0nt4.zacks.com/zdigest/Working/SGP.doc · Web viewSGP shareholders will receive 0.5767 Merck shares and $10.50 for each Schering-Plough common share. Merck will fund the cash portion

© Copyright 2009, Zacks Investment Research. All Rights Reserved.

October 29, 2009

Research Associate: Madhu Goyal, MBA (Fin.)

Editor: Kinjel Shah, C.A.

Sr. Ed: Ian Madsen, CFA, [email protected]; 1-800-767 -3771, x9417

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Zacks Research Digest

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© Copyright 2009, Zacks Investment Research. All Rights Reserved.

Schering-Plough (SGP-NYSE) $28.72*

Note to Reader: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q09 Earnings Update

Prev. Ed.: October 14, 2009; Received EU Approval for Simponi Brokers’ Recommendations: Neutral: 66.7% (6 firms); Positive: 33.3% (3); Negative: 0.0% (0) Prev. Ed.: 6; 3; 0

Brokers’ Target Price: $30.25 (↑ $1.89 from the last edition; 6 firms) Brokers’ Avg. Expected Return: 5.3%

Note: *Though dated October 29, share price and brokers’ materials are as of October 23.

Note: The tables below for Revenue, Margins, and Earnings per Share contain less brokers’ materials than the brokers’ materials used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Schering-Plough (SGP) is a global healthcare company that offers both prescription and over-the-counter (OTC) products. The company specializes in anti-infective, anticancer, allergy/respiratory and cardiovascular products such as Temodar (brain cancer), Clarinex (allergy relief), Nasonex (allergy relief), Remicade (anti-inflammatory), and Zetia and Vytorin (cholesterol inhibitor). Besides, its prescription drug Claritin, used to treat allergies, is also available over the counter. In March 2009, Merck & Co. and Schering-Plough Corp. announced that they plan to merge in a deal worth more than $41 billion as part of an effort to create a pharmaceutical giant that is less dependent on US sales or on just a few blockbuster products.

33.3% of the firms provided positive ratings on the stock while 66.7% maintained a neutral outlook and none rated the stock negatively. Two of the analysts did not provide any rating on the stock.

Neutral or equivalent outlook (6/9 firms): Target price of $29.00. These analysts believe that most of the growth will be driven only by the cost-cutting initiatives and the sales of Remicade and a number of smaller drugs such as Noxafil and Asmanex as well as Organon sales. However, SGP has a favorable growth outlook, lack of material generic risk, attractive pipeline assets, and operating leverage afforded by its Productivity Transformation Plan (PTP).

The firms with a neutral stance do not foresee significant impediments to a smooth closing of the SGP and Merck deal. However, JNJ could subsequently seek arbitration regarding ownership of the Remicade franchise, if the parties do not resolve the issue prior to closing.

Positive or equivalent outlook (3/9 firms): Target prices range from $29.00-$34.00. The bullish firms remain optimistic about the long term as SGP has limited patent risk through 2015. SGP’s R&D pipeline includes several promising compounds (TRA, Vicriviroc, and Boceprevir) that could fuel EPS growth in the coming years, if successful. Further, the analysts view Sugammadex (in Phase III trials for neuromuscular block reversal) as a potential blockbuster drug and believe its approval would provide additional product portfolio diversification and operating margin expansion.

The bullish analysts believe that the risk to the Merck and SGP deal and its timing is minimal.


Outlook: SGP and Merck deal makes strategic sense according to the analysts as the new company’s product portfolio is more diversified, with significant cost savings (approximately $3.5 billion synergies targeted beyond 2011). They also feel that SGP is the only company in the pharma universe that doesn’t face major patent expirations over the next 5 years. The lack of a material generic risk coupled with contributions from its pipeline products and operating leverage afforded by its $1.5 billion Productivity Transformation Program (PTP) should enable the company to have a growth rate above the peer group average. In 3Q09, SGP's PTP cost savings plan delivered $1billion in savings of the $1.5 billion expected by 2012.

October 29, 2009

Recent Events

On October 22, 2009, SGP announced its financial results for 3Q09. Highlights are as follows:

Net sales for 3Q09 was $4.50 billion, versus $4.60 billion in 3Q08. Net income available to common shareholders was $477 million or $0.29 per common share in

3Q09 versus $576 million or $0.35 per common share in 3Q08.

On October 6, 2009, SGP and Centocor Ortho Biotech Inc. announced that the European Commission has approved Simponi (Golimumab) as a once-monthly, subcutaneous therapy for the treatment of moderate-to-severe, active rheumatoid arthritis (RA), active and progressive psoriatic arthritis (PsA) and severe, active ankylosing spondylitis (AS).

Overview

Schering-Plough Corporation (SGP or the company), based in Kenilworth, New Jersey, is engaged in the discovery, development, manufacturing, and marketing of pharmaceutical and health care products worldwide, including prescription drugs, animal health, over-the-counter products, foot care products, and sun care products. Through a joint venture, SGP and Merck co-developed and now co-market the cholesterol-lowering combination drug Zocor/Zetia called Vytorin. SGP is being acquired by its long-time cholesterol franchise partner, Merck & Co. MRK (announced in March 2009) and this deal is expected to close in 4Q09.

The company’s website is www.schering-plough.com.

Analysts identified the following factors for evaluating an investment in SPG:

Key Positive Arguments Key Negative ArgumentsManagement’s strategy of forming alliances, acquiring products, and maintaining prudent cost control, are being positively viewed by the analysts.

SGP is heavily dependent on the cholesterol franchise, which is not doing very well.

SGP has a number of late-stage pipeline drugs that should start contributing in 4Q09.

The primary risk for SGP is the failure to complete the acquisition by Merck.

SGP is the only company in the pharma universe that doesn’t face major patent expirations over the next 5 years. SGP has a favorable growth outlook, lack of material

http://www.schering-plough.com/


generic risk, attractive pipeline assets and operating leverage afforded by its Productivity Transformation Plan (PTP).

Note: SGP’s fiscal year coincides with the calendar year.October 29, 2009

Revenue

According to the company, GAAP net sales in 3Q09 totaled $4.5 billion, down 2% y/y, reflecting operational growth of 4% and an unfavorable impact from foreign exchange of 6% during 3Q09. The Zacks Digest average total revenue was $4,499 million in 3Q09, a decrease of 1.7% y/y.

Provided below is a summary of total revenue as compiled by Zacks Digest:

Total Revenue ($M) 3Q08A 2008A 1Q09A 2Q09A 3Q09A 4Q09E 2009E 2010E 2011EDigest Average $4,576.0 $18,506.5 $4,393.2 $4,647.0 $4,499.0↑ $4,455.0↓ $17,977.8↑ $18,829.8↓ $19,710.8↓Digest High $4,576.0 $18,560.0 $4,394.0 $4,647.0 $4,499.0↑ $4,604.0↑ $18,144.0↓ $19,494.0↓ $20,866.0↑Digest low $4,576.0 $18,502.0 $4,393.0 $4,647.0 $4,499.0↑ $4,196.0↓ $17,735.0↑ $17,735.0↓ $18,020.0↓Year over Year Growth 62.7% 46.0% -5.7% -5.6% -1.7%↑ 2.3%↓ -2.9% 4.7%↓ 4.7%↑

Specific Products

Note: Recent significant changes have been highlighted in bold.

