Schering-Plough Q3 2007 Earnings Call Transcript

| About: Schering-Plough Corp. (SGP)
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Schering-Plough Corporation (SGP)

Q3 2007 Earnings Call

October 22, 2007 8:00 am ET


Alex Kelly - VP, IR

Fred Hassan - Chairman and CEO

Bob Bertolini - CFO

Carrie Cox - Head, GlobalPharmaceuticals Business


Steve Scala - Cowen and Company

Chris Schott - Banc of America

John Boris - Bear Stearns

Tony Butler - Lehman Brothers

Tim Anderson - Sanford Bernstein

Jami Rubin - Morgan Stanley

Roopesh Patel - UBS

Catherine Arnold - Credit Suisse


Good morning. My name is Luannand I will be your conference operator today. At this time, I would like towelcome everyone to the Schering-Plough Third Quarter Earnings Call. (OperatorInstructions). I will now turn the call over to Mr. Alex Kelly. Sir, you maybegin your conference.

Alex Kelly

Thank you, Luann and good morningeveryone. And welcome to the Schering-Plough third quarter 2007 conferencecall. We know that you have other conference calls lined up later today, so wewill wrap up our call about 8:50 this morning.

Before we begin, I would like to covera few items. First, some of the statements we make during the call this morningmay be considered forward-looking statements. Our SEC filings, including Item 8.01of the 8-K that we filed this morning identifies certain factors that couldcause the company's actual results to differ materially from those projected inany forward-looking statements we make this morning. The company's SEC filings,our earnings release and the tables, are available on

Finally, I would note that duringthe call we may refer to non-GAAP measures, including adjusted net sales orjust the top-line sales. This is a non-GAAP measure that we define as our GAAPnet sales plus an assumed 50% sales contribution from our cholesterol jointventure.

Another two other non-GAAPmeasures were referred to EPS excluding acquisition related items and anupfront R&D payment. We will also refer to R&D expenses excluding theupfront R&D payment. You can refer to our non-US GAAP reconciliation tablesin the "financial highlights" section of our website for a reconciliationof these adjusted figures to our reported GAAP results.

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

Now I'd like to introduce FredHassan.

Fred Hassan

Thank you Alex, and welcome toour call. You'll have seen our press release. We are pleased that we had anotherstrong quarter, with continued top and bottom line growth and continuedexpansion of our R&D engine. This marks the 12th consecutive quarter ofdouble-digit adjusted top-line growth in a very increasingly challengedenvironment. We are continuing on track on the six to eight yeartransformational journey of our action agenda, which is the action agendaroadmap we laid out more than four years ago. Pivotal milestones in thattransformation were reaching our turnaround phase in the Fall '05 and then thelaunch of the Build the Base phase in the Fall '06.

During Build the Base, anotherpivotal action has been our major continuing investments to strength ourR&D pipeline and we are beginning to see those investments pay off. Now aswe continue the Build the Base phase we have two further transformationalopportunities ahead. One of those transformational opportunities is to realizethe promise of our advancing later-stage pipeline. And the secondtransformational opportunity ahead is to realize the promise of our combinationwith Organon BioSciences. Most especially, to realize the promise of the five,Phase III compounds that this transaction will add to our late stage pipeline.Through this combination, we will have 12 significant projects in Phase III.

I will talk more about theseopportunities in a moment. First, let me comment on the third quarter. For thethird quarter, we grew 9% GAAP sales growth, adjusted for our assumed 50% shareof VYTORIN and ZETIA sales. That is a 12% adjusted sales growth versus the samequarter last year. And for the first three quarters of this year, we deliveredGAAP sales growth of 13% and adjusted sales growth of 16%. And we haveleveraged our P&L with adjusted EPS growing much faster than adjusted salesgrowth.

We are continuing this quarter-after-quarterperformance by continuing to execute on our core strategy. We are driving top-linegrowth, and we are reinforcing that growth through financial discipline todrive even faster bottom line growth. We are investing strongly in R&D andother critical areas to drive further growth for the long-term. With the rightstrategies, with strong people and with the relentless focus on executionalexcellence, we have transformed this company into a global high-performer. Wecontinue to see good growth contributions from key products, such as REMICADE, NASONEX,TEMODAR and AVELOX. Seven out of our top-10 products continue to grow doubledigits, including ZETIA and VYTORIN, and our cholesterol franchise continued tobe a driver. We continued to grow market share in a very big market.

VYTORIN and ZETIA are the onlymajor brands that have continued to grow their market share during thedisruption that began in December '06 that was caused by multi-source generics.The lower is better story continues. Evolving medical science continues to findthat reaching lower and lower goals for LDL is better for patients and VYTORINand ZETIA provides very good options.

