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Janet Barth - VP of IR

Fred Hassan - Chairman and CEO

Robert J. Bertolini - EVP and CFO

Carrie S. Cox - EVP and President, Global Pharmaceuticals


Tim Anderson - Sanford Bernstein

Catherine Arnold - Credit Suisse

Chris Schott - JPMorgan

Steve Scala - Cowen & Co

David Moskowitz - Caris & Company

Seamus Fernandez - Leerink Swann

Athony Butler - Lehman Brothers

Roopesh Patel - UBS

Jim Tumbering - BMO Capital Markets

Schering Plough Corp. (SGP) Q2 FY08 Earnings Call July 22, 2008 4:45 PM ET


Good afternoon. My name is Ely, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schering-Plough 2008 Second 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 Ms Janet Barth. Vice President of Investors Relations. Ms. Barth you may begin your conference.

Janet Barth - Vice President of Investor Relations

Thank you, Ely, and good afternoon everyone. And welcome to the Schering-Plough, 2008 second quarter conference call. We know many of you have another call schedules right after ours, so we plan to wrap up our call a little before 5:30.

Before we begin I'd like to cover a few items. First, some of the statements made on our call maybe considered forward-working statements. The company's SEC filings, including our first quarter 10-Quarter, identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this afternoon

The company's SEC filings, as well as today's earnings release and tables are available at Also furnished, as exhibits in our 8-K filing today, are the two press releases issued today by independent investigators relating to the SEAS study. Finally, I would also note that during the call we may refer to non-GAAP measures, including adjusted net sales or adjusted topline 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.

This afternoon, I am joined by Fred Hassan, our Chairman and Chief Executive Officer; Bob Bertolini, our Chief Financial Officer; and Carrie Cox, the Head of our Global Pharmaceutical.

Now, I would like to introduce Fred Hassan.

Fred Hassan - Chairman and Chief Executive Officer

Thank you, Janet. I will open with some comments, and I will be followed by Bob Bertolini and then Carrie Cox. And then we will open up for Q&A.

As many of you will be aware, data was just released today from the SEAS trial, sponsored by the Merck-Schering-Plough joint venture. The SEAS study looked at a possible new use for Vytorin in patients with aortic stenosis that is hard or poorly functioning heart valves.

Many of you may also been listening to Dr. Pedersen, the Lead Investigator and the other experts in their conference call update on the study earlier today. What I took away was that this study confirmed the results from other cholesterol lowering agents that reducing LDL does not reduce the rate of progression of aortic valve disease.

And I was encouraged by the comments by the Lead Investigator and other experts that Vytorin had good data, in fact Vytorin had positive outcomes data, reducing the risk of coronary artery disease in these patients. At this point we want to leave the interpretation of the science to the independent scientists. So we won't be discussing this further on our call today.

And now, I'm going to turn to the strong Q2 results we're reporting. Our strong performance in the second quarter demonstrates the strength and diversity that we've built at Schering-Plough on many fronts. We continue to focus on the basic strategy of our action agenda. We continue to grow the topline, we continue to grow the pipeline, and we continue to invest wisely, while reducing our cost.

We've also continued to effectively manage our challenges. Today, we along with the entire global pharmaceutical industry are facing many pressures. Our long term focus on driving growth and building diversity has served us well. We have strengthen and diversity on four important fronts. First, we have diversity from diversity in our products.

An important part of our strategy has been to build our strength in biologics, as well as small molecules. As a result, we are benefiting from the value migration to biotech that we expect will continue. We have achieved a good balance between small molecules and biologics.

In the second quarter nearly 30% of our sales came from biologic products. For example, with over $550 million in sales this quarter, REMICADE is now annualizing at over $2 billion. With this broad range of indications REMICADE is making a real difference in the lives of patients. Many of whom have regained their mobility and their freedom. And we have golimumab, which is under regulatory review in Europe. PEGINTRON also demonstrates our long heritage of innovation in biologics.

With the OBS transaction, we are among the world leading biotech fertility franchises. In animal health, we are a global leader in vaccines. Through our shared science platform we see this science contributing to our human health R&D. REMICADE and other growth drivers are helping us to power through the cholesterol challenge we face in the United States.

The second dimension of our diversity is geographic. Back in '01, our industry relied on the US for more than half of its growth. Today, across our industry, the US has become a very challenging market. So we are fortunate that now, 70% of our sales came from outside the US this quarter. Our long strategy to invest in newer markets is also coming through. Today, we are strong in many of those markets, such as Brazil, where our growth rates are much higher than in the established markets.

