based on current
expectations or forecasts of future events. You can identify
these forward-looking statements by their use of words such as
anticipate, believe, could,
estimate, expect, forecast,
project, intend, plan,
potential, will, and other similar words
and terms. In particular, forward-looking statements include
statements relating to future actions, ability to access the
capital markets, pending acquisitions, prospective products or
product approvals, timing and conditions of regulatory
approvals, patent and other intellectual property protection,
future performance or effectiveness of marketed products and
pipeline drugs, trends in performance including trends in the
cholesterol market, sales efforts, research and development
programs and anticipated spending, estimates of rebates,
discounts and returns, expenses and programs to reduce expenses,
the outcome of contingencies such as litigation and
investigations, growth strategy, expected synergies and
financial results.
Any or all forward-looking statements here or in other
publications may turn out to be wrong. There are no guarantees
about Schering-Ploughs financial and operational
performance or the performance of Schering-Ploughs stock.
Schering-Plough does not assume the obligation to update any
forward-looking statement. Many factors could cause actual
results to differ from Schering-Ploughs forward-looking
statements. These factors include inaccurate assumptions and a
broad variety of other risks and uncertainties, including some
that are known and some that are not. Although it is not
possible to predict or identify all such factors,
Schering-Plough refers you to Item 1A, Risk
Factors, of this report, which we incorporate herein by
reference, for identification of important factors with respect
to risks and uncertainties.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
See the Market Risk Disclosures as set forth in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
59
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Financial Statements
60
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
(Amounts
in millions, except per share figures)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
$
|
12,690
|
|
|
$
|
10,594
|
|
|
$
|
9,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
4,405
|
|
|
|
3,697
|
|
|
|
3,346
|
|
Selling, general and administrative
|
|
|
5,468
|
|
|
|
4,718
|
|
|
|
4,374
|
|
Research and development
|
|
|
2,926
|
|
|
|
2,188
|
|
|
|
1,865
|
|
Acquired in-process research and development
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
Other (income)/expense, net
|
|
|
(683
|
)
|
|
|
(135
|
)
|
|
|
5
|
|
Special and acquisition-related charges
|
|
|
84
|
|
|
|
102
|
|
|
|
294
|
|
Equity income
|
|
|
(2,049
|
)
|
|
|
(1,459
|
)
|
|
|
(873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes
|
|
|
(1,215
|
)
|
|
|
1,483
|
|
|
|
497
|
|
Income tax expense
|
|
|
258
|
|
|
|
362
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income before cumulative effect of a change in
accounting principle
|
|
|
(1,473
|
)
|
|
|
1,121
|
|
|
|
269
|
|
Cumulative effect of a change in accounting principle, net of tax
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(1,473
|
)
|
|
|
1,143
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
118
|
|
|
|
86
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income available to common shareholders
|
|
$
|
(1,591
|
)
|
|
$
|
1,057
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings available to common shareholders before
cumulative effect of a change in accounting principle
|
|
$
|
(1.04
|
)
|
|
$
|
0.69
|
|
|
$
|
0.12
|
|
Cumulative effect of a change in accounting principle, net of tax
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share
|
|
$
|
(1.04
|
)
|
|
$
|
0.71
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings available to common shareholders before
cumulative effect of a change in accounting principle
|
|
$
|
(1.04
|
)
|
|
$
|
0.69
|
|
|
$
|
0.12
|
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share
|
|
$
|
(1.04
|
)
|
|
$
|
0.71
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
0.26
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
61
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
(Amounts
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(1,473
|
)
|
|
$
|
1,143
|
|
|
$
|
269
|
|
Cumulative effect of a change in accounting principle, net of tax
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income before cumulative effect of a change in
accounting principle, net of tax
|
|
$
|
(1,473
|
)
|
|
$
|
1,121
|
|
|
$
|
269
|
|
Adjustments to reconcile net (loss)/income before cumulative
effect of change in accounting principle, net of tax to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
861
|
|
|
|
568
|
|
|
|
486
|
|
Accrued share-based compensation
|
|
|
211
|
|
|
|
168
|
|
|
|
|
|
Special and acquisition related charges and payments
|
|
|
(430
|
)
|
|
|
65
|
|
|
|
265
|
|
Purchases of derivative currency options
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
Change in fair value of currency options
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
Proceeds from derivative instruments
|
|
|
675
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
Payment to U.S. taxing authorities
|
|
|
(98
|
)
|
|
|
|
|
|
|
(239
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
21
|
|
|
|
(241
|
)
|
|
|
(209
|
)
|
Inventories
|
|
|
(132
|
)
|
|
|
(25
|
)
|
|
|
(92
|
)
|
Prepaid expenses and other assets
|
|
|
(1
|
)
|
|
|
16
|
|
|
|
168
|
|
Accounts payable and other liabilities
|
|
|
(259
|
)
|
|
|
395
|
|
|
|
241
|
|
Income taxes payable
|
|
|
94
|
|
|
|
94
|
|
|
|
(7
|
)
|
Foreign currency transaction exchange loss
|
|
|
101
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,630
|
|
|
|
2,161
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(618
|
)
|
|
|
(458
|
)
|
|
|
(478
|
)
|
Dispositions of property and equipment
|
|
|
2
|
|
|
|
9
|
|
|
|
43
|
|
Acquisition, net of cash acquired
|
|
|
(15,789
|
)
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(1,136
|
)
|
|
|
(6,648
|
)
|
|
|
(2,608
|
)
|
Maturities of short-term investments
|
|
|
4,444
|
|
|
|
4,199
|
|
|
|
2,641
|
|
Other, net
|
|
|
(59
|
)
|
|
|
(10
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(13,156
|
)
|
|
|
(2,908
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid to common shareholders
|
|
|
(382
|
)
|
|
|
(326
|
)
|
|
|
(324
|
)
|
Cash dividends paid to preferred shareholders
|
|
|
(99
|
)
|
|
|
(86
|
)
|
|
|
(86
|
)
|
Proceeds from preferred stock issuance, net
|
|
|
2,438
|
|
|
|
|
|
|
|
|
|
Proceeds from common stock issuance, net
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt, net
|
|
|
6,430
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
900
|
|
Payments of short-term borrowings
|
|
|
(29
|
)
|
|
|
(1,035
|
)
|
|
|
(1,183
|
)
|
Stock option exercises
|
|
|
225
|
|
|
|
83
|
|
|
|
60
|
|
Other, net
|
|
|
(31
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used for) financing activities