During the quarter, we alsodelivered growth in our Animal Health and Consumer Healthcare segments.Recently, over-the-counter CLARITIN reached a cumulative $2 billion in netsales, since its launch in December '02. CLARITIN is one of the most successfulRx-to-OTC switches in history and now we are pleased to see that switch of theMiraLAX laxative is proving to be one of the most successful switches of '07.

In fact, after only seven monthsin the market, MiraLAX is already the number two brand in the US with 7% marketshare compared to the well-known market leading brand in this category with13%.

In Animal Health, we’ve surpassed$1 billion in cumulative net sales of our multi-species anti-infective NUFLORand related brands.

This is a major milestone for anAnimal Health product. NUFLOR comes from our shared science platform. It's anexample of a strategy of creating added-value from a human health molecule, bymoving it into Animal Health.

Our steady performance in anincreasingly challenging environment reflects our success in attracting andretaining strong people across our customer segments.

Now, let me turn to thetransformational opportunities that lie ahead. First, realizing the promise of our current pipeline, what is especiallygratifying is that our focus on driving R&D excellence is starting toproduce. Four years ago, we said, that we would transform Schering-Plough intoa truly science-centered company. Our goal was to build a powerful R&Dengine that would drive a steady flow of innovative new products. To do this,we changed this company's previous investment strategy. We used to be on thelow-side of investment in R&D, and now we are on the high-side. We've beentransforming our processees to drive, innovation, speed, and flexibility, we'vebeen investing in superior people, and we've been using passionate champions todrive up programs and projects.

We've been investing heavily inclinical trials and other dimensions. Today, four years later, we are beginningto see the fruits of this transformation. The most exciting work in our R&D,right now, is the Thrombin Receptor Antagonist, TRA for deadly blood clots. TRAhas now started Phase III, the clinical trials for TRA are very large and theinvestments are also very large. The TRA could be transformational for patientsresponding to an enormous unmet medical need. And then there is Vicriviroc forHIV AIDS. Vicriviroc has just advanced into Phase III, then Boceprevir for HepC, another promising compound. Today, Tom Koestler, our Head of R&D, hadjoined us for this call.

At this point, I'd like to askhim to make some comments, Tom?

Tom Koestler

Thanks Fred. Let me spend coupleof minutes talking about the status of our Thrombin Receptor Antagonistprogram. TRA is a special product that we discovered in the lab at Schering-Plough.It is unique, distinct and complementary to current antiplatelet therapy. Asyou know, we presented positive Phase II data on TRA in March, which created alot of interest in TRA. We are glad to report that we have now seen new datawhich gives us more confidence about its profile.

We just completed two small PhaseII studies in Japanthat were designed to confirm the safety of TRA in Japanese patients. Oneinvolved 120 patients with acute coronary syndrome, and the second studyinvolved 90 patients with prior ischemic stroke. The primary end-point in eachtrial was safety and tolerability, and in particular adverse events, such asTIMI, major and minor bleeding.

Each trial confirm the results ofour previous Phase II trial, that TRA does not increase TIMI major and minorbleeding when added to standard of care therapy, and the TRA is well-tolerated.

In Japan, the standard of care andacute coronary syndrome consist of aspirin, ticlodipine and heparin. When addedto the standard regimen TRA did not increase the risk of bleeding. What was surprisingabout the ACS trial was the efficacy. In the trial, patients presenting withACS and undergoing PCI were the Primary Cohort of Interest. Those treated withTRA and standard therapy, have significantly fewer myocardial infarctions orheart attacks, than patients who only receive standard therapy.

With only 120 patients in thetrial, we did not expect to achieve statistical significance on the efficacyparameter. Now we don’t want to go into all the data, because we are planningto present the data at a future medical conference, but it was a robustfinding.

Remember, in our earlier Phase IITRA-PCI trial, patients receiving TRA and standard therapy had 41% reduction inmyocardial infarctions compared to standard therapy alone. Then again, most ofthose myocardial infarctions were peri-procedural events. This was a veryimpressive finding, but the data were not statistically significant. However,the Phase II ACS study in Japandid achieve statistical significance, but it is important to keep in mind thestandard of care in Japan isdifferent than in the US andEurope.