The third dimension of our diversity is our business segments. Sector risk for innovation-based human Rx pharma is increasing. So diversification into areas such as consumer health care and animal health is adding value. For the past five years, we've been focusing on consumer health care and animal health. We've been building strength in consumer health care. This is visible in the strong Rx-to-OTC switch of MiraLAX last year.

According to drugstore [ph], MiraLAX has now reached the same market share zone as Metamucil in the powder category. We are also proud of the leading position we have maintained in the US with CLARITIN, despite an aggressive competitive launch. We are now working to diversify a strong US consumer health care business into other markets such as China.

A key strategy of our combination with Organon BioSciences was to create a very strong animal health business. Today, we have a world-leading animal health unit that is growing strongly and we have world class animal health R&D. So with our Rx, our consumer health care and our animal health units, we have a large strength from business diversity.

Fourth, and most importantly, for the long-term, we have the strength of our robust pipeline. With more than 10 compounds in Phase III are filed, our late-stage pipeline is one of the strongest and most diverse in our industry. We are pleased with the positive opinion from the European Authorities on sugammadex and with the unanimous positive recommendation from the FDA panel.

We are also excited by golimumab and asenapine, as well as our other late-stage compounds, including TRA. We look forward to telling you more about the exciting compounds in our pipeline during our R&D Update Meeting, which will be held in late November. Further details about the meeting will be available soon.

And we should not forget the strong expected exclusivity on our key growth driving products, most of them protected into the middle of the next decade. This means that our robust pipeline will be additive to the current portfolio. This is a very favorable situation compared to many of our peer companies. The strength and diversity we have today results from our five years of hard work.

A key step on that journey of transformation was the acquisition of OBS. After two full quarters, we can see that our combination is succeeding. The solid foundation that we built at Schering-Plough since '03 gave us the strength to take on a big acquisition.

The OBS combination has made us even stronger and more diverse. It is unusual to see accretion in the first year of a major complex acquisition like this one. Yet we have here an OBS contribution to our performance in the first quarter of this year, and it continue to contribute in the second quarter. This illustrates the value of the combination and our execution on the integration.

We folded the ongoing integration actions into the Productivity Transformation Program or PTP when we announced the PTP in April. PTP is designed to make us even stronger, leaner and more flexible company. We are getting results. We are taking costs out of the system. We're taking work out of the system. We are driving productivity improvements across the organization.

In summary, when we look at the challenging environment that faces our entire industry, the strength and diversity that we have built at Schering-Plough gives us a special edge for the long-term. And now, let me turn over to Bob.

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

Thanks, Fred, and good afternoon, everyone. As Fred mentioned, this is our second full quarter of combined operations with Organon BioSciences., and we're pleased to see that OBS continues to add to our performance. Positive results in the second in the second quarter reflect our ongoing efforts to manage the challenges in our business. In addition, we are harnessing the potential of our strategic OBS acquisition.

On a reconcile basis, we earned $0.45 per share in the second quarter. Consistent with the first quarter, this amount excludes purchase accounting adjustments, and special and acquisition-related charges. It also excludes income from the termination of our respiratory joint-venture with Merck.

Over the next few minutes, I would like to review the key drivers of our quarterly sales performance; review highlights of our operations, and finally wrap up with some comments on our Productivity Transformation program, which includes the ongoing OBS integrations.

First, our sales performance for the quarter. On a GAAP basis, our net sales increased to $4.9 billion and include about $1.4 billion in sales from OBS. Excluding OBS sales, nets sales for Schering-Plough on a standalone basis would have been $3.5 billion, an increase of more than 9% compared to the prior year. Currency was again favorable this quarter, contributing an estimated 7.6% to the Schering-Plough standalone sales growth.

Now if we included and assume 50% contribution from the cholesterol joint-venture, our adjusted net sales were $5.5 billion this quarter. Global sales of the cholesterol franchise were down about 10% compared to the prior year period, with a 26% on the US, offsetting continued growth in other markets. Outside of United States, cholesterol franchise sales increased 37% to about $450 million in the second quarter.

Overall, our prescription pharma sales this quarter benefited from three key factors: First, about $920 million in sales from Organon, including contributions from NUVARING and FOLLISTIM; second, solid growth REMICADE and TEMODAR; and finally, we benefited from currency.

