Schering-Plough Corp. Q1 2008 Earnings Call Transcript

Schering Plough Corporation (SGP)

Q1 FY08 Earnings Call

April 23, 2008, 8:00 AM ET

Executives

Alex Kelly - VP, IR

Fred Hassan - Chairman and CEO

Thomas P. Koestler - EVP and President, Schering-Plough Research Institute

Robert J. Bertolini - EVP and CFO

Carrie S. Cox - EVP and President, Global Pharmaceuticals

Analysts

Catherine Arnold - Credit Suisse

Roopesh Patel - UBS

Tim Anderson - Sanford C. Bernstein

James Kelly - Goldman Sachs

John Boris - Bear Stearns

Anthony Butler - Lehman Brothers

Craig Baskin - Putnam Investments

Steve Scala - Cowen & Company

Seamus Fernandez - Leerink Swann

David Risinger - Merrill Lynch

Jamie Rubin - Morgan Stanley

Presentation

Operator

Good morning, my name is Sylvia, and I'll be your conference operator today. At this time I would like to welcome everyone to the Schering-Plough First 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].

I will now turn the conference over to Mr. Alex Kelly, Group VP of Global Communications and Investors Relations.

Alex Kelly - Vice President, Investor Relations

Thank you, Sylvia and good morning everyone, and welcome to the Schering-Plough, first quarter 2008 conference call. We will wrap up our call by 9.00 AM this morning.

Before we begin I'd like to cover a few items. First, some of the statements that we make on our call this morning may be considered forward-working statements. Our SEC filings including an 8-K we filed this morning, identifies certain factors that could cause our actual results to differ materially from any forward-looking statements that we make today.

Our SEC filings are available on our schering-plough.com website, as well as the earnings release and tables. Finally I'd I also note that during the call we may refer to non-GAAP measures including adjusted net sales, or adjusted top-line sales. This is a non-GAAP measure which we define as our GAAP net sales plus an assumed 50% contribution from the cholesterol joint venture.

We will also refer to items on a reconciled basis or as reconciled amounts. These exclude purchase accounting adjustments, acquisition-related items and certain specified items. You can refer to the non-US GAAP reconciliation tables that we provided on our website in the Investor Relations section of our schering-plough.com website.

This morning I am joined by Fred Hassan, our Chairman and Chief Executive Officer; Tom Koestler, the Head of Schering-Plough Research Institute. Bob Bertolini, our Chief Financial Officer; and Carrie Cox, the Head of our Global Pharmaceutical Business.

Now I'd like to introduce Fred Hassan.

Fred Hassan - Chairman and Chief Executive Officer

Thank you Alex and welcome to our call. As Alex indicated Tom Koestler, our Head of R&D is on the call today as a special guest. Tom will make some comments during my opening remarks. Then I'll turn over to Bob and to Carrie and then we will open up for your questions.

I will cover three topics this morning. First I will comment on the quarter and what it shows about the strength we've built in Schering-Plough. Second, I will talk about the challenges we face including the new cholesterol challenge and how we're responding in order to continue our story of building a high performance company for the long term.

Third, I'll talk about the transformation I see ahead for our global industry and why I am optimistic about Schering-Plough's future.

So let me begin with the quarter. We are pleased with our performance. It reflects the dramatic transformation of Schering-Plough that we have executed since the spring of '03. We grew on a broad front across all of our businesses. The early impacts of the colestral challenge in the US were significant. Importantly however we also saw VYTORIN and ZETIA grows strongly in other markets. This truly is a global franchise.

We saw our geographic expansion strategy continue to bear fruit with growth in new markets such as Brazil. During this quarter we also saw our rich late-stage pipeline continue to advance. For example; with the unanimous positive recommendation of the SC advisory's panel on sugammadex. This product that we added in from OBS is just one dimension of the value of the OBS acquisition.

When we announced the OBS deal in March of '07 we said it was a strong science, strong strategic, and a strong financial fit. Now we are realizing that promise.

During the quarter the integration process continued as planned. We saw this combination adding value across all our operations. We created more value in our late stage pipeline and in our combined R&D engine and we created more value across the company. For Example in the new long-term growth engine we create in women's health and in the strong performance delivered by our powerful combined animal health unit.

Finally our quarterly results reflect the impact of our rigorous focus on cost control such as the hiring freeze imposed from March of last year. So our first quarter performance really underscores the breadth and depth of strength that we've steadily been building into Schering-Plough including the transformational impact of OBS. These strengths are why we feel that we can manage the new challenges in front of us, especially the cholesterol challenge. The unwarranted confusion in the U.S. about cholesterol management and about our products VYTORIN and ZETIA, that started in January, clearly had a big impact on this important franchise.

Let me pause here and ask Tom Koestler to make some comments.

Thomas P. Koestler - Executive Vice President and President, Schering-Plough Research Institute

Thanks Fred. Let me spend a couple of minutes talking about our science at Schering-Plough, especially the science around cholesterol as I have been giving this a lot of thought lately.

Obviously we've been frustrated by the confusion in the U.S. market that has been created by the reporting on the enhanced trial. As you know, this was one of many trials conducted by the Merck Schering-Plough joint venture. Many cardiologists and lipid specialists have told us that lately the [ph] results of this imaging trial have been blown way out of proportion. I would venture to say that these doctors are the meaningful majority whose tempered views are not being portrayed by the news stories they try to sensationalize. And by blowing this one trial out of proportion in unwarranted controversy of around the importance of treating LDL cholesterol to the recommended targets may actually be hurting patients.

Let me review 5 points about the science here. First, dozens of outcome studies over the last several decades have reconfirmed the value of lowering LDL cholesterol and reducing cardiovascular events. In fact an article in Clinical Therapeutics in 2007 cited over 60 studies with greater than 200,000 patients over the last thirty years that have demonstrated a cholesterol lowering, is clinical beneficial in patients with coronary heart diseases or elevated coronary heart disease risk.

Second, as referenced in the journal of the American College of Cardiology article from 2005, this is true for drugs that reduce cholesterol synthesis in the liver as well as for treatments that reduce cholesterol by working in the intestines. Even surgical removal of part of the gut is associated with reduced cholesterol in better outcomes.

