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Executives

Janet Barth – Investor Relations

Fred Hassan – Chairman & CEO

Tom Koestler – Executive Vice President and President, Schering-Plough Research Institute

Bob Bertolini – Executive Vice President and Chief Financial Officer

Raul Kohan – Senior Vice President and President, Global Animal Health

Carrie Cox – Executive Vice President and President, Global Pharmaceuticals

Analysts

Tim Anderson - Sanford Bernstein

Jami Rubin - Goldman Sachs

Catherine Arnold - Credit Suisse

Chris Schott - JP Morgan

David Risinger - Morgan Stanley

Seamus Fernandez - Leerink Swann

Steve Scala – Cowen

Schering-Plough Corporation (SGP) Q3 2009 Earnings Call October 22, 2009 7:15 AM ET

Operator

(Operator Instructions) Welcome everyone to the Schering-Plough Third Quarter Earnings Conference Call. I would now like to turn the call over to Ms. Janet Barth.

Janet Barth

Thank you for joining us to review our 2009 third quarter results. We know we are among several companies reporting today so we plan for our call to run about 30 minutes. After some brief remarks we will open up the call to Q&A.

Before we begin, I would like to note that some of the comments made today may contain forward looking statements about Schering-Plough's business and prospects. As you know, our actual results may differ from these forward looking statements. Schering-Plough does not assume the obligation to update any forward looking statement. Please refer to the company’s Securities and Exchange Commission filings, including Item 1A, Risk Factors, and the company's 2009 second quarter 10-Q for additional information about the things that could cause our actual results to differ from our forward looking statements. The company's SEC filings, as well as today's earnings release and tables, are available on the web 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 will 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.

Now I’d like to introduce our Chairman and CEO, Fred Hassan.

Fred Hassan

I am pleased that today we’re again reporting a solid quarter. This quarter we delivered operational top line growth, reconciled bottom line growth, and major pipeline successes. The ongoing business is robust. Our people are executing with excellence and a powerful R&D engine is driving a strong pipeline forward. This is a tribute, above all, to the professionalism, the tenacity, and the resilience of our people. They have powered through continuing pressures related to currency and the global economic environment. They’ve also powered through the challenges of integration planning.

For example, we achieved 18% sales growth with Remicade, excluding currency, and solid growth of other key products such as Temodar and Nasonex. In fact, six of our top 10 largest selling prescription products delivered sales growth this quarter with and without the impact of currency. We also continue to see the benefit of a geographic expansion strategy coming through with strong growth ex-US especially in the newer markets.

Meantime the powerful R&D story continues to unfold. You heard about our 5-Stars in our R&D pipeline last November. Less than one year later three of those stars, Simponi, Saphris, and Bridion are launched or being launched in major markets. Earlier this month Carrie Cox and I were with our new field force for the Saphris launch meeting in Dallas. It was an exciting event and a very satisfying moment.

Back when we announced our planned acquisition of Organon BioSciences in March ’07 we said we believed Saphris was one of the underappreciated jewels in that acquisition. Today we can see that the OBS acquisition has been a great move strategically, scientifically, and financially. Today we continue to see Saphris as a jewel. We are also gratified to see that clinical trials of our other last stage stars progressing well.

As we approach our merger with Merck I’m proud that our colleagues are maintaining their focus and that Schering-Plough is firing on all cylinders. With those comments I will now turn over to other management colleagues to round out the picture of our business as we approach the day one of accommodation with Merck.

In addition to Bob Bertolini and Carrie Cox, you will be hearing from Raul Kohan about our Animal Health business and Tom Koestler will expand on my comments about our powerful R&D story. We’ll start with Tom.

Tom Koestler

I’d be happy to elaborate on the recent successes within our advancing late stage pipeline. As Fred mentioned, less than a year ago we began highlighting the 5-Stars within our research pipeline which includes Simponi, Bridion, Saphris, Thrombin Receptor Antagonist (TRA), and Boceprevir. Now three of the five have been approved and launched in at least one major world market.

During the past three months Simponi was granted approval in Europe and Saphris was approved in the US. We continue to study Simponi for Ulcerative Colitis Phase III and we also plan to study and file for additional uses with Saphris including in a maintenance setting as well as to treat negative symptoms. We are also submitting a supplemental application for use as an adjunctive therapy in bi-polar disorder.

