UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (973) 822-7000
(telephone number)
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, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of June 30, 1999: 1,468,302,898
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Amounts in millions, except per share figures)
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . $2,451 $2,124 $4,637 $4,032
Costs and expenses:
Cost of sales. . . . . . . . . 472 423 904 803
Selling, general
and administrative. . . . . . 963 828 1,757 1,540
Research and development . . . 297 261 559 485
Other, net . . . . . . . . . . (7) 9 (22) 5
1,725 1,521 3,198 2,833
Income before income taxes. . . 726 603 1,439 1,199
Income taxes. . . . . . . . . . 179 148 353 294
Net Income. . . . . . . . . . . $ 547 $ 455 $1,086 $ 905
Basic earnings per common share $ .37 $ .31 $ .74 $ .62
Diluted earnings per common share $ .37 $ .31 $ .73 $ .61
Dividends per common share. . . $.125 $ .11 $ .235 $ .205
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in millions, except per share figures)
<CAPTION>
June 30, December 31,
1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents . . . . . . . . $ 1,523 $ 1,259
Accounts receivable, net. . . . . . . . . 1,018 704
Inventories . . . . . . . . . . . . . . . 861 841
Prepaid expenses, deferred income
taxes and other current assets . . . . . 1,058 1,154
Total current assets. . . . . . . . . 4,460 3,958
Property, plant and equipment . . . . . . 4,153 4,068
Less accumulated depreciation . . . . . . 1,412 1,393
Property, net . . . . . . . . . . . . 2,741 2,675
Intangible assets, net. . . . . . . . . . 551 565
Other assets. . . . . . . . . . . . . . . 867 642
$ 8,619 $ 7,840
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 914 $ 1,003
Short-term borrowings and current
portion of long-term debt. . . . . . . . 749 558
Other accrued liabilities . . . . . . . . 1,548 1,471
Total current liabilities . . . . . . 3,211 3,032
Long-term liabilities . . . . . . . . . . 1,010 806
Shareholders' Equity:
Preferred shares - $1 par value;
Issued: none . . . . . . . . . . . . . . - -
Common shares - $.50 par value;
Issued: 1999 and 1998 - 2,030. . . . . . 1,015 1,015
Paid-in capital . . . . . . . . . . . . . 493 365
Retained earnings . . . . . . . . . . . . 7,541 6,802
Accumulated other comprehensive income. . (276) (238)
Total . . . . . . . . . . . . . . . . 8,773 7,944
Less treasury shares, at cost - 1999
- 562 shares; 1998 - 558 shares . . . . 4,375 3,942
Total shareholders' equity. . . . . . 4,398 4,002
$ 8,619 $ 7,840
See notes to consolidated financial statements.
</TABLE>
<TABLE>
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(Amounts in millions)
<CAPTION>
1999 1998
<S> <C> <C>
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $1,086 $905
Depreciation and amortization . . . . . . 121 114
Accounts receivable . . . . . . . . . . . (352) (223)
Inventories . . . . . . . . . . . . . . . (49) (43)
Prepaid expenses and other assets . . . . (84) (174)
Accounts payable and other liabilities . 45 262
Net cash provided by operating activities 767 841
Investing Activities:
Capital expenditures . . . . . . . . . . (201) (127)
Reduction of investments. . . . . . . . . 213 -
Purchases of investments. . . . . . . . . (257) (69)
Other, net. . . . . . . . . . . . . . . . (2) (2)
Net cash used for investing activities. . (247) (198)
Financing Activities:
Dividends paid to common shareholders . . (347) (302)
Common shares repurchased . . . . . . . . (425) (85)
Short-term borrowings, net. . . . . . . . 204 (256)
Other, net, primarily equity proceeds . . 314 (6)
Net cash used for financing
activities . . . . . . . . . . . . . . . (254) (649)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (2) (1)
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . 264 (7)
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 1,259 714
Cash and cash equivalents, end of period . $1,523 $707
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These statements should
be read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1998
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 137, requires
adoption no later than January 1, 2001; the Company plans to
adopt the new standard at that time. This statement is not
expected to materially impact the Company's financial statements
because management has not engaged in a formula-based program
using derivative instruments to hedge market risks.