Third, regulatory authorities including the FDA recognize the pre-eminence of LDL cholesterol over other surrogate markets. And fourth, new studies come out every year that further validate the LDL hypothesis and add to the legion of studies that support the move to aggressive therapy, including the SAM study which was published earlier this month and the COURAGE study which was published in 2007.

In both of these studies, ZETIA was used to augment statin efficacy. These studies show that aggressive management of cholesterol and other risk factors leads to better results. And fifth the safety and excellent tolerability of ZETIA remains unchallenged.

There were no new safety issues in Enhance. And in our large ongoing trails of more than 20,000 patients, the Data Safety Monitoring Review Boards have raised no new safety issues.

Finally, what has been unsaid in all of the media coverage about cholesterol is that there are only so many ways to get patients to their LDL cholesterol results. Physicians note that many of these options are hard to take due to the tolerability and potential toxicity issues.

VYTORIN and ZETIA are approved to lower LDL cholesterol. They do that and we are confident in the science behind them. In fact VYTORIN has more patients to goal than rosuvastatin, atorvastatin or silverstatin alone, whether the goal is to get to 100 or especially to the more aggressive target of 70. This is the reality of what happen in clinical practice.

And before I hand this back to Fred, I just want to address some integrity issues that have been raised.

First, no one at Merck or Schering-Plough knew the results of the enhanced trial before December 31st '07, the day the study was un-blinded, and second, our scientists act in good faith in conducting trails. Strong-willed? Yes. Quality-obsessed? Yes. Passionate? Yes. But the record shows that we acted in good faith.

Third, we have a robust science culture and we continue to expand and build. And finally we stand behind our science and the science behind VYTORIN and ZETIA. Our goal, the reason we do what we do is always meant to use that science to bring medicines to patients, and improve and extend their lives; we remain undeterred in that mission.

And finally, let me comment on the strength of our pipeline by mentioning sugammadex. We are pleased with the sugammadex advisory committee, which voted unanimously, 10 to 0, to recommend approval. We will continue working with FDA and regulators in Europe and Japan, as they review our applications and we are proud of the innovation represented by sugammadex and the other products in our pipeline.

Now with that, Fred, let me hand it back to you.

Fred Hassan - Chairman and Chief Executive Officer

Thank you, Tom. So we have a lot of confidence in our science, but we are concerned about the unwarranted confusion of our cholesterol treatment and our products. We are concerned about the impact of this on our shareowners, and we are concerned that this unwarranted uproar has been undermining patient care.

Confusion among patients and patients not taking their needed medicines, undermines the war on heart disease; our nation's number one killer. So it is encouraging to see attention come back to doing what is right for public health. The basics are that lower LDL cholesterol is better and the doctors need the right tools to get their patients to their lower cholesterol goals. VYTORIN and ZETIA continue to be valuable tools for cholesterol management. That is why we are committed to these treatments and that is why we will continue to advocate their appropriate use.

Meantime, we do face a big cholesterol challenge. We also face other dramatically increasing pressures in the pharmaceutical environment, pressures such as the political pressures on the FDA in the US, pressures such as intensifying price control pressures around the world, pressures such as the increasing challenges to intellectual property protection, and other challenges.

The responding... we are responding decisively to these challenges with our new productivity transformation program or PDP that we announced earlier this month. We already have started with actions and they will accelerate I am personally leading PDP with the members of my executive management team. Target is clear, $1.5 billion in annual savings by 2012 with more than 80% of those savings achieved by 2010. Bob Bertolini will talk more about the details in a moment.

As we said earlier this month, we are using PDP as a tool to increase productivity including cost reduction and cost avoidance. We will get these savings through a numbers of actions. Every area of the company will contribute to this program. However, PDP is not and in itself [ph]. PDP is a key action to support our continuing core strategy for driving long-term high performance. We'll be focusing on growing the top-line, we'll be focusing on growing the pipeline, and we will be focused on reducing costs and improving productivity while continuing to invest wisely.

The transformation we have accomplished at Schering-Plough gives us special strength. And the job ahead for us is to use all of those strength and PDP to bridge our challenges, so that we advance to the new product cycle that lie ahead; to TRA, to asenevite [ph], to golimumab, to vicriviroc, to boceprevir, to sugammadex or other late-stage compounds.

Lately, a few words about the transformation of our industry and why I am optimistic about Schering-Plough's future. The intensifying pressures on the pharmaceutical industry in the US are very unfortunate because this industry is our country's high-technology, high-innovation jewel.

Only a few years ago, the FDA took great pride regarding how many new products were approved first in the United States. We were at the Science Innovator and the regulated clinical [ph] gold standard. Now you hardly hear about this. The studies to EMEA that are becoming the agency that acts faster with less political interference and with high science. So the U.S. environment is clearly becoming more negative while other markets are becoming increasingly more important, including the new markets of Asia, Latin America and East Central Europe.

Meantime, many of our competitors are also facing huge patent expiry cliffs on billions of dollars of branded drugs with few new products to replace them. In this rapidly transforming environment we have many reasons for optimism about the future at Schering-Plough.

Our geographic expansion strategy that we have been pursuing for four years is paying off. We are also realizing the promise of our other diversification actions. Actions such as the diversification of our product portfolio including the OBS assets, actions such our investment in consumer healthcare and the creation of a world leading combined animal health unit.

While many of our competitors are suffering from late-stage pipeline gaps, we have one of the richest late-stage pipelines in our industry. We can see exceptional potential value creation as we look back 2012. While many of our competitors are grappling with huge patent expiry issues, our key existing products are all protected well into the next decade.

Most importantly of all through our people we have forged a strong, aligned, and passionate global team. They are led by a very strong management team; one that has prevailed over even bigger challenges than the ones we face now. So Schering-Plough is very well prepared for the future.

Our challenges are significant but they are manageable. Our long-term prospects are among the strongest in our global industry. We have been challenged before and succeeded; we can do it again.

