默克藥廠 (MRK) 2003 Q2 法說會逐字稿

Good morning.

My name is Tiffany, and I will be your conference facilitator.

I would like to welcome everyone to the Schering-Plough second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

I would now like to turn the call over to Fred Hassan, Chairman and CEO.

Please go ahead, sir.

Thank you very much and good morning, everyone, and welcome to this Second Quarter Earnings Conference Call.

We have about 185 people on the call.

As you just heard, I'm Fred Hassan, Chairman and CEO of Schering-Plough.

I'm very pleased to be leading our telephone meeting with you today.

Also joining me on the call are Jack Wyszomierski, our CFO, and Carrie Cox, the Head of our Global Pharmaceutical Business.

Jack will begin with a review of our second quarter sales and earnings announcement, which was issued earlier today.

I will then give you my observation and an update on the actions we have been taking and will be taking on our action agenda to build long-term strength at Schering-Plough.

Carrie will follow me to give you a more detailed look at the pharmaceutical business.

Then we'll open up for a Q and A.

Now I'll turn it over to Jack for his review of the second quarter.

Jack?

Thank you, Fred.

Good morning, I'm Jack Wyszomierski, Schering-Plough's Chief Financial Officer.

I apologize if some investors may have experienced a delay in receiving our earnings release today, which was due to storm related difficulties with our e-mail system.

If you have not received the release yet, go to our web site at www.schering-plough.com.

The disclosure notice I'm about to read covers this entire conference call.

This earnings conference call includes certain forward looking statements relating to the company's business and research prospects and financial performance.

The forward-looking statements are subject to substantial risks and uncertainties, which may cause actual results to differ materially.

For further details and a discussion of these and other risks and uncertainties see the company's SEC filings including the first quarter 2003 10-Q and current reports and 8-Ks.

Also this morning, we will provide details about sales and earnings including the impact of foreign currency exchange.

As required by SEC regulation G, you'll find reconciliations to GAAP presentation, which include the impact of foreign currency exchange titled foreign currency exchange reconciliation attached to our press release.

The press release is available, as I mentioned, on the Schering-Plough investor relations web site at www.ir.schering-plough.com and is included as an exhibit to our 8-K.

Now let's get started with the second quarter results.

On July 7th we announced the first quarter diluted earnings per share, second quarter earnings diluted share were expected to be approximately 12 cents.

Today in our earnings release we reported diluted earnings per share of 12 cents for the second quarter of 2003 versus 43 cents last year, a decline of 72%.

The decline in earnings is due predominantly to the loss of U.S. sales and profits of prescription Claritin which was launched as an OTC product in December 2002, excluding foreign exchange rate fluctuations, the decline in earnings per share was 77%.

We also stated on July 7th that the company's earnings for the second half of 2003 may not reach the levels achieved in the first half.

We will continue to have the impact of the loss of prescription Claritin plus the company faces additional private label competition for the OTC Claritin line.

In addition, the company's largest US franchise, the Intron franchise including Pegintron/Rebetol combination therapy for Hepatitis C faces potential generic competition for Rebetol.

Now let's start with a review of sales for the quarter.

Consolidated sales for the second quarter were $2.3 billion down 17% versus $2.8 billion in the second quarter of last year.

Global pharmaceutical sales were $1.9 billion down 23% in the second quarter.

U.S. pharmaceutical sales were down 45%, to $797 million, primarily due to the rapid decline of U.S. sales of prescription Claritin.

International pharmaceutical sales benefited primarily from favorable exchange and were up 7% to $1.1 billion, excluding exchange international pharmaceutical sales declined 6%.

Now let me turn to the sales of specific products.

Global sales of the Intron franchise were $569 million in the second quarter, down 14% from $659 million in the second quarter of last year.

Sales in the U.S. were down 20% to $302 million in the second quarter due to market share decline coupled with changes in trade inventory levels.

As you know a competitor's new products entered the overall prescription Hepatitis C market at the beginning of 2003.

International sales of the Intron franchise were $266 million down 6% from $282 million in 2002 due to lower sales in Japan and increasing competition in various European markets.

Remicade sales increased 65% to $126 million in the second quarter versus $76 million last year due to increased patient utilization from new indications for Remicade.

As a reminder, we sell Remicade only in international markets.

Global sales of Temodar increased 17% to $87 million for the second quarter.

U.S. sales increased 2% to $48 million, international sales increased 43% to $40 million reflecting increased market penetration.

Caelyx sales grew 53% to $26 million in the second quarter versus $17 million in the second quarter of last year benefiting from increased patient utilization due to the newly approved breast cancer indication.

As a reminder, Schering-Plough has international marketing rights to Caelyx except in Japan and Israel.

Global sales of Claritin were $112 million in the second quarter this year versus $792 million in the second quarter of last year, a decline of $680 million.

Not included in this figure are U.S.

OTC Claritin sales of $88 million for the quarter.