|
|
|
10,089
|
|
|
|
(1,361
|
)
|
|
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
50
|
|
|
|
7
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(387
|
)
|
|
|
(2,101
|
)
|
|
|
(217
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
2,666
|
|
|
|
4,767
|
|
|
|
4,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,279
|
|
|
$
|
2,666
|
|
|
$
|
4,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
157
|
|
|
$
|
170
|
|
|
$
|
159
|
|
Cash paid for income taxes (see Note 7)
|
|
|
389
|
|
|
|
234
|
|
|
|
592
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
62
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
(Amounts
in millions, except per share figures)
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,279
|
|
|
$
|
2,666
|
|
Short-term investments
|
|
|
32
|
|
|
|
3,267
|
|
Accounts receivable, less allowances: 2007, $261; 2006, $237
|
|
|
2,841
|
|
|
|
1,804
|
|
Inventories
|
|
|
4,073
|
|
|
|
1,676
|
|
Deferred income taxes
|
|
|
349
|
|
|
|
266
|
|
Prepaid expenses and other current assets
|
|
|
1,272
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,846
|
|
|
|
10,423
|
|
Property, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
326
|
|
|
|
67
|
|
Buildings and improvements
|
|
|
4,634
|
|
|
|
3,387
|
|
Equipment
|
|
|
4,503
|
|
|
|
3,240
|
|
Construction in progress
|
|
|
891
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,354
|
|
|
|
7,321
|
|
Less accumulated depreciation
|
|
|
3,338
|
|
|
|
2,956
|
|
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
7,016
|
|
|
|
4,365
|
|
Goodwill
|
|
|
2,937
|
|
|
|
206
|
|
Other intangible assets, net
|
|
|
7,004
|
|
|
|
286
|
|
Other assets
|
|
|
1,353
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
29,156
|
|
|
$
|
16,071
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,762
|
|
|
$
|
1,254
|
|
Short-term borrowings and current portion of long-term debt
|
|
|
461
|
|
|
|
242
|
|
Income taxes
|
|
|
617
|
|
|
|
323
|
|
Accrued compensation
|
|
|
995
|
|
|
|
794
|
|
Other accrued liabilities
|
|
|
2,208
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,043
|
|
|
|
4,162
|
|
Long-term Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
9,019
|
|
|
|
2,414
|
|
Deferred income taxes
|
|
|
1,701
|
|
|
|
122
|
|
Other long-term liabilities
|
|
|
2,008
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
12,728
|
|
|
|
4,001
|
|
Commitments and contingent liabilities (Note 20)
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
2004 mandatory convertible preferred shares
$1 par value; $50 per share face value; issued 0 at
December 31, 2007 and 29 at December 31, 2006
|
|
|
|
|
|
|
1,438
|
|
2007 mandatory convertible preferred shares
$1 par value; $250 per share face value issued 10 at
December 31, 2007 and 0 at December 31, 2006
|
|
|
2,500
|
|
|
|
|
|
Common shares authorized shares: 2,400,
$.50 par value; issued: 2,111 at December 31, 2007 and
2,034 at December 31, 2006
|
|
|
1,055
|
|
|
|
1,017
|
|
Paid-in capital
|
|
|
4,815
|
|
|
|
1,661
|
|
Retained earnings
|
|
|
7,856
|
|
|
|
10,119
|
|
Accumulated other comprehensive loss
|
|
|
(534
|
)
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,692
|
|
|
|
13,363
|
|
Less treasury shares: 2007, 490; 2006, 547; at cost
|
|
|
5,307
|
|
|
|
5,455
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
10,385
|
|
|
|
7,908
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
29,156
|
|
|
$
|
16,071
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
63
SCHERING-PLOUGH
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Mandatory
|
|
|
Mandatory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
Share-
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Treasury
|
|
|
hensive
|
|
|
holders
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Loss
|
|
|
Equity
|
|
|
Balance January 1, 2005
|
|
$
|
1,438
|
|
|
$
|
|
|
|
$
|
1,015
|
|
|
$
|
1,234
|
|
|
$
|
9,613
|
|
|
$
|
(5,444
|
)
|
|
$
|
(300
|
)
|
|
$
|
7,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
(160
|
)
|
Minimum pension liability, net of tax, per
SFAS No. 87/88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(324
|
)
|
|
|
|
|
|
|
|
|
|
|
(324
|
)
|
Dividends on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
Stock incentive plans and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
$
|
1,438
|
|
|
$
|
|
|
|
$
|
1,015
|
|
|
$
|
1,416
|
|
|
$
|
9,472
|
|
|
$
|
(5,438
|
)
|
|
$
|
(516
|
)
|
|
$
|
7,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
1,143
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
94
|
|
Minimum pension liability, net of tax, per
SFAS No. 87/88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
67
|
|
Unrealized gain on investments available for sale, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
(326
|
)
|
Dividends on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
Accrued dividends on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
Adjustment of pension and other-post-retirement liabilities upon
the adoption of SFAS No. 158, net of tax of $25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
|
|
(521
|
)
|
Stock incentive plans and other
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
245
|
|
|
|
(3
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
$
|
1,438
|
|
|
$
|
|
|
|
$
|
1,017
|
|
|
$
|
1,661
|
|
|
$
|
10,119
|
|
|
$
|
(5,455
|
)
|
|
$
|
(872
|
)
|
|
$
|
7,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
(259
|
)
|
Comprehensive (loss)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,473
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
210
|
|
Pension and other-post-retirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
138
|
|
Derivative interest rate instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Unrealized gain on investments available for sale, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,438
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,380
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
1,537
|
|
Conversion of preferred stock
|
|
|
(1,438
|
)
|
|
|
|
|
|
|
32
|
|
|
|
1,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 158 measurement date provisions, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
Cash dividends on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
(382
|
)
|
Dividends on preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
Accrued dividends on common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Stock incentive plans and other
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
430
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
|
|
|
$
|
2,500
|
|
|
$
|
1,055
|
|
|
$
|
4,815
|
|
|
$
|
7,856
|
|
|
$
|
(5,307
|
)
|
|
$
|
(534
|
)
|
|
$
|
10,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
64
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Overview
Schering-Plough is an innovation-driven, science-centered global
health care company. Through its own biopharmaceutical research
and collaborations with partners, Schering-Plough creates
therapies that help save and improve lives around the world.