Earnings Per Common Share
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows:
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Average shares outstanding for
basic earnings per share . . . 1,470 1,467 1,471 1,467
Dilutive effect of options and
deferred stock units . . . . . 16 21 17 19
Average shares outstanding for
diluted earnings per share . . 1,486 1,488 1,488 1,486
As of June 30, 1999, there were nine million options outstanding
with exercise prices higher than the average price of the
Company's common stock during the second quarter of 1999.
Accordingly, these options are not included in the dilutive
effects indicated above.
Comprehensive Income
Comprehensive income for the three months ended June 30, 1999 and
1998 was $549 and $431, respectively. Comprehensive income for
the six months ended June 30, 1999 and 1998 was $1,048 and $876,
respectively.
Inventories
Inventories consisted of: June 30, December 31,
1999 1998
Finished products . . . . . . . $401 $483
Goods in process. . . . . . . . 248 174
Raw materials and supplies. . . 212 184
Total inventories . . . . . . $861 $841
Segment Reporting
Schering-Plough is a worldwide research-based pharmaceutical
company engaged in the discovery, development, manufacturing and
marketing of pharmaceutical products. Discovery and development
efforts target the field of human health. However, application
in the field of animal health can result from these efforts. The
Company views animal health applications as a means to maximize
the return on investments in discovery and development. The
Company operates primarily in the prescription pharmaceutical
marketplace. However, the Company has sought regulatory approval
to switch prescription products to over-the-counter (OTC) status
as a means of extending a product's life cycle. In this way the
OTC marketplace is yet another means of maximizing the return on
investments in discovery and development. Effective January 1,
1999, the Company changed the structure of its internal
organization to reflect this focus on pharmaceutical research and
development. As a result, the Company will report as one
segment. Previously, the Company was organized into two business
units: pharmaceuticals and healthcare.
Net sales by major therapeutic category were as follows:
Three Months Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
Allergy & Respiratory . . . . . $1,124 $962 $1,990 $1,715
Anti-infectives & Anticancer. . 408 271 830 583
Dermatologicals . . . . . . . . 160 168 311 329
Cardiovasculars . . . . . . . . 172 208 332 381
Other Pharmaceuticals . . . . . 201 142 405 290
Animal Health . . . . . . . . . 172 169 325 314
Foot Care . . . . . . . . . . . 100 99 183 171
OTC . . . . . . . . . . . . . . 43 42 105 103
Sun Care . . . . . . . . . . . 71 63 156 146
Consolidated Net Sales. . . . . $2,451 $2,124 $4,637 $4,032
Financing
During the second quarter of 1999, a subsidiary of the Company
issued $200 of equity-type securities, which have a carrying cost
based on LIBOR. The rate is fixed through November 28, 2003;
thereafter, the Company can elect to reset the rate annually or
fix the rate for an additional five years. The Company can call
the securities at fair value at any time after November 30, 2004,
or earlier under certain circumstances. The holders can put the
securities back to the Company at fair value at any time after
November 30, 2027, and sooner under certain circumstances.
Because of the put and call features, this obligation is included
in other long-term liabilities.
Legal and Environmental Matters
The Company has responsibilities for environmental clean-up under
various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. At several Superfund sites (or
equivalent sites under state law), the Company is alleged to be a
potentially responsible party (PRP). The Company estimates its
obligations for clean-up costs for Superfund sites based on
information obtained from the federal Environmental Protection
Agency, an equivalent state agency, and/or studies prepared by
independent engineers, and on the probable costs to be paid by
other PRPs. The Company records a liability for environmental
assessments and/or clean-up when it is probable a loss has been
incurred and the amount can reasonably be estimated.
The Company is also involved in various other claims and legal
proceedings of a nature considered normal to its business,
including product liability cases. The estimated costs the
Company expects to pay in these cases are accrued when the
liability is considered probable and the amount can be reasonably
estimated. Consistent with trends in the pharmaceutical industry,
the Company is self-insured for certain events.
The recorded liabilities for the above matters at June 30, 1999
were not material. Expected insurance recoveries have not been
considered in determining the costs for environmental-related
liabilities. Management believes that, except for the matters
discussed in the following paragraphs, it is remote that any
material liability in excess of the amounts accrued will be
incurred.
The Company is a defendant in more than 160 antitrust actions
commenced (starting in 1993) in state and federal courts by
independent retail pharmacies, chain retail pharmacies and
consumers. The plaintiffs allege price discrimination and/or
conspiracy between the Company and other defendants to restrain
trade by jointly refusing to sell prescription drugs at
discounted prices to the plaintiffs.