Global sales of Clarinex increased $46 million or 27% to $219 million during the second quarter.

In the U.S., sales of prescription Claritin were $13 million versus $677 million last year, a $664 million or 98% decrease.

As we have said previously, we continue to be fully reserved for U.S. prescription Claritin trade inventory levels.

The sales figure of $13 million reflects a difference in estimated trade inventory levels at the end of the second quarter versus levels at the end of the first quarter less actual product returns.

Clarinex sales in the U.S. increased 5% or $7 million to $144 million for the quarter as we continued to experience intense competition in the U.S. allergy market.

International sales of prescription Claritin declined 14% or $16 million to $99 million in the second quarter due to the continued conversion of patients from Claritin to Clarinex tempered by sales growth in Japan reflecting the September 2002 launch of the product.

Internationally, sales of Clarinex were $75 million in the second quarter, an increase of $39 million versus $36 million last year benefiting from new product launches.

Nasonex, our nasal inhaled steroid for allergies was up 74% globally to $175 million in the second quarter versus $101 million last year.

Nasonex sales in the U.S. increased $61 million to $115 million, more than double second quarter sales from last year.

However, this increase is largely due to favorable timing differences in trade inventory levels.

In last year's second quarter trade inventory levels declined reducing sales while in the past quarter trade inventory levels increased over 2003 first quarter levels due to increased buying from the trade thereby increasing sales.

Nasonex is also experiencing intense competition in the U.S. allergy market.

International sales of Nasonex in the second quarter are up 29% to $60 million due to market share gains.

As previously disclosed, Schering-Plough is reporting share of Zetia profit as alliance revenue.

Zetia alliance revenue for the second quarter was $30 million as noted in a footnote in the cardiovascular section of the product sales tables.

Schering-Plough's sales force costs for Zetia is reported at SG&A and the development expenses are recorded in the R&D line.

Global sales of Zetia were $123 million in the second quarter with U.S. sales of $112 million and international sales of $11 million.

So year-to-date that comes to $169 million globally in Zetia sales.

Global sales in Integrilin were $92 million up 18%.

Sales in the U.S. were $87 million up 22% due to increased trade buying and increased utilization.

Integrilin continues to be the U.S. market leader.

Burns, other pharmaceuticals, OTC, foot care, sun care and animal health care sales are all included in your sales tables in the press release.

Let me just again mention that OTC Claritin sales were $88 million in the second quarter.

Before I talk about the remainder of the income statement, I would like to comment on trade inventory level.

You heard me refer to trade inventory levels in relation to a number of our products.

While I am not going to be specific about inventory levels by product, I will mention that IMS projections have been indicating our overall trade inventory levels are higher than they actually are.

This is primarily due to the increased buying of selective products by a particular wholesaler whose buying patterns are not representative of other wholesalers and are therefore distorting the resulting IMS projection.

The IMS projections come from a sample of consisting of a limited number of wholesalers that do not accurately represent the overall level of Schering-Plough's inventories.

This buying that has taken place during the first half of this year is not the result of any incentives or inducements offered by (inaudible).

Let's turn to the remainder of the income statement.

The gross margin ratio was 66.5% in the second quarter of 2003, versus 76.2% in the second quarter last year.

The decrease in the gross margin ratio was primarily due to the loss of U.S. sales of prescription Claritin which resulted in a change of sales product mix.

Higher manufacturing costs for the company has increased current GMP compliance efforts also negatively impacted cost for sales.

SG&A decreased 6%, $938 million in the second quarter of 2003 versus $995 million in 2003.

The decrease was mostly due to lower sales and marketing relating spending in the U.S. of approximately 28% tempered by foreign exchange.

On a net exchange basis SG&A decreased internationally as well.

The SG&A ratio of 40.1% in the second quarter of this year is higher than the 35.1% in the second quarter of last year primarily due to the overall sales reported in the second quarter this year and the promotional and sales efforts of our recently launched product such as Zetia, Clarinex, Remicade and the Pegintron Rebetol combination therapy.

Now let's move on to R&D.

R&D was up 10% at $393 million for the second quarter.

Research expenditures primarily reflecting higher spending in the area of drug development including clinical trials were such major outcomes trials for Zetia and (inaudible) combination therapy.

The tax rate was 20% for the second quarter down 23% from last year and the same as the first quarter this year.

The lower tax rate was primarily due to the loss of prescription Claritin sales in the U.S. resulting in a shift of earnings to certain jurisdictions with lower tax rates.

One other item before I turn the call over to Fred.

You will see that as of this quarter's 10-Q we will be reporting three company segments, pharmaceuticals, consumer healthcare, and animal healthcare.

That's it for the second quarter.

Let me now turn this call over to Fred Hassan.

Thank you, Jack.

Now I'll give you my overview.

The second quarter results continue to demonstrate what we saw in the Q1 numbers.

And a very tough situation we inherited.