Schering-Plough applies its
research-and-development
platform to human prescription and consumer products as well as
to animal health products.
In November 2007, Schering-Plough acquired Organon BioSciences
N.V. (OBS), a company that discovers, develops and manufactures
human prescription and animal health products. See Note 2,
Acquisitions, for additional information.
Principles
of Consolidation
The consolidated financial statements include Schering-Plough
Corporation and its subsidiaries (Schering-Plough). Intercompany
balances and transactions are eliminated. The accounts of OBS
have been included as part of Schering-Ploughs results
from the date of acquisition (November 19, 2007).
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an ongoing basis,
Schering-Plough evaluates its estimates which are based on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual
results could differ from those estimates.
Equity
Method of Accounting
Schering-Plough accounts for its share of activity from the
Merck/Schering-Plough joint venture (the joint venture) with
Merck & Co., Inc. (Merck) using the equity method of
accounting as Schering-Plough has significant influence over the
joint ventures operating and financial policies.
Accordingly, Schering-Ploughs net sales do not include
sales from the joint venture, and Schering-Ploughs share
of earnings in the joint venture is included in equity income in
determining consolidated net income/(loss). Equity income from
the joint venture is included in the Human Prescription
Pharmaceuticals segment.
Revenue from the sales of VYTORIN and ZETIA are recognized by
the joint venture when title and risk of loss has passed to the
customer. Equity income from the joint venture excludes any
profit arising from transactions between Schering-Plough and the
joint venture until such time as there is an underlying profit
realized by the joint venture in a transaction with a party
other than Schering-Plough or Merck. See Note 4,
Equity Income, for additional information regarding
this joint venture.
Cash
and Cash Equivalents
Cash and cash equivalents include operating cash and highly
liquid investments with original maturities of three months or
less, including highly-rated money market accounts.
Short-term
Investments
Short-term investments are carried at their fair value and are
classified as available-for-sale. These investments consist of
certificates of deposit and commercial paper with maturities of
less than a year.
65
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined by using the
last-in,
first-out (LIFO) method for a substantial portion of inventories
located in the U.S. The cost of all other inventories is
determined by the
first-in,
first-out method (FIFO).
Depreciation
of Property and Equipment
Depreciation is provided over the estimated useful lives of the
properties, generally by use of the straight-line method.
Useful lives of new property acquisitions are generally as
follows:
|
|
|
|
|
Asset Category
|
|
Years
|
|
|
Buildings
|
|
|
40
|
|
Building Improvements
|
|
|
25
|
|
Equipment
|
|
|
3-15
|
|
Schering-Plough reviews the carrying value of property and
equipment for indications of impairment in accordance with
Statement of Financial Accounting Standard (SFAS) 144,
Accounting for the Impairment and Disposal of Long-Lived
Assets.
Depreciation expense was $404 million in 2007,
$443 million in 2006 and $362 million in 2005.
Depreciation expense in 2006 included accelerated depreciation
related to the manufacturing streamlining of $93 million.
Foreign
Currency Translation
The net assets of most of Schering-Ploughs international
subsidiaries are translated into U.S. dollars using current
exchange rates. The U.S. dollar effects that arise from
translating the net assets of these subsidiaries at changing
rates are recorded in the foreign currency translation account,
which is included in other comprehensive income/(loss) and are
reflected as a separate component of Shareholders Equity.
For the remaining international subsidiaries, non-monetary
assets and liabilities are translated using historical rates,
while monetary assets and liabilities are translated at current
rates, with the U.S. dollar effects of rate changes
included in the statements of consolidated operations.
Exchange gains and losses arising from translating intercompany
balances of a long-term investment nature are recorded in the
foreign currency translation account. Transactional exchange
gains and losses are included in other (income)/expense, net.
Revenue
Recognition
Schering-Ploughs pharmaceutical products are sold to
direct purchasers which include wholesalers, retailers and
certain health maintenance organizations. Price discounts and
rebates on such sales are paid to federal and state agencies,
other indirect purchasers and other market participants such as
managed care organizations that indemnify beneficiaries of
health plans for their pharmaceutical costs and pharmacy benefit
managers.
Schering-Plough recognizes revenue when title and risk of loss
pass to the purchaser and when reliable estimates of the
following can be determined:
i. commercial discount and rebate arrangements;
ii. rebate obligations under certain federal and state
governmental programs; and
iii. sales returns in the normal course of business.
66
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When recognizing revenue, Schering-Plough estimates and records
the applicable commercial and governmental discounts and rebates
as well as sales returns that have been or are expected to be
granted or made for products sold during the period. These
amounts are deducted from sales for that period. If reliable
estimates of these items cannot be made, Schering-Plough defers
the recognition of revenue. Estimates recorded in prior periods
are re-evaluated as part of this process.
Earnings
Per Common Share
Diluted earnings/(loss) per common share is computed by dividing
net income/(loss) available to common shareholders plus
preferred stock dividends for the dilutive effect of any
mandatory convertible preferred stock by the sum of the weighted
average number of common shares outstanding plus the dilutive
effect of shares issuable through deferred stock units and the
exercise of stock options and any dilutive effect of shares
issuable upon conversion of Schering-Ploughs mandatory
convertible preferred stock.
Basic earnings/(loss) per common share is computed by dividing
net income/(loss) available to common shareholders by the
weighted average number of common shares outstanding.
Goodwill
and Other Intangible Assets
Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets, requires that
intangible assets acquired either individually or with a group
of other assets be initially recognized and measured based on
fair value. An intangible with a finite life is amortized over
its useful life, while an intangible with an indefinite life,
including goodwill, is not amortized.