Our third star, Bridion, or sugammadex was approved last year in the EU in response to a complete response letter we received from the FDA we recently initiated a healthy voluntary study in the US and Europe. This is a hypersensitivity study being conducted in about 450 healthy volunteers. The study [inaudible] and patients are currently enrolling. The study should complete in the first half of 2010.

Our two other stars, Thrombin Receptor Antagonist (TRA) and Boceprevir also continue to progress in their respective Phase III clinical programs. With TRA our first and best in class power one receptor antagonist I am happy to report that we currently have a total of more than 32,000 patients enrolled in both the TRA 2P or Timi-50 and Tracer studies. You may have also seen that the TRA Phase III methodology papers for both of the studies were published last month in The American Heart Journal.

Boceprevir, our investigational best in class protease inhibitor for the treatment of Hepatitis C is also progressing. We have two ongoing Phase III studies in both treatment experience and treatment naïve patients. Back in January we announced that these two studies were fully enrolled. The Phase III program remains on track and scheduled for completion in 2010 and we anticipate filing for regulatory approval by the end of 2010.

We’re also very excited about [Narlapovir], our next generation once a day protease inhibitor. There will be a presentation of interim Phase II data at the upcoming AASLD meeting in Boston at the end of the month. We also have presentations on Boceprevir and data from our Ideal Trial with Pegintron.

As Fred said earlier, the powerful Schering-Plough R&D story does continue to unfold. Over this past year we filed for regulatory approval of three new entities in either the US or EU. Corifollitropin Alfa, Mometasone Formoterol or [Dalera] and Nomac/E2 and we also filed a new version of Implanon. Meanwhile for Vicriviroc we plan to have a key FDA meeting this quarter before we initiate the rolling NDA process.

In Japan we introduced eight new products over the past two years and we recently received an endorsement for the approval for Sugammadex by the Japanese Committee on Drug. By any measure these are major accomplishments for any pharmaceutical company. For Schering-Plough it also reinforces the culture of development excellence and high through put clinical that we’ve built here.

In addition to the 5-Stars we have a constellation of programs in various stages of research development. Let me update you about a few of our earlier stage programs that we’re pretty excited about. First, Preladenant which is our novel first investment class antagonist two way receptor antagonist currently in Phase II for the treatment of Parkinson’s Disease. Based on feedback from FDA and the European Medicine’s Evaluation Agency we have recently developed a Phase III program to include use in both the mono-therapy and agent settings. These Phase III studies are in the planning phase for initiation in 2010.

While we remain very excited about the near term potential Simponi for inflammatory disease we also have additional shots on goal including our first and best in class opportunity for Anti Aisle 23 P19 [Monoponal] antibody which is currently in Phase I testing. We’re encouraged by the emerging proof of concept data in psoriasis.

We’re also very excited about the progress of our early development program for [Base or Betasicratise], a first and best in class treatment for Alzheimer’s Disease. Our pre-clinical data on primates which we shared with you last fall was pretty exciting because it showed that Base produce a greater than 90% reduction in A-Beta 42 Peptide upon continuous dosing. This novel once oral once a day treatment that can penetrate the blood/brain barrier is now in the clinic. Now we’ve seen in Phase I that with a single dose administration we are observing a 58% reduction in A-Beta Peptide in the cerebral/spinal fluid.

In closing, we’ve worked hard over the past six years to build a robust late stage pipeline. We are gratified by these recent R&D successes and we remain focused on delivering the promise of these new medicines to the patients who need them most.

I’ll turn the call over to Bob.

Bob Bertolini

Let me now take a few minutes to review the highlights of the quarter. As Fred mentioned, as we near the anticipated close of our merger with Merck we’re pleased that we’ve delivered another solid quarter with operational sales growth of 4% that’s growth excluding the impact of exchange. Despite the pressures for a currency headwind and tough global economic conditions we also increased earnings to $0.40 a share on a reconciled basis. In fact, starting in 2005 we delivered year over year reconciled earnings growth each year. We’ve done it again each quarter this year. We’re very proud of this long term performance.