One of the federal cases is a class action on behalf of
approximately two-thirds of all retail pharmacies in the United
States and alleges a price-fixing conspiracy. The Company agreed
to settle the federal class action for a total of $22, which has
been paid in full. The settlement provides, among other things,
that the Company shall not refuse to grant discounts on brand-
name prescription drugs to a retailer based solely on its status
as a retailer and that, to the extent a retailer can demonstrate
its ability to affect market share of a Company brand-name
prescription drug in the same manner as a managed care
organization with which the retailer competes, it will be
entitled to negotiate similar incentives subject to the rights,
obligations, exemptions and defenses of the Robinson-Patman Act
and other laws and regulations. The United States District Court
in Illinois approved the settlement of the federal class action
on June 21, 1996. In June 1997, the Seventh Circuit Court of
Appeals dismissed all appeals from that settlement, and it is not
subject to further review. The defendants that did not settle
the class action proceeded to trial in September 1998. The trial
ended in November 1998 with a directed verdict in the defendants'
favor.
Three of the state antitrust cases have been certified as class
actions. Two are class actions on behalf of certain retail
pharmacies in California and Wisconsin, and the other is a class
action in the District of Columbia, on behalf of consumers of
prescription medicine. In addition, an action has been brought in
Alabama purportedly on behalf of consumers in Alabama and several
other states. Plaintiffs are seeking to maintain the action as a
class action. The Company has settled the retailer class action
in Wisconsin and the alleged class action in Minnesota. The
settlements of the state antitrust cases in Wisconsin and
Minnesota have been approved by the respective courts. The
settlement amounts were not significant. In August 1998, a class
action was brought in Tennessee purportedly on behalf of
consumers in Tennessee and several other states. The court has
conditionally certified a class of consumers, but has stayed the
case pending the resolution of an earlier-filed Tennessee case,
which the Company has settled in principle. In April - June
1999, state consumer cases were filed in state courts in North
Dakota, West Virginia and New Mexico. The Company has also
recently settled the state consumer cases in all of the states
except Alabama, Tennessee, North Dakota, West Virginia and New
Mexico. Court approval of those settlements has been obtained.
The settlement amounts were not material to the Company. In June
1999, the Alabama Supreme Court reversed the denial of a motion
for judgment on the pleadings in one of the Alabama retailer
cases. The court held that the Alabama antitrust law did not
apply to conspiracies alleged to be in interstate commerce. The
Company believes that this ruling should result in the dismissal
of all of the Alabama state court cases.
Plaintiffs in these antitrust actions generally seek treble
damages in an unspecified amount and an injunction against the
allegedly unlawful conduct.
In May 1998, the Company settled six of the federal antitrust
cases brought by 26 food and drug chain retailers and several
independent retail stores. Plaintiffs in these cases comprise
collectively approximately one-fifth of the prescription drug
retail market. In April 1999, the company settled federal
antitrust cases brought by independent pharmacists and small
pharmacy chains comprising about 2% of the prescription drug
retail market. The settlement amounts were not material to the
Company.
In April 1997, certain of the plaintiffs in the federal class
action commenced another purported class action in United States
District Court in Illinois against the Company and the other
defendants who settled the previous federal class action. The
complaint alleges that the defendants conspired not to implement
the settlement commitments following the settlement discussed
above. The District Court has denied the plaintiffs' motion for
a preliminary injunction hearing.
The Company believes all the antitrust actions are without merit
and is defending itself vigorously.
On March 13, 1996, the Company was notified that the United
States Federal Trade Commission (FTC) is investigating whether
the Company, along with other pharmaceutical companies, conspired
to fix prescription drug prices. The investigation is ongoing.
The Company vigorously denies that it has engaged in any price-
fixing conspiracy.
The Company is a defendant in a state court action in Texas
brought by Foxmeyer Health Corporation, the parent of a
pharmaceutical wholesaler that filed for bankruptcy in August
1996. The case is against another pharmaceutical wholesaler and
11 pharmaceutical companies and alleges that the defendants
conspired to drive the plaintiff's wholesaler subsidiary out of
business. The complaint also alleged that the defendants defamed
the wholesaler and interfered with its business. There are
related actions pending in the Delaware bankruptcy proceedings of
the wholesaler and certain of the plaintiff's claims against the
Company have been dismissed. The Company believes that this
action is without merit and is defending itself vigorously
against all claims.