The Company assesses the recoverability of the carrying value of
its goodwill and other intangible assets with indefinite useful
lives annually or whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be fully
recoverable. Recoverability of goodwill is measured at the
reporting unit level based on a two-step approach. First, the
carrying amount of the reporting unit is compared to the fair
value as estimated by the future net discounted cash flows
expected to be generated by the reporting unit. To the extent
that the carrying value of the reporting unit exceeds the fair
value of the reporting unit, a second step would be performed,
wherein the reporting units assets and liabilities are
fair valued. To the extent that the reporting units
carrying value of goodwill exceeds its implied fair value of
goodwill, impairment exists and would be recognized.
Recoverability of other intangible assets with indefinite useful
lives is measured by a comparison of the carrying amount of the
intangible assets to the fair value of the respective intangible
assets. Any excess of the carrying value of the intangible
assets over the fair value of the intangible assets would be
recognized as an impairment loss.
Schering-Plough conducts its annual impairment testing of
goodwill at October 1 each year. Based on the impairment
tests performed, there was no impairment of goodwill in 2007,
2006 or 2005; however, there can be no assurance that future
goodwill or indefinite lived assets impairment tests will not
result in a charge to the Statement of Consolidated Operations.
In 2007, Schering-Ploughs goodwill and other intangible
asset balances increased significantly due to the acquisition of
OBS. See Note 2, Acquisition, and Note 12,
Goodwill and Other Intangible Assets, for additional
information.
Other
Assets
Included in other assets is capitalized software of
$278 million and $246 million at December 31,
2007 and 2006, respectively. Amortization expense were
$89 million, $76 million, and $71 million in
2007, 2006, and 2005, respectively.
67
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Schering-Plough implemented the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48) as of January 1, 2007.
Under FIN 48, in order to recognize an uncertain tax
benefit, the taxpayer must be more likely than not of sustaining
the position, and the measurement of the benefit is calculated
as the largest amount that is more than 50 percent likely
to be realized upon resolution of the benefit.
Deferred income taxes are recognized for the future tax effects
of temporary differences between the financial and income tax
reporting basis of Schering-Ploughs assets and liabilities
based on enacted tax laws and rates.
Accounting
for Share-Based Compensation
Prior to January 1, 2006, Schering-Plough accounted for its
stock-based compensation arrangements using the intrinsic value
method. No share-based employee compensation cost was reflected
in the statements of consolidated operations, other than for
Schering-Ploughs deferred stock units and performance
plans, as stock options granted under all other plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant.
Effective January 1, 2006, Schering-Plough accounts for all
share-based compensation in accordance with
SFAS No. 123 (Revised 2004) Share-Based
Payment (SFAS 123R). See Note 5,
Share-Based Compensation, for additional information.
Shipping
and Handling Expenses
Shipping expenses are classified as selling, general and
administrative expenses in the Consolidated Statement of
Operations.
Impact
of Other Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. The standard defines fair
value, establishes a framework for measuring fair value in
accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. The standard
codifies the definition of fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. The standard clarifies the principle that fair
value should be based on the assumptions market participants
would use when pricing the asset or liability and establishes a
fair value hierarchy that prioritizes the information used to
develop those assumptions. For calendar year companies the
standard is effective beginning January 1, 2008 except for
non-financial items measured on a non-recurring basis for which
it is effective beginning January 1, 2009. Based on
Schering-Ploughs current financial position the impact of
this standard on the consolidated financial statements is not
expected to be material.
In November 2006, the FASB issued Emerging Issues Task Force
Issue (EITF)
No. 06-10,
Accounting for Deferred Compensation and Postretirement
Benefits Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements, which is effective for calendar
year companies on January 1, 2008. The Task Force concluded
that an employer should recognize a liability for the
postretirement benefit related to a collateral assignment
split-dollar life insurance arrangement in accordance with
either FASB Statement No. 106 or APB Opinion No. 12
based on the substantive agreement with the employee. The Task
Force also concluded that an employer should recognize and
measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement.
The impact of this standard on the consolidated financial
statements is not expected to be material.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement
No. 115 (SFAS 159), which permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS 159 also
68
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
includes an amendment to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, which applies to all entities with
available-for-sale and trading securities. This statement is
effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007. Based on
Schering-Ploughs current financial position the impact of
this standard on the consolidated financial statements is not
expected to be material.
In June 2007, the FASB issued EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities, which is effective for calendar year companies
on January 1, 2008. The Task Force concluded that
nonrefundable advance payments for goods or services that will
be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the related goods are
delivered or the services are performed, or when the goods or
services are no longer expected to be provided. The impact of
this standard on the consolidated financial statements is not
expected to be material.
In December 2007, the FASB issued EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements, which is
effective for calendar year companies on January 1, 2009.
The Task Force clarified the manner in which costs, revenues and
sharing payments made to, or received by a partner in a
collaborative arrangements should be presented in the income
statement and set forth certain disclosures that should be
required in the partners financial statements.
Schering-Plough is currently assessing the potential impacts of
implementing this standard.
In December 2007, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin 110 (SAB 110), which
permits entities, under certain circumstances, to continue to
use the simplified method of estimating the expected
term of plain options as discussed in SAB No. 107 and
in accordance with SFAS 123R The guidance in this release
is effective January 1, 2008. The impact of this standard
on the consolidated financial statements is not expected to be
material.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations.
(SFAS 141R) For calendar year companies, the standard is
applicable to new business combinations occurring on or after
January 1, 2009. SFAS 141R requires an acquiring
entity to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited exceptions. Most significantly, SFAS 141R will
require that acquisition costs generally be expensed as
incurred, certain acquired contingent liabilities will be
recorded at fair value, and acquired in-process research and
development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date. The
standard will also impact certain unresolved matters related to
purchase transactions consummated prior to the effective date of
the standard. Schering-Plough is currently assessing the
potential impacts of implementing this standard.
In December 2007, the FASB also issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51,
which is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15,
2008. The standard establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. Schering-Plough is
currently assessing the potential impacts of implementing this
standard.