PRESCRIPTION PHARMACEUTICALS

Sales of Prescription Pharmaceuticals in 3Q09 totaled $3.5 billion, reflecting operational growth of 6% offset by a 6% unfavorable impact from foreign exchange.

Within the Pharmaceuticals Segment, the company reports revenue from the following drugs:

Claritin Family (Claritin and Clarinex (Desloratadine))

Indication: Claritin and Clarinex are used to treat allergies, hives (urticaria), and other allergic inflammatory conditions. Both Claritin and Clarinex are antihistamines. Antihistamines prevent sneezing, runny nose, itching and watering of eyes, and other allergic symptoms (both indoor and outdoor allergies).

Product Life Cycle Position: Fully commercialized. Claritin is also available as a dry syrup in Japan for patients aged 3 years and older. Additionally, Claritin tablets and Claritin (loratadine) Reditab tablets have been approved for patients over 7 years. SGP also introduced a new Claritin Liqui-Gels in January


2009 for adults and children aged 6 years and older, the first and only non-drowsy allergy medicine in an easy-to-swallow liquid filled capsule.

On September 1, 2009, SGP announced the introduction of Claritin12-Hour, the only 12-hour allergy medicine found in the allergy aisle. The product is available for adults and children aged six and above.

Sales: According to the company, global sales of Clarinex were $164 million, a decrease of 7% y/y. Sales of prescription Claritin were $95 million, a 9% increase y/y. According to the Zacks Digest model, sales of the Claritin family were $259.0 million in 3Q09, a decrease of 1.5% y/y. Litigation: SGP announced an agreement with Orchid Chemicals & Pharmaceuticals Ltd. and Orgenus Pharma, Inc. (Orchid), related to the generic manufacturing of certain formulations of Clarinex on August 11, 2009. The agreement resolves all pending patent infringement litigation filed by SGP against Orchid and will allow Orchid to introduce a generic version of the Clarinex brand Reditabs (orally-disintegrating tablets) in the US market on January 1, 2012 and Clarinex brand 5 milligram tablets on July 1, 2012. Schering holds various patents related to Clarinex that will extend to 2022.

A generics company GeoPharma Inc., settled a patent suit with SGP and Sepracor Inc. (now a part of Dainippon Sumitomo Pharma) relating to its generic version of Clarinex in January 2009. Under the settlement, GeoPharma can commercially launch its generic product, with 6 months marketing co-exclusivity, on July 1, 2012, or earlier in certain circumstances. The new product launch may be a prescription or over-the-counter product depending on its status at the time of launch.

Mylan Inc. settled a patent lawsuit in April 2009, brought by SGP and will be able to start selling a generic version of the allergy drug Clarinex on July 1, 2012. Under the agreement, Mylan will be allowed to market 5 mg tablets of desloratadine, the active ingredient in the drug, providing its version receives approval from the FDA. The companies settled all outstanding patient litigation, which dated back to September 2006.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthClaritin Family $1,214.2 $1,130.0↑ $987.5↓ $921.5↓ -8.8%↓

Vytorin and Zetia (Cholesterol Franchise)

Indication: Vytorin is the cholesterol fighting combination of SGP’s Zetia (ezetimibe) and MRK’s Zocor (simvastatin). Zetia is an anti-hyperlipidemic medication, which is used to lower cholesterol levels. It acts by decreasing cholesterol absorption in the intestine.

Product Life Cycle Position: Mature and widely sold

Safety Issues: The US health officials warned the public on August 8, 2008, about the risk of a rare type of muscle injury seen when the cholesterol-drug simvastatin is combined with the anti-arrhythmia medicine Amiodarone. Simvastin is one of the two components in Vyotrin.

Partners: The Vytorin-Zetia franchise is a 50:50 joint venture with Merck. SGP and Bayer have launched Zetia in Japan. SGP will split Japanese Zetia revenue with Bayer.

Sales: According to the company, net sales of the cholesterol franchise, which include sales of the cholesterol joint venture(Vytorin and Zetia), plus sales recorded by SGP in non-joint venture territories (such as Japan and Latin America), declined 5% in 3Q09 to $1.1 billion, reflecting a 2% operational decrease and a 3% unfavorable impact from foreign exchange. Sales declined 10% in the US. In international markets, sales increased 3%, reflecting operational growth of 10% and a 7% unfavorable impact from foreign exchange. Zetia in Japan, contributed $47 million to

http://en.wikipedia.org/wiki/Intestine

http://en.wikipedia.org/wiki/Cholesterol


cholesterol franchise sales in 3Q09. According to the Zacks Digest model, cholesterol franchise sales in 3Q09 was $1050.6 million, a decrease of 1.8% y/y.

Additional Studies: SGP and Merck are conducting a larger trial called IMPROVE-IT. It has 15,000 of 18,000 patients enrolled with results expected in 2012, which is expected to answer many of the questions raised by ENHANCE. The trial had initially expected to enroll 12,500 patients with data expected in 2011, but was increased in size and duration in March 2008 at the recommendation of the study’s academic leaders.

Results of the ARBITER-6 cIMT study (Zetia versus Niaspan) that was terminated will be presented at the AHA meeting on November 16, 2009.

Litigations: SGP and Merck announced on August 5, 2009, that they have agreed to resolve a pending class action suit over Vytorin and Zetia for $41.5 million. The settlement will resolve all civil class action suits that seek compensation related to purchase of the drugs. The companies added that the settlement is not an admission of misconduct or liability in association with the products.

SGP and Merck & Co. in July 2009, agreed to pay $5.4 million in legal costs incurred by 35 states and the District of Columbia regarding their probe of how Vytorin and Zetia were marketed. The settlement agreement does not require the companies to make any other payment, and does not require or include any admission of misconduct or liability by the companies.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthCholesterol Franchise (MRK-SGP JV) $4,331.6 $4,094.5↑ $4,048.0 ↑ $4,118.0↑ -1.7%↑

Remicade

Indication: Rheumatoid arthritis (RA), Crohn’s disease, pediatric Crohn's disease ankylosing spondylitis, psoriatic arthritis, psoriasis, and moderate-to-severe ulcerative colitis.

Product Life Cycle Position: Currently available in Europe.

Importance: It is a key international growth driver of revenue and continues to perform well.

Safety Issues: People with heart failure should not take Remicade. However, there are reports of serious infections, including tuberculosis (TB), sepsis, and pneumonia. Some of these infections have been fatal.

The FDA warned on August 4, 2009, that several of the leading biologic medications used to treat rheumatoid arthritis like Remicade and Simponi, can increase the risk of cancer when used in children and adolescents. The medications will now carry a boxed warning advising of a cancer risk.

Partners: SGP and Centocor, Inc. (a subsidiary of JNJ) revised their 1998 distribution agreement for the development, commercialization, and distribution of both Remicade and its pipeline drug Golimumab. Effective upon the regulatory approval of Golimumab in the EU, SGP’s marketing rights to both the products will be extended for 15 years after Golimumab’s first commercial sale. In addition, Centocor will receive a progressively increased share of profits on SGP’s distribution of both products in the SGP marketing territory between 2010 and 2014, and remain fixed thereafter for the remainder of the term.

