默克藥廠 (MRK) 2008 Q3 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Schering-Plough third quarter earnings conference call.

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

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the call over to Janet Barth, Vice President of Investor Relations.

Ms.

Barth, you may begin your questions.

Thank you.

And good morning, everyone.

Welcome to the Schering-Plough 2008 third quarter conference call.

Given that there are other earnings calls today, we will be mindful of our time and plan to finish up with the Q&A portion of the call by 9:00 a.m.

Before we begin, I would like to cover a few items.

First, some of the statements made on our call may be considered forward-looking statements.

The Company's SEC filings, including our 8-K filed today in item 8.01 risk factors identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning.

The Company's SEC filings, as well as today's earnings release and tables are available at Schering-Plough.com.

I would also note that during the call, we may refer to non-GAAP measures, including adjusted net sales or adjusted top line sales, which is a non-GAAP measure that we define as our GAAP net sales, plus an assumed 50% sales contribution from our cholesterol JV.

We also refer to as reconciled amounts, or amounts on a reconciled basis.

As reconciled amounts exclude purchase accounting adjustments, acquisition-related items and other specified items.

Please refer to the non-US GAAP reconciliation tables for a reconciliation of these adjusted figures to our reported GAAP results.

These can be found under financial highlights in the investor relations section of our website.

This morning, I'm joined by Fred Hassan, our Chairman and Chief Executive Officer; Bob Bertolini, our Chief Financial Officer; and Carrie Cox, the Head of Global Pharmaceuticals.

We also have other members of management available for Q&A.

Also as a reminder, our R&D update meeting is scheduled for November 24, here in Kenilworth, New Jersey.

This meeting will be webcast and invitations will be going out soon.

Now, I would like to introduce Fred Hassan.

Thank you, Janet, and welcome to our call.

We are pleased that we have again delivered a strong quarter.

Despite the global challenges affecting our industry and the challenges with our US cholesterol joint venture, we continued to execute on our three-prong strategy.

Number one, we continue to grow our top line.

Number two, we continue to grow our pipeline.

Number three, we continue to reduce our costs while continuing to invest wisely, especially in our rich late stage pipeline.

We also had some currency tail wind in the quarter, but the fundamentals were strong.

Our good performance in these tough times reflects the strength and diversity we've been building into our Company over the past five years.

Our good performance also reflects our financial discipline.

This is visible in the early success of our productivity transformation program, or PTP.

Through PTP, we've been systematically reducing costs and enhancing our productivity for the long-term.

Step by step, we've been advancing the action agenda that we set out five years ago to transform our Company.

It is delivering.

Let me begin by talking about the new strength and diversity we've built.

Next month will be the first anniversary of our acquisition of OBS.

Now that we have had almost one year of experience, we can see that this is proving to be a powerful combination.

We bought a strong R&D-based global Company with solid products and good cash flows.

We have integrated it well.

It was the right move at the right time.

As a result, we have further transformed Schering-Plough into a Company with the size and scale to be a strong global competitor.

Through the OBS combination, we have also created the world's leading Animal Health Company, with sales of nearly $2.3 billion year to date.

Our people have executed with excellence.

We're creating value from our combination, by leveraging our strong combined global platforms.

Let me give you some examples.

With Sugammadex, we're already launching our first new product from the OBS combination in Europe, using a strong sales and marketing platform.

Another example, Nuvaring.

Nuvaring is an important innovation that came out of the Organon labs.

We're looking at markets like Spain, where Nuvaring has an 18% market share.

We are leveraging the strong Schering-Plough global sales and marketing network to share these successful experiences in order to drive growth in other markets.

And a third example, our combined global Animal Health platform.

The Animal Health integration is making very good progress.

The combined organization is beginning to operate as one team.

The depth and breadth of our combined Animal Health portfolio is making us more relevant to customers.

Our combined field forces are starting to leverage the new broader portfolio.

We are also benefiting from what we believe is the strongest Animal Health R&D platform in the industry.

Now, let me turn to diversity.

We're benefiting from our successful long-term strategy to build diversity on many fronts.

The OBS combination has been an important part of that strategy.

At the macro level, we've been implementing our long-term strategy of business diversification, via three pharma-based segments.

Human Rx, consumer and Animal Health, which all benefit from a strong science platform.

We began investing in consumer health and Animal Health back when the fashion was to be a pure play Rx Company.

We stayed with our strategy and it is proving to be a wise one.

We're building diversity.

Close to a quarter of our total sales came from these units in the third quarter.

At the macro level, we're also seeing our long-term geographic diversification strategy coming through.

About 70% of our GAAP sales came from outside the US in the third quarter and delivered strong growth.

We have become much stronger in the other established markets like Japan, the world's second largest market.

In Japan, we have almost doubled our sales in the past five years and we have a chain of new drugs coming through the pipeline for Japan.

This makes us excited about our future in this market.

We are also becoming strong in a group of newer markets that we have been prioritizing, markets such as China, Russia, Brazil and Central Eastern Europe.

Their relatively fast growth is contributing to our Company's overall growth.