Fortunately, I like challenges.

I joined Schering-Plough because of the challenges and because I like adventure.

Having been here now for part of the second quarter, I can see that we've also inherited many, many challenges here in at Schering-Plough.

And in addition, and indeed challenges are in addition to the very large one created by the loss of the profit stream from prescription Claritin in the United States.

On my second day on the job, I attended our annual shareholders meeting.

It was quite obvious that our shareholders and our investors were anxious.

On my third day on the job, I met our employees in a global town hall meeting and I've met one on one in groups with hundreds of them since then.

It was obvious that they, too, were anxious.

A few days later I met the key stake-holders in the New Jersey communities where Schering-Plough operates.

It is clear that they were anxious.

I've met with many of our most significant customers, and it's clear that they were concerned.

I've written to the key regulators and will meet them once ongoing inspections at our various plants are concluded.

But it's very clear that we must work intensively to improve our trust level with them.

I've spent a great amount of time over the past weeks assessing our situation.

It is clear that we have been a company that slept while enjoying the huge cash flow from Claritin, the product that had been the leading contributor of gross profits.

Once Claritin prescription life in the U.S. ended, no product even came close to filling this gap.

The loss of Claritin led to some stopgap measures to offset the gross profit loss.

This included cutbacks in the sales force last year.

But you cannot drive growth by cutting the sales force and indeed now we're seeing that gross profit losses caused by resulting declines in market share for high growth margin products like Nasonex and Clarinex are greater than the savings we have achieved from sales force cuts.

These problems are compounded by a number of structural and process issues within the organization.

The fact is that in many areas this is a deeply challenged company requiring transformational change.

I've been involved in many, many turnarounds and transformations in my years at Sandoz, now Novartis, at Wyeth, at Pharmacia Upjohn and at Pharmacia Corporation.

This is the fastest I've ever moved at a new situation.

The reason is because the situation is urgent.

And I can move quickly with some confidence because of what I've learned from past experience.

I can make decisions quickly.

No turnaround is exactly the same, so we will customize our actions to the Schering-Plough situation.

But knowing this business, it all comes down to people, products and processes.

Our strategy is very simple but it will require superb execution because we must work on two fronts at the same time.

The first front is to deal with the immediate regulatory, legal, manufacturing and compliance challenges facing the company.

While embedding business integrity into the new culture we are developing.

The second front is to fix the business.

We must fix what is broken and take the necessary actions to put Schering-Plough on a track for long-term high performance.

On this long-term front of fixing the business, we have set three priorities.

Number one, cut costs by at least $200 million with a heavy focus on G&A as well as purchasing productivity.

This won't happen overnight but will be helped by the changes we are making in the business model going from a decentralized holding company to a unified global pharmaceutical company.

Number two, (inaudible) market share losses and protect gross profit streams on patented products.

Three, invest in product flow.

I've learned that without strong product flow, a company becomes weaker and weaker.

The immediate action is to invest in the Zetia opportunity with the object of creating a large and long-term profit flow stream that will underpin the whole company and create enormous shareholder value into the middle of the next decade.

Very few of our peer companies have a gas tank that will last that long.

With Zetia and the Zetia/Zocor combination we do have a full tank.

We will also invest carefully in our other most promising pipeline products and also invest in external innovation to generate exciting product flow.

So those are our three longer term priorities.

As you know, we have a clear action agenda in place for the company for the next five to eight years.

That agenda is, number one, stabilize, number two, repair, number three, turn around, number four build a base, number five, break out.

Right now we're focusing on the first three phases.

Stabilize, repair, and then turn around.

We expect this will be an 18 to 24-month effort.

In terms of stabilizing, we're putting intense focus on resolving the big regulatory compliance and legal issues that we face.

Over the past months, I've been putting a lot of my own time into this work.

On the manufacturing compliance front, I now feel that we have a sense of direction in terms of the huge amount of work we are undertaking.

As you know, the company signed a consent decree with the FDA in May of 2002.

This requires a massive effort to complete hundreds of milestones by December 2005 and there are negative consequences if we miss.

We're investing vigorously in this area.

In Q2, we took a very important step forward in obtaining formal FDA approval for our work plan which is nearly 300 pages long.

As we work hard on stabilizing manufacturing, we are beginning to put a high focus on the legal issues we inherited.

My focus is on constructive dialog.

Recently, we've begun dialog with the multiple legal authorities with regard to their issues.

The next several quarters are going to be very busy as we work to stabilize our legal situation.

This work will have my direct oversight.

As I mentioned, I've also been in touch with many of our customers.

We're working very hard to rebuild their trust and we're making progress.

Our customer chemistry is improving.

Let me also comment on the employee dimension.

In some of my turnaround experiences there has been a lot of resistance to change.

Situations where people don't believe things are broken.

What good in this case is that our people are wide open to change.

They see the need for transformation.

This allows us to implement immediate actions with real support from the rank-and-file.