Johnson &Johnson (JNJ) filed an arbitration demand on May 27, 2009, that seeks to end its Remicade drug partnership with SGP. The arbitration claims that the planned merger between SGP and Merck triggers the termination of the agreements between SGP and Centocor Ortho Biotech Inc. regarding Remicade and Simponi.


Sales: According to the company, sales of Remicade increased 8% y/y to $608 million in 3Q09 primarily due to continued market growth. The Zacks Digest average figure was in-line with the company’s reports.

Competitors: Remicade’s growth prospects appear solid, although competition from Enbrel (AMGN) and Humira (ABT) is heating up.

Additional Indications: Future growth for Remicade will be driven by its approval for indications in psoriatic arthritis, ulcerative colitis (Phase III, fast track status received), and psoriasis (Phase III). Remicade is also under development for other indications (early RA and juvenile RA). JNJ and SGP are working to expand awareness about the use of Remicade with the ATTRACT and ASPIRE trials, which have demonstrated an improvement in the physical function of patients (with moderate to severely active RA) on Remicade therapy.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthRemicade Sales $2,118.8 $2,313.5↑ $2,559.5 ↑ $2,768.0 ↑ 9.3%↑

Hepatitis C Franchise (PEG-Intron, Intron A, and Rebetol)

Indication: PEG-Intron is indicated to be used alone or in combination with Rebetol capsules for the treatment of chronic hepatitis C virus (HCV) in patients of at least 18 years of age with compensated liver disease, who have not been previously treated with interferon alpha. The combination is also approved by the FDA for use in previously-untreated patients aged 3 years and older with chronic hepatitis C and compensated liver disease. SGP received the EU approval for using PEG-Intron plus Rebetol for the treatment of previously-untreated hepatitis C patients, who are also infected with HIV.

Intron A (interferon alfa-2b, recombinant) for injection in conjunction with anthracycline-containing combination chemotherapy has been approved for the initial treatment of patients with clinically aggressive non-Hodgkin's lymphoma (NHL). It is also indicated for the treatment of chronic hepatitis B, chronic hepatitis C, hairy cell leukemia, AIDS related Kaposi's sarcoma, condylomata acuminata (venereal warts), and as adjuvant therapy for malignant melanoma.

Product Life Cycle Position: PEG-Intron and Rebetol are the main drugs under the HCV franchise of SGP. Both are mature, widely sold, and distributed.

Safety issues: FDA staff reviewers stated on October 1, 2009, that PEG-Intron carries substantial toxicity and had no effect on overall survival in melanoma skin cancer patients undergoing surgery.

In a separate document, SGP stated that the drug increased the time before the cancer reoccurred with patients, who were only observed experiencing a relapse of 25.5 months compared with 34.8 months with PEG-Intron.

Importance: The HCV franchise is the key driver of revenue. However, in the face of tough competition, revenue is expected to decline over the next few years.

PEG-Intron remains No. 1 in Japan due to its very strong ramp. Moreover, the approval of Peg-Intron (Peg-Interferon alfa-2b) and Rebetol (ribavirin, USP) combination therapy for their use in previously-untreated patients aged 3 years and older with chronic hepatitis C is the first and only approval for pediatric hepatitis C. PEGIntron/Rebetol is the only pegylated interferon combination therapy approved in the US for treatment experienced HCV patients.

Regulatory Issues: On October 30, 2009, SGP announced FDA issued a complete response letter to the company's supplemental Biologics License Application regarding PEG-Intron for the


adjuvant treatment of patients with stage III malignant melanoma after complete lymphadenectomy. SGP will work closely with FDA to respond to outstanding concerns related to the Peg-Intron melanoma filing.

SGP announced on October 5, 2009, that the FDA’s Oncologic Drugs Advisory Committee (ODAC) recommended approval by a vote of six to four for PEG-Intron in the adjuvant treatment of patients with Stage III malignant melanoma. SGP is seeking FDA permission to sell the drug for use in patients, whose melanoma has spread to the lymph nodes and who would undergo surgery to remove both the cancer and the surrounding lymph nodes. It is already approved to treat liver disease.

Sales: According to the company, sales of PEG-Intron decreased 16% y/y to $198 million in 3Q09 with lower sales in both the US and outside the US. According to the Zacks Digest model, hepatitis C franchise sales were $295.6 million in 3Q09, a decrease of 17.7% y/y. The decline in demand is attributable to a number of factors including the use of shorter courses of therapy in certain patient types, a significant recent expansion of the clinical trial population for trials testing new approaches for HCV therapy in combination with interferons, and greater competitive pressures. International growth is also slowing for these reasons.

Competitors: The hepatitis C franchise faces intense competition from Pegasys (Roche). Pegasys is already approved in Japan, but as a monotherapy.

Combination Studies: SGP is studying the combination therapy of PEG-Intron and Rebetol in a Phase IIIb IDEAL study versus the combination therapy of Pegasys (Roche) and Copegus (Roche) for the treatment of chronic hepatitis C. Results from the study showed both combinations had similar efficacy. The study also showed that fewer patients reported incidents of relapse after ending their treatment with the PEG-Intron-Rebetol therapy.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthHepatitis C Sales $1,384.3 $1,222.0↓ $1,191.5↓ $1,194.5↑ -4.8%↑

Nasonex

Indication: Taken once a day, Nasonex helps relieve an itchy and runny nose, sneezing, and congestion in adults and children aged 12 years and older. Nasonex Nasal Spray 50 mcg is also approved for the treatment of allergic rhinitis in adult patients.

Product Life Cycle Position: Mature, widely sold, and distributed.

Importance: Nasonex is the first and only intranasal corticosteroid approved by the FDA for the treatment of nasal polyps prior to surgery in patients, who are aged 18 years or older.

Sales: According to the company, global sales of Nasonex, increased 3% y/y to $266 million in 3Q09. Operational sales increased in both the US and internationally y/y. Nasonex product line continues to be impacted by increased generic and branded competitive pressures. 3Q09 Nasonex US sales of $151million were up 7% y/y, although US total prescription growth (TRx) levels were down 5% 3Q09. The Zacks Digest 3Q09 sales were in-line with the company’s report.

Competitors: The brokerage firms noted that Nasonex is under pressure due to the introduction of generic fluticasone in the US market and the branded competition from GSK. GSK’s Veramyst is already launched in the US.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthNasonex Sales $1,155.8 $1,172.5 ↑ $1,198.5↑ $1,215.5↑ 1.7%↑


Temodar/Temodal in the EU

Indication: Used in combination with radiotherapy for the first-line treatment of newly-diagnosed glioblastoma multiforme (a type of brain cancer).

Product Life Cycle Position: Mature, widely sold, and distributed. An intravenous (IV) formulation was approved in March 2009 in both Europe and the US as an alternative to the already approved oral form.

Sales: According to the company, sales of Temodar, increased 2% to $278 million, with higher sales in all regions, excluding foreign exchange. The Zacks Digest figures were in-line with the company’s reports.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthTemodar Sales $1,002.0 $1,022.5↑ $994.5↑ $1,036.0↑ 1.1%↑

Integrilin

Indication: Used for the treatment of patients with acute coronary syndrome (ACS)

Product Life Cycle Position: Marketed and widely sold

Partners: SGP has the exclusive US marketing rights for Integrilin with an agreement with Takeda. Under the relationship, SGP has exclusive development and commercialization rights to Integrilin in the US, and Millennium receives a royalty for the sales of the product. European marketing rights to Integrilin are licensed to GlaxoSmithKline.