In February 1998, Geneva Pharmaceuticals, Inc. (Geneva) submitted
an Abbreviated New Drug Application (ANDA) to the U.S. Food and
Drug Administration (FDA) seeking to market a generic form of
CLARITIN in the United States several years before the expiration
of the Company's patents. Geneva has alleged that certain of the
Company's U.S. CLARITIN patents are invalid and unenforceable.
The CLARITIN patents are material to the Company's business. In
March 1998, the Company filed suit in federal court seeking a
ruling that Geneva's ANDA submission constitutes willful
infringement of the Company's patents and that its challenge to
the Company's patents is without merit. The Company believes
that it should prevail in the suit. However, as with any
litigation, there can be no assurance that the Company will
prevail.
Copley Pharmaceutical, Inc. (Copley), Teva Pharmaceuticals, Inc.
(Teva) and Novex Pharma (Novex) notified the Company in February,
April and June 1999, respectively, that each had submitted an
ANDA to the FDA seeking to market a generic form of CLARITIN
Syrup in the United States before the expiration of certain of
the Company's patents. Each has alleged that one of those
patents is invalid and unenforceable. In March 1999, the Company
filed suit in federal court seeking a ruling that Copley's ANDA
submission and proposed marketing of a generic syrup constitute
willful infringement of the Company's patent and that its
challenge to the patent is without merit. The Company also sued
Teva in June 1999 asking for the same relief. The Company has
filed a similar suit in federal court concerning the Novex ANDA
submission. In May 1999, the Company received notice from Zenith
Goldline Pharmaceuticals (Zenith) that it had submitted an ANDA
to the FDA for generic CLARITIN tablets. In June 1999, the
Company filed suit in federal court in New Jersey seeking a
ruling that Zenith's ANDA submission and proposed marketing of a
generic tablet constitute willful infringement of the Company's
patent and that Zenith's challenge to the patent is without
merit. The Company believes that it should prevail in these
suits. However, as with any litigation, there can be no
assurance that the Company will prevail.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three and six months ended June 30, 1999
compared with the corresponding periods in 1998.
Net Sales
Consolidated net sales for the second quarter advanced $327
million or 15 percent compared with the same period in 1998. For
the six months, net sales rose $605 million or 15 percent over
1998. Excluding the effect of foreign currency exchange rate
fluctuations, consolidated net sales grew 16 percent in the
quarter. Exchange rate fluctuations had no impact on the net
sales for the six months.
Net sales by major therapeutic category for the second quarter
and six months were as follows ($ in millions):
Second Quarter Six Months
1999 1998 % 1999 1998 %
Allergy & Respiratory $1,124 $ 962 17 $1,990 $1,715 16
Anti-infectives & Anticancer 408 271 50 830 583 42
Dermatologicals 160 168 ( 5) 311 329 ( 5)
Cardiovasculars 172 208 (17) 332 381 (13)
Other Pharmaceuticals 201 142 41 405 290 39
Animal Health 172 169 2 325 314 4
Foot Care 100 99 2 183 171 7
OTC 43 42 2 105 103 1
Sun Care 71 63 12 156 146 7
Consolidated Net Sales $2,451 $2,124 15 $4,637 $4,032 15
Worldwide net sales of allergy and respiratory products advanced
17 percent in the quarter and 16 percent for the six-month period
due to continued strong market growth of the CLARITIN line of
nonsedating antihistamines. Worldwide net sales of the CLARITIN
brand totaled $819 million and $1,384 million for the quarter and
first half, respectively, compared with $687 million and $1,124
million for the corresponding periods in 1998. Franchise sales
of nasal inhaled steroid products, which include Vancenase
allergy products and Nasonex, a once-daily corticosteroid for
allergies, increased in the quarter and year-to-date due to
market expansion in the U.S. and international markets.
Net sales of anti-infective and anticancer products worldwide
increased 50 percent in the quarter and 42 percent for the six
months, primarily due to the 1998 U.S. introduction of REBETRON
Combination Therapy containing REBETOL Capsules and INTRON A
Injection for the treatment of chronic hepatitis C in both
relapsed and previously untreated (naive) patients.
International sales of INTRON A also contributed to the sales
increase in the second quarter and six months due to the 1998
launch of INTRON A solution in a multidose pen in several
European markets.