On a GAAP basis our third quarter net sales were $4.5 billion down 2%. This reflects 4% operational growth and an unfavorable impact from currency of 6%. Within our Global Prescription business operational sales grew 6% offset by an unfavorable impact from currency of 6%. On an operational basis our growth was led by solid performance from key global brands such as Remicade, Temodar, Nuvaring, Nasonex, and Zetia in Japan.

Consumer healthcare sales were roughly in line with the prior year quarter at $282 million. Higher sales of Miralax and other OTC products offset lower sales of OTC Claritin and sun care and foot care products. Raul Kohan will talk about our performance in Animal Health in a few minutes.

Let me review our operating performance during the third quarter. On a reconciled basis our gross margin was 65.9% lower then the prior year period. The decrease in the quarter was primarily due to an unfavorable impact from foreign exchange, partly offset by favorable mix and manufacturing cost savings.

Before turning to SG&A I want to briefly review our progress on PTP our Productivity Transformation Program. For just the first nine months of 2009 we achieved more than $1 billion of PTP savings so we remain well on track to achieve our annual $1.5 billion PTP target by 2012.

SG&A expense in the third quarter decreased 9% to $1.5 billion, benefiting primarily from favorable currency and PTP actions. Excluding a favorable impact from exchange SG&A was about 5% lower.

Moving to R&D, as you just heard from Tom, we continued to invest in R&D and advance our pipeline including our 5-Stars. In the third quarter our R&D expenses increased 2% to $913 million. Excluding a favorable impact from currency R&D spending increased 4% in the quarter.

In closing, our continued focus and execution on our core strategies helped drive solid performance in the quarter. This is a testament to the hard work and dedication of our Schering-Plough colleagues around the world. As we move closer to the anticipated close of our merger with Merck we remain confident about the contribution that our people are making to the business.

Let me turn it over to Raul.

Raul Kohan

We continue to be excited about the potential of our Animal Health business. Our combination with InnoVet has created a stronger Animal Health company with a broad product portfolio and an innovative research pipeline. We are working together as one team and our long term fundamentals are strong.

Now I’d like to briefly comment on the performance of our business in the third quarter. Sales declined 12% reflecting an operational decrease of 5% and an unfavorable impact from currency of 7%. On a global basis our results were unfavorably impacted by a few factors. First, the Animal Health market continues to be impacted by tough global economic conditions. Second, we also had unfavorable comparisons related to the 2008 launch of our bluetongue vaccine. In addition to that our results were affected by backorders on certain products primarily due to the ongoing integration of Animal Health manufacturing practices and quality standards.

On the positive side our underlying business remains strong and we continue to bring new and innovative products to market. For example, during the third quarter we continued the successful launch of our new vaccine in Europe for Circovirus and Swine. We also strengthened our companion animal offering with several new introductions in both Europe and the United States, including the launch of a first in-class vaccine for canine influenza in the United States.

These new products help position us well for future growth and that is why we have a confidence about the long term performance of our Animal Health business.

I will now turn the call over to Carrie.

Carrie Cox

I’ll take just a few minutes to provide some perspective on our strong third quarter results. We’ve continued to work hard to capture the value in our product portfolio and we’re pleased to have driven solid operational growth across many of our top brands and in most major markets. Products like Remicade, Temodar, Nuvaring, and Nasonex have been important growth drivers. Their strong third quarter performance and their positive momentum maintained throughout the year provide another example of the strength of our global teams.

Leading the way is Japan, delivering strong double digit growth, ex exchange. The September launches of Remeron and Asmanex as well as the continued development of Zetia and Nasonex helped to transform our performance in this critical market. In fact, year to date sales in Japan have more than tripled since 2003.

I also want to comment on how we are delivering on the pipeline especially the 5-Stars. As you know, Simponi was approved in Europe in October for the subcutaneous treatment of Rheumatoid Arthritis, Psoriatic Arthritis and Ankylosing Spondylitis. It has already been launched in Germany. Market feedback from Canada where Simponi launched this past June shows that Simponi is delivering on its unique promise of powerful efficacy and once monthly dosing.