Schering-Plough acquired OBS for a purchase price of
approximately Euro 11 billion in cash, or
approximately $16.1 billion (including legal and
professional fees) on November 19, 2007 (the Acquisition
Date). This acquisition added further diversification of
marketed products, including two new therapeutic areas
(Womens Health and Central Nervous System), as well as
significant strength in Animal Health products and the R&D
pipeline. The purchase method of accounting was used to account
for the transaction in accordance with SFAS No. 141,
Business Combinations. The operating results of OBS
are included in Schering-Ploughs consolidated financial
statements for the period subsequent to the Acquisition Date.
69
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides pro forma financial information for
the years ended December 31, 2007 and 2006 as if the
acquisition had occurred as of the beginning of each period
presented:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions except per share data)
|
|
|
|
(unaudited)
|
|
|
Net sales
|
|
$
|
16,853
|
|
|
$
|
15,079
|
|
Net loss before cumulative effect of a change in accounting
principle
|
|
|
(2,500
|
)
|
|
|
(3,987
|
)
|
Net loss available to common shareholders
|
|
|
(2,712
|
)
|
|
|
(4,201
|
)
|
Diluted loss per common share
|
|
|
(1.72
|
)
|
|
|
(2.73
|
)
|
Basic loss per common share
|
|
|
(1.72
|
)
|
|
|
(2.73
|
)
|
The pro forma financial information for both periods presented
includes amortization of the
step-up of
inventory of $1.1 billion and an acquired in-process
research and development charge of $3.8 billion, which are
non-recurring charges directly attributable to the accounting
for the acquisition. The pro forma financial information also
includes the effect of purchase accounting adjustments such as
additional amortization expense from the acquired identifiable
intangible assets and depreciation from the
step-up of
property. No effect has been given in the pro forma financial
information for synergistic benefits that may be realized or
costs related to the integration of OBS. The pro forma financial
information should not be considered indicative of actual
results that would have been achieved had this acquisition been
consummated on the dates indicated and does not purport to
indicate results of operations as of any future date or for any
future period.
The preliminary allocation of the purchase price of OBS on
November 19, 2007 is as follows:
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Cash
|
|
$
|
330
|
|
Current assets (excluding inventories)
|
|
|
1,288
|
|
Inventories
|
|
|
2,404
|
|
Property
|
|
|
2,501
|
|
Identifiable intangible assets(1)
|
|
|
6,793
|
|
Goodwill(2)
|
|
|
2,711
|
|
Other-non current assets
|
|
|
750
|
|
Acquired in-process research and development (IPR&D)(3)
|
|
|
3,754
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
20,531
|
|
|
|
|
|
|
Acquisition related liabilities(4)
|
|
$
|
151
|
|
Other current liabilities
|
|
|
1,633
|
|
Deferred tax liabilities
|
|
|
2,145
|
|
Other-non current liabilities
|
|
|
483
|
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
4,412
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
16,119
|
|
|
|
|
|
|
This allocation of the purchase price is subject to finalization
of Schering-Ploughs management analysis of the fair value
of the assets acquired (including assets related to pension
plans) and liabilities assumed of OBS as of the Acquisition
Date. The final allocation of the purchase price may result in
additional adjustments to the recorded amounts of assets and
liabilities and may also result in adjustments to depreciation,
amortization and acquired in-process research and development.
The adjustments arising out of the finalization of the purchase
price allocation will not impact cash flows. However, such
adjustments could result in material increases or decreases to
net income/(loss) available to common shareholders. Further
revisions to the purchase price allocation will be made as
additional information becomes available. The final allocation
is expected to be completed as soon as practicable but no later
than 12 months after the Acquisition Date.
70
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(1) The preliminary purchase price allocation to
identifiable intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Dollars, in millions
|
|
|
Amortization Period (years)
|
|
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
4,021
|
|
|
|
11
|
|
Trademarks
|
|
|
2,772
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
6,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average life for the $6.8 billion of total
intangibles is approximately 15 years. The intangible
assets have no significant residual value. There were no
acquired intangible assets that were determined to have an
indefinite life.
(2) $1.8 billion of the goodwill has been assigned to
the Human Prescription Pharmaceuticals segment and
$888 million has been assigned to the Animal health
segment. None of the goodwill is deductible for income tax
purposes.
(3) The preliminary value of $3.8 billion assigned to
acquired IPR&D was charged to operations in the fourth
quarter of 2007. This charge was associated with research
projects in animal health and research projects in the
womens health, central nervous system and anesthesia
therapeutic areas of human health. The amount was determined by
using discounted cash flow projections of identified research
projects for which technological feasibility had not been
established and for which there was no alternative future use.
The discount rates used ranged from 14 percent to
18 percent. The projected launch dates following FDA or
other regulatory approval are years 2008 through 2013, at which
time Schering-Plough expects these projects to begin to generate
cash flows. The cost to complete the research projects will
depend on whether the projects are brought to their final stages
of development and are ultimately submitted to the FDA or other
regulatory agencies for approval. As of December 31, 2007,
the estimated cost to complete projects near the final stages of
development was in excess of $700 million. All of the
research and development projects considered in the valuation
are subject to the normal risks and uncertainties associated
with demonstrating the safety and efficacy required to obtain
FDA or other regulatory approvals.
(4) Included in acquisition related liabilities are
involuntary termination benefits and costs to exit certain
activities of OBS.
In conjunction with the OBS acquisition, Schering-Plough agreed
to divest certain assets as part of regulatory reviews in the
U.S. and Europe. These assets have been classified as held for
sale and are included in other current assets in the
consolidated balance sheet and are not material.
|
|
3.
|
SPECIAL
AND ACQUISITION RELATED CHARGES AND MANUFACTURING
STREAMLINING
|
2007
Special and Acquisition Related
Charges
During the year ended December 31, 2007, Schering-Plough
incurred $84 million of special and acquisition-related
charges, comprised of $61 million of integration-related
costs for the OBS acquisition and $23 million of severance
charges as part of integration activities.