Sales: According to the company, Integrilin sales were $74 million in 3Q09, a decrease of 12% y/y. The Zacks Digest average figure was in-line with the company’s report for 3Q09.

Additional Studies: In a study presented on March 30, 2009, at the 58th annual Scientific Sessions of the American College of Cardiology and simultaneously published by The New England Journal of Medicine, researchers reported that a strategy using an upstream, investigational dose of Integrilin routinely in patients with ACS, at least 12 hours prior to angiography, failed to achieve either the primary or secondary endpoints of the trial. Significantly higher rates of bleeding and transfusions were also reported.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthIntegrilin Sales $314.0 $299.5↓ $298.5↑ $295.0↑ -2.1%↑

Noxafil (posaconazole)

Indication: Treatment of invasive fungal infections (IFIs) and oropharyngeal candidiasis (OPC)

Product Life Cycle Position: Approved in the European Union (EU) and Australia for the treatment of certain IFIs. Also approved in the US and EU for OPC.

Importance: Noxafil is the first and only antifungal agent approved by the FDA for the prevention of invasive fungal infections (IFIs) caused by Aspergillus.


Sales: According to the company, Noxafil sales were $47 million in 3Q09, an increase of 20% y/y. The Zacks Digest average 3Q09 sales figure was in line with the company’s report.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthNoxafil Sales $152.7 $178.0↑ $239.5↑ $293.5↑ 24.3%↑

Asmanex Twisthaler (mometasone furoate dry powder inhaler)

Indication: Asmanex is an inhaled corticosteroid (ICS) for the treatment of asthma.

Product Life Cycle Position: Marketed in the US in patients 4 years of age and older and received marketing approval in Japan for the treatment of bronchial asthma in adults in early July 2009.

Sales: According to the company, sales were $53 million in 3Q09, an increase of 31% y/y. The Zacks Digest average sales figure was in-line with the company’s report for 3Q09.

Combination Studies: SGP has a global collaboration with Novartis to develop and commercialize a once-daily inhaled fixed-dose combination therapy of mometasone furoate and formoterol fumarate called Dulera for the treatment of asthma and chronic obstructive pulmonary disease (COPD) using the inhaled corticosteroid mometasone furoate (the active ingredient in Asmanex) and beta2-agonist formoterol (MFF).

SGP announced on August 26, 2009, that the European Medicines Agency (EMEA) has accepted for review the company's Marketing Authorization Application (MAA) for Dulera a fixed-dose combination of mometasone furoate and formoterol fumarate for the maintenance treatment of asthma patients aged 12 years or older.

FDA accepted for review the filing of a New Drug Application (NDA) for Dulera, for the maintenance treatment of asthma in patients of 12 years of age and older in July 2009.

$ in Million 2008A 2009E 2010E 2011E Est. GrowthAsmanex Sales $179.3 $213.5↑ $241.5↑ $270.0↑ 14.6%↑

Suboxone/Subetex

SGP has the marketing approval from the European Commission for Suboxone sublingual tablets indicated for the substitution treatment of opioid dependence, within a framework of medical, social, and psychological treatment. Suboxone is currently the only centrally-approved product for the treatment of opioid dependence in the European Union (EU). The company reported Suboxone sales of $53 million in 3Q09, down 16% y/y. The Zacks Digest average sales figure was in-line with the company’s report for 3Q09.

Golimumab/Simponi

Indication: Golimumab (CNTO 148) targets tumor necrosis factor (TNF) and is being developed as a therapy for the treatment of rheumatoid arthritis (RA), psoriatic arthritis (PsA) , akylosing spondylitis (AS), and ulcerative colitis.

Product Life cycle Status: Approved in the US in April 2009 and in Europe in October 2009, the drug is in Phase III trials for ulcerative colitis.


Partners: Golimumab/Simponi (CNTO-148) is an anti-TNF monoclonal antibody that SGP licensed from Centocor, Inc. (a subsidiary of JNJ). SGP has the worldwide rights for Golimumab except in the US, Japan, and parts of the Far East.

Regulatory Issues: SGP and Centocor Ortho Biotech Inc. announced on October 6, 2009, that the European Commission has approved Simponi (Golimumab) as a once-monthly, subcutaneous therapy for the treatment of moderate-to-severe, active RA, active and progressive PsA and severe, active AS. Simponi is available in two device forms, either through the SmartJect(TM), a novel autoinjector designed to meet the needs of arthritis patients, or as a prefilled syringe. Thus far, this agent’s efficacy is comparable to Remicade, and its safety appears to be competitive.

Additional Studies: On October 19, 2009, SGP reported new long-term data from two pivotal, Phase III clinical trials showing that patients with active rheumatoid arthritis receiving Simponi every four weeks achieved sustained improvements in signs and symptoms and physical function response through one year.

Simponi, when used in combination with the common treatment methotrexate was significantly more effective at inhibiting structural damage to joints than methotrexate alone, according to data from a late- stage study reported on October 17, 2009.

Importance: Simponi is the first and only once-monthly subcutaneous anti-tumor necrosis factor (TNF)-alpha therapy approved in Europe for the simultaneous treatment of RA, PsA, and AS.

CONSUMER HEALTH CARE

Consumer Health Care sales were $282 million in 3Q09, roughly in line with 3Q08. Higher sales of Miralax and other OTC products were offset by lower sales of OTC Claritin, sun care and foot care products.

Within the consumer division, Schering-Plough acquired prescription drug MiraLAX for the treatment of occasional constipation and moved the product to OTC sales.

SGP launched Afrin PureSea Hydrating Nasal Rinse in March 2009, the only nasal rinse product entirely made of 100% purified sea water. Afrin PureSea is clinically proven to cleanse nasal and sinus passages of mucus, pollutants, and irritants so that users can breathe freely.

ANIMAL HEALTH

Animal Health sales totaled $669 million in 3Q09, a 12% decrease versus $759 million. The sales decline was primarily due to the overall economic environment, difficult comparisons against the 2008 launch of bluetongue vaccine as well as back orders on certain products primarily due to the ongoing integration of Animal Health manufacturing practices and quality standards.

In Animal Health, the company has more than 120 small molecule projects and 140 biological projects under way. The company recognizes three growth corridors within the segment: companion animal; parasiticides; and geographic expansion in the US, Japan, and emerging markets.

SGP’s Animal Health announced in July 2009, the availability of the first vaccine against canine influenza virus (CIV), which was granted a conditional product license by the US Department of Agriculture (USDA)


on May 27, 2009, for use by veterinarians in the United States. Canine influenza is a highly contagious respiratory infection that has a significant impact on dogs housed in shelters, kennels, and communal facilities. The availability of a vaccine would help prevent the medical, financial, and emotional costs associated with this new virus.

Pipeline Drugs

Boceprevir: Boceprevir, a HCV protease inhibitor (SCH-503034), currently in Phase II and Phase III trials, was granted Fast Track status by the FDA. The Phase II study evaluates Boceprevir in 28-week and 48-week treatment regimens.