So where do we go from here withour TRA program? We now have more than 1,200 patients from three Phase IIstudies that point to a favorable safety and efficacy profile for TRA. We nowneed to confirm those findings in large scale clinical trials. We are pleasedto report that we have just started dosing patients in our global phase IIIdevelopment program. The program consists of two trials, one in acute coronarysyndrome and one in secondary prevention. Keep in mind that this is not ahead-to-head trial against Plavix. This is on top of the standard of care,which usually includes aspirin, plus Plavix. The trials will involve nearly30,000 patients that will be designed to achieve a global registration dossier,included for TRA in Japan.

It marks that for the first timein Schering-Plough's history, we have undertaken a global program that willaccomplish a global registration. It will take some time to conduct the phaseIII program. But if the trails are successful, TRA could be a transformationalproduct for patients with atherothrombosis.

Atherothrombosisis an area of high unmet medical need and in fact is the largest cause ofmortality among all diseases. As a result, atherothrombosis is a huge market inthe US and overseas. But to meet the unmet need, there is a need to be improvedupon by adding products like TRA which have a new mode of action.

Our Phase IIItrials are designed to show the potential for incremental efficacy withoutan increased safety burden.

Let me close with the comment onthe strength of science at Schering-Plough. We are proud to note that "ScienceMagazine" recently ranked Schering-Plough as the "Number FourEmployer" in their 2007 top employer survey. Just one year ago, we rankednumber 17 out of those top 20 companies. Our significant climb in theserankings demonstrates how far we have come in realizing our action agenda and thatwe are becoming a company that places a high value on scientific innovation. Inparticular, Schering-Plough was recognized for doing important qualityresearch, being socially responsible, and being an innovative leader in theindustry.

As Fred mentioned, we are alsobuilding a strong wave of Phase III products. The next wave of products toemerge from our pipeline will be added to our exiting portfolio of patentprotective products. This put Schering-Plough in a good position for thefuture.

With that, let me hand it back toyou Fred.

Fred Hassan

Thank you, Tom. We are seeinggrowing opportunities in our late-stage pipeline and we are investing torealize their promise. Finally, I will turn to the second transformationalopportunity ahead. Our planned combination with Organon BioSciences, we arepleased that even in difficult markets, we have raised nearly $9 billion infinancing. We appreciate the confidence of our investors. We are also pleasedthat we have gained the approval of the EU regulators for the deal. We havealso received positive advice from the Dutch Works Council, which is anothernecessary milestone in this deal. And we continue to work to gain clearancesnotably with the FTC, and we continue to anticipate that we will be able toclose sometime before the end of this year.

As we assessed the comments ofthis combination, we appreciate even more the fit and the strength we createfor the long-term in Human Health and also in Animal Health. We see the fit andbreadth in Animal Health as a very important strategic asset of thecombination.

A moment ago I spoke to you aboutthe transformation that we have engineered in Schering-Plough's R&D and thedramatic growth of our existing late-stage pipeline. When we add in the Organonlate-stage pipeline, our Phase III expansion will be even more dramatic. Wewill be investing in this rich array of Phase III compounds when most of ourexisting growth drivers have anticipated exclusivity into 24 team and beyond.

Instead of losing some products,we are hoping that our existing products will keep growing, and we are also hopingthat the new products will be add-ons to our existing growth drivers into 24team and beyond.

As we plan for the integrationand then begin to execute from day one, we'll be focused on driving top-linegrowth, driving productivity gains, advancing key R&D projects and forginga unified high-performance culture. The promise of a plan combination is profoundand we are committed to doing our best to realize it.

And now, let me turn themicrophone over to Bob Bertolini.

Bob Bertolini

Thanks Fred, and good morning,everyone. As Fred mentioned, we had another strong quarter with continued topand bottom line growth. This morning, I'd like to cover three topics with you.First, our sales performance and factors that affected our earnings; second,our operations; and finally, I'll discuss some information pertaining toOrganon BioSciences and our outlook.

First, our sales performance forthe third quarter. Our GAAP sales increased 9% to $2.8 billion, reflectingcontinued sales growth across each of our customer segments. Currency had a 3%favorable impact on the quarter, as the dollar continued to weaken. Adjustedsales increased 12% to $3.5 billion as VYTORIN and ZETIA continue to grow on ayear-over-year basis.

So, you can see we've once againgenerated double-digit adjusted sales growth this quarter. Keep in mind thatsales in the third quarter 2006 reflects a one-time benefit from TRICARE.Excluding this one-time benefit, our sales would have grown at a rate 2% higherthan we reported this quarter. We continue to see good growth across ourportfolio, with contributions from REMICADE, NASONEX, TEMODAR, and AVELOX. Weare also pleased to see that our Animal Health and Consumer Health customersegments continue to grow again this quarter.