2006
Manufacturing Streamlining
During 2006, Schering-Plough implemented changes to its
manufacturing operations in Puerto Rico and New Jersey that have
streamlined its global supply chain and further enhanced
Schering-Ploughs long-term competitiveness. These changes
resulted in the phase-out and closure of Schering-Ploughs
manufacturing operations in Manati, Puerto Rico, and additional
workforce reductions in Las Piedras, Puerto Rico, and New
71
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Jersey. In total, these actions resulted in the elimination of
over 1,000 positions. These actions yielded an annualized cost
savings of approximately $100 million.
Special
charges
Special charges in 2006 related to the changes in
Schering-Ploughs manufacturing operations totaled
$102 million. These charges consisted of approximately
$47 million of severance and $55 million of fixed
asset impairments.
Cost
of sales
Included in 2006 cost of sales was approximately
$146 million consisting of $93 million of accelerated
depreciation, $46 million of inventory write-offs, and
$7 million of other charges related to the closure of
Schering-Ploughs manufacturing facilities in Manati,
Puerto Rico.
The following table summarizes activities reflected in the
consolidated financial statements related to changes to
Schering-Ploughs manufacturing operations which were
completed in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Special
|
|
|
Total
|
|
|
Cash
|
|
|
Non-cash
|
|
|
Accrued
|
|
|
|
Cost of Sales
|
|
|
Charges
|
|
|
Charges
|
|
|
Payments
|
|
|
Charges
|
|
|
Liability
|
|
|
|
(Dollars in millions)
|
|
|
Accrued liability at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Severance
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
47
|
|
|
$
|
(35
|
)
|
|
$
|
|
|
|
|
12
|
|
Asset impairments
|
|
|
|
|
|
|
55
|
|
|
|
55
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
Accelerated depreciation
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
|
|
Inventory write-offs
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
Other
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146
|
|
|
$
|
102
|
|
|
$
|
248
|
|
|
$
|
(37
|
)
|
|
$
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liability at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Special Charge Activities
Special charges incurred in 2005 are as follows:
|
|
|
|
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Litigation charges
|
|
$
|
250
|
|
Employee termination costs
|
|
|
28
|
|
Asset impairment and other charges
|
|
|
16
|
|
|
|
|
|
|
|
|
$
|
294
|
|
|
|
|
|
|
Litigation
charges
In 2005, litigation reserves were increased by
$250 million. This increase resulted in a total reserve of
$500 million for the Massachusetts Investigation, as well
as the investigations and the state litigation disclosed under
AWP Litigation and Investigations in Note 20,
Legal, Environmental and Regulatory Matters,
representing Schering-Ploughs then current estimate to
resolve this matter. On August 29, 2006, Schering-Plough
announced it had reached an agreement with the
U.S. Attorneys Office for the District of
72
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Massachusetts and the U.S. Department of Justice to settle
the Massachusetts Investigation for an aggregate amount of
$435 million, which was paid during 2007. This settlement
amount relates only to the Massachusetts Investigation. The AWP
investigations and litigation are ongoing.
Employee
termination costs
Employee termination costs in 2005 consisted of $7 million
associated with a Voluntary Early Retirement Program (VERP) in
the U.S. during 2003 and $21 million of other employee
termination costs.
Asset
impairment and other charges
For the year ended December 31, 2005, Schering-Plough
recognized asset impairment and other charges of
$16 million related primarily to the consolidation of
Schering-Ploughs U.S. biotechnology organizations.
In May 2000, Schering-Plough and Merck & Co., Inc.
(Merck) entered into two separate sets of agreements to jointly
develop and market certain products in the U.S. including
(1) two cholesterol-lowering drugs and (2) an
allergy/asthma drug. In December 2001, the cholesterol
agreements were expanded to include all countries of the world
except Japan. In general, the companies agreed that the
collaborative activities under these agreements would operate in
a virtual joint venture to the maximum degree possible by
relying on the respective infrastructures of the two companies.
These agreements generally provide for equal sharing of
development costs and for co-promotion of approved products by
each company.
The cholesterol agreements provide for Schering-Plough and Merck
to jointly develop and commercialize ezetimibe in the
cholesterol management field:
i. as a once-daily monotherapy (managed as ZETIA in the
U.S. and Asia and EZETROL in Europe);
ii. in co-administration with various approved statin
drugs; and
iii. as a fixed-combination tablet of ezetimibe and
simvastatin (Zocor), Mercks cholesterol-modifying
medicine. This combination medication (ezetimibe/simvastatin) is
managed as VYTORIN in the U.S. and as INEGY in many
international countries.
ZETIA/EZETROL (ezetimibe) and VYTORIN/INEGY (the combination of
ezetimibe/simvastatin) are approved for use in the U.S. and have
been launched in many international markets.
Schering-Plough utilizes the equity method of accounting in
recording its share of activity from the Merck/Schering-Plough
cholesterol joint venture. As such, Schering-Ploughs net
sales do not include the sales of the joint venture. The
cholesterol joint venture agreements provide for the sharing of
operating income generated by the joint venture based upon
percentages that vary by product, sales level and country. In
the U.S. market, Schering-Plough receives a greater share
of profits on the first $300 million of annual ZETIA sales.
Above $300 million of annual ZETIA sales, Merck and
Schering-Plough generally share profits equally.
Schering-Ploughs allocation of the joint venture income is
increased by milestones recognized. Further, either
companys share of the joint ventures income from
operations is subject to a reduction if that company fails to
perform a specified minimum number of physician details in a
particular country. The companies agree annually to the minimum
number of physician details by country.
The companies bear the costs of their own general sales forces
and commercial overhead in marketing joint venture products
around the world. In the U.S., Canada and Puerto Rico, the
cholesterol agreements provide for a reimbursement to each
company for physician details that are set on an annual basis,
and in Italy, a contractual amount is included in the profit
sharing calculation that is not reimbursed. In the U.S., Canada
and Puerto Rico this amount is equal to each companys
physician details multiplied by a contractual fixed fee.