So we're putting special emphasis on our front line people who work with the customers, do the manufacturing, and do the science.

This leads to our repair actions.

During the past month, we launched the repair phase of the action agenda.

Our goal is to repair the broken parts and create a global organization that is ready to compete with the best in our industry.

It is all concentrated on people, products, and processes.

We announced the first wave of major repair actions earlier this month.

We are rebuilding the commercial organization so that it's globalized, efficient and customer centric.

We've installed a new senior leadership team in key areas in the pharmaceutical business with more change to come.

We're above all concentrating on giving our sales people the resources and support they need to win.

We're working to reinvent our R&D.

And I believe we're already beginning to make progress in improving its effectiveness.

One of my first actions has been to elevate the head of R&D to our senior leadership team and involve him in key issues facing the company.

We've also been lucky to attract people from the former Pharmacia.

These are people who have been hand picked as among the best in the industry from all the big global pharmaceutical companies and who have worked as a team in achieving the successful global turnaround of P&U.

In our global pharmaceutical business Carrie Cox is driving this change process.

Carrie is one of the best sales and marketing professionals in our industry.

We've also brought in Tom Kessler, also formerly at Pharmacia and before that at Novartis.

Tom will lead our regulatory work.

Tom has 22 NDAs to his credit and is widely acknowledged to be the best in the industry at what he does.

We're also bringing in top players from other companies.

Dan Barshay is one example.

He's the best in class consumer health executive with a clear record of success at Wyeth.

Dan is in charge the leading the rejuvenation of our OTC business.

I said earlier that we have a target of some $200 million in cost savings.

Less than three weeks after arriving at Schering-Plough, I launched a value enhancement initiative, VEI for short, to achieve this goal.

Through VEI we already have identified opportunities for savings through the elimination of redundant spending, global operational efficiencies and other measures.

I should underscore that this initiative does not affect any of our extensive compliance programs or FDA mandated upgrades of manufacturing.

We will not shortchange these areas.

Most of these savings out of our G&A will be invested in the third phase of our action agenda, the turnaround phase.

I said before we must build Schering-Plough from a company that relied mainly on just one growth engine into a company that is ultimately powered by five or six growth engines.

Our goal is to maximize the best opportunities we already have while building new product flow.

We will build new product flow through good science inside the company and also through smart licensing and partnering.

After an intense review of our assets and the competitive landscape, we're beginning to implement this growth driver strategy.

We will have a lot more to tell you at our investor meeting in November.

However, at this stage, I can tell you that the more I learn about Zetia, the more excited I am about the prospects for this very special cholesterol medication.

Thanks to Zetia's efficacy as additional treatment to the statin class of drugs and its excellent safety profile we see the potential for Zetia and Zetia simvastatin to become a very major global product.

In fact two major global products.

So these are two of our identified growth drivers.

Carrie will tell you more about the product story going forward including some exciting potential in our current inline portfolio that until now may not have been so visible outside the company.

We will be reinvesting much of the savings I mentioned earlier into prudent product bits such as Zetia.

We'll be investing selectively in our sales force to drive the sales of these big bets.

We'll be aggressive in in-licensing and partnering to build on our areas of strength.

You will see me personally active on the in-licensing and partnering front with the unit responsible for in-licensing now reporting directly to me.

Already we're in the deal flow.

In fact, we're moving quickly toward a status where we see nearly every deal that eventually gets announced.

But we'll be operating with very strict financial discipline.

And finally about processes.

This is a critical area so one of my top priorities is to implement an effective product flow system between R&D and the commercial operations.

We are in the first phases of forging a process that will become much more collaborative and ultimately seamless.

Already we are making progress.

Stabilize, repair, turnaround.

On each of these critical phases in our action agenda, we're pleased that we're making good progress.

We're concentrating on the basics, products, people, and processes.

We're right on track.

And we're doing what we planned and what we promised.

And now let me turn it over to Carrie for her review of the pharmaceutical business.

Carrie?

Good morning.

As Fred has said there is a lot of work to be done to reclaim this company's success.

We are taking rapid steps forward to strengthen our company and there are good assets here to work with.

Since joining Schering-Plough ten weeks ago I've spent most of my time reviewing our products and our country operations around the world and I'd like now to share some of my observations and to emphasize that we are already identifying and capturing costs to take out of the system.

Significant excess spending in the past came from redundant functions and structures and a lack of organized purchasing power.

Both of these areas are being actively addressed now.

It's clear to me that we must improve sales and marketing execution across the company.

We are rebuilding our competitive edge to win the competitive battles.

We can and will stabilize the share declines, protect gross profit streams on patented products and then invest selectively to drive growth.

Schering-Plough has two major growth drivers today and several other inline products with more potential.

Zetia and Remicade are our growth drivers for today.

Nasonex, Clarinex and Assonex (ph) are high gross profit products that have more growth to give if managed properly.