Worldwide sales of cardiovascular products decreased 17 percent
for the quarter and 13 percent for the six months primarily in
the U.S. due to lower sales in the quarter and six month periods
of IMDUR, an oral nitrate for angina and NORMODYNE, an alpha-beta
blocker for hypertension due to generic product introductions, as
well as lower sales of K-DUR, a sustained-released potassium
supplement, due to unusually high trade purchases in the first
half of 1998. Partially offsetting these declines in both
periods were higher U.S. sales of INTEGRILIN injection, a
platelet receptor glycoprotein inhibitor following its launch in
the second quarter of 1998.
Other pharmaceuticals consist of products that do not fit into
the Company's major therapeutic categories and include bulk
manufacturing and alliance revenues. International sales of
Subutex, a treatment for opiate addiction, increased in both the
quarter and the first half of 1999.
Sales of suncare products grew 12 percent in the second quarter
and 7 percent in the first six months of 1999 led by the
Children's Sunblock lines.
Sales of foot care products increased 2 percent in the quarter
and 7 percent for the six months. The increase in the first half
of 1999 was driven by higher sales of Dr. Scholl's insoles and
devices reflecting new product introductions and increased sales
of the antifungal line of products which includes Tinactin and
Lotrimin brands.
Costs and Expenses
Cost of sales as a percentage of sales decreased slightly to 19.3
percent in the quarter and 19.5 percent for the first six months
from 19.9 percent in both periods of 1998. The slight decrease
in the overall rate is primarily due to product mix improvements.
Selling, general and administrative expenses represented 39.3
percent of sales in the second quarter of 1999, a slight increase
compared with 39.0 percent last year. For the six-month period,
the ratio decreased slightly to 37.9 percent versus 38.2 percent
in 1998. The second quarter increase was primarily driven by
increased product promotion.
Research and development spending rose 14 percent in the second
quarter representing 12.1 percent of sales compared with 12.3
percent in 1998. For the first half of 1999 spending increased
15 percent and represented 12.1 percent of sales, compared to
12.0 percent in 1998. The higher spending in 1999 reflects the
Company's funding of both internal research efforts and research
collaborations with various partners to develop a steady flow of
innovative products. The Company expects research and development
spending for 1999 to increase by more than 15 percent over prior
year spending.
Income before income taxes increased 20 percent for the quarter
and six months compared with the same periods in 1998, and
represented 29.6 percent of sales for the second quarter versus
28.4 percent last year and 31.0 percent of sales for the first
half of 1999 versus 29.7 percent last year.
The effective tax rate was 24.5 percent in the three and six
month periods of both 1999 and 1998.
Diluted earnings per common share grew 19 percent in the second
quarter to $.37 from $.31 in 1998. For the six-month period,
diluted earnings per common share increased 20 percent from $.61
last year to $.73. Basic earnings per common share advanced 19
percent in the quarter and six-month periods. Foreign currency
exchange rate changes had no impact on basic or diluted earnings
per common share for the second quarter or first half of 1999.
Additional Factors Influencing Operations
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions, government agencies and other
buying groups seek price discounts. In most international
markets, the Company 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 of cost control.
Since the Company is unable to predict the final form and timing
of any future domestic and international governmental or other
health care initiatives, their effect on operations and cash
flows cannot be reasonably estimated.
The market for pharmaceutical products is competitive. The
Company's operations may be affected by technological advances of
competitors, patents granted to competitors, new products of
competitors and generic competition as the Company's products
mature. In addition, patent positions can be highly uncertain
and 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.
Uncertainties inherent in government regulatory approval
processes, including among other things delays in approval of new
products, may also affect the Company's operations. The effect
on operations of regulatory approval processes cannot be
predicted.
Liquidity and financial resources - six months ended June 30,
1999
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, additions to
property, shareholder dividends and common share repurchases.
Cash provided by operating activities was $767 million for the
first six months of 1999, a decrease of $74 million from 1998.
The decrease in 1999 is primarily due to an increase in accounts
receivable due to the increase in second quarter net sales and a
reduction in accounts payable. Cash provided by financing
activities included equity proceeds as well as proceeds from
short-term borrowings which was used to pay shareholder dividends
of $347 million and repurchase shares for $425 million. Cash was
also used to fund capital expenditures of $201 million.
In October 1997, the Board of Directors authorized the repurchase
of $1 billion of the Company's common shares. As of June 30,
1999 this program was approximately 57 percent complete.