Meanwhile as Fred mentioned, the US prescription market continues to be challenging across the industry. Carrie will talk more about the performance of our global prescription brands in a few minutes. Also as Fred noted, our business diversity has strengthened, with about 25% of our reported sales this quarter coming from our animal health and consumer health care businesses.

Coming to Animal Health; second quarter sales were $818 million including more than $520 million from the acquired OBS, Animal Health business. Our product portfolio within animal health can be grouped into two main categories: Biologics and Pharmaceuticals.

This quarter, sales were roughly split evenly between the two groups. In Biologics we are a market-leading vaccine producer. Just this quarter, we launched a new vaccine for the treatment of bluetongue disease. This disease primarily affects cow and sheep in Europe, and we are pleased with launch so far. Our other animal health products consist of a wide range of pharmaceuticals such as anti-infectives, anti-inflammatories and antiparasitics.

Turning now to Consumer Health Care business; our sales this quarter were about $400 million. MiraLAX led the growth this quarter, with sales of $28 million. Sun Care and Foot Care also contributed to our growth. Meanwhile, OTC CLARITIN sales were unfavorably impacted by the timing of shipments, a less severe allergy season and increasing competition.

Moving to earnings, on a GAAP basis, we recorded earnings of $0.24 per share. As I mentioned earlier, when you exclude purchase accounting adjustments, special and acquisition related charges and the $64 million of income related to the termination of the respiratory joint venture, we're on $0.45 per share on a reconciled basis.

Before going further, let me remind you, this year we expect to record income of $105 million from this termination. So, we'll be recording another $41 million as income during the second half of 2008. This income is recorded in the GAAP equity income line, but excluded from our reconciled earnings.

Let me now review some highlights of our operations. On a reconciled basis, our gross margin in the second quarter was 68.4%, representing a decline on a year-over-year and sequential basis. On a sequential basis, the gross margin decline was primarily impacted by REMICADE and AVELOX as well as growth in our animal health business.

Moving to SG&A, expenses were $1.9 billion in the quarter. Excluding the impact of currency and estimated OBS expenses, our SG&A costs were roughly flat on a year-over-year basis.

Moving our R&D, our R&D expenses totaled about $900 million this quarter, an increase of 42% on a reconciled basis. This was driven by an estimated $230 million related to OBS and continued investment in our R&D pipeline.

Let me now comment on PTP and the OBS acquisition. First, we're pleased with the way the integration is going, and we're already seeing positive contributions. In fact, we estimate that we've already achieved our first year target of about $0.10 of accretion. Keep in mind we're integrating these businesses on a global and country basis. So, going forward, we will not be able to separately identify the OBS results.

Finally, let me now provide an update on our PTP program, which includes the OBS integration. As a quick reminder, this program seeks to reduce and avoid costs, increase productivity and generate a total of $1.5 billion in targeted annual savings and synergies by the end of 2012. We anticipate achieving $1.25 billion of this target by 2010. Keep in mind, PTP includes the original $500 million of integration synergies related to the OBS acquisition.

To date, we have achieved about $100 million in savings, including about $70 million this quarter. Most of the savings were in SG&A.

In closing, we're pleased with our results this quarter. Our performance continues to reflect the breadth and depth of our business. Our broad-based business diversity, coupled with our robust R&D pipeline position us well to match the challenges in our business.

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

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

Thanks, Bob. Good afternoon. Our strategy of building depth and breadth into our portfolio has served us well. We've focused on excellence and execution to maximize performance across our core brands and geographies.

Our US business reflects difficult market dynamics, while our international business continues to perform well, with strong growth in both emerging and established markets.

Our pipeline has many important assets, including near-term opportunities, such as golimumab, sugammadex and asenapine, all currently under regulatory review. We are very pleased with the continued progress we are making with REMICADE and with our new women's health care products, and many of our brands have expected exclusivity well into the next decade.

Turning to our results for the quarter. Sales from our global cholesterol franchise decreased 10% to $1.2 billion. In the U.S., sales were down 26%, reflecting the impact of earlier events in the cholesterol market. During the quarter, total U.S. prescriptions for our cholesterol franchise were down 24%, versus the prior year, with pressure on both market share and market growth.

Recent IMS data suggests that 94% of patients switching from VYTORIN have moved to a less efficacious product. Only VYTORIN provides more than a 50% LDL cholesterol reduction at the usual starting dose, and gets more patients to goal than simvastatin, atorvastatin and rosuvastatin.