On the Animal Health side, salesgrew 8% with good performance outside the US, especially in poultry,companion animal, swine and aquaculture. We are looking forward to gainingadditional scale in the animal health segment, with a planned acquisition ofIntervet. Meanwhile Consumer Health sales increased 5% due to the successfullaunch of MiraLAX and growth of CLARITIN OTC.

Moving on to earnings, we had afew items that affected our earnings this quarter. On a GAAP basis we earned$0.45 per share in the third quarter. Excluding acquisition-related items andenough for an R&D payment, we earned $0.28 per share. Let me explain thetwo factors that led to the earnings adjustments.

First, we had a net gain of $294million or $0.18 per share, primarily related to our market-to-market gain onour currency option for the OBS acquisition. And second, we had an upwardR&D expense of $20 million or $0.01 per share for Acadesine.

Let me spend the next few minuteson our operations. On a year-over-year basis, the gross margin improved, mostlydue to cost savings from our streamlining actions in 2006. On our last earningscall, we noted that we expected our gross margin would be slightly lower in thesecond half than it was in the first half, primarily due to the seasonality ofour higher margin respiratory products. In particular, we had sequentiallylower sales of seasonal products like CLARINEX, NASONEX and CLARITIN as theallergy season ended. We also had higher sales of REMICADE, which had anunfavorable product mix effect on the gross margin. I should also note thatthat we had $29 million of ZETIA sales in Japan during our second quarter,due to initial stocking this helped the first half gross margin.

As a result of these factors, ourgross margin was sequentially lower this quarter at 67.1%. Keep in mind that ifyou include half the sales and half the costs of the cholesterol joint venture,our gross margin for the third quarter will be in the range of our peer group.Moving on to SG&A, we continue to make additional promotional investmentsto drive top line growth. This is due to increased competitive pressures onsome of our key brands and continued spending to gain share for drugs likeASMANEX and MiraLAX. As a result our SG&A expenses increased 9%.

On R&D, as Fred mentioned weare investing heavily in R&D. and we are making good progress with ourpipeline. Two of our fast-track products advanced into Phase III trials, TRAand Vicriviroc. Based on the progressin our clinical trials and the number of products we have been licensedthis year, our R&D expenses are growing faster than our adjusted salesagain this quarter, as we expected.

R&D expenses were $649million. If you exclude the $20 million upfront payment on Acadesine, theR&D expenses increased 21% versus the prior year. Let me close with a fewcomments starting with OBS. As you know, we planned to acquire OBS for EUR11billion, or roughly $15 billion. Of this we planned to use about $5 billionfrom cash we had on hand before the financing. Since August we raised nearly $9billion to finance the transaction despite very tough market conditions. Wegenerated strong demand for our financings based on investor's confidence inour long-term prospects.

So we've completed most of ourfinancing and are well positioned for the closing. We now have EuropeanCommission approval for the acquisition and we continue to expect that we'llclose the transaction by year-end. After the close we'll begin the integrationprocess and we'll harmonize the practices of the two companies. In the fourthquarter we'll again have acquisition related charges and impacts from ourcurrency activities, as we did in the second and third quarters. After closingwe will also have purchase accounting adjustments, such as in-process researchand development, amortization and depreciation of intangibles and fixed assetsas well as a step-up of inventory values that will impact cost of sales.

Due to the complexity of theaccounting, we will continue to provide cover on the financial impacts on ournext conference call. On our outlook let me provide the following comments.First, we anticipate that sales of VYTORIN and ZETIA will continue to grow inthe fourth quarter and in 2008.

Second, as Carrie will tell you,we are confident in our key brands. However, as we mentioned, there was growingcompetition for our key brands and we will invest to sustain our leadershipposition.

Third, on R&D, we anticipatethat the number of patients in our clinical trials will continue to increase,especially with new Phase III trials for TRA, Vicriviroc, and recentlyin-licensed products. As a result, we continue to expect R&D expenses willgrow faster than adjusted sales in the fourth quarter. Keep in mind, thiscomment relates to Schering-Plough on a standalone basis only. Given theadvancing pipeline, we also expect that R&D expenses will also grow againin 2008.

In summary, we are proud of whatour people have accomplished this quarter. You can see that we are continuingto execute on our strategy. First, we are driving the top line, with 12consecutive quarters of double-digit adjusted sales growth. Second, we aremaintaining control of our overhead spending. Finally, we are investing in thefuture to R&D, and we are delivering a much stronger Phase III pipeline.

Now, let me turn it over toCarrie.