In April 1999, the Board of Directors increased the quarterly
dividend by 14 percent to $.125 from $.11 per common share.
In September 1998, the Board of Directors authorized a 2-for-1
stock split of the Company's common shares. The distribution of
the split shares was made on December 2, 1998, to the
shareholders of record at the close of business on November 6,
1998. Certain 1998 amounts have been restated to reflect this
stock split.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
Year 2000
Many computer systems ("IT systems") and equipment and
instruments with embedded microprocessors ("non-IT systems") were
designed to recognize only the last two digits of a calendar
year. With the arrival of the Year 2000, these systems and
microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding
1999. As a result, the Company is engaged in an extensive project
to remediate or replace its date-sensitive IT systems and non-IT
systems.
The project involves four phases: (1) compiling an inventory of
IT and non-IT systems; (2) distinguishing "critical" systems from
"non-critical" systems; (3) remediating or replacing IT and non-
IT systems; and (4) testing the remediated or replaced IT and
non-IT systems. "Critical" systems for this purpose include
systems that may affect health and safety, product manufacturing,
product distribution, customer service and certain research
systems.
The following chart indicates the estimated state of completion
of each phase of this project as of June 30, 1999:
IT Systems Non-IT Systems
Inventory systems 100% 100%
Identify critical and
non-critical systems 100% 100%
Remediate or replace systems 99% 99%
Testing systems 97% 97%
The last two lines of the preceding table exclude non-critical,
non-IT equipment because the Company has concluded that any
failure of such equipment will not adversely affect the Company's
operations. Repairs or replacements of non-critical, non-IT
equipment will continue into the year 2000. The Company expects
to complete all phases of this project for all IT systems and all
critical, non-IT systems by December 31, 1999.
The estimated maximum cost of the Year 2000 project is
approximately $95 million. Approximately 55 percent of the $95
million will be of an expense nature and 45 percent will be for
capitalizable replacements. As of June 30, 1999, $53 million of
the $95 million has been incurred; $17 million has been
capitalized and $36 million has been expensed. This $95 million
cost estimate includes the estimated cost to repair or replace
non-critical, non-IT equipment some of which will be spent in the
year 2000. No other significant information systems projects
have been deferred as a result of the Company's Year 2000
project. The book value of computers, software and equipment
that will need to be written-off as a result of not being Year
2000 compliant is immaterial.
The Company's internal auditors are reviewing progress on the
Year 2000 project and provide evaluations of the Company's
readiness to senior management on a regular basis.
Management believes that the Year 2000 issue will not have a
material adverse effect on the Company's internal operating
systems. However, the Company's operations may be impacted in
the event that computer disruption is encountered by third
parties with whom the Company conducts significant business.
These third parties include wholesalers, distributors, managed
care organizations, hospitals, suppliers, clinical researchers,
research partners and government agencies. The Company has
initiated communications with these third parties concerning
their state of readiness and intends to continue these
communications throughout 1999. However, the Company can provide
no assurance that these third parties will not experience
business disruption.
The Company currently believes that the most reasonably likely
worst case scenario concerning the Year 2000 involves potential
business disruption among the third parties with whom it conducts
significant business. If a number of these third parties
(including, in particular, wholesalers, managed care
organizations and clinical researchers) experience business
disruption due to a Year 2000 computer problem, the Company's
results of operations and cash flows could be materially
adversely affected.
The Company is in the process of developing contingency plans to
address potential business disruptions at these third parties.
Contingency planning will include increasing inventory levels,
establishing secondary sources of supply and manufacturing and
maintaining backup lines of communications with our customers.
However, it is unlikely that any contingency plan can fully
mitigate the impact of significant business disruptions among
these third parties.
Certain third parties, such as retail pharmacies and wholesalers,
have informed the Company that they plan to order extra inventory
as part of their contingency planning. The impact to the Company
of such contingency planning by third parties cannot be
predicted.
The estimates and conclusions in this description of the Year
2000 issue contain forward-looking statements and are based on
management's estimates of future events. Risks to completing the
Year 2000 project include the continued availability of resources
and qualified information systems personnel.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains
certain forward looking statements, including statements
regarding the Company's financial position and results of
operations. These forward looking statements are based on
current expectations. Certain factors have been identified by
the Company in Exhibit 99 of the Company's December 31, 1998,
Form 10-K filed with the Securities and Exchange Commission,
which could cause the Company's actual results to differ
materially from expected and historical results. Exhibit 99 from
the Form 10-K is incorporated by reference herein.