We will continue to remain focused on the many patients who require the LDL cholesterol reduction that VYTORIN and ZETIA can provide. We are firmly committed to both brand and will continue to invest appropriately to further advance patient care.

Cholesterol franchise sales from our international markets increased 37%. This strong performance reflects continued momentum across the core European markets. We are pleased with the steady progress we have made with ZETIA in Japan since its launch last June.

As you may know, there is a two-week prescribing restriction imposed on all new product introductions in Japan during their first year. Despite this, ZETIA has already captured more than a 5% value share, on par with other major country launches in its first year.

As of July 1st, physicians now have the flexibility to prescribe ZETIA more freely to help get patients to their LDL cholesterol goal.

Turning to Immunology, REMICADE sales increased 41% to $557 million. With this record quarter, REMICADE has now delivered sales of nearly $1.1 billion during the first half of the year, and is currently annualizing past the $2 billion mark

REMICADE continues to be an important growth driver, and represents our growing strength and expertise in biologics. Despite increasing competition, REMICADE has now delivered more than 25% growth in each of the past 10 consecutive quarters.

As new competition has entered the market, overall utilization of biologics continues to increase, particularly in Crohn's disease and ulcerative colitis. Anti-TNF have provided important treatment advances and we are proud of the pioneering role that REMICADE has played in changing the treatment paradigm for these debilitating conditions.

With the potential addition of golimumab as early as next year, our immunology franchise is well positioned for long-term growth. While REMICADE may already be perceived as one of the most efficacious products in its category, golimumab has the potential to be seen as the best subcutaneous injectable with its once a month dosing. We are very excited about having two products in this large and growing biologic market, with expected exclusivity for golimumab until 2024.

In allergy, global NASONEX sales increased 6%, driven by solid growth across our international markets. In the US, NASONEX sales declined 5%, driven by a mild spring allergy season, as well as continued competitive pressures. NASONEX has now been approved in Japan, representing another important milestone in its life cycle. We anticipate the Japanese launch this fall.

Sales from our women's health care franchise, including fertility and contraception grew to over $500 million during the quarter. NUVARING, CERAZETTE, and IMPLANON are important products that provide women more contraceptive options than just the traditional birth control pill.

Earlier this month, we announced promising Phase III results for our next generation fertility treatment. Patients treated with corifollitropin alfa achieved a 39% pregnancy rate, on par with existing therapies but offering patients the added benefit of less frequent injections. We are exited about the potential to expand this franchise and the category, helping more couples to become families.

Turning to hepatitis. Global PEGINTRON sales declined 2%, despite continued strong performance in emerging markets.

Final results of the IDEAL study were presented at the Annual Meeting of the European Association for the Study of the Liver. Important insights were discussed among physicians that may help shape worldwide clinical practice in treating this serious disease. Although SPR rates and safety profiles were found to be similar between PEGINTRON and Pegasus. IDEAL demonstrated predictability of response and lower relapse rates for PEGINTRON. We believe health care providers and payors may consider these findings to help improve patient outcomes.

Earlier this month, results of a significant Phase III trial with PEGINTRON in melanoma, the deadliest and most difficult to treat form of skin cancer were published in The Lancet. This cooperative group trial was the largest positive adjuvant trial ever conducted in patients with stage 3 melanoma. Treatment with PEGINTRON for up to five years provided a sustained increase in relapse free survival. And if approved, PEGINTRON may provide an important treatment option for physicians and patients in a very challenging disease.

I also want to comment briefly on sugammadex. Last month the EMEA issued a positive opinion for sugammadex by rapidly and safely reversing the effects of shallow and profound muscle relaxation, sugammadex has the potential to modernize the use of anesthesia around the world. Sugammadex is a good strategic fit with our current portfolio, leveraging our experience in the hospital channel. We are looking forward to regulatory action and hope to bring this novel treatment to anesthesiologist and their patients later this year.

We are taking important steps toward our goal of high performance for the long-term. We continue to execute on our core strategy of driving topline growth, advancing the pipeline and reducing costs. We believe our portfolio and geographic diversity positions us well to compete in a dynamic pharmaceutical marketplace.

Now, let me turn the call back to Janet.

Janet Barth - Vice President of Investor Relations

Thank you, Carrie. Now, we'd like to open up the call to Q&A. And I'd ask that in order for us to get through as many questions as possible and be able to wrap-up our call on time, please limit yourself to one question. Ely, you can now start the Q&A



[Operator Instructions]. Your first question comes from the line of Tim Anderson from Sanford Bernstein.