The final results (April 2009), from the HCV SPRINT-1 study in 595 treatment-naive patients with chronic hepatitis C virus (HCV) genotype 1 showed Boceprevir, in combination with peginterferon alfa-2b and ribavirin, significantly increased sustained virologic response (SVR) rates with 28 and 48 weeks of therapy compared with current standard of care, peginterferon and ribavirin for 48 weeks (control group).

SGP also initiated two large Phase III studies of Boceprevir in patients chronically infected with HCV genotype 1. One study known as HCV SPRINT- 2 involves previously-untreated (naive) patients and the other known as HCV RESPOND-2 involves patients, who failed prior treatment (relapsers and nonresponders). The two randomized, double-blind, placebo-controlled studies will evaluate the efficacy of Boceprevir in combination with Peg-Intron and Rebetol compared with standard of care with Peg-Intron and Rebetol alone. The company has completed patient enrollment in the RESPOND-2 and SPRINT-2 studies. A total of more than 1,500 patients were enrolled in these studies at US and international sites. The company expects to complete the studies in June 2010 and October 2010, respectively. SGP plans to file for approval in year end 2010.

Corifollitropin alfa: The drug, first in the class of sustained follicle stimulants (SFS), is meant for fertility treatment to increase the chance of pregnancy through the development of multiple follicles. The European Medicines Agency (EMEA) accepted for review the Marketing Authorization Application (MAA) for Corifollitropin alfa in December 2008.

The results from the Phase III ENGAGE clinical trial demonstrated that a single injection of corifollitropin alfa achieved similar efficacy to recombinant follicle stimulating hormone (rFSH), given once daily for seven days. The ENGAGE data was presented along with data from the Phase III ENSURE trial and the Phase II REALIZE trial at the 25th annual meeting of the European Society of Human Reproduction and Embryology (ESHRE) in Amsterdam, Netherlands, on July 1, 2009. An analysis compared data from the ENGAGE trial to data from the ENSURE trial. The ENSURE trial used a similar protocol to ENGAGE with identical patient inclusion criteria, but different body weight categories. It showed that exposure and ovarian response were similar after a single-dose of 100 mcg corifollitropin alfa in patients weighing 60 kg or less, as compared with 150 mcg corifollitropin alfa in patients weighing more than 60 kg. Additional data from the ENSURE trial showed that patients weighing 60 kg or less, given a single dose of 100 mcg corifollitropin alfa resulted in significantly more oocytes and an equally short duration of treatment as those receiving 150 IU rFSH daily during the first week of stimulation. Data from the Phase II REALIZE study, a 50-patient, open-label uncontrolled pilot study, showed that a single dose of 100 mcg or 150 mcg corifollitropin alfa in a long GnRH agonist protocol was able to support multifollicular development during the first week of ovarian stimulation.

Sarasar: Sarasar is a FTI compound for oncology applications. Sarasar’s future is considered high-risk due to poor data in a non-small cell lung cancer trial, which prompted the company to discontinue its Phase III studies for this indication. Sarasar is in Phase III study for myelodysplastic syndrome, Phase II study for breast cancer, and a Phase II combination study with Temodar for glioma tumors of the brain.


SCH 530348: Thrombin receptor agonist (TRA) (SCH 530348) is being developed by SGP for the prevention and treatment of atherothrombotic events in patients with acute coronary syndrome (ACS), and in those with prior myocardial infarction or stroke, as well as in patients with existing peripheral arterial disease. This compound has been granted Fast Track status by the FDA. However, SGP continues to expect to file for approval in late 2010/early 2011 with a potential launch in late 2011. Management stated that it remains hopeful to be able to partner the TRA program, but will move forward with the product on its own if the right partner does not come along.

SGP has initiated two global Phase lll trials (TRA 2P-TIMI 50 and TRA-CER). The first trial, TRA-2P-TIMI-50, will eventually involve approximately 19,500 patients with prior myocardial infarction (MI) or stroke, as well as patients with existing peripheral arterial disease. The second trial, TRA-CER, in ACS, will involve approximately 10,000 patients with non-ST segment elevation acute coronary syndrome. SGP has begun dosing the patients in the two programs. Both studies are placebo-controlled and dosed on top of the current standard of care (Aspirin, Plavix, and/or an anti-thrombin). The studies are expected to conclude in September 2010 and July 2011, respectively.

SCH 900518 (518): SCH 900518 is a highly potent next-generation oral hepatitis C protease inhibitor that could become the future best-in-class drug. The compound is currently in a Phase IIa clinical development study, NEXT-1. First data for SCH 900518 were unveiled in April 2009, in Copenhagen at the annual meeting of the European Association for the Study of the Liver (EASL). Patients were infected with genotype 1, the most common form of the liver-damaging virus. The medicine drove levels of hepatitis C to undetectable levels within eight days in a tiny mid-stage study, and with less frequent dosing than similar medicines in development.

Vicriviroc (SCH D): Vicriviroc is a next-generation extracellular inhibitor of HIV infection designed to block the entry of infectious virions into uninfected CD4 cells via antagonism of the CCR5 co-receptor. Vicriviroc is indicated for the treatment of HIV/AIDS and has been granted Fast Track status. SGP anticipates launching this drug later in 2009. In a Phase II clinical study, Vicriviroc is being evaluated in a novel nucleoside-sparing regimen that is designed to provide additional options for treatment-naive patients in a once daily regimen, while preserving other drug classes for subsequent lines of treatment. The study is being conducted in two stages, with the first stage initiated in January 2008 and having enrolled 95 patients (47-48 per treatment arm). Following 24 weeks of treatment, a formal interim analysis was conducted and the safety results were reviewed by an independent Data Safety Monitoring Board. Based on these results, the study has been extended to stage two, in which the enrollment target is an additional 105 patients. SGP is also undergoing two large Phase III clinical studies (known as VICTOR-E3 and VICTOR-E4) with Vicriviroc, administered once-daily as a single 30 mg tablet in combination with an optimized background therapy that must include a protease inhibitor boosted by ritonavir in adult treatment-experienced HIV patients with R5-type virus only. The product will compete head-to-head with Pfizer’s Maraviroc (approved as Selzentry).

SGP reported long-term data on September 14, 2009, with Vicriviroc, from an ongoing, open-label extension of the Phase II VICTOR-E1 study in treatment-experienced HIV-infected patients. The results showed that Vicriviroc plus optimized background therapy achieved durable virologic suppression and increased CD4 cell counts, and was generally well tolerated over two years of therapy. These 96-week results were presented at the 49th Annual Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC).

Acadesine: Acadesine, a nucleoside analog, is in Phase III clinical development as an intravenous infusion for the prevention of ischemia-reperfusion injury, a complication of cardiac surgery in patients undergoing coronary artery bypass graft (CABG) surgery. SGP licensed Acadesine from PeriCor Therapeutics.


SGP announced in May 2009, the start of patient enrollment in RED-CABG, the Phase III trial for Acadesine. The RED-CABG (Reduction in cardiovascular Events by Acadesine in subjects undergoing CABG) trial is a randomized, double-blind, placebo-controlled, multinational, Phase III study of 7,500 high-risk patients undergoing on-pump CABG. The primary endpoint is a composite of all-cause death, severe left ventricular dysfunction requiring mechanical support, or stroke at post-operative day 28. All-cause death will also be assessed at six months.