Schering-Plough reports these amounts as part of equity income
from the cholesterol joint venture. These amounts do not
represent a reimbursement of specific, incremental and
identifiable costs for Schering-
73
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Ploughs detailing of the cholesterol products in these
markets. In addition, these amounts are not reflective of
Schering-Ploughs sales effort related to the joint venture
as Schering-Ploughs sales force and related costs
associated with the joint venture are generally estimated to be
higher.
For the year ended December 31, 2005, Schering-Plough
recognized milestones of $20 million. These milestones
related to certain European approvals of VYTORIN
(ezetimibe/simvastatin) in 2005.
Costs of the joint venture that the companies contractually
share are a portion of manufacturing costs, specifically
identified promotion costs (including
direct-to-consumer
advertising and direct and identifiable
out-of-pocket
promotion) and other agreed upon costs for specific services
such as market support, market research, market expansion, a
specialty sales force and physician education programs.
Certain specified research and development expenses are
generally shared equally by Schering-Plough and Merck. Under
certain conditions, as specified in the joint venture agreements
with Merck, Schering-Plough could be entitled to receive
reimbursements of its future research and development expenses
of up to $105 million.
The following information provides a summary of the components
of Schering-Ploughs equity income from the cholesterol
joint venture for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Schering-Ploughs share of net income (including milestones
of $20 in 2005)
|
|
$
|
1,831
|
|
|
$
|
1,273
|
|
|
$
|
689
|
|
Contractual amounts for physician details
|
|
|
242
|
|
|
|
204
|
|
|
|
196
|
|
Elimination of intercompany profit and other, net
|
|
|
(24
|
)
|
|
|
(18
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity income from Merck/Schering-Plough joint venture
|
|
$
|
2,049
|
|
|
$
|
1,459
|
|
|
$
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from the joint venture excludes any profit arising
from transactions between Schering-Plough and the joint venture
until such time as there is an underlying profit realized by the
joint venture in a transaction with a party other than
Schering-Plough or Merck.
Due to the virtual nature of the cholesterol joint venture,
Schering-Plough incurs substantial costs, such as selling,
general and administrative costs, that are not reflected in
equity income and are borne by the overall cost structure of
Schering-Plough. These costs are reported on their respective
line items in the Statements of Consolidated Operations and are
not separately identifiable. The cholesterol agreements do not
provide for any jointly owned facilities and, as such, products
resulting from the joint venture are manufactured in facilities
owned by either Schering-Plough or Merck.
The allergy/asthma agreements provide for the joint development
and marketing by the companies of a once-daily,
fixed-combination tablet containing CLARITIN and Singulair.
Singulair is Mercks once-daily leukotriene receptor
antagonist for the treatment of asthma and seasonal allergic
rhinitis. During 2007, a New Drug Application filing for this
combination tablet has been accepted by the U.S. Food and
Drug Administration (FDA) for standard review.
During 2007, Schering-Plough announced that it had agreed with
Merck to commence development of a single-tablet combination of
ezetimibe and atorvastatin as a treatment for elevated
cholesterol levels.
See Note 20, Legal, Environmental and Regulatory
Matters, for discussion of the ENHANCE matter.
|
|
5.
|
SHARE-BASED
COMPENSATION
|
Prior to January 1, 2006, Schering-Plough accounted for its
stock compensation arrangements using the intrinsic value
method, which followed the recognition and measurement
principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees and the related Interpretations.
Prior to 2006, no stock-based employee compensation cost was
reflected in the Statement of Consolidated Operations, other
than for
74
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Schering-Ploughs deferred stock units, as stock options
granted under all other plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
Schering-Plough adopted SFAS 123R effective January 1,
2006. SFAS 123R requires companies to recognize
compensation expense in an amount equal to the fair value of all
share-based payments granted to employees. Schering-Plough
elected the modified prospective transition method, and
therefore, adjustments to prior periods were not required as a
result of adopting SFAS 123R. Under this method, the
provisions of SFAS 123R apply to all awards granted after
the date of adoption and to any unrecognized expense of awards
unvested at the date of adoption based on the grant date fair
value. SFAS 123R also amended SFAS No. 95,
Statement of Cash Flows, to require that excess tax
benefits that had been reflected as operating cash flows be
reflected as financing cash flows.
For grants issued to retirement-eligible employees prior to the
adoption of SFAS 123R, Schering-Plough recognized
compensation costs over the stated vesting period of the stock
option or deferred stock unit with acceleration of any
unrecognized compensation costs upon the retirement of the
employee. Upon adoption of SFAS 123R, Schering-Plough
recognizes compensation costs on all share-based grants made on
or after January 1, 2006, over the service period, which is
the earlier of: i) one year if the employee is or becomes
retirement eligible during the first year of the grant;
ii) the employees retirement eligibility date if
after the first year of the grant; and iii) the service
period of the award.
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position
No. FAS 123R-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. Schering-Plough has elected
to adopt the transition method provided in this FASB Staff
Position for purposes of calculating the pool of excess tax
benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS 123R.
During 2006, the 2006 Stock Incentive Plan (the 2006 Plan) was
approved by Schering-Ploughs shareholders. Under the terms
of the 2006 Plan, 92 million of Schering-Ploughs
authorized common shares may be granted as stock options or
awarded as deferred stock units to officers and certain
employees of Schering-Plough through December 2011.
Schering-Plough intends to utilize unissued authorized shares to
satisfy stock option exercises and for the issuance of deferred
stock units. Expensed related to share-based compensation are
classified in the line item associated with the employees
function.
During 2007, Schering-Plough granted performance-based deferred
stock units under the 2006 Stock Incentive Plan, which provide
certain senior managers the opportunity to earn shares of
Schering-Plough common stock. These units will only be earned if
specific pre-established levels of performance and service are
achieved during a three year performance period
(2007-2009).
Implementation
of SFAS 123R
In the first quarter of 2006, Schering-Plough recognized a
benefit to income of $22 million for the cumulative effect
of a change in accounting principle related to two long-term
compensation plans required to be accounted for as liability
plans under SFAS 123R.
Tax benefits recognized related to stock-based compensation and
related cash flow impacts were not material during 2007 and 2006
as Schering-Plough is in a U.S. Net Operating Loss position.