Tim Anderson - Sanford Bernstein

Hi. I have a couple of questions on your pipeline, which is just on your asenapine PDUFA, where are we, and what's your confidence level on giving a favorable opinion, what should be near term I suppose? And then, sugammadex, Carrie, you just mentioned introducing this product later this year, PDUFA date is next month for the team like, you are very close to launching, but your comments seem to suggest it might be a little farther off than something like September. Am I reading too much into this?

Fred Hassan - Chairman and Chief Executive Officer

Tim, very good questions. I can just say that we are very confident in both these products. We like the profile. Carrie, you may want to comment on the… on your understanding of the situation.

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

Yes. Let me start with asenapine first. I think the potential for that product is very interesting and one that we're quite excited about bringing to market. We've had experience in this marketplace for many years, and I think during that time we've seen that this may be considered as one of the most conservative divisions of FDA and it is unusual for them to provide any first cycle approvals. We are with active review with asenapine right now and don't have anything further to report. Hopefully, we will be bringing that one to the market soon.

Looking at sugammadex, we actually do have a positive opinion from EMEA for Europe. So that's part of why we are hoping to be able to bring it to the market later this year. And with FDA, the product is under active review.

Fred Hassan - Chairman and Chief Executive Officer

Thank you. Next question, please?


Your next question comes from Catherine Arnold of Credit Suisse.

Catherine Arnold - Credit Suisse

Thanks a lot. I just wanted to touch on your integration success so far in expense control. You are obviously far ahead of your target for the year, and I'm wondering if you could just comment us to whether or not that was because you gave us a conservative base case or that you are pleasantly surprised as you've moved through early days of the integration, and if it's the latter, maybe you could share the surprises? And then, also on the same topic, are we seeing expense control in the equity income numbers that you reported this quarter, or is that something that we might see in subsequent quarters?

Fred Hassan - Chairman and Chief Executive Officer

I'll make a general comment. I'll ask Bob to make some comments too and Carrie if you want to join in. Catherine, in general, we tend to be careful with our targets because we don't like to do things that might hurt the long-term success of the business. But I can tell you very sincerely that I am very pleased that we have made very strong progress in a very systematic manner on our PTP project. We did what we said we would do in April. We went first to the senior management groups, and then we are now looking at the broader picture and we are reducing costs.

But most importantly, we are reducing cost across the company. Everybody is making their contribution. And also, most importantly, people are doing it with a certain spirit of really feeling that they belong to a company that has a strong future. And also, we are doing it in a very careful manner so that the business does not get hurt. We are really making very good choices and doing it very well. I am very proud of our team. Bob any comments?

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

I think I had just a couple other points, Catherine. We are very pleased that when we announced the deal we put higher [ph] increase in place. So we're seeing some benefits from that. We also tackled procurement early on. So, I think those are two factors that are coming through. Your comment with respect to equity income, we are seeing some level of savings and promotion at JV, so I'll pass that comment on to you.

Fred Hassan - Chairman and Chief Executive Officer

Carrie any comments?

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

I would just take this opportunity to thank our people around the world for the energy that they have engaged with this process, and it's really a credit to everyone that we've seen expense savings coming from all across the company, and a real good spirit of cost savings.

Fred Hassan - Chairman and Chief Executive Officer

So Catherine in summary, these were targets that we believed were very doable, and we are ahead of plan at this stage. Next question please.


Mr. Schott, your line is open.

Chris Schott - JPMorgan

Great, thank you this is Chris Schott at JPMorgan. Quick question with regards, I know you are still digesting results of SEAS. But just how do you kind of intend to handle questions on cancer risk associated with VYTORIN, I know you recall today, you provided a pretty fair view of the signal, but I know everybody in here had [ph] a question, just was interested in how you'll handle those coming in. And then second on that same issue, just kind of timing it when you feel you have a better sense of if there is going to be an impact with SEAS, kind of what type of time frame would you expect to have, a better fair update on that? Thanks.

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

Yeah, we will really do a good job, and by the way and by the way congratulations on your new job Chris and good luck. Yeah, but I really think doctors know about certain trails that have occurred out there. We have read about them for the last several years. As you know BioScience is very unpredictable. It's not as predictable as physical science is, and when you do a lot of trials and you heard that during the conference call, you do get the deviant observations. And you did hear very clearly from Sir Richard Peto, who is a world renowned cancer epidemiologist. In fact the science of meta-analysis in the use of medical - in the practice of medicine in some ways has been strongly associated with him as a pioneer.