AN2690: AN2690, a topical antifungal therapy, is licensed from privately-held Anacor Pharmaceuticals. The drug is currently in Phase II clinical trials for onychomycosis, a fungal infection of the nail and nail bed that affects nearly 10% of the US population.

AV-299: AV-299 is an antibody that has demonstrated efficacy in preclinical models of human cancer. AV-299 targets the hepatocyte growth factor/scatter factor ligand (HGF/SF) that binds the c-met receptor. This ligand/receptor target is important in the etiology of several solid cancer types. Management purchased the rights to AV-299 from privately-held AVEO Pharmaceuticals.

Zegerid (omeprazole and sodium bicarbonate): Indicated to treat frequent heartburn. SGP has a license agreement with Santarus Inc., a specialty pharmaceutical company, under which SGP is responsible for the development, manufacturing, and marketing of Zegerid branded OTC products with the dosage strength of 20 mg of omeprazole for heartburn-related indications in the US and Canada. On January 13, 2009, SGP and Santarus announced that US health regulators declined to approve the marketing application for the over-the-counter (OTC) version of Zegerid, the NDA of which was submitted in March 2009. SGP received a complete response letter, which included questions that the FDA identified during its review of the NDA for OTC Zegerid. SGP intends to continue to work closely with the FDA on a confidential basis to expeditiously address these questions.

When approved, Zegerid will be a valuable addition to SGP’s expanding portfolio of gastrointestinal OTC products that includes MiraLAX.

Rapid oral test for the detection of antibodies for HCV: SGP is partnered with OraSure Technologies to develop and promote a rapid oral test for the detection of antibodies for the hepatitis C virus (HCV) utilizing OraSure Technologies's OraQuick technology platform.

Preladenant: It is a novel and selective adenosine 2a receptor antagonist for the treatment of Parkinson’s disease. In a Phase II dose-finding trial Preladenant was shown to be statistically superior to placebo in reducing the symptoms of Parkinson’s in patients continuing their standard treatments with Levodopa. Levodopa is widely used as a treatment for Parkinson’s disease, but loses its effectiveness over time. A more effective treatment with a favorable tolerability profile could be a best-in-class drug. Preladenant phase III trials are expected to begin in 2010.

SCH 900795: Nobilon, the human vaccine business unit of SGP, announced that it has initiated a clinical Proof of Concept trial with SCH 900795, a new intranasal Live Attenuated Influenza Vaccine (LAIV) for annual seasonal use. In the new study, safety, tolerability and immunogenicity of SCH 900795 will be investigated in 140 healthy adults of 50 years and older. The earlier Phase I study had a randomized, double-blind, placebo-controlled, rising single-dose design and included a total of 117 healthy volunteers between the ages of 19 and 50 years. The objectives of this study were to investigate the safety, tolerability and immunogenicity of escalating doses of SCH 900795.


Collaborations with Bayer

According to an agreement with Bayer, SGP will market, sell, and distribute a few of Bayer’s primary care products in the US and Puerto Rico. These products include Adalat (calcium channel blocker), Cipro, and Avelox (antibiotics). Two of these products, Cipro and Adalat, are already facing generic competition. SGP received the FDA approval for Avelox (moxifloxacin HCl) that is used for the treatment of complicated intra-abdominal infections (cIAI).

SGP will also promote erectile dysfunction drug Levitra, for which Bayer has a co-promotion agreement with GlaxoSmithKline (GSK).

Acquisition of Organon BioSciences (OBS)

The acquisition of Organon BioSciences N.V., in November 2007, enhanced SGP’s human and animal health portfolios. Organon BioSciences was primarily comprised of Organon, a human health business, and Intervet, an animal health business. SGP expects to achieve annual synergies over $500 million after three years from the closing of the deal.

Organon’s key marketed products include:

Nuvaring –Nuvaring is a monthly vaginally inserted contraceptive ring that delivers a low dose of hormone. Sales of Nuvaring in 3Q09 increased 11% y/y to $131 million, with higher sales in all regions when excluding foreign exchange.

Remeron – It is a psychological disorder treatment drugs. Remeron is an antidepressant and currently marketed in 90 countries worldwide. In early July 2009, it received marketing approval in Japan.

Saphris (Asenapine)

Indication: A 5HT2/D2 receptor antagonist, for schizophrenia and bipolar 1 disorder

Product Life Cycle Status: Approved in the US

Regulatory Issues: On August 14, 2009, the FDA approved Saphris, a 5HT2/D2 receptor antagonist, for schizophrenia and bipolar 1 disorder in adult patients. Approval for both indications was largely expected, given the positive FDA Advisory panel recommendations for the therapy in July 2009. Saphris is expected to be available in the US in 4Q09. SGP is committed to organically build its neuroscience sales force to launch Saphris.

On September 14, 2009, SGP reported final results of a Saphris long-term schizophrenia relapse prevention clinical study. The study showed that time to relapse or impending relapse, the primary efficacy endpoint, was significantly longer with saphris than with placebo.

On July 24, 2009, SGP announced that Saphris met the primary endpoint over one year of treatment in an extension study in patients with predominant, persistent negative symptoms of schizophrenia.

Organon’s Pipeline Products

Sugammadex/Bridion


Indication: Sugammadex is a neuromuscular blockage treatment that quickly and easily reverses the effects of anesthesia. It is specifically designed to reverse the effects of certain muscle relaxants.

Product Life Cycle status: Phase III

Regulatory issues: The company continues its European rollout of the drug after the launch in Sweden in September 2008. However, the drug has a not-approvable letter (received in August 2008) from the FDA, citing issues with hypersensitivity and allergic reactions to the injectable drug. After a meeting in December 2008, the agency asked SGP to conduct a small (a few hundred patients) study in healthy volunteers. In August 2009, SGP finally initiated the safety study for Sugammadex that had been requested by the FDA. The 450 patient study will examine the potential for hypersensitivity to Sugammadex dosed four times over an 80 day period. The study is expected to conclude in 1Q10 and resubmission of Sugammadex NDA is expected in 1H10 and final US approval could therefore potentially be forthcoming by 4Q10.

A filing for regulatory approval was also submitted in Japan in January 2008.

Zemuron (rocuronium bromide) Injection: This is a non-depolarizing neuromuscular blocking agent with a rapid-to-intermediate onset depending on dose and intermediate duration. The drug is one of the most extensively used muscle relaxants in the US, Canada and many European nations.

Implanon - It is a three-year implanted estrogen free contraceptive agent.

Nomac/e2 -It is a contraceptive pill containing nomegestrol and estradiol and is currently in Phase III trials. A filling is expected in 1Q10. On August 26, 2009, the company announced that the EMEA has validated the MAA for nomegestrol acetate (2.5 mg) / 17 beta-estradiol (1.5mg), a combined oral contraceptive (COC) containing a unique combination of a natural estrogen identical to the estrogen produced by a woman's own body and a selective progestin.

Other products in development include Esmirtazapine, a Phase III serotonin receptor blocker with potential in insomnia and vasomotor symptoms, and ORG-36282 and Puregon, which are follicle stimulating hormones (FSH) for female infertility.