Peg-Intron is and will continue to be an important contributor and our oncology portfolio of Temodar and Caelyx worldwide is small but growing nicely at 18%, propelled by the greater acceptance of Temodar in the treatment of refractory anaplastic cytoma, a type of brain tumor and by Caelyx in European markets for ovarian and breast cancer.

We have several brands that excel where it matters most, in efficacy.

For example, we believe Peg-Intron and Remicade offer overall clinical performance that is unsurpassed.

Adding Zetia improves efficacy of any statin regimen.

And Nasonex and Clarinex have excellent efficacy profiles and can be differentiated from the competition.

Most of our brands have periods of exclusivity that extend well past 2010 and the first upcoming expiry isn't till 2007 of Clarinex in the U.S.

I'll begin by addressing our newest growth driver, Zetia the first cholesterol absorption inhibitor developed through the joint venture between Schering Plough and Merck.

Zetia uniquely blocks absorption of dietary cholesterol, so it can be used alone or in combination with statin.

As you know more than 1.8 million prescriptions for Zetia have been filled in the U.S. since the product's launch in November of 2002.

The opportunity for Zetia is great.

In a market of more than $20 billion worldwide and we believe Zetia can become a major product for the company.

Efficacy drives the cholesterol market and adding Zetia improves the efficacy any statin at any dose.

Zetia is a breakthrough product.

The challenge is to educate subscribers about the importance of targeting the second source of cholesterol as an important way to bring cholesterol values down lower and faster.

While safety concerns can limit the physician's willingness to tight rate statins, the addition of it Zetia provides more efficacy than doubling or even tripling the dose of statin alone.

With an overall side effects generally similar to statin alone.

Creating this paradigm shift can take time but dual inhibition of both sources of cholesterol may be a better approach than titration of statins.

Additionally we're excited about our next potential product in this category, the Zetia simvastatin combination product and we're on track for a late 2003 filing with the FDA.

With these two major growth drivers in the primary care segment it is clear that the future of Schering-Plough will be in both primary care and specialty markets.

As Fred mentioned following the cuts in the U.S. primary care sales force last year, our presence in primary care is at the minimum critical mass required to play in this key segment.

That short-term cost cutting has led to some market share losses in our allergy and respiratory products that more than offset the savings gained.

Thus, through selective investment, aggressive in-licensing efforts and the future launch of the Zetia simvastatin combination product we will look to strengthen our mass in the primary care segment and drive further profits in the important allergy and respiratory brands.

As you know, the U.S. antihistamine market has undergone enormous change over the last several months and although this market is declining, I believe Clarinex represents an opportunity for modest growth, which we will achieve through enhanced sales and marketing execution.

Clarinex is part of a strong portfolio of allergy and respiratory products such as Nasonex, all of which have more opportunity for some growth in the U.S. and around the world.

These brands are very responsive to promotion.

And our share of voice has neither been adequate nor consistent.

Going forward, we will increase our impact and our share voice to recapture market share with these very profitable brands.

As mentioned earlier, Remicade is the market leading product and the preferred anti-TNF therapy and has been a very good growth driver for the company in the international markets where we sell it.

It is the first and only biologic approved in the E.U. for treating rheumatoid arthritis, Crohn's disease and spondylitis.

And with new indications for Remicade in Crohn's disease and AS we now have a stronger platform to drive Remicade's future success.

Remicade's patent exclusively extends through 2012 in Europe.

With Peg-intron we believe we have the best overall offering of efficacy, safety and patient education and support.

And will prevail over time.

We are confident that individualized weight based dosing with Peg-Intron in combination with Rebetol is key to achieving the optimal efficacy outcomes with consistent responses across all patient types.

And while we were complacent at the time Roche launched Pegasus we are not complacent anymore.

Unfortunately, the potential introduction of generic ribavirin and the intense competition for share will keep significant pressure on our Hepatitis franchise for some time.

It is important to note, however, that there are early signs that Peg-Intron market shares are stabilizing in the U.S. and in Europe.

Additionally, Roche's entry into the European regulated inteferon market in June 2002 led to a greater than 80% market expansion of which Peg-Intron owns 71% as of April 2003.

So unfortunately, the U.S. market did not expand.

Our focus with Peg-Intron will be to hold share worldwide but also to identify more new patients to get Peg-Intron growing again.

I'd also like to note that in Japan, the second largest pharmaceutical market in the world, there's a major long-term opportunity for Schering-Plough.

Our sales and market share today are quite small compared to our portfolio in ranking worldwide but we have launched two new products in the last two years and we are vigorously planning for five new product launches in the next two to three years.

As you may recall, we retained rights to Zetia in Japan.

In summary, we are moving quickly to stabilize the business.

We will focus on key products, key markets and in-licensing with our first priority being to fix the U.S. and Schering-Plough has good inline product assets with additional potential for profitable growth.

I'll turn this call back over to Fred.

Thank you, Carrie.