So our diversification strategy is working at the macro level.

It's also working at the micro level, with product diversity in our Rx unit.

We continue to be committed to our cholesterol franchise.

Vytorin and Zetia are very effective in getting people to their LDLC goals in countries around the world.

We continue to be committed to these products because they are so important to physicians and their patients.

Meantime, however, we have built strength with many other products, from Remicade to Temodar to Nasonex and to our new Women's Health franchise.

We have built special strength in biologics, led by our biologic Remicade, which is now annualizing at over $2 billion in sales.

Overall, biologics now account for nearly 30% of our total Rx sales and growing.

Today, we're among the top companies in biologics, so we've built diversity on multiple fronts.

Given the challenges in today's environments, this diversity is an important strength.

Now, let me turn to our financial management and our progress with the productivity transformation program, PTP, that we launched in April.

Our strong quarterly performance reflects sound financial management.

Our Company is generating good cash flow.

Bob will talk more about our financial strength in a moment.

About PTP, we launched PTP in early April this year to achieve important savings in our cost structure and to make us even more effective as a Company.

We've moved quickly and decisively.

Our goals have been to take costs out of the system, to become more efficient, to make Schering-Plough even more resilient and even more nimble.

We're looking at every part of our business and at every process, including sales, R&D, our supply chain and our global functions.

Earlier this month, we completed a strategic realignment of our US sales force.

The realignment is one of the many actions to reduce our cost base in the US.

The realignment is designed to give us even more flexibility in a fast-changing environment.

Looking ahead, we continue to be very excited about the strength and diversity of our late stage human Rx pipeline.

With 10 projects in Phase III, we believe we have the strongest late stage pipeline for our size in our peer group.

We also have relatively long expected patent exclusivity on key Rx projects, mostly well into the next decade.

Thus our late stage pipeline is expected to be additive to the current inline portfolio.

So at a time when there's a lot of anxiety in the industry about the approaching patent cliff in pharma for many of our peers, we are a Company that has a lot of positives to work with.

We look forward to talking more about the pipeline at our R&D day next month.

So overall, in a tough and changing environment, we have again come through with a very good quarter.

This reflects the diverse strength that we have built in our Company, strength that also give us confidence that we can continue to power through.

Now, let me turn it over to Bob.

Thanks, Fred.

And good morning, everyone.

Our performance in the third quarter continues to reflect our diverse and broad based portfolio as well as our ability to manage the challenges in our business.

As Fred mentioned, we're pleased with the positive impact that Organon BioSciences is having on our business.

On a reconciled basis we own $0.39 per share in the third quarter.

This amount excludes purchase accounting adjustments, special and acquisition-related items.

About $19 million of income from the termination of our respiratory joint venture with Merck and a gain of $160 million from the required divestiture of certain Animal Health products.

Now turning to our results, first, I would like to discuss the key drivers of our quarterly sales and operating performance.

I will also provide an update on PTP and the ongoing OBS integration.

First, our sales performance for the quarter.

On a GAAP basis, our net sales increased to $4.6 billion and include about $1.4 billion in sales of products from OBS.

Excluding sales or products from OBS, net sales for Schering-Plough on a stand-alone basis would have been $3.2 billion, an increase of about 13% compared to the prior year.

Currency was again favorable this quarter.

Excluding sales from OBS products, currency contributed approximately 6% to the Schering-Plough stand-alone sales growth.

If we include an assumed 50% contribution from the cholesterol joint venture, our adjusted net sales were $5.1 billion this quarter.

Global sales of the cholesterol franchise were down about 13% compared to the prior year period.

Overall, our prescription pharma sales this quarter benefited from nearly $900 million in sales from Organon, including contributions from Follistim and Nuvaring.

And higher sales of Remicade and Temodar.

Offsetting this growth were declines in our US prescription respiratory business.

Our sales also benefited from foreign exchange.

Carrie will talk more about the performance of our global prescription brands in a few minutes.

As Fred mentioned, our overall business diversity is stronger today than a year ago, with Animal Health and consumer healthcare contributing a combined 23% of sales.

These important businesses provide solid revenue and generate positive cash flow, while extending the value of our R&D investments.

In Animal Health, third quarter sales were $759 million, including more than $500 million from the acquired Animal Health business.

Our Animal Health sales this quarter were roughly split between vaccines and pharmaceuticals, including a wide range of products to treat livestock and companion animals.

Turning now to consumer healthcare, our sales this quarter were about $278 million, up 2%.

Sales of OTC Miralax continue to be strong and nearly doubled in the quarter to $31 million.

In fact, within just two years of being on the market, OTC Miralax is already a category leader, running neck and neck with Metamucil.

Let me now review our third quarter operating performance.

On a reconciled basis, our gross margin in the third quarter was 66.9%, roughly flat with last year.

Sequentially, the gross margin decline was primarily due to the seasonality of our business.

Moving to SG&A, this quarter, SG&A expenses were $1.7 billion.

On a year-over-year basis, the increase related primarily to the OBS acquisition.

Also, as we continue to focus on controlling costs through the PTP program, we're seeing the benefit in our cost base.