And he said it very clearly, that this does not provide credible evidence of any adverse effect on cancer. So, we do hope as the science keeps going forward, things will keep coming forward. But there was a lot of confidence expressed by the leaders that you heard today this afternoon. Next question, please.


Your next question comes from Steve Scala of Cowen.

Steve Scala - Cowen & Co

Can you clarify, is the $60 million from Merck in or out of the $0.45? And secondly, I'm wondering if you know the results of the sands' subset analysis, and if you can you reassure us that it's not going to generate concern for ZETIA? Thank you.

Fred Hassan - Chairman and Chief Executive Officer

So, Bob first you may want to answer and then we'll have Carrie if she knows anything about the sand situation. Yeah, Bob?

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

Thanks, Steve. Steve the 64 million is not in the $0.45.

Steve Scala - Cowen & Co


Fred Hassan - Chairman and Chief Executive Officer

And the sands analysis, as we all know was intriguing because the LDL levels went down quite a bit. And as you heard from the speakers this afternoon, it's hard to get the LDL levels down with just titrating the statins up because then you get other issues. But at this point, I think, I'm speaking for Carrie that we really do not know what the situation is with the publication or anymore sub-analysis. Am I right, Carrie?

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

We don't know anything further about sands. But we hope that it will be published soon.

Fred Hassan - Chairman and Chief Executive Officer

Next question please?


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

David Moskowitz - Caris & Company

Yes, thanks. Good afternoon. Just a couple of questions on the P&L. I might have missed this. Did you talk about the specific synergies that were gained in the second quarter? And if so, could you quantify that and also quantify how much of that was related to ZETIA and VYTORIN, the cholesterol JV cost reductions? And the other question I have relates to R&D and the trend for the rest of the year. It looks like you guys are tracking right around 900 million in the quarter. Can you talk about what you'd expect the next two quarters to look like on a run rate basis? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

Very good questions. Bob?

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

Okay, David. So, the total savings year-to-date was about $100 million. And the savings from PTP and synergies, 70 million roughly came in this quarter. So, about 70 million came in this quarter. And then with respect to R&D, generally as our pipeline matures, we would expect R&D to increase in the back half versus the front half.

Fred Hassan - Chairman and Chief Executive Officer

Thank you. And next question, please.


Your next question comes from Seamus Fernandez of Leerink Swann.

Seamus Fernandez - Leerink Swann

Thanks very much. I was just wondering if Carrie could reiterate what her… what she commented on with regard to sugammadex in United States versus Europe, I think I missed that, but it sounded to me like the expectations for sugammadex in the United States may not be included this year?

And then, with regard to asenapine, you say that you are hopeful about a review and the duration of that review, but that we should expect that the committee to be or this group to be conservative. I guess I found those comments a little bit confusing us to what we should be thinking about that. So, maybe you could help us think about that a little bit bore.

And then, just separately on PTP and the thought process around the combined company, as I look at my longer-term model… this question is really more for Bob. Just wondering as we look across the industry and compare it to other companies in the industry, the 32… 31% to 32% SG&A rate that maybe you could achieve with the incremental $1.5 billion in cost savings, seems like it might actually be low and that you might be able to do more than that.

What are the hopes that you could actually generate most cost savings, given the fact that your competitors are also moving aggressively on those targets as well?

Fred Hassan - Chairman and Chief Executive Officer

First Carrie, then Bob.

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

Seamus, to reiterate what I said before, sugammadex has already received a positive opinion from EMEA. So, we expect that we could be able to look forward to a launch later this year in Europe. In the U.S., it's under regulatory review.

And regarding asenapine, my comments there really reflect my own experience of 25 years now working in the CNS field where we've seen repeatedly that that particular division of FDA does not tend to give first cycle approval. They seem to be one of the more conservative groups.

So, while asenapine is under review at this time, I wonder if we will see a first cycle review out of a group that typically does not do that. We are very optimistic about the profile of the product and bringing it to market, but it's difficult to say at this point exactly when it would be.

Fred Hassan - Chairman and Chief Executive Officer

Because the answer is, on Asenapine, we feel good about our product. We are not… we cannot say much about the timing, given the past history here. And Bob, on the second part?