We would now like to open up for the Q and A portion of this call.

At this time I would like to remind everyone, if you would like to ask a question, press star then the number 1 on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from David Risinger of Merrill Lynch.

Thanks very much.

I have a number of questions.

First of all, in terms of the $200 million of cost savings that you mentioned in your press release, I guess my initial reaction is I'm surprised it's not more than that.

Is that net of the sales rep hiring that you expect over the next couple of years?

And then in terms of your guidance for the second half of this year for EPS, does that include the $152 million Zetia milestone payment from Merck and does that include the four to five cents per share in low sec payments that have occurred annually over the last several years and be ending in 2003?

Thank you.

Thank you very much, David.

Your comments about the G&A cuts are understandable because clearly the company has lost a lot of gross profit and we like to cut as much as we can.

I can assure you that this has the attention of the executive management team.

We talk about cost cutting every two weeks.

We have a very, very tough attitude on the subject.

But we will not shortchange our shareholders for the long-term.

We'll do the right thing.

And if we get opportunities to go beyond that number, we will go beyond that number.

And Jack, why don't you go ahead and answer the second question?

Sure the second question, David, I believe, was relating to the rest of the year and the $152 million in potential payments from Merck on the joint venture.

Those payments, as we've talked about in our financial disclosures, are subject to a number of considerations.

And we'll have to see, you know, if those considerations come to pass.

We would not anticipate the entire amount being realized in the second half of the year.

OK.

And so just to follow up on that, if I may, when you have provided your guidance in the second half to be down from the first half does that include any Zetia milestone payments at all?

And in terms of the numbers this year, are you including the low sec payments that have been occurring over the last several years that will be completed at the end of 2003?

The low sec numbers are in the annual numbers.

In terms of the milestone measurements payments for Merck, the guidance holds regardless of the level of the milestone payments in there, even if a substantial -- they are all subject to various conditions.

Even if those conditions are met, that will trigger some of those payments.

We still project we'll see earnings in the range that we said.

OK, thank you.

Thank you, David.

Your next question comes from Barbara Ryan with Deutsche Bank.

Good morning, thank you for taking my question.

I wonder, Fred or Jack, if you would care for comment, because it's particularly important to shareholders in the near term, as you talk about the repair and turnaround or the 18-24 months on your position on the dividend?

I know you did state that you had adequate liquidity to cover the dividend but that was basically the extent of the comment.

And obviously the pay-out is at least far in excess of the expected earnings in the near term so if you could just comment on how you're looking at your balance sheet, liquidity and the other resources or uses of cash, thank you.

Barbara, that's a very good question because we have noticed that there's been a migration of our shareholder base to value investors and I'm sure there's a lot of interest in that dividend stream.

On my second day at the company, it was publicly announced at our annual meeting that the Board has asked me to do a 360-degree view of the company and that review is still on going.

And of course that review did include a review of the dividend policy.

I just have to tell you that I'm very impressed with the strength of our balance sheet.

It's a pretty good balance sheet with very high component of net equity in the balance sheet.

As you know, some of our competitors have a pretty high debt to total capitalization ration which is not the case with Schering-Plough.

But we need to be prudent and look at our environment that has a lot of moving parts.

I will be able to come back to the Board with my recommendations whenever I'm ready.

Jack, if you can answer.

Yeah, I think as Fred has indicated that we obviously have the strong balance sheet.

I don't want to comment specifically on the balance sheet because as you know we haven't published the 10-Q yet so until we publish the 10-Q I don't want to comment where the balance sheet is as of this time but we do, when we look at the various ratios compared with both companies within the pharmaceutical business as well as outside the industry, we believe we have the, you know, strong financial resources.

But it is something that we will be looking at as time goes on.

Thank you.

Thank you, Barbara.

Your next question comes from Charlie Butler with Lehman Brothers.

Thank you and good morning, Jack.

Question around balance sheet is an interesting one.

I'm curious if you would care to comment about the current cash position, as I understand at least from the previous quarter, most of that cash was in subsidiaries that were foreign and, therefore, repatriation of that cash is a bit problematic from a tax base.

And the second part of that question is, then, have you been able to take down part of the debt for which you filed the shelf in Feb. and/or acquired cash through the existing revolver, thanks.

In terms of the first question, in terms of our cash being overseas, that has long been the case and continues to be the case.

Again, I won't comment as to what our cash levels are until we publish the Q. But the great majority of our cash always resides overseas and that situation continues.

In terms of have we taken down any debt under our shelf registration, the answer to that is no.

Was there a third point to that?

So, no, we have not drawn down on the shelf registration yet.

Thanks.

Thank you, Tony.

Your next question comes from Jami Rubin with Morgan Stanley.

Thank you.

Fred, I wish you all the success in the world in your turnaround opportunity and I'm sure you'll do a great job.

I just have two sort of general questions for you.