Moving to R&D, our R&D expenses were higher on a year-over-year basis this quarter and totaled $893 million.

The increase relates to the addition of OBS and continued investment in our R&D pipeline.

Sequentially, R&D spending was slightly lower.

However, we do expect R&D spending in the fourth quarter to be higher than the levels this quarter.

Now let me provide an update on our ongoing PTP program, which includes the integration of OBS.

After nearly one year of intense work and integration, the acquisition of OBS is proving to be a powerful combination.

Our combined operations are benefiting from new product and geographic strength, new strength with our customers, and new strength in R&D, including a late stage pipeline that we believe is now one of the strongest in our industry.

We're also making steady progress toward achieving our $1.5 billion PTP target.

To date, we've achieved more than $300 million in savings and we're seeing savings across all business units, with most of the savings this quarter in SG&A.

Before closing, I also want to comment on our solid financial position and how this relates to the current global financial environment.

While a number of global companies may be challenged to meet their liquidity needs, Schering-Plough does not have any current need to access the capital markets.

Additionally, we're not relying on commercial paper to fund our liquidity needs.

We do not have any debt maturities coming up in either 2008 or 2009.

We currently have more than $3 billion in cash on hand, which represents an increase of about $300 million since last quarter.

With our positive cash flow, we've also made good progress on paying down debt.

In fact, we've already paid down approximately $1 billion in debt this year.

From a cash perspective, we remain invested in highly liquid and highly rated securities, primarily instruments such as bank time deposits and government-backed money market funds.

So you can see we have a solid financial position.

In closing, our strong top line and bottom line performance this quarter shows that the integration is working.

We're building diversity in our business and making steady progress with our PTP program.

Together with our robust R&D pipeline, we believe we can continue to manage the challenges in our business.

With that, I'll now turn the call over to Carrie.

Thank you, Bob.

Good morning.

Despite continued challenges in our global pharmaceutical business, our core strategy remains the same.

Driving top line growth, advancing the pipeline, and reducing costs.

With long periods of expected exclusivity on many of our core brands, we can leverage our investments in our existing portfolio.

We're also focused on capturing opportunities through our continuing geographic expansion program and we've seen a number of success stories around the globe.

Our international business continues to perform well, with solid growth in both emerging and established markets.

Outside the US, our international product portfolio is broader and includes products like Remicade, Caelyx, Cerazette, Suboxone, and now Bridion.

Along the same lines, products like Nasonex, Pegintron and Noxafil have even broader indications in international markets, which may provide additional growth potential for these brands over time.

Maximizing geographic opportunity is a critical component of our life cycle management plans.

As Fred mentioned, we've seen our country performance in Japan transformed through the launches of Pegintron, Temodar, Zetia and most recently, Nasonex.

Combined with future opportunities including Remeron, Asmanex, and Sugammadex, each currently under regulatory review in Japan, we believe there may be good growth potential over time in this important market.

In the US, our business environment is particularly challenging.

We have recently taken steps to address some of these marketplace dynamics through PTP, including the reduction in the size of our US sales force and the launch of a new selling model for our primary care sales team.

This new approach is tailored to individual prescribers' interests and focuses on better capturing local opportunity.

Because we place such a high value on our sales professionals, we worked hard to retain high performers and to preserve the important customer relationships that they have built over time.

Turning to product results for the quarter, sales from our global cholesterol franchise were down 13% to $1.1 billion.

We continue to see sharp differences between the US and international markets in sales of our cholesterol products.

Outside the US, franchise sales increased 37%, driven by strong performance across much of Europe, as well as Japan.

We are pleased to report that Zetia is benchmarking well with other major launches in Japan.

In the US, franchise sales were down 29% versus the prior year, consistent with declines in prescription volumes.

We have seen a continued shift towards generic preference in US managed markets, including Medicare Part D.

For 2009, we expect both Vytorin and Zetia to have competitive, second tier access in line with other branded cholesterol-lowering medicines.

Vytorin and Zetia each continue to have an important role in lowering LDL cholesterol.

Vytorin gets more patients to goal than the competition.

In head-to-head clinical trials using comparable doses, 52% of patients taking Vytorin achieved their LDL cholesterol goal versus only 35% with Crestor.

More than twice the number of Vytorin patients achieved their LDL goal versus Lipitor and more than six times the number of Vytorin patients achieved their LDL goal versus simvastatin.

Zetia, used alone or in combination, provides physicians flexibility to help get their patients to goal especially for those patients who cannot tolerate higher dose statins.

We will continue to remain focused on the many patients who require the dramatic LDL cholesterol lowering that Vytorin and Zetia can both provide.

Turning to immunology, we are delighted with the strong performance of Remicade, with sales increasing 32% to $564 million.

A key to this excellent performance has been the good growth across all indications, despite increasing competition.

Although the utilization of biologics has increased, market penetration in Europe is still substantially lower than in the US.

And with our growing strength and expertise in this segment, we believe that Remicade and ultimately, once-monthly golimumab position us for long term growth in both the hospital and office space settings.