Finally I want to talk about the US introduction of Saphris. You heard Fred mention the launch meeting and we are absolutely delighted in the team’s energy, execution, and excitement. Saphris is now available in the US and the early feedback our sales team has received from psychiatrists is quite encouraging. We believe Saphris can make a difference for the millions of patients living with schizophrenia or bi-polar disorder. Its combination of competitive efficacy and demonstrated metabolic safety make it an important treatment option for new and switch patients alike.

In closing, back in March we asked our teams for their continued commitment to our business and our goals. They have more then delivered and have remained focused on driving performance. A very special thank you to all of our Schering-Plough colleagues for never losing sight of what matters most, our customers and their patients.

Now let me turn the call back to Fred.

Fred Hassan

As you’ve heard, our people are doing a remarkable job keeping up our strong forward momentum. Thanks to them we will be delivering a powerful engine to the new combined company with Merck. We look forward to what we can achieve together.

Now let’s turn to your questions.

Janet Barth

We’re now ready to begin the Q&A session. In the interest of time we would appreciate if you could limit yourself to one question so that we can get to as many of you as possible.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tim Anderson - Sanford Bernstein

Tim Anderson - Sanford Bernstein

I wanted to wish you, Fred, and the others well in your next endeavor whatever that’s going to be. The first question is whether you can give us an inkling when and where we’ll see you next. The second question is a product question on your cholesterol franchise. Can we get an update on when the FDA will come out with its analysis of CUs? It seems very much behind schedule and I wonder if FDA could be waiting on arbiter six to say anything on CUs. What are the updated expectations?

Fred Hassan

Thank you for those kind comments. As you know, I’m very focused on Schering-Plough results and very proud of the results we’re achieving. As I said earlier I love this industry, I’m passionate about this industry and I’m very, very confident about the future of this industry. You will see a very active Fred Hassan as we go into the future.

Tom Koestler

We have not heard anything back from the FDA so I would assume its still under review. I don’t really see a relationship to Arbiter 6. It’s not clear when we expect to hear from FDA and I really can’t offer much more then that.

Operator

Your next question comes from Jami Rubin - Goldman Sachs

Jami Rubin - Goldman Sachs

The equity income number from the cholesterol joint venture came in below our expectations and represents a yield to revenues of about 33%. Can you explain what’s going on because it does seem to be slipping? Is this a reflection of increased promotional expenses when I actually thought you were sort of pulling back given how much the market has shrunk?

Bob Bertolini

The equity income as reconciled came in around $387 million compared to roughly $415 million last year. I would say you’re right; the actually promotional spending is down so we’re actually pretty pleased with the performance we’ve seen in the equity income line.

Jami Rubin - Goldman Sachs

Even though as a percentage of sales it’s below what it was in the previous quarters?

Bob Bertolini

It’s really a function of the top line.

Operator

Your next question comes from Catherine Arnold - Credit Suisse

Catherine Arnold - Credit Suisse

Congratulations to you and your team for all you’ve accomplished with this company since you took the reigns. You’re leaving it in a very different place. Good for you. The question that I have for you is going back to Tom’s review of some of the mid-stage pipeline. The specific question about that I want to clarify is the base program in Phase II and if he could speak to what he expects the timeline of that Phase II program to be. What are the Phase II programs that will be in line for a go, no go decision on Phase III in 2010 that we should be watching out for?

Tom Koestler

As far as the base program is concerned as I just reported, we’re in Phase I and we’re moving into Phase II probably within the next three to six months. It’s in the rising multiple-dose phase so it’s early so I really can’t offer too much more then that. In terms of Phase transitions for the pipeline going Phase II to Phase III certainly [Narlapovir] which is the compound that I mentioned a few minutes ago which we’re pretty excited about out next generation protease inhibitor that is currently in Phase II so I think sometime later in 2010 we think about transitioning that program.

We will have some pretty interesting results that will presented at the AASLD. Boceprevir is already in Phase III; [Biperviroc] is on late Phase III as well. We also have a treatment naïve program for [Biperviroc] that’s in the Phase II setting so that could also transition going forward. We also have some interesting programs with [Anacor] which is this topical product that we have for [anikle mycosis] which is in late Phase II testing as well. We have a few others that are in the pipeline. I would highlight those right now and we’ll see what the future will bring for us.