And my first is I'm very curious to know your view on how you would characterize the relationship, Schering-Plough's relationship with FDA, Asmanix has been pending approval for many, many years, Clarinex D is continuing to be in the approval process, so curious to know what you found and how the impact of the consent decree has affected the relationship and the ability of the company to get products approved on time.

And any sort of specific insights you can provide on Asmanix would be very helpful.

And my second question has to do with what you believe is the appropriate level of SG&A expense for the company.

I too thought the $200 million in annual G&A sales seemed light relative to the opportunity you have and with the $2 billion loss in sales over the past two years, and with the mix obviously having changed a lot, I'm just curious to know what your views are and what's appropriate for the company of this now new size, thanks.

I'll try to answer both questions, Jami and ask my colleagues to join me in trying to clarify this area as much as possible.

On the FDA front, Jami, I've not had a chance to directly talk to the FDA because there are ongoing inspections in our plants.

And I've not felt it was appropriate for me to see them.

I do know the folks at the FDA quite well and I do have appointments lined up later this summer.

And I will get a much better sense of how they feel about us.

But it's very clear that we have seen delays with late-stage projects.

And we are trying to get better at it.

You are seeing that we are bringing in some people.

We brought in Tom Kessler now who we believe is the best in the business.

We are going to have a big spotlight on this whole area so that we can execute better.

We are not going to tolerate an exclusive culture.

We're only look for a performance culture.

And if we have to make more changes we will make more changes.

But we are going to see a much better rate of success than we've seen in the past.

And I agree with you, we've not been able to execute with consistency and dependability.

Asmanex is a very good product.

The reason it's held up in the U.S. is because the U.S. has higher standards or different standards from Europe.

We are working on some very difficult technical issues with the FDA, and we hope we can amend our NDA later this year.

As you know we've had that NDA out there for a while.

It does look like a very promising long-term opportunity.

Because this is a heritage business for Schering-Plough and very determined to be very big at it.

As far as the SG&A is concerned, Jami at this time the ratio is high, we don't like it, we'd like to bring it down.

We can do it in two ways.

One is to cut now and try to make that ratio right.

The second is to do it by going the top line.

We will do it both ways.

We will cut now.

And at this point, after a very rigorous review, including outside consultants, we have come upon this $200 million dollar figure as something that won't destroy the machine but help us do the most we can to cut, you know, the part of the company that can be cut.

And this is going to be pretty transformational in the company because it will involve changing the whole business model from a holding company model to a very lean managed shared services company model and it's going to take a lot of work even to get the $200 million out of the system.

And we will cut sales forces where necessary but we don't like to look at those share figures every week and we need to do some repair work in that area.

Carrie, do you have any comments on Asmanex?

Actually Asmanex has been launched already as you may know in a number of European markets and is starting to do quite well.

We do continue to face share of voice issues in a number of those markets and that's part of my why my optimism is high for the future of the Zetia simvastatin combination products because that gives us the engine that allows us to add resources selectively where we know the ROI will be there, which will therefore also benefit the products like Clarinex, Asmanex and Nasinex which are good brands that still have more opportunity to grow.

Yes.

I think going back to your SG&A comments, Jami, the other challenge that we face is that the promotional noise levels bar is now going to rise as a result of the product launch.

And if we're going to be a very weak share of voice clear with the easy statin correspondence, the Zetia/Zocor combination that would not be a good strategy.

This is very important part of the company's future.

This is not the time to get very faint hearted on our whole attitude to selling.

We were a little faint hearted last year and it's not doing well for us this year.

But I promise you we will keep an eye on the cost and be very rigorous and takes take very tough action wherever necessary.

I think we should go on to the next question.

Your next question comes from Cecil Godman (ph) with Highland Capital Management.

Yes, you just answered that question so thank you.

Thank you, Cecil.

Next question.

Your next question comes from Jim Kelly with Goldman Sachs.

Good morning.

My questions are about the Hepatitis C franchise.

Could you characterize your focus in Hepatitis C between working on category growth versus share gains, and if you could detail any new efforts that could be brought to bear on category growth in the coming year or two that are different than the ones that we've seen in the past?

Great question.

I think one of the challenges for us as a company is that we were focused on category growth at a time when we probably should have been focused on share gains and share protection.

So I do think in a number of markets, we were rather caught off guard by the impact of the Roche launch.

And so for the near term, we've definitely focused our efforts now on stabilizing our share declines and in some markets in Europe we've actually gained back a point or two of opportunity.

So I think we're probably in good shape in terms of getting stabilization.

Now, again, in this category, as others like it, the larger opportunity going forward is going to be to build the market.

So our goal will be to stabilize the share, hold the share, but then focus on the bigger opportunity, which is treating the many untreated patients.

So we will have new efforts under way to expand the category, there are actually being a couple being discussed now, and forgive me I don't want to telegraph that to the competition but we will be working both on stabilization and category growth.

Thank you.

Thank you Jim.

I think next question.