Item 3.
Market Risk Disclosures
As discussed in the 1998 Annual Report to Shareholders, the
Company's exposure to market risk from changes in foreign
currency exchange rates and interest rates, in general, is not
material.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 3, Legal Proceedings, of Part I of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998,
is incorporated by reference.
Reference is made to the fifth paragraph of Item 3, Legal
Proceedings, of Part I of the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1998, relating to state
antitrust cases. In April-June 1999, state consumer cases were
filed in state courts in North Dakota, West Virginia and New
Mexico. The Company has also recently settled the state consumer
cases in all of the states except Alabama, Tennessee, North
Dakota, West Virginia and New Mexico. Court approval of those
settlements has been obtained. The settlement amounts were not
material to the Company. In June 1999, the Alabama Supreme Court
reversed the denial of a motion for judgment on the pleadings in
one of the Alabama retailer cases. The court held that the
Alabama antitrust law did not apply to conspiracies alleged to be
in interstate commerce. The Company believes that this ruling
should result in a dismissal of all of the Alabama state court
cases.
Reference is made to the twelfth paragraph of Item 3, Legal
Proceedings, of Part I of the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1998, relating to
CLARITIN patent litigation. Copley Pharmaceutical, Inc.
(Copley), Teva Pharmaceuticals, Inc. (Teva) and Novex Pharma
(Novex) notified the Company in February 1999, April 1999 and
June 1999, respectively, that each had submitted an Abbreviated
New Drug Application (ANDA) to the U.S. Food and Drug
Administration seeking to market a generic form of CLARITIN Syrup
in the United States before the expiration of certain of the
Company's patents. Each has alleged that one of those patents is
invalid and unenforceable. In March 1999, the Company filed suit
in federal court seeking a ruling that Copley's ANDA submission
and proposed marketing of generic syrup constitute willful
infringement of the Company's patent and that its challenge to
the patent is without merit. The Company also sued Teva in June
1999 asking for the same relief. The Company has filed a similar
suit in federal court concerning the Novex ANDA submission. In
May 1999, the Company received notice from Zenith Goldline
Pharmaceuticals (Zenith) that it had submitted an ANDA to the FDA
for generic CLARITIN tablets. In June 1999, the Company filed
suit in federal court in New Jersey seeking a ruling that
Zenith's ANDA submission and proposed marketing of a generic
tablet constitute willful infringement of the Company's patent
and that Zenith's challenge to the patent is without merit. The
Company believes that it should prevail in these suits. However,
as with any litigation, there can be no assurance that the
Company will prevail.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
27 - Financial Data Schedule
99 - Company Statement Relating to Forward
Looking Information
b) Reports on Form 8-K:
No report was filed during the three months ended June 30,
1999.
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Schering-Plough Corporation
(Registrant)
Date August 10, 1999 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller
S:\2188\2nd qtr 99 10 Q.doc 08/10/99 8:49 AM
S:\2188\2nd qtr 99 10 Q.doc 08/10/99 8:49 AM
- 9 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial data extracted from Schering-Plough Corporation
and Subsidiaries consolidated financial statements for the six months ended June
30, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1523
<SECURITIES> 0
<RECEIVABLES> 1018
<ALLOWANCES> 0
<INVENTORY> 861
<CURRENT-ASSETS> 4460
<PP&E> 4153
<DEPRECIATION> 1412
<TOTAL-ASSETS> 8619
<CURRENT-LIABILITIES> 3211
<BONDS> 0
0
0
<COMMON> 1015
<OTHER-SE> 3383
<TOTAL-LIABILITY-AND-EQUITY> 8619
<SALES> 4637
<TOTAL-REVENUES> 4637
<CGS> 904
<TOTAL-COSTS> 904
<OTHER-EXPENSES> 559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1439
<INCOME-TAX> 353
<INCOME-CONTINUING> 1086
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<EPS-BASIC> .74
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</TABLE>
Exhibit 99
Company Statement Relating to Forward Looking Information
From press releases by the Company dated June 24, 1999 and July 21, 1999
(Filed Pursuant to Rule 175)
Mr. Richard J. Kogan, Chairman and Chief Executive Officer, commenting on the
Company's business results, stated "For the full year, we expect the
increase in Schering-Plough's 1999 earnings per share to approach 20 percent."