Agreement with Valeant Pharmaceuticals

SGP and Valeant Pharmaceuticals (VRX) entered into an exclusive option agreement on June 1, 2009 for developing and selling Valeant's hepatitis C drug Taribavirin in Japan. In exchange for the exclusive option, Schering-Plough agreed to waive and release its last right of refusal under a previous agreement with Valeant. Under the terms of agreement, Schering-Plough would make an upfront payment of $2 million to Valeant and pay mid-single-digit royalties on net sales of Taribavirin in Japan.

Please refer to the Zacks Research Digest spreadsheet on SGP for further details on revenue.

Margins


SGP’s gross margin on a GAAP basis was unfavorably affected by purchase accounting adjustments and special items, and totaled 61.8% in 3Q09 versus 62.0% in 3Q08. On an adjusted basis, the gross margin percentage decreased to 65.9% in 3Q09 versus 66.9% in 3Q08, primarily due to the unfavorable impact from foreign exchange, partially offset by favorable product mix and manufacturing cost savings. According to the Zacks Digest report, gross margin in 3Q09 was 66.3%, down 60 bps y/y.

SG&A expenses were $1.5 billion in 3Q09, a 9% decrease y/y primarily due to the impact of foreign exchange and the company's Productivity Transformation Program. According to the Zacks Digest report, SG&A expense in 3Q09 was 1,510 million, a decrease of 9.0% y/y.

Research and development (R&D) spending in 3Q09 totaled $913 million, a 2% increase related to higher spending for clinical trials and related activities, partially offset by the impact of foreign exchange. According to the Zacks Digest report, R&D expense in 3Q09 was 909.0 million, an increase of 2.1% y/y.

Margins 3Q08A 2008A 1Q09A 2Q09A 3Q09A 4Q09E 2009E 2010E 2011EGross 66.9% 67.6% 71.0% 68.1% 66.3%↓ 66.4%↓ 67.8%↓ 67.9%↓ 67.8%↓Operating 11.2% 13.2% 18.9% 14.6% 12.2%↓ 13.1%↑ 14.7% 16.1%↑ 17.0%↑Pre-tax 17.6% 18.7% 26.0% 20.3% 18.5%↑ 19.2%↑ 21.0%↑ 22.9%↑ 24.1%↑Net 14.0% 15.1% 21.5% 16.5% 14.9% 15.5%↑ 17.1%↑ 18.6%↑ 19.9%↑

Note: According to the Zacks Digest model, revenue is expected to decrease by 2.9% in 2009 and increase 4.7% in 2010. In comparison, SG&A expenses are expected to decrease by 9.1% in 2009 and increase by 4.6% in 2010; R&D expenses are expected to decrease by 0.6% in 2009 and increase by 2.8% in 2010; and cost of goods sold is expected to decrease by 3.6% in FY09 and increase by 4.4% in FY10.

Please refer to the Zacks Research Digest spreadsheet on SGP for further details on margin.

Earnings per Share

In 3Q09, SGP reported GAAP net of $477 million or $0.29 per common share on versus GAAP net of $576 million or $0.35 per common share in 2Q08.

According to the Zacks Digest model, pro forma EPS was $0.40 in 3Q09, an increase of 2.5% y/y. GAAP EPS in 3Q09 was $0.29, a decrease of 14.2% y/y.

EPS 3Q08A 2008A 1Q09A 2Q09A 3Q09A 4Q09E 2009E 2010E 2011EDigest High $0.39 $1.77 $0.56 $0.46 $0.40 ↓ $0.45 ↓ $1.86 ↓ $2.10 ↓ $2.28 Digest Low $0.39 $1.29 $0.56 $0.42 $0.40 ↑ $0.38 ↑ $1.80 ↑ $1.70 $1.70 Digest Avg. $0.39 $1.71 $0.56 $0.45 $0.40 $0.41 ↓ $1.82 ↓ $1.98 $2.11 Digest YoY growth 39.6% 24.8% 5.9% 1.0% 2.5%↑ 7.3%↓ 6.7%↓ 8.4% 6.8%↑

Please refer to the Zacks Research Digest spreadsheet on SGP for further details on EPS.

Target Price/Valuation


The average Zacks Digest price target is $30.25 (↑ $1.89 from the previous report; up 5.3% from the current price). The target prices range from $29.00 (BMO Capital, Barclays Capital, Citigroup and Deutsche Bank ) (up 1.0% from the current price) to $34.00 (Bernstein) (up 18.4% from the current price).

Of the nine firms reporting on the stock, three assigned Positive ratings, six rated the stock Neutral, and none of the firms rendered a Negative rating.

Rating DistributionPositive 33.3%Neutral 66.7%Negative 0.0%Avg. Target Price $30.25↑ Digest High $34.00↑ Digest Low $29.00↑ No. of Analysts with Target Price/Total 6/9

Capital Structure/Solvency/Cash Flow/Governance/Other

Acquisition

On October 13, 2009, Opko Health, a Miami-based company entered into an agreement with SGP to acquire assets relating to its neurokinin-1 (NK-1) receptor antagonist program. Terms of the deal were not disclosed. Rolapitant, which is the lead product, recently completed Phase II clinical testing for prevention of nausea and vomiting related to cancer chemotherapy and surgery, and other indications. SGP decided to divest its formulations of Rolapitant and the other assets in its NK-1 program as a result of its pending merger with Merck & Co. The deal with Opko is subject to completion of that merger.

Merck Acquisition

The shareholders of Merck & Co. and SGP both overwhelmingly backed the merger of the companies in August 2009, and the shares of both companies jumped. The 99.6% of the votes cast by Merck stockholders, or about 1.4 billion shares, supported the $41.1 billion purchase of Schering-Plough. SGP stockholders also approved the deal almost unanimously, with about 99.1% of votes cast, or about 1.26 billion shares, supporting the deal.

The two companies still need approval from the regulators in the US and other countries. They plan to close the deal in 4Q09. The deal is structured as a reverse merger, which means SGP is technically the surviving company, but will operate under Merck's better-known name. SGP shareholders will receive 0.5767 Merck shares and $10.50 for each Schering-Plough common share. Merck will fund the cash portion with $9.8 billion cash-on-hand and $8.5 billion in short-term financing ($3 billion 364-day bridge loan and $5.5 billion in revolving debt). The companies expect the deal to produce $3.5 billion in annual cost savings and expect it to be slightly accretive to non-GAAP EPS in the first-full year and significantly accretive afterward. Merck issued guidance for the combined company of non-GAAP EPS annual growth in high single digits from 2009-2013 (using Merck’s standalone non-GAAP EPS as the 2009 base). The dividend, currently paying $1.52, is expected to be maintained following the closure of the deal.

On October 29, 2009, Merck and SGP announced that they have received clearance from the European Commission (EC) under the EC Merger Regulation for their proposed merger. The companies also


stated that the Canadian Competition Bureau terminated the waiting period under the Canadian Competition Act and cleared the proposed transaction.

On July 30, 2009, Merck signed an agreement to sell its 50% interest in the Merial animal health joint venture for $4 billion in cash to its venture partner Sanofi. Sanofi will own 100% of Merial once the transaction closes. The companies also signed a call option agreement, in which following the closing of the merger of Merck and SGP, Sanofi could choose to combine the Intervet/Schering-Plough Animal Health business with Merial to form a joint venture that would be owned equally by Sanofi and the new Merck.