Your next question comes from George Grofik with Smith Barney.

Thanks for taking my question.

Can you provide us with an update of the status of Zetia in Japan, final status there, do you have any intention of collaborating with Merck there?

And also what is the status of Peg-Intron filing in Japan as well?

Thanks.

We have a number of up upcoming filings in Japan.

Those are two of them.

They are on track and they are near term.

And as you know, we do have sole rights to Zetia in Japan.

And right now we're looking at a range of options to determine how to best maximize the opportunity for Zetia and certainly how to maximize our position best in Japan.

So we'll probably give a further update on those filings at our November meeting.

Okay, next question.

Your next question comes from Mara Goldstein with CIBC World Markets.

Thanks.

I wanted to do a follow-up question on the Hepatitis market because as much as Schering has been perhaps focused more on upstanding the market and less on Roche prices definitely crept into that market and given the potential for generic competition for Ribovirin, I'm wondering how you can level that playing field without devaluing your own product.

Secondarily, a question on the OTC infrastructure of the company.

It's long been Schering's OTC infrastructure was a lot larger than the sales force would support, given all the competition in Claritin OTC I'm wondering what we can expect from the reorganization of that unit.

Carrie, why don't you answer the first question, I'll try to answer the second question.

When it comes to the Hepatitis-C franchise I think for me the way to look at this market and the opportunity comes back to what is being achieved in treatment.

And what is happening here is physicians and patients are looking to eradicate a very serious condition with Hepatitis.

So I think efficacy is always going to drive the market.

That's why I'm actually quite encouraged to see that I think the package that we have with Peg-Intron particularly that combines the efficacy, the safety, the tolerability, the weight based dosing, the patient education and support, for all those things put us in a very strong position to be the premier product going forward.

Again, in this market, because of the nature of the disease and the marketplace, it's going to be imperative that we also continue to grow the category.

When there's more than one major player in any category, the goal is going to be future growth as well as the market share battle.

And I think, as I said that we maybe were not focusing on both of those areas, we are focusing on both now.

But it all starts with the product itself and I think we're very well positioned there.

And as far as the OTC infrastructure is concerned, we already have centralized the manufacturing under one roof.

So that part's working.

Unfortunately, that element of our company, we cannot attack very aggressively in terms of cost reductions because of our ongoing legal obligations, which are going to be in place till December of 2005.

We have to be extremely careful not to shortchange our manufacturing area.

We also have centralized distribution as a way to save costs with Rx business.

There are opportunities in shared services and we're working on that.

But those opportunities exist for the whole company.

We don't want to under-spend on R&D because there are big opportunities to grow the line extensions from the Claritin brand name, which is a very strong brand name.

We're pleased we brought Stan Barshay in because that's going to make a big difference on what happens to the Claritin brand name, I mean the whole Claritin franchise going forward.

We also have to plan for an eventual switch of the Clarinex brand to the OTC market and try to do the right thing with that product to eventually, whenever that occurs.

So we are going to be prudent here as well.

Grow the business, be competent in the business, at the same time take costs out of the system as much as possible.

And I think we have time for one more question.

Your next question comes from Ken Kulju with Credit Suisse First Boston.

Thank you very much and good morning.

Two quick questions, first, on the potential for portfolio optimization, is there any contemplation of asset sales perhaps in some of the other product areas and also just with respect to '04, obviously, Zetia is going to be a key driver for profitability, we would assume next year.

Is there a sense of optimism that for '04 that we could actually see positive earnings growth or is reinvestment next year still positioning '04 as a bit of a transition year in the turnaround?

Thanks a lot.

Ken, both very good questions.

The asset sales we're going to look at very aggressively as you know, in my years at Pharmacia, there was 7 or 8 major transactions where we got rid of assets which were not part of the core.

And we will do the same here if we find that they are non-core.

I am going to my business review.

The one thing I do want to say is if they are not core, we still want to get the right price for these assets because we are very sensitive to the EPS line and we don't want to see too many diluted transactions in terms of getting rid of assets.

So we will be looking at that area.

As far as '04 is concerned, little early to tell right now, Ken.

We are pleased with the way Zetia keeps growing.

It's looking good, we're still on track with the filing of the combination products.

Our company will become stronger as we manage it better and as we motivate the sales force better.

The productivity gains will come through, and in my experience and I've seen this many, many times, the sales force ROI is the fastest and that's where we hope to see it next year.

We will comment on the '04 numbers as we get closer to that time and as we learn more about the other moving parts in our company.

And I think this brings us to the end of our Q and A session.

I'd just like to say that Schering-Plough is a good company going through hard times.

My goal is to follow a fix and build strategy and that's what we're working at.

So I'd like to thank our investors for their support as we go about the task of stabilizing and repairing this company.

We do believe that we have good days ahead for this company.

Thank you very much for listening in to this call.

This concludes today's Schering-Plough second quarter earnings call.

You may now disconnect.