And now let me turn over to Bob Bertolini.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Thanks Fred, and good morning everyone. As Fred mentioned, we are making good progress with the integration of the strategic OBS acquisition and managing the challenges of our business by long-term performance. As you know this is our first full quarter of combined operations with OBS. So it's a bit confusing to compare our operating results to the prior year, when there was no impact from OBS.

We are trying to help you navigate through the financial results to help you understand the underlying performance. Also we continue to provide tables to help you compare our GAAP to our reconciled results. On a reconciled basis we generated $0.53 per share in the first quarter and we are pleased with the performance.

Over the next few minutes, I'd like to cover our first quarter financial results. First our sales and earnings. Second, I'll discuss some information pertaining to operations. And finally, I'll give you some perspective on 2008 and discuss our productivity transformation program or PTP for short.

First, our sales performance for the quarter. And GAAP sales increased to $4.7 billion. This includes about $1.3 billion in sales from OBS. Absent OBS, our net sales for Schering-plough on a standalone basis would have been $3.3 billion, up 12% year-over-year.

Currency also worked in our favor this quarter contributing about 7% to the Schering-Plough standalone sales growth. Adjusting net sales were $5.3 billion this quarter. Now remember adjusted net sales includes an assumed 50% contribution from the cholesterol join venture.

In the first quarter, we saw decline in the U.S. prescription volume for VYTORIN and ZETIA as expected. As a result U.S. sales of the cholesterol franchise were down 5% year-over-year. Outside the U.S. cholesterol franchise sales were up 46% driving a 6% increase in global franchise sales on year-over-year basis.

Moving past cholesterol, you can see that our increased geographic and business diversity is adding strength to our top-line. For example sales in international markets increased 78% to $3.2 billion, about 20% excluding OBS. Remember we also benefited from currency this quarter. Our prescription pharma sales were driven by about $850 million in sales from Organon including full quarter contributions from FOLLISTIM-MARVELON [ph] among others. We also saw continued growth of REMICADE, TEMODAR and AVELOX.

Meanwhile we are seeing some challenges in the U.S. prescription business. We see our CLARINEX and PEGINTRON declining on a year-over-year basis. Our NASONEX was also down slightly.

Carrie will talk more about the prescription products in a few moments.

Meanwhile sales Animal Health were $723 million and Consumer Health were $377 million. Combined they generated more than $1 billion in sales this quarter, more than 20% of GAAP sales. We like that they are growing. They generate reliable cash flows and they add to the diversity of our by business. In Animal Health, there was good underlying growth in both Schering-Plough and Intervet, with Intervet adding about $450 million to our results.

Consumer Health grew 9% to $377 million this quarter to the continued growth of OTC CLARITIN and NEUROVAX.

Moving to earnings. On a GAAP basis we recorded earnings of $0.15 per share. As I said when you exclude items related to the acquisition of OBS and other specified items we earned $0.53 per share on a reconciled basis. Let me explain the three pre-tax items that read [ph] to the earnings reconciliation.

First, we had purchase accounting adjustments of $691 million. Second, we had integration costs and other acquisition related items of $23 million. And third, we had a gain of $17 million from the sale of a manufacturing plant in Australia. Let me now touch briefly on our operations.

On a reconciled basis, our gross margin of 68.9% was generally in line on a year-over-year basis. This reflects a slight improvement stemming primarily from mix with OBS and other higher margin products offsetting some unfavorable mix impact from REMICADE.

Moving on to SG&A. Excluding OBS expenses of about $400 million, SG&A expenses grew by 5%, largely due to foreign exchange. We also had a strong focus on cost control, including our hiring freeze that started in March of 2007 as Fred mentioned. This strong focus on cost control will continue with PTP.

We also had a benefit of about $0.02 resulted from FAS 123R fair value re-measurement made to an incentive plan that is based on the performance of Schering-Plough stock. This benefited our first quarter earnings.

On research and development, we continue to invest in R&D. R&D expenses came in at $880 million this quarter. This included about $225 million from OBS. On a standalone basis, the Schering-Plough R&D expense would have grown about 7% year-over-year absent OBS.

Going forward, as we continue to integrate the business and financial systems at the operating level, it will be more difficult for us to break out OBS separately. Let me close with a few comments about our perspective on the remainder of 2008 and our productivity transformation program.

On cholesterol, we only have a couple of weekly data points since the end of March. While it's too early to determine the long-term impact of this in our business, second quarter and full year sales of VYTORIN and ZETIA in the U.S. are expected to decline on a year-over-year basis. You can expect us to continue our support of VYTORIN and ZETIA. They are strong global brands with good safety, efficacy and tolerability profiles.

And now some comments on the company. Our performance in the first-quarter was strong. As you think about future performance, you should keep a few points in mind. The following factors helped our first-quarter reconcile results but may not be present in the remaining quarters of 2008. First currency was a significant factor in our sales and reconciled earnings growth, so keep a close eye on year-over-year currency moves.

Second as in previous years, the first quarter benefited from NUVARING in the U.S. cholesterol franchise. This benefit amounted to about $45 million in the quarter. As a result of this NUVARING and current U.S. prescription trends, equity income is likely to be lower in subsequent quarters of 2008.

Third, there was a FAS 123R adjustment that I mentioned earlier. And fourth, we expect the R&D spending to be higher in the remaining quarters of 2008 and it wasn't the first quarter based on advancing late-stage projects.

Moving on to our productivity transformation program or PTP, we are still developing the implementation plan. But let me tell you what I can. As announced earlier this month, we plan to generate a total of $1.5 billion in targeted savings and synergies. This includes our original $500 million synergy target plus an additional $1 billion in savings. This represents about 10% of the combined companies' full year 2007 estimated cost base including OBS. $1.25 billion or more than 80% of the plant savings are targeted to be accomplished by the end of 2010. The remaining saving are targeted to be achieved by 2012.

As Fred said, we are looking for savings and productivity improvements across the company. We are currently targeting the biggest chunk of our saving to come from SG&A.

And looking at the individual lines, we see about half from SG&A and the remainder split pretty evenly between R&D and manufacturing. As I mentioned, we are still developing the details of the implementation plan so the numbers may get refined over time or we are on our way.

As you know there are new challenges ahead in 2008, and we are taking decisive actions to address them. Compared to the past, we are now a more diversified company with a stronger R&D engine and in a better position to manage these challenges.

Now, let me turn the call to Carrie.

Carrie S. Cox - Executive Vice President and President, Global Pharmaceuticals

Thanks Bob. Good morning. Our foundation remains very much intact even as we face new challenges. We have good depth and breadth across our portfolio with many of our brands having expected exclusivity well into the next decade. While our U.S. business momentum has slowed especially with the impact of the cholesterol business, our international business continues to deliver solid growth.

Turning to our product portfolio, sales from our global cholesterol franchise increased 6% to $1.2 billion. International franchise sales grew 46%. We had particularly impressive performance in the core European market. In the U.S. sales were down 5%.

I want to provide some background information to help frame the current cholesterol environment in the U.S. First December data suggests that more than 90% of VYTORIN and ZETIA prescriptions come from continuing patients. Next ZETIA usage is split roughly between monotherapy and combination therapy where ZETIA is typically added to statins of 20 milligrams or more to help patients get to goal.

Third, total prescriptions for the cholesterol market this quarter grew less than 5% versus the prior year, but also declined 1% versus the fourth quarter. Lastly, total prescription share for our cholesterol franchise is down close to three market share points in the month March versus December. The recent weekly data suggests a further decline.

These numbers are deeply concerning for patient care and indicate that the recent fear has needlessly scared patients off their medication or into using a less effective therapy. Recent IMS data suggests that more than 90% of patients switching from VYTORIN have moved to a less efficacious product. Therefore these patients may not be reaching their LDL cholesterol goals.

For example, most of the patients switched from VYTORIN 10/40 are now taking simvastatin 40 milligrams or other lower doses. We are seeing a shift to lower efficacy products across the dosing range.

Most patients treated for high cholesterol have co-morbidities such as diabetes or hypertension. For these high risk patients LDL cholesterol goes up 70 or below may be appropriate. At comparable doses VYTORIN simply gets more patients to goal versus the competition. More than six times that of simvastatin, more than twice the number of patients versus Lipitor and 52% of VYTORIN patients got to goal versus only 35% with Crestor.

We will continue to stay focused on the many patients who require the superior LDL cholesterol reduction that VYTORIN provides. In managed care, VYTORIN and ZETIA continue to have competitive second tier access though it a highly competitive environment. We are pleased that key stakeholder continue to recognize the safety and efficacy of our medicines and the important role they play in getting patients to goal. We proudly stand behind VYTORIN and ZETIA and will continue to fully support these brands.

REMICADE reached another milestone delivering a $500 million quarter for the first time in its history. We continue to see broad growth across all indications despite intensifying competition.

In rheumatoid arthritis, REMICADE market share among patients, new to biologic therapy, has grown to 23% since last year. In psoriasis, REMICADE market share has already surpassed RAPTIVA and now ranks number two in the category with a 28% market share.

REMAICADE remains the only anti-TNF therapy approved for ulcerative colitis. C Clinical data now included in the label show that REMICADE helped reduce surgeries by one-third in UC patients. REMICADE is a significant advance for patients who previously had little choice but to progress to surgery. As the market leader in both ulcerative colitis and Crohn's disease, REMICADE will be well positioned for future growth as the use of anti-TNF therapy continues to expand.

Last month we announced the European submission of golimumab for rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis and we are very pleased that we expect to have both REMICADE and golimumab for another 15 years following launch in our current territories.

In allergy and respiratory, global NASONEX sales increased 8% driven by solid growth across our international market. NASONEX remains the global leader among nasal inhaled steroids and enjoys expected exclusivity in the US through 2018.

In the US NASONEX sales declined slightly with a slow start to the spring allergy season. NASONEX market share has held firm and remains the number one nasal inhaled steroid prescribed among allergists, pediatricians and ENTs.

With AVELOX, sales increased 24%. Market share reached an all time high of more than 22% despite a weak respiratory tract infection season during the winter. To put this performance into perspective, AVELOX market share has more than doubled since we began marketing the brand late in 2004.

I also want to comment briefly on our women's health portfolio. Organon has long been a leader in this therapeutic area with franchise sales exceeding $1.4 billion based on 2007 IMS sales. We are very excited to build on this success and we have been impressed with highly experienced sales teams and we are deeply engaged in work to capitalize on the potential of this very important franchise particularly with NUVARING.

In closing, our people around the globe especially our sales professionals remain firmly committed and passionate about building a high performance company for the long-term. We look forward to our important work ahead. Thanks, and let me turn the call back to Alex.

Alex Kelly - Vice President, Investor Relations

Thanks Carrie. Now we'd like to open up the call to take your questions. In order to get through as many questions as possible, please limit yourself to one or two questions and we will not take any follow-up questions. But if you do have additional question, you are welcome to rejoin the queue. Slyvia, we are ready for the Q&A.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question comes from the line of Catherine Arnold from Credit Suisse.

Catherine Arnold - Credit Suisse

Good morning. I would like to get your opinion in regards to the cholesterol script trend and is it plausible that the script trends already show the most negative response to enhance an ACC and that further downside although not impossible is less likely from here? And secondly as we talk to investors, there's some concerns that your $1.5 billion target for PTP is too aggressive. Can you share your argument to why this number is achievable and does not have risk? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

Catherine that's... those are both very good questions. I can ask my colleagues to try to help answer the first one, but I think that the reality is it's too early. It's just too early... we all know that the open science discussion that we are hoping for at the ACC never occurred, and there has been confusion in the market. And we are working with it; it's very difficult to go to any previous models to make a prediction on how the market share might recover here. But we are working very hard and we're engaged and we are very pleased that temperate voices have surfaced that are again advocating the importance of lowering LDL and getting people to goal.

As far as the PTP is concerned, it is very achievable, it's 10% of our '07 cost base. It's 10% of our headcount... combined headcount. This company has a very, very tough attitude to costs. It's very deep into our NDA... into our D&A, and we are at the same time having this ambitious goal of growing the top-line and growing our R&D pipeline. The reason we are being very selective with our cost cuts is to make sure that we don't hit our growth areas which have made this company so strong. We were an $8.3 billion company in '04, we're now in the $20 billion zone, we're very proud of our growth rate; we would like to keep growing. At the same time, we do feel that we can't be much more productive and we can be more tough with our overhead costs as well as some R&D programs and sales and marketing programs. And we will be going after that... after all those areas.

We also do assume some natural growth in costs. There will be opportunities that will come our way and we will certainly go after those opportunities. And with that answer, let's go to the next question please.

Operator

Your next question comes from Roopesh Patel from UBS.

Roopesh Patel - UBS

Thanks. Just a couple of questions. First on VYTORIN and ZETIA in the US; if you could just discuss the potential figures that could get this franchise growing again prior to release of the IMPROVE-IT trial results in 2012 and then internationally what impact if any are you seeing post the ACC meeting? And then separately for Bob it appears that this quarter's results demonstrate meaningful SG&A leverage. Can you further elaborate on what is so unique about this quarter that may not carry through in two subsequent quarters? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

So Roopesh, I will just make a general comment that "lost in the noise" [ph] is a very important statement that came from the American Heart Association on the great advance that we have made in our country in reducing heart attacks and strokes over the last several years and one reason that's happened is because people are more carefully about their lifestyle. There is much more care being placed to diet and exercise. But also the new medicines have greatly helped in that regard.

We know that 90 million people in our country are candidates for cholesterol care... cholesterol management. Only half of them even know that they should be aware of their issues and of those half who are being treated only really half are getting medicines. The other half know they have an issue but they are really not being treated. And of those half who are being treated, only half are at their LDL goals. So there's a huge opportunity here to improve public heath and to improve cholesterol care and it just happen as you heard from Carrie that when it comes to getting people to their LDL targets, especially the risk could be... the patients at risk are at very high risk. VYTORIN and ZETIA are the best tools that doctors have to get patients to their targets. And as we look at the landscape around us, we don't see any new molecules or any new major approaches that might be there for the next several years.

So ZETIA was a major advance when it came along in '02 and VYTORIN was a major advance when it came along in '04. And we do believe very strongly in the opportunity that exists here. We also believe... so Carrie, if you would want to add to my comments?

Carrie S. Cox - Executive Vice President and President, Global Pharmaceuticals

I think we have seen very good work done with our sales forces focusing on where this issue really needs to be addressed which is in the physician's office. We are encouraged that average practicing physicians understand the need to get their patients to their LDL cholesterol goals and as Fred said, the big thing to take away from this is more than have other patients who are not reaching goal even prior to these events. The concern that we have going forward is that even fewer patients may be reaching their goals right now. So our job is to continue to do the very good work that these extraordinary products give us the opportunity to do which is making sure that patients get the opportunity to get to their LDL cholesterol goals and not have the additional risk that can come from a raised LDL level.

Fred Hassan - Chairman and Chief Executive Officer

Next question please. Wait, I think [multiple speakers], yes, Bob.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

And Roopesh let me get back to you and your question on the SG&A lines. So a couple of things if I can point to. As I mentioned we had a $0.02 benefit from that 123R adjustment that I mentioned, so that was $0.02 in the quarter as a benefit that came through.

I think when you think about our second quarter, it generally tends to be a seasonal quarter with promotion spending in our consumer business and in our allergy business. As Fred mentioned, we are seeing the hiring freeze, that's having an impact on us. So we are getting some leverage in the business.

And finally, I think, we are starting to see some of the OBS synergies come through. So I would say actually those are the points going forward.

Fred Hassan - Chairman and Chief Executive Officer

Thank you Roopesh and next question please.

Operator

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

Tim Anderson - Sanford C. Bernstein

Thank you. Can you talk about how you see Merck's Coadaptive impacting VYTORIN and ZETIA, their producer date I think is Monday? And can you about whether you will restart at some point your DTC for VYTORIN and ZETIA? And then on SINGULAR/CLARITIN, do you have a producer date coming up on that; you never have seemed to mention it, should we assume that that product is not exactly going anywhere?

Fred Hassan - Chairman and Chief Executive Officer

Three very good questions Dr. Anderson, so Carrie?

Carrie S. Cox - Executive Vice President and President, Global Pharmaceuticals

Yes, first in terms of Coadaptive, we actually are always watching the other opportunities in the market and I think while the niacin component is certainly an interesting one in the marketplace, those product do tend to be relatively niched because of the difficulty the patients continue to have with flushing and side effects in taking the niacin compound. So they can be important options to add to overall therapy but the niacin portion of the market is unlikely to become a major portion of the overall cholesterol management market.

In terms of DTC and other avenues like that, we obviously are committed to continuing to provide very... full support for VYTORIN and ZETIA and continue to evaluate when is the right time to consider what to do next with DTC. But we are very committed to patient education and do provide substantial support to physicians for patient education materials as well.

I did forget to comment earlier on the international markets, my apology. What we see at this point is that there has been little impact of the entire ENHANCE issue outside the United States where the media did not pick it up with the same rigor that it was addressed here and we find that there is good scientific dialogue and discussion and it is probably being seen more in the right perspective without the impact in the U.S.

Fred Hassan - Chairman and Chief Executive Officer

And Tom Koestler.

Thomas P. Koestler - Executive Vice President and President, Schering-Plough Research Institute

Yeah, your question on lowering Lucast [ph], a fixed combination DUVERA [ph]. We did some... edited an application last year for this product, it is under regulatory review, and remember there was a long history on this product, some challenges based on the early trials, and we did take a different approach with this. We have conducted some additional trials. We are working with FDA and it's under review. We should be hearing something in the near term from FDA on this application.

Fred Hassan - Chairman and Chief Executive Officer

Thank you, and next question please.

Operator

Your next question comes from James Kelly from Goldman Sachs.

James Kelly - Goldman Sachs

Can you update us a little bit on what... on the gross margins inside the OBS business? I know that you mentioned Bob that they were positive to the quarter. Can you help us a little bit more with that? And then secondly, could we get an update on boceprevir, Phase III timing and just the prod status and progress of that program. Thank you.

Fred Hassan - Chairman and Chief Executive Officer

Bob and then Tom Koestler.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Thanks... thanks Jim. As I said, our gross margin came in about 68.9 versus the 68.5. Going forward product mix will be the primary driver over the near term. OBS was slightly better in the Schering margin this quarter. It actually came in close to 71% or so, Jim, this quarter. So we are still getting our hands on that business but it was a strong quarter, also helped by the Intervet business. So it's coming in around that range.

Fred Hassan - Chairman and Chief Executive Officer

Jim, we will give you much more color on the gross margin once we get a few more quarterly data points on the OBS transaction but we are very encouraged by the good gross margin upgrade. Tom?

Thomas P. Koestler - Executive Vice President and President, Schering-Plough Research Institute

Yes, Jim, the boceprevir program, we have submitted our protocols to FDA for Phase III, and we are waiting feedback from them. In addition, we are now in the process of building clinical supplies. These are complex... this is a complex synthetic... rather production for this API, the active ingredient for this product. But that's what we are doing, we're building our clinical supplies right now for the Phase III program and waiting for feedback from FDA. And then finally, I would point out that we do have some data that will be presented at a late breaker at EASL this coming Saturday in Italy... at Milan, Italy and that will be presented... there will be two arms of the ongoing SPRINT-1 trial which is our treatment naive trail.

Fred Hassan - Chairman and Chief Executive Officer

Thank you and next question please.

Operator

Your next question comes from John Boris from Bear Stearns.

John Boris - Bear Stearns

Thanks for taking the question. Just two parts. First it has to do with the U.S. business. You reported 19% growth in the U.S., Bob. If you strip out the Organon business, can you just comment on what growth was for the underlying Schering business? There's been a trend of sequential deceleration there; I think ex- sugammadex last quarter was a minus 4%. So, also for... just you thoughts on improving growth or improving the growth of the top-line in the U.S. And then the second question just has to do with VYTORIN. When are you anticipating that the political inquiry that's on-going might wrap up and is that influencing your ability to restart direct-to-consumer advertising and then have you seen a slowdown in enrollment in the IMPROVE-IT trial that correlates to the slowdown that we've seen in prescription trends? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

Thank you John. A number of good question, so, we'll start with Bob.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Yes, first John on the U.S. prescription business. If we carve out the Organon business on the prescription side, we're down about 2%. Carrie do you want to --

Fred Hassan - Chairman and Chief Executive Officer

And Carrie, if you can comment on the U.S. business.

Carrie S. Cox - Executive Vice President and President, Global Pharmaceuticals

We have a number of very strong brands in the U.S. today and we are also excited about the potential of some of the products that we see as the future growth drivers in the U.S. market. We've talked about a number of them that do come from the OBS acquisition and the opportunities that we still have in front of us. I think sugammadex will be particularly exiting when it comes to market because it represents a major change in a market that has seen little innovation in about 50 years now.

The opportunity to completely change the treatment paradigm in that marketplace is an exiting one. It may take some time to accomplish but bringing up the product that represents that kind of innovations to market is very exiting.

And we also see some very interesting opportunities within the Organon women's health portfolio. Products that we think are every strong and have very good profile but haven't maybe had the overall kind of support that we can provide now is part of the combined company.

So we are exited about what we can do now going into some new product cycles and some new areas of growth.

Fred Hassan - Chairman and Chief Executive Officer

Yes. And Tom, if you would respond to the IMPROVE-IT?

Thomas P. Koestler - Executive Vice President and President, Schering-Plough Research Institute

Yes, IMPROVE-IT, of course we have to be watchful... very closely... watch this trial very closely, but recruitment is going quite well. We have over 11,000 patients to-date that's in that trial and as you know we are recruiting up to 18,000 patients for the trial. But it's... we will need to watch it closely.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

And this is a massive trial, this is a very, very big particularly.

Fred Hassan - Chairman and Chief Executive Officer

And just a quick comment on the U.S. We are absolutely committed to growing our US business and we all know that product cycles influence the U.S. business a lot more in the short-term compared to international markets. So certain products which might be more advanced in their lifecycle here in the U.S. are still growth products in international markets, and that's the strength with the diversity that we have in our company.

And on the subject of DTC, this timing will be at our discretion. There's very good dialogue with our partner Merck and also with the joint venture and there is no way to predict when there might be any end to any congressional enquires regarding both companies. And next question please.

John Boris - Bear Stearns

Thanks.

Operator

Your nest question comes from Tony Butler from Lehman Brothers.

Anthony Butler - Lehman Brothers

Thanks very much. Carrie you made some reference to the very strong growth of REMICADE X-US and certainly I think everyone's an agreement. But J&J made some commentary in their call about superfluous bulk shipments, X-US and I am curious if in fact part of this year's strong growth in Q1 is really related to some excess stocking, as they suggest. In fact, their Q1 number is unlikely to be representative of the total market X-US and more importantly that might not be representative of what happens in Q2 to Q4. So any complementary explanation would be helpful. And then lastly Fred, think back with me, has there been a time in the pharmaceutical industry that you can remember when absolute costs have been reduced to any one company and has that been over some extended period of time? Thank you very much.

Fred Hassan - Chairman and Chief Executive Officer

Okay, thank you Tony. Carrie?

Carrie S. Cox - Executive Vice President and President, Global Pharmaceuticals

What we see is REMICADE is reflective of the in-market demand. We only book the sales when we ship it to the trade, so the inventory that we are working with is very consistent demand. So then, the figures that I am providing you are reflective of what is happening with our customers in the market and the on going increased use both of overall anti-TNF in the market but also the specific strength of REMICADE. You probably are aware that REMICADE holds a reputation with physicians as perhaps the greatest efficacy product in the anti T&F category, so it has a very strong position in a market, which is still an overall growth market. We are going across to all indications and are just delighted that we have such breadth with this product but also continued potential for growth.

Fred Hassan - Chairman and Chief Executive Officer

Bob?

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Tony, let me just comment on a little bit to amplify what Carrie mentioned? We actually are building some safety stock in the quarter for REMICADE, so its sitting in our inventory. As Carrie mentioned, we don't report a sale until we actually ship it to our customers. We just wanted to have more safety stock on hand to make sure we meet future demand.

Anthony Butler - Lehman Brothers

Thanks Bob.

Fred Hassan - Chairman and Chief Executive Officer

Yeah. And Tony, on the subject of cost structure, I think we are not the same fast growing industry that we might have been 10 years ago or 15 years ago and is largely influenced by new product flow. The new product flow in our industry has dropped by about 50% in the last 10 years and that is creating a big pressure on our industry. I think our industry grew the slowest it's grown since 1961 than last year. So, this has become a big challenge for us, and I think in many ways we are going to have to look at our overall business models. We have to look at our cost structures, we have to look at our R&D as well as really way we do business.

In many ways the R&D costs as that will be hard to reduce because their requirements go up all the time. But if we go back to the '93, '94 period, there was an effect on R&D costs that time but they didn't go down, but there was an effect.

In terms of the SG&A costs, we used to be an industry that was... that used to be in the low 40s, high 30s, many, many years ago. Now we are headed for the mid 30s, low 30s, and we as an industry are going to have to adapt to a much slower growth environment if that truly will occur. I firstly am more optimistic that the new product cycle in our industry will create more speed in the next several years, but we not very encouraged with what we have seen in the last five to seven years, and next question please.

Operator

Your next question comes from Craig Baskin from Putnam Investments.

Craig Baskin - Putnam Investments

Thanks for taking my question. I was wondering in the periods of improved disclosure and transparency if you would be able to provide us with pro forma results for 2007?

Fred Hassan - Chairman and Chief Executive Officer

Bob?

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Craig I think the issue we have is... Organon was a part of... was a division of the company under a different set of accountings, so it's not really in our accounting records, so I'll not be able to provide that at this point in time. So, it's not audited.

Fred Hassan - Chairman and Chief Executive Officer

And next question please.

Operator

Your next question comes from Steve Scala from Cowen.

Steve Scala - Cowen & Company

Thank you. I have two questions about events in 2008. First, the company had committed to deliver $0.10 of accretion from OBS in the first full year of ownership, but Q1 would suggest that you are going to beat that forecast by wide margin. So, is that forecast either intact or are you revising it upward? And secondly, do you have visibility on when you'll host an analyst meeting in the second half of his year, perhaps that's key to the time you have the SEAS trial results or some other new product data? So, do you have any visibility on that? Thank you very much.

Fred Hassan - Chairman and Chief Executive Officer

Steve, I'llanswer the last question. We will have an R&D day in October, November time... in the October, November timeframe and we've been talking about that for a while. We were going to do it last year but then because of the OBS transaction, we did postpone it and we would like to show the new portfolio, not only R&D portfolio but also our product portfolio around the world at that time. So that will be our analyst meeting, and Bob.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Steve, I would estimate in the quarter, roughly about $0.04 was contributed by OBS and we are on track.

Fred Hassan - Chairman and Chief Executive Officer

Thank you very much and next question please.

Operator

You next question comes from Seamus Fernandez from Leerink Swann.

Seamus Fernandez - Leerink Swann

Thanks very much. I just wanted to get an update. You provided information on the operating or that could get us to an operating margin on the OBS business. So, I was hoping that you could provide with some incremental details on the contribution to SG&A and R&D from OBS just so that we can get down to an OPM. My recollection is that the operating margin on the $626 million that was booked in the fourth quarter was roughly 13%, which was about 300 to 400 basis points below the first half of 2007. So just hoping that you could provide us with an update there

Second, just wondering on R&D, I am trying to understand... this is a question for Tom Koestler. Why the company is... and if you can just help me understand why the company is specifically pursuing vicriviroc when sales of salventry, the other selengentre [ph] the other CCR5 inhibitor in the marketplace launched by Pfizer where that company had certainly higher expectations than the $5 million that were booked in the first quarter of this year and is about one year after the launch.

Commercially, it seems like a class that just is not that appealing. So I'm just wondering what you see in this product? And then lastly on boceprevir, certainly the headline RBR data and in fact Schering-Plough's publication of a correlation of RBR to SBR, which is going to be at the DDW meeting, would suggest that your product may in fact be inferior to talaprovir [ph] Vertex's drug and I'm wondering why Schering would plan to move forward with such a costly program in the context of your cost cutting programs. Thank you.

Fred Hassan - Chairman and Chief Executive Officer

Thank you, very good questions. Since many of them were R&D, Tom, why don't you go first?

Thomas P. Koestler - Executive Vice President and President, Schering-Plough Research Institute

Sure. With reference to vicriviroc, I like this product for a couple of reasons. Number one, unlike Mariviroc [ph], this product is a once-a-day... a true once a day drug. It doesn't have the kind of drug-drug interaction concerns that the other product has, so it is going to be very convenient to be dispensed in the marketplace, particularly for these patients who are on heart therapy, which is complex therapy, so we don't have to do a lot of dose adjustments or any dose adjustments with vicriviroc. We are well on our way through our... well into our Phase III program. Not only is it once a day but it also crosses the blood brain barrier and we are exploring what that might mean from a patient benefit point of view going forward. So, we like vicriviroc for those reasons.

As far as RBR, SBR data is concerned; as you know what really counts at the end of the day is the SBR, which is Sustained Biologic Response. And while it is true, we do believe and we've published data correlating the predictive value of RBR. But that's for interferon based therapies. And I think it still remains to be proven with good SBR data whether or not an early RBR response will be predictive when one's looking at the protease class of inhibitors. So, I will also remind you that we do have data that is going to be presented at the UR... at the Easel meeting this week, on Saturday in Milan. I would encourage you to take a look at that. Perhaps that might help answer your question.

Fred Hassan - Chairman and Chief Executive Officer

And Bob on the Organon question.