We're very excited about participating in the 70% of the market, which is currently occupied by subcutaneous anti-TNF therapies.

In allergy, global Nasonex sales increased 6% with our international markets continuing to deliver strong double-digit growth.

Nasonex remains the leader among all nasal inhaled steroids with a global value share of more than 45%.

Our teams have done an excellent job blunting the uptake of Veramist.

We are also excited about the opportunity to extend our leadership position with the launch of Nasonex in Japan, just a few weeks ago.

In the US, Nasonex sales fell 8%.

We're pleased, however, that Nasonex' market share has held firm against increasing competitive pressures.

I also want to cover our new portfolio in womens healthcare and CNS.

I've been very pleased to see the enthusiasm of our people and the strong performance of our womens healthcare franchise in many countries around the world.

In first half IMS data, we have seen Nuvaring, Cerazette and Implanon each deliver strong double-digit growth versus the prior year.

From contraception to fertility, our womens healthcare franchise is among the broadest in the world today and our pipeline should keep us in a leadership role in the future.

In CNS, sugammadex, or Bridion, as it is called in Europe, is in the very early stages of its launch rollout as an agent to reverse muscle blockade during anesthesia.

Bridion has the potential to modernize and transform the practice of anesthesia around the world, though changing paradigms takes time.

Early feedbacks from physicians already using Bridion has been extremely positive.

We're proud to be associated with such an important treatment innovation for anesthesiologists, for surgeons, and for their patients.

In the US, our CNS product, Asenapine remains under review by the FDA.

Review of Asenapine has taken longer than we expected.

We look forward to FDA response, but we do not have any additional information at this time.

In summary, we continue to execute on our core strategy.

We will optimize our product investments to build new growth drivers over time and our people are committed to continuing to build a high performance Company for the long-term.

Now let me turn the call back to Janet.

Thank you, Carrie.

We would now like to open up the call for the question and answer session.

Thank you, ma'am.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Chris Schott from JPMorgan.

Just a couple questions on the Zetia/Vytorin franchise.

Can you talk a little bit more about your outlook for the formulary status in the US, specifically as it relates to Medicare Part D looking out to 2009?

Just what percent of accounts are you targeting to get to Tier 2 with this franchise looking out to next year?

Along the same lines, could you talk about the investment associated with the cholesterol JV right now?

Are you rescaling any of your investment level on this business given what appears to be lower sales base on the US side?

Thanks.

Very good questions, Chris.

Carrie?

In general, if you look at the availability of the products going forward currently and as we anticipate it could be for 2009, we feel very comfortable that there is good access.

As I mentioned, we believe we have very competitive second tier access for our products and we're quite comfortable with that.

We also are continuing to have a market leading share of voice of sales force promotion with these products and, again, we're comfortable with the promotional levels we have.

We reassess them continually, but we think we're in a good position now.

It's clear there's continuing generic pressure across the entire market.

We see this to be similar to other large categories in the US, but there continues to be a strong role for the high performance products, with significant impact on LDL, like Vytorin and Zetia.

So I think, Chris, what really is needed is more work on LDL and I think when it comes to the stronger products, the more effective products, they have a very important role to play and we do not see any big new products following the category of products that are on the market at this time.

So our goal really is to expand the population that gets to their LDL goals.

And next question, please?

Your next question comes from the line of Roopesh Patel with UBS.

Thanks for taking my questions.

I just have a couple of questions.

The first one for Fred, if we do experience a global economic slowdown, I was wondering if you could give us your perspective on how deeply that might impact the industry and the Company this time around relative to what we've seen in the past.

And then my second question is for Bob.

On a year-to-date basis, by my calculation, the FX benefit to net income is somewhere in the $0.17 to $0.18 range, about 12 to 13% of net reported income so far.

I was wondering if you could discuss how the Company plans to manage net income exposure to FX head winds potentially as we look forward to 2009?

Thanks.

Thank you, Roopesh.

Very good questions.

First, we are encouraged to see that governments are working together around the world to make sure that the downturn is a moderate or a mild one and this interaction is very helpful.

As you recall in the past, this kind of interdependence and interaction has not been very good and so this is a new model and we hope that it will be a mild downturn globally.

We are one of the defensive sectors and that is one of the advantages of being in the healthcare industry.

And within this sector, those companies that have diversity and innovation will always do well.

There is always an innovation premium for important products.

For example, a product like Remicade has done very well in already price-controlled economies because there's a need for a product like that.

It creates dramatic results for the patients that benefit from that medicine.

So we really are working very hard at managing for the new events.

We've already demonstrated that we can move with speed and flexibility when circumstances change around us and we do believe that if there are more government price controls, we will deal with those, but in the end, it's the innovation that really drives the premium that companies deserve for their products.

Next question, please?

There was an FX question, Fred.

So Bob -- please.

Roopesh, let me talk about FX a little bit.

Clearly we have been benefiting both on a top and the bottom line from FX.

I'll just go through the quarter.

The impact on Schering-Plough standalone this quarter on the top line was about 6% or so or roughly $170 million.

Now, while the percentage that drops to the bottom line will vary based on country and product mix of expenses and inventory movements, we estimate that roughly half of that drop to the bottom line.