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

Just quickly on PTP, our teams are focused. They are focused hard on achieving our $1.5 billion target. And I'd say, we are pleased with the leverage we are seeing in the business in the first half of this year and we're going to work hard to do as much as we can.

Fred Hassan - Chairman and Chief Executive Officer

And as I said earlier… to the earlier question, we are pleased and pleasantly surprised that we are able to make so much progress with PTP taking costs out of the system, getting the teamwork around the world, people making their contributions. If we believe that there is another time for us to change our numbers, we will certainly do so. At this point, we are just going faster than we had expected. And next question, please.


Your next question comes from Tony Butler of Lehman Brothers.

Fred Hassan - Chairman and Chief Executive Officer


Anthony Butler - Lehman Brothers

Thanks very much. A non-pharma question. I've been impressed with the diversity that Organon brings, with respect to its animal health franchise. I seem to recall that under the Akzo Nobel umbrella, part of the gross -- the operating margin opportunity that they were trying to shoulder was something in excess of 20% out of that business. I'm just curious Bob, if you could provide some information that supports that kind of target for the animal health business is either already there and perhaps there is even more that can be achieved even throughout this PTP process in that subgroup, subdivision of your organization? Thanks.

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

Thank you, Tony. We are very pleased with the animal health business. We have seen good growth in that business. The vaccine business is very diverse and from a profit standpoint, I think we would like to see operating targets north of 20% in that business.

Fred Hassan - Chairman and Chief Executive Officer

And Tony, we do care about margins and we also care about growth in this case, because we are R&D intensive with animal health. We actually do enjoy a strong opportunity here to keep going with very good margins. And we probably only have time for one or two more question. So next question, please.


Your next question comes from Roopesh Patel of UBS.

Roopesh Patel - UBS

Thank you. Just a couple of questions. First, on the SEAS trial, has the FDA seen these results that were presented today, and have they given you any initial feedback? I'm just wondering as to when you expect them to complete their overall review on this? And then separately on TRA, is the initiative to partner the drugs still on the table, and if so, if you could kindly just discuss the progress towards that? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

So I will first answer the TRA. We are still looking at the opportunity to partner our drug at the same time. As I have said before, it does look a little difficult with getting the right quit [ph], but there is tremendous interest in TRA. And we are also feeling very, very good about our own situation. So, if we don't get the right partner, we will definitely go on our own, because we have the horsepower and the enthusiasm to get the job done. The SEAS results are with the FDA, there might be more submissions and we are making a normal progress you heard in the call this afternoon, directly from the independent investigators as they have directly filed their reports also with the authorities. And, we also have done the same in the EU and in other countries. And as you also heard on the ENHANCE situation, that is also under review at the FDA and there does not seem to be any particular accelerated schedule. And last question, please.


Your final question comes from Bert Hazlett of BMO Capital Markets.

Jim Tumbering - BMO Capital Markets

Hi, Jim Tumbering [ph] here with Bert. Thanks for taking the question. I know the SEAS study maybe the topic of the day, but there has also been some discussion lately about a fill Lipitor CIMT study. I'm wondering if you could comment on that and any implications for in hand? Thanks.

Fred Hassan - Chairman and Chief Executive Officer

So, our understanding -- Carrie, why don't you try to answer that question.

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

The Cashmere study was interesting in the sense that it also demonstrated the complexity of these trials and we believe that it is another way to understand how long it can take to be able to provide the data to the public. It's interesting to see that it's another failed trial and it may raise the question as to whether or not these unproven surrogate endpoint is in fact a viable option for studies going forward. We also think in the case of statin depleted population or statin treated populations that you find that pre-treatment and aggressive treatment of LDL should be done, may again affect these populations for future study. Our focus continues to be on the many patients out there who do need aggressive LDL lowering and will really benefit from the products that we bring to the market, since they are the best in providing options for lowering LDL cholesterol.

Fred Hassan - Chairman and Chief Executive Officer

So, I think, we are at the end now. We are very encouraged by the overall situation in our company. Pleased with the second quarter results and very pleased with the contribution of OBS, this was not an easy situation. And we are pleased that the acquisition is coming through very well. We are encouraged by the update that's coming out of SEAS. We're also making steady progress with our PTP program. And we feel that our strength and diversity as we look at the very tough environment that faces our industry today, this strength and diversity does give us a very special edge.

Thank you very much for listening in.


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

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Source: Schering Plough Corp. Q2 2008 Earnings Call Transcript

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