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

I will just say Seamus; it is difficult to break out this going forward as we integrate OBS into our structure, so we really can't break out the OBS operating margin. In my remark, I could give some color with respect to this quarter, how much was in the line items? But as I said, as we integrate these businesses at country level, at the financial system level, will be very difficult to break that out.

Fred Hassan - Chairman and Chief Executive Officer

And Seamus, we'll do our best when we get another quarter under our belt to give you as much color as we can give you at that time based on the evolving situations. But, it does look like a very good gross margin upgrade. And we have just time for two more questions, and the next question please.

Operator

Your next question comes from David Risinger from Merrill Lynch.

David Risinger - Merrill Lynch

Yes, thanks very much. I have a couple of questions. First of all, in terms of FX, Bob, if you could please tell us the benefit to the bottom-line EPS and if you could help us understand if there was any lack of hedging related to Organon that particularly helped the EPS this quarter and whether there will be any hedging differences going forward.

And then the second question relates to IP challenges. Fred I believe that you mentioned IP challenges in your opening remarks, if you could tell us about the key IP challenges facing Schering-Plough and also discuss the timing for CLARINEX generics? Thank you.

Fred Hassan - Chairman and Chief Executive Officer

Thank you very much. So Bob?

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Thanks David for the questions. SP on a standalone basis and excluding a OBS... SP on a standalone basis, the sales benefited roughly 7% or about $240 million or so, on the top line David. We would estimate and it is an estimate that roughly half of that contributed to earnings, so roughly half. And as you seen in our 10-Kind, we do not have an active hedging program.

Fred Hassan - Chairman and Chief Executive Officer

Thank you David. And in terms of IP challenges, I was referring more to the industry challenges, the fact that in the past we have had a pretty strong consensus between the U.S and Europe and other countries on the subject of IP, and I can see that that whole alliance needs to be reworked and strengthened. I am the President of the International Pharmaceutical Manufacturers Associations, and I do see some pressures... some pressures developing around the world as individual countries want to break intellectual property rights and there is not the same organized sense of monitoring this as I saw 10 years ago. So we are working very hard to make people understand that without IP you are not going to have any new products coming along 5 years, 10 years, 20 years, down the road.

On the subject or IP challenges to our company we are rather fortunate. We have a few but really compared to our competitors we have very, very few. In fact in the last 10-K, there was nothing significant to report. And last question please?

Operator

Your final question comes from Jamie Rubin from Morgan Stanley.

Jamie Rubin - Morgan Stanley

Thank you. Just two questions. Merck was a lot more specific on their VYTORIN, ZETIA equity income guidance than you and they said... they cut equity income by $700 million. And Bob while we appreciate that ZETIA, VYTORIN will be down the year... I think that... everybody knows that including my 11 year old son, can you just provide a little bit more color around or if you could help us to reconcile Merck's guidance for equity income to how we should think about your P&L? I mean I've just sort of taken $700 million off what we had originally expected the equity income contribution to be, that's sort of one way to look at it. But if you could provide color around that number and how you look at it?

And secondly, Bob, the $0.16 bid is really spectacular but it wasn't too many quarters ago that you actually came in a couple of pennies below. So, if you could maybe provide a little bit more color around the SG&A line because is seems that that's where the bulk of the leverage is coming from? And while I appreciate that there were some issues this quarter that won't play out going forward, the magnitude of the bid is pretty meaningful and I am sure the last thing you want is for people to get carried away on the SG&A line. So if you can give us a little bit more color around where this line is going... Schering's always had among the highest SG&A ratios in the industry and Fred you just said that things are changing and spending patterns are likely to change as well. And how we think about that line for Schering in 2008 and beyond? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

Thank you Jamie. I know you are looking for more certainty in a world that's not that certain. But Bob if you can try to --

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

Let me try over the second set... second question first Jamie. Now first there was this day... as we talked about earlier, there was currency in the quarter. So you got to keep that in mind and that helped our bottom line when you look at it on a comparative basis. As I said the top line was a little more than 200, roughly half of that based on our estimates fell through the bottom line; that may or may not continue going forward.

Two, we had about a $0.02 benefit in the SG&A line, that FAS 123R adjustment that I mentioned earlier.

Three, OBS contributed roughly $0.04 in the quarter. Now we may have some additional spending as we move NUVARING going forward in the SG&A line. So that may not continue with that level, but we had a good quarter that was also helped by currency. So those are some of the big drivers that are doing that. And the second quarter SG&A tends to be a seasonal quarter. So you should expect to see some fairly large promotional spending as we support CLARITIN and the rest of the allergy franchise. So think about it from that perspective on kind of where we are.

Fred Hassan - Chairman and Chief Executive Officer

Thank you very much Jamie, and thank you everybody. I'd like to --

Jamie Rubin - Morgan Stanley

Wait, wait. And what about my other question... my first question, on Merck's more specific VYTORIN, ZETIA guidance?

Fred Hassan - Chairman and Chief Executive Officer

Bob?

Robert J. Bertolini - Executive Vice President and Chief Financial Officer

We will provide numeric guidance Jamie.

Fred Hassan - Chairman and Chief Executive Officer

Yes, Jamie, I think you did here the market share delta between March and December and then you also heard that there's another drop that's occurred after the ACC. I think what I said is that there is no model that we can relate to that would... that can give us any prediction. The previous models have been related to side effect issues and we have a very strange situation here where there's a U.S. media driven situation which is quite different from outside the U.S. There are no months to be looking at here. But the reality is that science is strong and we're going to work hard to recapture a lot of the market share that we've lost. It's hard to predict when that recapture will start to occur. Because at this time there is still a lot of confusion out there only in the U.S. market.

And with those comments, I would like to just make some closing comments. Our strategy continues to unfold. We continue to diversify and to strengthen. OBS has been a pivotal action and is contributing to our performance. A strong late-stage pipeline is a tremendous asset, and on our challenges including the cholesterol challenge, we are taking decisive actions. So we do believe in our future and we thank you all for calling-in and we wish you a happy day and a good day. Thank you.

Operator: Ladies and gentlemen, this concludes the Schering-Plough first quarter earnings conference call. You may now disconnect.

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