Now, on OBS, remember, OBS was not in our sales base in 2007, so that's not included in the 6% SP stand-alone base.

But if you look at the expense base for OBS, it's more weighted to outside the US, so we would estimate that less than half of 50% would drop to the OBS business on an overall basis when you start seeing that contribute and starting in the fourth quarter.

Now, on a cash flow perspective, on an economic perspective, our large exposure is to the euro.

Given our euro debt and our anticipated euro debt repayments, and our euro expense base, those are fairly well balanced from a cash flow perspective.

Now, there is a P&L impact, but from a cash flow perspective, we're generally well-balanced given that euro debt and that euro expense base.

Thank you very much.

And next question, please?

Your next question comes from the line of Tony Butler with Barclays Capital.

Thanks very much.

The growth of Remicade continues to be quite strong and really two questions around it.

Carrie, what is it about -- which subindication can you give us some level of comfort that really is the principle driver?

I realize there may be all indications, but which one really is generating the principal driving force there?

Number two, you alluded to 70% of the market occupied by subcue therapies, is that also true internationally?

And then the third question is around the non-US, non-European strategy, of the products that you sell in Brazil, China or Central or Eastern Europe, can you tell me what the top three to five products actually are in those countries?

Thanks very much.

Carrie?

Thanks.

I think one of the things that we're most excited about with the growth of Remicade is that we see good growth across all of the indications and as you know, the penetration of use of biologics in Europe particularly is right now, only in the range of about half of that that we see in the US and more developed markets.

So we think that there is still potential for the entire category to continue to grow.

Rheumatoid arthritis has been the largest segment of the market and continues, of course, to be the largest portion of our sales as well, but we have been delighted to see, again, consistent growth, but I think the GI indications, the use in Crohn's and in ulcerative colitis are some of the others that are the most exciting because the potential for life-changing therapy for patients is there, but also the impact in terms of the available patient pool, the size of the afflicted populations for those markets is fairly substantial.

Psoriatic arthritis is important psoriasis, again, the impact that Remicade can have on patients suffering from severe psoriasis is pretty outstanding, so it's very motivating to physicians and frankly to our people to be able to be part of a product that has such a potential to change people's lives.

When you look at the subcue portion of the market, that is essentially that 70% refers to the portion where you see Embrel and Humira sales today.

The reason that's important for us is because, in Europe particularly the hospital channel is often where you find Remicade because of the need for infusion.

Now, we believe that Remicade may have the best efficacy profile of all the products out there today, but it does require infusion.

So the opportunity with golimumab in the future to participate in the subcutaneous portion of the market is exciting to us, because in some countries that takes us into a whole new channel and a new set of prescribers.

We think we have built such strengths already that we clearly have potential to take that strength into the other portion of the market.

Looking into our emerging market sales, we tend to see, particularly in those markets where there's a substantial amount of government business, that the specialty products generally are the ones that are doing the best.

These are new areas of treatment for many of these countries where the depths of use of products in these areas such as hepatitis is still fairly low.

So there is now more opportunity for treatment.

A market, for example, like China represents one third of the hepatitis B opportunity in the world, we do have the Hep B indication there as well and you see clearly Pegintron is one of the amazing opportunities for continuing growth in all of those emerging markets.

I was in Russia not too long ago and was just delighted to see in a country like that, that we are doing extremely well not only with the specialty products, but also in growing the primary care portfolio and particularly in women's healthcare.

We have a very strong franchise opportunity in China and we're doing well in all those emerging markets.

So I'm delighted to see that the potential there continues to be strong.

Carrie, I think there is a reimbursement component in every market and there is a private pay component.

And we let our country managers customize the local portfolio to take advantage of the local opportunity.

Yes.

But it's good to have a broad range of products available.

Okay.

Thank you, Tony, and next one, please.

Your next question comes from the line of David Risinger with Merrill Lynch.

David?

Yes, hi.

Thanks so much for taking the question.

In terms of currency, you provided a little bit more color this quarter, but, Bob, I was hoping you could be a little bit more specific about the currency benefit for Organon's top line.

You said less than half would drop to the bottom line, but if you could characterize that for us so that we can understand the Organon piece?

And then in terms of the joint venture, there's obviously a currency benefit given that the IP is in Singapore, if you could help us understand the currency benefit for the joint venture also?

Thank you.

Bob?

On Organon first, if you look at the overall percentage impact, which is roughly 6% for Schering-Plough on a stand-alone basis, while the skewing may be a little bit weighted outside the US for Organon, it wouldn't change that 6% materially.

And so there's a bit of an incremental revenue base, if you were to do it on a pro forma basis, David, that would drop, but, again, it would be less than the 50%, at least what we're seeing right now.

Now, going forward, that could vary, could vary by inventory movements, could vary by inventory mix.

That's kind of what we're seeing right now.

And I think, Bob, it's fair to say that country mix matters a lot, we have, for example, a very important Animal Health business that happens to be a very large business in a country like Brazil, which is not in the euro zone.