Stock
Options
Stock options are granted to employees at exercise prices equal
to the fair market value of Schering-Ploughs stock at the
dates of grant. Stock options under the 2006 Plan generally vest
over three years and have a term of seven years. Certain options
granted under previous plans vest over longer periods ranging
from three to nine years and have a term of 10 years.
Compensation costs for all stock options are recognized
75
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the requisite service period for each separately vesting
portion of the stock option award. Expense is recognized, net of
estimated forfeitures, over the vesting period of the options
using an accelerated method. Expense recognized in 2007 and
2006, was approximately $72 and $56 million, respectively.
The weighted-average assumptions used in the Black-Scholes
option-pricing model in 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
|
1.7
|
%
|
Volatility
|
|
|
24.8
|
%
|
|
|
25.7
|
%
|
|
|
31.6
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
5.0
|
%
|
|
|
4.1
|
%
|
Expected term of options (in years)
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
7.0
|
|
Dividend yields are based on historical dividend yields.
Expected volatilities are based on historical volatilities of
Schering-Ploughs common stock which is not expected to
differ materially from future volatility. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected
life of the options. The expected term of options represents the
weighted average period of time that options granted are
expected to be outstanding giving consideration to vesting
schedules. Schering-Plough utilizes the simplified method of
calculating the expected term of stock options as allowed under
SAB 107 as amended by SAB 110.
The amount of cash received from the exercise of stock options
in 2007, 2006 and 2005 was $225 million, $83 million
and $60 million, respectively.
Stock-based compensation prior to January 1, 2006, was
determined using the intrinsic value method. The following table
provides supplemental information for 2005 as if stock-based
compensation had been computed under SFAS 123:
|
|
|
|
|
|
|
2005
|
|
|
|
(Dollars in millions
|
|
|
|
except per
|
|
|
|
share figures)
|
|
|
Net income available to common shareholders, as reported
|
|
$
|
183
|
|
Add back: Expense included in reported net income for deferred
stock units
|
|
|
89
|
|
Deduct: Pro forma expense as if both stock options and deferred
stock units were charged against net income available to common
shareholders in accordance with SFAS 123
|
|
|
(177
|
)
|
|
|
|
|
|
Pro forma net income available to common shareholders using the
fair value method
|
|
$
|
95
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
Diluted earnings per common share, as reported
|
|
$
|
0.12
|
|
Pro forma diluted earnings per common share using the fair value
method
|
|
|
0.06
|
|
Basic earnings per common share:
|
|
|
|
|
Basic earnings per common share, as reported
|
|
$
|
0.12
|
|
Pro forma basic earnings per common share using the fair value
method
|
|
|
0.06
|
|
76
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized information about stock options outstanding and
exercisable at December 31, 2007, is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
Exercise Price Range
|
|
Options
|
|
|
Term in Years
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Under $20
|
|
|
32,668
|
|
|
|
5.7
|
|
|
$
|
18.23
|
|
|
|
25,475
|
|
|
$
|
17.99
|
|
$20 to $30
|
|
|
9,118
|
|
|
|
7.2
|
|
|
|
21.03
|
|
|
|
5,724
|
|
|
|
20.93
|
|
$30 to $40
|
|
|
23,839
|
|
|
|
3.8
|
|
|
|
34.68
|
|
|
|
14,342
|
|
|
|
36.74
|
|
Over $40
|
|
|
14,215
|
|
|
|
2.3
|
|
|
|
46.36
|
|
|
|
14,164
|
|
|
|
46.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,840
|
|
|
|
|
|
|
|
|
|
|
|
59,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of stock options granted in
2007, 2006 and 2005 was $8.06, $5.22 and $7.04, respectively.
The intrinsic value of stock options exercised in 2007, 2006 and
2005 was $132 million, $21 million and
$24 million, respectively. The total fair value of options
vested in 2007, 2006 and 2005 was $80 million,
$73 million and $69 million, respectively.
As of December 31, 2007, the total remaining unrecognized
compensation cost related to non-vested stock options amounted
to $52 million, which will be amortized over the
weighted-average remaining requisite service period of
2.1 years.
The following table summarizes stock option activity as of
December 31, 2007, and changes during the year then ended
under the current and prior plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
|
(In thousands)
|
|
|
|
|
|
Outstanding at January 1
|
|
|
84,089
|
|
|
$
|
26.75
|
|
Granted
|
|
|
10,070
|
|
|
|
31.32
|
|
Exercised
|
|
|
(12,056
|
)
|
|
|
18.65
|
|
Canceled or expired
|
|
|
(2,263
|
)
|
|
|
29.51
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
79,840
|
|
|
$
|
28.47
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
|
|
|
59,705
|
|
|
$
|
29.51
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options outstanding at
December 31, 2007, was $326 million. The aggregate
intrinsic value of stock options currently exercisable at
December 31, 2007, was $253 million. Intrinsic value
for stock options is calculated based on the exercise price of
the underlying awards and the quoted price of
Schering-Ploughs common stock as of the reporting date.
77
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes nonvested stock option activity
as of December 31, 2007, and changes during the year then
ended under the current and prior plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Fair
|
|
|
|
Options
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
Nonvested at January 1
|
|
|
24,451
|
|
|
$
|
6.00
|
|
Granted
|
|
|
10,070
|
|
|
|
8.06
|
|
Vested
|
|
|
(13,300
|
)
|
|
|
6.05
|
|
Forfeited
|
|
|
(1,086
|
)
|
|
|
6.13
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31
|
|
|
20,135
|
|
|
$
|
6.99
|
|
|
|
|
|
|
|
|
|
|
Deferred
Stock Units
The fair value of deferred stock units is determined based on
the number of shares granted and the quoted price of
Schering-Ploughs common stock at the date of grant.
Deferred stock units generally vest at the end of three years
provided the employee remains in the service of Schering-Plough.
Expense is recognized on a straight-line basis over the vesting
period. Deferred stock units are payable in an equivalent number
of common shares. Expense recognized in 2007, 2006 and 2005 was
$125 million, $112 million and $89 million,
respectively.
Summarized information about deferred stock units outstanding at
December 31, 2007, is as follows: