Schering-Plough Reports In-line

Schering-Plough Corp. (SGP) reported third-quarter earnings of 40 cents per share, which was in-line with the Zacks Consensus Estimate. Although earnings came in a cent above the year-ago level, revenues declined 2% to $4.5 billion mainly due to an unfavorable foreign exchange (Fx) impact. Operational growth of 4% was set off by a 6% Fx impact.
 
Cholesterol franchise performance disappointed with sales declining 5% to $1.1 billion, reflecting a 2% operational decrease and a 3% unfavorable impact from Fx. U.S. sales declined 10% reflecting slowing demand. Sales in international markets increased 3%, reflecting operational growth of 10% and a 7% unfavorable impact from Fx.
 
We believe cholesterol drugs, Zetia and Vytorin (Zetia plus simvastatin) remain under severe pressure due to disappointing clinical trial outcomes and a potential cancer risk. Results from the ENHANCE trial and SEAS trials, released in March 2008 and July 2008, respectively, have significantly depressed sales of both drugs. We believe the drugs will continue to struggle against increased competition from generic and branded statins, especially following the patent expiration of Pfizer’s (PFE - Analyst Report) Lipitor in November 2011.
 
Remicade, which is approved for inflammatory diseases, delivered year-over-year growth of 8% with sales coming in at $608 million. Remicade growth is being driven by strong demand in the rheumatoid arthritis market, as well as a significant unmet need in the Crohn’s disease and ulcerative colitis markets. Recent approvals for pediatric Crohn’s, psoriatic arthritis and chronic severe plaque psoriasis should help drive growth. We expect Remicade to continue to be a strong contributor to revenues.
 
While sales of products like Temodar ($278 million, up 2%), Nasonex ($266 million, up 3%), Nuvaring ($131 million, up 11%), and Claritin ($95 million, up 9%) increased, products like PEG-Intron ($198 million, down 16%), Follistim/Puregon ($122 million, down 14%), and Clarinex ($164 million, down 7%) recorded a steep decline in sales.
 
Animal Health sales also declined 12% to $669 million. Meanwhile, Consumer Health Care sales were $282 million, roughly in line with the 2008 period. Higher sales of Miralax and other over the counter (OTC) products were offset by lower sales of OTC Claritin, sun care and foot care products.
 
Gross margins declined from 66.9% in the year-ago period to 65.9% in the reported quarter mainly due to the negative impact of Fx which was partially offset by favorable product mix and manufacturing cost savings.
 
Favorable Fx impact and the effect of the company’s Productivity Transformation Program, which has been undertaken to improve efficiencies and reduce costs, helped reduce SG&A expenses by 9% to $1.5 billion. However, R&D expenses increased 2% to $913 million due to higher spending on clinical trials.
 
The merger between Schering-Plough and Merck (MRK - Analyst Report) remains on track to be completed in the fourth quarter of 2009. We believe Merck needs Schering-Plough to help offset its significant difficulty in growing revenues due to near term patent cliffs and softening sales of Cozaar/Hyzaar and Gardasil. Schering-Plough has relatively little exposure to patent cliffs through 2013. Moreover, the company has several interesting candidates in its pipeline which could contribute to top-line growth going forward. We are Neutral on Schering-Plough shares.

Read the full analyst report on SGP

Read the full analyst report on PFE

Read the full analyst report on MRK