We need to be looking at the diverse portfolio that we have here -- gives us a lot of shelter.

InterCompany product sourcing also impacts it.

Yes, and we'll give more color, David, next year on this subject as we also understand the full cost base of Organon in countries outside the US, but there is a lot of natural hedges here in our Company as we go forward, but we do recognize that foreign exchange is going affect all companies with international operations.

And the next question, please?

Your next question comes from the line of John Boris with Citi.

Thanks for taking the questions.

Bob, can you just remind us, exiting 2007 what NOLs were through third quarter of '08, what cumulative NOLs there through 3Q '08.

And then on R&D, is it possible to get any update on your response on sugammadex to the nonapprovable and what additional work you might have to do on sugammadex in the US and then also on Asenapine, was there no official action on Asenapine and what is the status of Asenapine around the world?

Thanks.

Well, I'll ask Bob to answer the first question and our head of R&D, Tom Koestler who is overseas at this time, but calling in, he'll answer the R&D questions.

Bob?

First off, John, on the NOL coming into the year at the end of '07, we had roughly $1.7 billion or so of net operating losses.

Now, as we indicate in our SEC and 10-Q filings, some of that could be used to settle ongoing audit issues and we've disclosed that.

With respect to where we are, we do that once a year, John, so that will be in the 10-K, because it's variable throughout each individual quarter and those tax updates on the tax basis gets done once a year.

So we'll disclose that at the end of the year.

But we have not needed from a cash standpoint to access, international cash to fund US operations, if that helps you.

And Tom Koestler?

Yes, John, thanks for the question on sugammadex, this is -- as you know, we're fully committed to working with FDA to bring sugammadex to the market in the US over time but it's a process and the first step will be to have a meeting with the agency.

We have not yet had that meeting with the agency, but we will in fact have one and at that meeting, we just want to learn about the FDA's expectations and work with them to find a common pathway forward.

So that will be a process and we'll keep you updated along the way as we go forward.

With reference to Asenapine, yes, the FDA has missed their PDUFA date, their action date.

The application remains under review and as we've mentioned before, in terms of outside the US, the European Union requires a very specific trial called a relapse maintenance trial and that trial is still under way and we expect to get results from that trial sometime early next year and hopefully by the time we get -- may perhaps by the time we get to R&D day, we might be able to give you a little more color on that.

Thanks for the question.

Thank you, Tom.

And next question, please?

Your next question comes from the line of Craig Baskin with Putnam Investments.

Thanks for taking my questions.

I only have one left that's not been asked.

Bob, you talked about $1 billion in debt being retired this year, but if I look at interest expense over the last three quarters, it looks pretty flat.

So I'm hoping that you could explain why that's so, if debt has been retired?

Bob?

Sure, Craig.

The majority, $600 million of it was done just this quarter, this past quarter.

Okay.

If you look at it today, Craig, we have roughly $8.4 billion of debt outstanding.

Yes.

I would say the current annual run rate on interest is going to be in the low $500, there's some variable debt in there that can move around but in the low $500 million range.

Okay, great.

Thank you.

And, Bob, did you want to go to the public information about the next tranche that has to be repaid?

Our next maturity, we don't have maturities until 2010 and that's a 500 million euro debenture.

So our free cash flow is quite strong.

We have no maturities due in 2008 or 2009.

Thank you.

And next question, please?

Your next question comes from the line of Barbara Ryan with Deutsche Bank.

Barbara?

Good morning, good morning.

I guess, Fred, you highlighted for us a number of things.

I mean number one, that the industry is defensive and number two within the industry, you are more diversified and don't have the punishing impact of generic competition that many of your peers face.

And so I'm just wondering in light of those things, in the uncertain environment, don't you feel some sort of obligation to give some earnings guidance?

I mean you're the only one of your peers that hasn't done that.

Barbara, if you'll recall I have been CEO elsewhere and I did have guidance there, so I'm not against guidance.

It's just that under the circumstances and given the fact that Schering-Plough has been through a lot of transition and has important alliances with large products with partners, and the fact that we did OBS, that's just caused us to pause when it comes to giving numerical guidance.

But the issue is going to be looked at repeatedly inside the Company and that the right time we'll certainly see if we would want to do that.

We're not totally opposed to it, even though some companies have said that it promotes short-term behavior.

We're much more pragmatic about it, but at this point, this is not the right time, especially in light of what's happened in the global environment in the last month or so, but hopefully in the future, we might be able to give more color on our policy on guidance.

Thanks for your honest answer.

Appreciate it.

Thank you, Barbara.

Next one?

Your next question comes from the line of Burt Hazlett with BMO Capital Markets.

Thanks.

I've got a couple.

First, when should we see the impact, or begin to see impact of the most recent sales force changes or alignment in the US?

And then two pipeline questions, Fred, specifically to you, Novartis continues to mention in their pipeline and in their presentations a respiratory collaboration with you.

Our tracking indicates it's in Phase III and it's wrapping up.

There may be a filing in 2009 and another one in 2010, so my question is given the significance of this combination, the potential significance, is this meaningful to Schering-Plough?

When do we get clarity on terms and more importantly, when do we get clarity on data for this?

And then last, given the golimumab, another pipeline question, given the significance of the go-after data should we be considering golimumab for second line initially in RA?

Thanks.

Very good questions.

A lot of these are going to be answered in some detail at the R&D day, but I can assure you that we are very excited about the MFF product, which, as you recall, is a product in the Advair space and we have had a successful launch of Asmanex in the US.

We also have a product called Foradil on the market in the US.

This will be a combination product similar to the category that Advair belongs to and we are absolutely committed to the respiratory space.

We are one of the innovators in this area from the past and the way we have invested in this area and especially new approaches like the Grazax vaccine that we are working on just shows our commitment to this space.

And you'll learn a lot more on this in R&D day.

Tom Koestler, anything you would like to add to the specifics that were asked?

Fred, I think you covered MFF.

We will provide color on that mark at the R&D day next month.

We'll be able to give you some good color on that.

Then as far as the -- your question on second line, first line positioning for golimumab.

Golimumab is under Regulatory review, as you know, for both RA, psoriatic arthritis and ankylosing spondylitis and we have an ongoing trial in ulcerative colitis as well.

So that's under Regulatory review so I think it would be premature for us to make any comment on online positioning until Regulators get through their review, but maybe we will also be able to provide more color at the R&D day.

Thanks for your question.

And Carrie will give a brief response to the field force questions.

Carrie?

The changes in the US field force were done to be effective for October 1.

We are nearly through the training stages and the alignments that are necessary and I think right now our people are feeling pretty good, pretty energized and very focused on the future.

Thank you.

And next question, please?

Your next question comes from the line of Jami Rubin with Goldman Sachs.

Hi, Jami.

Hi, just a quick question on gross margins.

Your gross margins were about flat with where they were last year in the third quarter.

While I understand there's seasonality, Bob, just curious to know why you weren't able to show some improvement?

I would be happy to.

Thank you, Jami, for the question.

Here's what really happened.

You look at it, Jami, you had Remicade, we had Avelox and Cipro from Bayer, I would say some higher Animal Health pulling down in the margins, that's some of the product mix issues.

Offsetting that was generally a higher margin on the Organon products that we have.

When you look at those two net together, it was roughly flattening out.

Going forward, Jami, as we've said, gross margin's going to be a function of product mix.

As Remicade and our Animal Health business grow, it will put some downward pressure on the gross margin.

I think longer term, we're looking at gaining manufacturing efficiencies from our PTP program.

Also, our new product launches going forward should help the product margin.

Thank you.

Jami, we are fortunate that some of the newer products that have entered our portfolio are high margin products.

The womens health products have very good margins.

Just as a follow-up, if I could just follow up, is it safe to assume that without those new product launches in the US and with the growing contribution of Remicade and the -- the expected launch of golimumab next year and the changing royalty rates, is it safe to assume that we should continue to see sort of flattish to potentially pressure on the gross margin line at least until we start to see new product launches in the US?

I think that's right, Jami, but just keep in mind though, as we grow Remicade we make bottom line profits.

So while the gross margin line may get a little pressure, the operating margin line improves, so just keep that in mind as you go forward.

Okay, thank you.

Next question, please?

Your next question comes from the line of Steve Scala with Cowen.

Thank you.

I have two questions.

First, traditionally Q3 has not been the strongest quarter for nonethical businesses and there would appear to be both seasonal and economic reasons why Animal Health would not have had a great quarter, yet you delivered a quarter over quarter acceleration.

So was there anything unusual in Q3, nonethical revenues, such as maybe new launches or stocking that boosted this quarter?

And secondly, has Schering looked at all available public and nonpublic data on Vytorin, including registrational trials to see if there's a cancer signal?

The recent New England Journal of Medicine article did not consider all available data, so I'm wondering if you've done that analysis?

Thank you.

So I'll ask Tom Koestler to answer the second question.

Bob, I guess it's fair to say that at least in consumer healthcare this year, the allergy season has not been that great.

So Claritin has been effected on the, in the unfavorable direction.

In Animal Health, I think it's been innovation driven.

Also a couple of things in Animal Health, we still have increasing market penetration for the bluetongue vaccine, which started in Q2.

We've also had a patented fish vaccine that was launched in the quarter.

So those are two areas in Animal Health that are helping us, very new product launches.

It's too early to sell what the economic cycle is going to be when it comes to farm animals, but we are in very good shape because of the strong innovation cycle that we have in that space.

And Tom Koestler, if you can answer the second question, please.

Sure, Steve, the way I would answer your question, is that, as you know sir Richard Peto and his colleagues in Oxford concluded that if you take the randomized control trials, which are SEAS, sharp and improve it together there's no evidence that provide any credible evidence on an adverse effect on cancer.

So it's the joint venture's belief right now that cancer finding and SEAS is likely to be an anomaly, that taken in light of all the available data does not support an association at all with Vytorin.

In fact, the meta analysis conducted by Peto and his colleagues and over 20,000 patients in these ongoing trials is pretty persuasive.