Productivity Transformation Program (PTP)

SGP’s new cost-cutting plan called the Productivity Transformation Program (PTP) is aimed at generating total savings of $1.5 billion by the end of 2012. Savings from the PTP represent 10% of the company’s full-year 2007 estimated cost base, including costs at Organon BioSciences and existing manufacturing plants. The company expects to achieve at least $1.25 billion in cost cuts by the end of 2010 with the rest by 2012. Management stated that approximately 50% of the savings would occur in SG&A expenses, with the remaining 50% split evenly between R&D expenses and manufacturing. Early PTP plans include the elimination and simplification of management layers, a reduction in the company’s project portfolio, and a prioritization of important Phase III compounds such as the Thrombin Receptor Antagonist (TRA), Schering’s cardiovascular compound. Other plans include an overall head count reduction of approximately 10%, a reduction of overlapping product lines such as in the Animal Health business, and a reduction in the number of manufacturing plants globally.

Dividend: On September 18, 2009, the Board of Directors of SGP declared a quarterly dividend of 6.5 cents per common share. Payment will be made on Nov. 30, 2009, to shareholders of record at the close of business on Oct. 26, 2009. As of June 30, 2009, there were 1,633,938,697 common shares outstanding.

The Board of Directors also declared a quarterly dividend of $3.75 per share on the 2007 Mandatory Convertible Preferred Stock. Payment will be made on Nov. 16, 2009, to holders of record at the close of business on November 2, 2009. There are currently 10 million shares of 2007 Mandatory Convertible Preferred Stock outstanding.

October 29, 2009

Potentially Severe Problems

There are none other than those discussed in other sections of this report.October 29, 2009

July 27, 2008

Long-Term Growth

SGP is in the process of a massive restructuring and reorganization program to cut costs and reduce its dependency on the now-OTC-available Claritin franchise. Through the Value Enhancement Initiative (VEI), SGP aims to increase productivity and efficiency while reinvesting for growth. SGP expects about $100 million in manufacturing cost reductions due to its continuing efforts to streamline the business. In New Jersey, SGP has trimmed operations at both its Kenilworth and Union facilities, reducing head count


by approximately 500 employees. The Productivity Transformation Program (PTP) initiated in response to the expected substantial decline in cholesterol franchise sales, which is expected to grow EPS in double digits through 2012.

Given the minimal product overlap and relative ease in combining the cholesterol business, the analysts expect the SGP and Merck combination to provide significant synergistic opportunities with combining sales, marketing, research and other back-office functions. The deal should also help geographically diversify revenue sources as Schering currently has about 70% of revenues coming from overseas, versus only 44% for Merck. For all these reasons, the merger makes a lot of sense, according to the firms.

Though SGP is a quality company in many aspects, it faces various challenges in a difficult pharmaceutical environment. A number of factors, including generic competition, declining R&D productivity, a hostile political environment, and a risk-averse FDA are forcing structural changes in the pharma industry beyond restructuring of company cost bases, which are already underway. Aggressive M&A (like Pfizer-Wyeth) within the industry, through the conversion of cash and strong balance sheets into visible revenues and EPS is necessary, and could eliminate the earnings cliff, faced by many companies. Significant excess capacity in the industry needs to be eliminated and R&D productivity needs to be improved. These are the only likely paths to multiple expansion in the sector.

October 29, 2009October 29, 2009

Upcoming Events

Date Events4Q09 Anticipated launch of Vicriviroc4Q09 Filing for Nomac/e24Q09 Filing for Aspenine for schizophrenia and bipolar indications in Europe.4Q09 Filing for MFF for the asthma indication4Q09/early ’10 Anticipated launch of GolimumabMid 2010 Completion of the two Phase III studies of Boceprevir - RESPOND-2 and SPRINT-2September 2010 Conclusion of the TRA 2P-TIMI 50 trial of SCH 530348July 2011 Conclusion of the TRA-CER trial of SCH 5303482010-2011 Expected launch of SCH 530348 2011-2012 Filing for Boceprevir

Individual Analyst Opinions

POSITIVE RATINGS

BMO Capital – Outperform ($29.00): October 23, 2009: The firm maintained an Outperform rating and its target price of $29.00. INVESTMENT SUMMARY: With negligible exposure to generics well into the next decade, a promising late-stage pipeline, and a deal with Merck for the merger of the company, the firm maintains its Outperform rating on SGP shares.

Bernstein – Outperform ($34.00): October 23, 2009: The firm maintained an Outperform rating and its target price of $34.00. INVESTMENT SUMMARY: The firm feels that SGP has several compelling investment attributes including its lowest-in-the-group generic exposure through 2015, and a phase III pipeline of products that is commercially meaningful.


UnionBankSwitz. – Buy ($31.50): October 22, 2009: The firm maintained a Buy rating and a price target of $31.50. INVESTMENT SUMMARY: The firm views the stock as attractive at current levels. It feels the risk to the deal and its timing is minimal. Therefore, it expects the spread to close over time. This, coupled with its expectation that MRK’s stock will appreciate over the next year, represents meaningful growth for SGP.

NEUTRAL RATINGS

Argus Fundamental Research – Hold (no target price): October 25, 2009: The firm maintained a Hold rating with no specific target price.

Leerink Swann – Market Perform (no target price): October 22, 2009: The firm maintained a Market Perform rating with no specific target price. INVESTMENT SUMMARY: The firm believes the main driver of potential upside for SGP shares would be the emergence of another suitor, which is believed to be highly unlikely at this point.

Barclays Capital – Equal Weight ($29.00): October 22, 2009: The firm maintained an Equal Weight rating and a target price of $29.00. INVESTMENT SUMMARY: The firm believes that the combined company will have an attractive growth profile, expanded pipeline and diversified revenue base to counter the patent expirations and other industry challenges.

Citigroup – Hold ($29): October 22, 2009: The firm maintained a Hold rating and a target price of $29. INVESTMENT SUMMARY: The firm believes the lack of a significant generic risk along with contributions from pipeline products and operating leverage afforded by Productivity Transform Plan (PTP) should enable the company to grow at a rate that is higher than the peer group average.

Cowen – Neutral (no target price): October 22, 2009: The firm reiterated a Neutral rating with no specific target price..

Deutsche Bank – Hold ($29): October 22, 2009: The firm reiterated a Hold rating and its target price of $29. INVESTMENT SUMMARY: The firm is optimistic on MRK's acquisition of SGP and hence recommends the investors to hold their SGP shares into the closing of the deal.

NEGATIVE RATINGS

None

DROPPED COVERAGE

MorganStanley – June 10, 2008: The firm dropped coverage on the stock.

NOT RATED

Goldman – October 22, 2009: The firm is acting as a financial advisor to SGP in an announced strategic transaction, and hence, it does not provide any rating and target price.

J.P. Morgan – October 22, 2009: The firm is acting as a financial advisor to SGP in an announced strategic transaction, and hence, it does not provide any rating and target price.


Research Associate Madhu Goyal

Copy Editor Bipasha Chowdhury

Content Ed. Kinjel ShahNo. of brokers reported/Total brokers 9/9

Reason for Update Earnings

0nt4.zacks.com/zdigest/Working/SGP.doc · Web viewSGP shareholders will receive 0.5767 Merck shares and $10.50 for each Schering-Plough common share. Merck will fund the cash portion

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