Operator

Your next question comes from Chris Schott - JP Morgan

Chris Schott - JP Morgan

I was hoping you could elaborate a little bit more on gross margin we saw in 3Q. Specifically can you quantify the impact from currency on gross margins this quarter? At current exchange rates should we expect another hit from currency in the fourth quarter?

Bob Bertolini

The gross margin, we came in about 65.9% this quarter on a reconciled basis. That compares to 66.9% in the prior year period so it’s down about 100 basis points. We would estimate that the impact from exchange was about 190 basis points actually. Excluding the impact from exchange our gross margin would have actually improved primarily due to mix. We’re seeing some manufacturing cost savings. I think going forward it depends on the volatility of the currency, as you can see they’re extremely volatile and really this is related to the inventories as they move to our international networks. It’s hard to predict going forward what that impact would be given the volatility we’re seeing in the currencies.

Fred Hassan

The reason I think it’s a good question is last year at the R&D day we got asked a question about currency and we are heavy with our outside business and when you compare the spot rate today versus the spot rate this time last year it is quite a good difference and it should be good for companies with large businesses overseas.

Operator

Your next question comes from David Risinger - Morgan Stanley

David Risinger - Morgan Stanley

I was curious if you could provide an update on Improve It including where the enrollment stands. Also if you could please comment on the next steps for the steering committee and the others leading the study with respect to the look at the lipid levels in both arms and also the look at when the study hits 50% of events.

Tom Koestler

The Improve It product trial rate we’re pretty pleased with the enrollment. We have exceeded 15,000 patients to date. As you pointed out, there will be continuous review as outlined in the methodology paper and quoted by the DSMB and the lipid panel. I really can’t predict for you exactly when the interim analysis will take place because that’s dependent upon the event rate. We would probably point to sometime next year for that particular analysis. I do fully expect that the program will continue to the full 18,000 patients that we’re attempting to enroll for the program.

Operator

Your next question comes from Seamus Fernandez - Leerink Swann

Seamus Fernandez - Leerink Swann

Congratulations Fred and everybody from the Schering-Plough management team. Moving forward I’m sure we’re all excited to see where everybody ends up. Two quick questions. On TRA can you update us on where enrollment stands in the TRA 2P study and the timing of when enrollment is expected to complete in that study. The second question, with regard to Improve It can you tell us whether or not there would be a futility analysis incorporated into this study. If there isn’t a futility analysis can you explain why?

Tom Koestler

For the TRA program I would expect that for 2P the Timi-50 trial I think I previously reported this has been the fastest enrolling trial ever in the history of Timi. I would expect very soon that the enrollment will be completed for that 2P Timi-50 trial. As far as Improve It is concerned I think the best thing for you to do is to really look at the methodology paper that will outline in more detail the types of analysis that will be occurring going forward.

Operator

Your last question comes from Steve Scala – Cowen

Steve Scala – Cowen

I also have a question on TRA. Schering has been saying a filing was possible in 2010 or 2011. Is there a scenario where 2010 is still possible based on current enrollment, treatment duration, data analysis, and NDA preparation?

Tom Koestler

It’s difficult to be absolutely precise because as you know these are event driven trials. We’re very pleased with the enrollment on 2P and tracer as well. Both of these trials have really, really been hitting the mark in terms of enrollment. As I just reported a few minutes ago in response to the other question we would expect that the enrollment for 2P to be complete very soon. The trial is designed; the methodology paper is now available that was published The American Heart Journal. It’s designed such that it’s based on event rates and it also has a one year follow up. You can do the math and we’re still cautiously optimistic 2010, 2011 is where we’re still netting out.

Fred Hassan

In closing, I’d like to thank everybody for your good wishes. We have actually a very, very strong company but the company, as the result of the good people we have in our company. We look forward to our individual futures as we go forward. We’re proud that our people continue to drive high performance in the face of major challenges. It’s rewarding to see that the Schering-Plough R&D story continues to unfold with new product launches and a very rich late stage pipeline. Thanks to our six year transformation journey at Schering-Plough we will now be delivering a very powerful engine into the combination with Merck. This is a great legacy created by our people.

Thank you very much for joining our call this morning.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Schering-Plough Corporation Q3 2009 Earnings Call Transcript
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