I would also add that there's no preclinical evidence of oncogenicity in the ezetemibe carcinogenicity studies.

So as appropriate, the DSMBs, the Independent Monitoring Review Boards will continue to monitor these trials going forward.

But just to conclude, gain, we think that this is an anomaly.

Okay.

Thank you.

Next question, please?

Your next question comes from the line of David Moskowitz with Caris & Company.

Yes, thanks.

Good morning, guys.

Fred, you had mentioned something, there was something I read in the press about the global credit crisis having an impact on international sales.

I know there was an earlier question about that, but could you specifically talk about what you meant when you were making those comments.

Is there anything out there in Europe or other markets internationally that we need to think about?

From my perspective, it's government sponsored coverage.

So I would like some clarification on that.

And also, just on some pipeline questions, number one, the Zetia atorvastatin product, Zetia/Lipitor product, is that still moving?

Could you give us an update on where that stands and also could you just quickly name the products that you're most excited about in the late stage pipeline?

The top ten products that you talked about?

Thanks.

In terms of the products that are most exciting as far as I'm concerned, it's obviously TRA.

That looks like a very, very interesting product and the Phase II trials have been very encouraging and it is a large space.

If you look at the global rank order of sales in products, you are looking at Lipitor and then you are looking at Plavix.

So we are in here, in a space that looks very interesting to us and the Phase II trials give us a lot of encouragement.

When it comes to the comment on the global economy, in fact I do claim a little credit for being a little early on the comments regarding Europe, because at that time we were focusing entirely on the US and we are a global economy and things happen around the world.

On the positive side, the European governments are very sensitive about the access to healthcare in their own populations and when we have important products like Noxafil, like sugammadex, like Remicade, in environments like these, we feel pretty secure that these are the kinds of products that will be protected even as healthcare budgets get tighter.

And Tom Koestler, any comments on the last question?

No, but I think that what I would add just, Fred, is that we're pretty excited.

We're looking forward to the R&D day and I think you'll get a good flavor at our R&D day where we'll update you on our late phase portfolio.

We'll also give you some insight into some of our earlier programs that we haven't talked about before, as well as some biologics.

So I would just say that's only a month away and we'll have an opportunity to share that information with you then.

And Zetia atorvastatin?

Yes.

So Tom, anything on the combo?

Yes.

The combination is, the joint venture is working towards a goal.

As we reported in the past, that program is under way and our goal is to have that program viable at the time or prior to the patent expiration.

Will that be something that you'll talk about at the R&D day?

We'll see.

Thanks.

We do note that now the timing of that event might be November 2011, so there is some time for Tom and his colleague at Merck to work on this project.

I think we have time for one more question.

Your final question comes from the line of Tim Anderson with Sanford Bernstein.

Tim?

Thanks.

There's been concern that some sort of new negative analysis may surface at the upcoming HA related to SEAS data that first came out in July.

I'm wondering if you're aware of any such analyses being performed or if you can otherwise talk about SEAS news flow that we may have over the next few months, if any from Schering or Merck or otherwise?

And a question going back to Carrie's comments on formulary positioning, are you saying you don't expect any disproportionate slippage in Tier 2 formulary coverage for Vytorin, for Zetia relative to the other cholesterol drugs as you go into 2009 either for Medicare or commercial plans?

So I'll ask Carrie to answer the second question first and then we'll come back to Tom.

Okay.

When you look at the formulary access going forward and the availability of the products, and remember, formulary is only one type of availability, we feel confident that we have good access that is competitive to the other branded statins.

It is clear, however, that across the entire category, there is a growing preference in the managed care segment for the use of generics.

Compared to other branded products, however, we remain in a very competitive position.

And Carrie, it's fair to say that at some point, people are going to become more aware again of the need to get people to the LDL goals.

And in that regard, there are very, very, very few products that can do that.

Yes.

High risk patients.

We do see there is some diminution in second tier access compared to 2008.

We're very comfortable that that also has occurred across the category for the branded products and therefore we remain competitive.

Thank you, Carrie.

And Tom?

Yes, Tim, we're not aware of any new data being presented in the near term.

As you know, we had full data presentation from SEAS, which is already presented at the European Society of Cardiology and was published in the New England Journal of Medicine just this September.

So we're not aware of any new negative data and of course if there is some information that is going to be presented, we would trust that it would be handled in an appropriate scientific fashion and given the appropriate scientific process.

And how about just rehashing the prior data that was presented in July?

Because I think that's the concern.

Yes, Tim, again, as I said, there's really no new data.

There's been pretty good transparency on the full disclosure of the SEAS trial already and so we're not aware of any new data being presented.

Thanks.

Yes, so Tom, if I could just add to that, while we're not aware of any new data being presented, there's always a chance that people could rehash data that's been presented before.

Yes, and I think we're now at the end of our call.

I would just like to say that the OBS integration is succeeding and adding value.

We've built strength and diversity on many fronts.

Our strong late stage pipeline and exclusivity profile on key products gives us special edge as we look ahead and in a tough environment, we're showing that we can power through.

Thank you very much for joining us in this morning's call.

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

You may now disconnect.