Carrie Cox

Thanks, Bob, and good morning. Wehave continued to maintain momentum across much of our portfolio, despiteincreasing competition. Our strategy to drive the top line has been successful,as you've heard. With long periods of expected exclusivity on most brands, wewill continue to make the appropriate investments to maximize the return on ourbrands.

Turning to our product portfolio,our global cholesterol franchise continued its strong performance, with salesincreasing 27% to nearly $1.3 billion, with growth well-balanced between the US andinternational markets. You will recall that our franchise includes sales fromthe joint venture and Schering-Plough only territories. In the US, VYTORIN andZETIA remained the fastest growing brands with total prescriptions for thefranchise increasing 17% versus the prior, growing more than twice as fast asthe cholesterol market.

Among LDL lowering brands,VYTORIN and ZETIA are the only two major products to grow market share thisyear. Our franchise is uniquely positioned to get more patients to their LDLgoal. Managed care organizations have recognized this important value andcontinue to provide competitive second tier access for both VYTORIN and ZETIA,despite the availability of multi-source generics.

Just last month, guidelinesreleased by the European Society of Cardiology again reinforced LDL as theprimary target of lipid-lowering therapy.

As clinical practice continues toshift towards more aggressive LDL management, only VYTORIN provides more than a50% LDL reduction at the usual starting dose.

Outside of the US, sales from the cholesterol franchiseincreased 62% to $321 million, driven by strong performances across establishedmarkets including France andItaly, as well as inemerging markets such as Greeceand Turkey.As expected, sequential franchise sales were affected by last quarter's initialstocking of ZETIA in Japan,which is a typical dynamic in that market.

REMICADE continues to be animportant growth driver with Q3 sales increasing 34% versus the prior year.REMICADE quarterly sales have now surpassed the $400 million mark, an all timehigh, despite increasing competition. A key to this strong performance has beenthe demonstrated efficacy and the broadest range of indications, all of whichare delivering double-digit growth.

As new anti-TNF therapies enterthe market, we expect the utilization of biologics overall to increase.

Just last week, REMICADE wasgranted two positive opinions by the EMEA, further strengthening our positionin both psoriatic arthritis and Crohn's disease.

The REMICADE label in psoriaticarthritis will broaden to include claims for improving physical functions andreducing the rate of structural damage. This means that not only may patientssee dramatic skin clearance, REMICADE will also help preserve their joint andtheir ability to function.

In Crohn's disease, the broadclinical benefit of REMICADE is unmatched by any other anti-TNF therapy. Withthe expanded label, physicians will be able to tailor REMICADE dosing whilesparing patients the need for steroids. Data describing mucosal healing, aswell as reductions in Crohn's related hospital stays and surgeries, will alsobe included in the label.

With more than 1 million patientstreated globally since 1999, the efficacy and safety profile of REMICADE iswell established and combined with Golimumab, our promising Phase III compound,our anti-TNF portfolio is poised to extend our strengths in immunology.

In Allergy, Global NASONEX salesincreased 10% with continued strong performance across our internationalmarkets. NASONEX remains the fastest growing brand among all nasal steroidscapturing nearly 40% of the global category.

In US, NASONEX new prescriptiongrowth continued to outpace the nasal steroid market. As we typically see afterthe Spring allergy season, NASONEX market share dipped, reflecting a seasonaldecline. September data show a clear acceleration in the Fall season with newprescription share nearing 35%, an increase of more than 90 basis points versusthe prior year.

In Hepatitis, global PEGINTRONsales increased 7%, driven by the strong performance in our emerging markets.We continue to see the category decline gradually across Europe, the US and Japan, where PEGINTRON hasmaintained clear market leadership. Last month PEGINTRON combination therapyreceived a positive opinion in the European Union for a retreatment indicationin Hepatitis C, a serious unmet medical need.

In the EPIC 3 trial, more than1,300 patients with moderate to severe liver disease were treated withPEGINTRON after failing previous therapy. Early virologic response at week 12was again shown to be an important predictor for achieving a sustainedvirologic response. Even in this tough-to-treat group, nearly 57% of patientswho had an undetectable virus at week 12 went on to sustain a positive responseat the end of their therapy. Upon approval, PEGINTRON will be the first andonly Hepatitis C therapy approved in EU for a retreatment indication.

I also want to comment briefly onNOXAFIL, the first and only agent indicated for the prevention of invasivefungal infections in immuno-compromised populations such as cancer andtransplant patient. With mortality rates as high as 90% from these infections,the need for affective agents has never been greater. NOXAFIL has been shown toprovide powerful prophylaxis, substantially reducing breakthrough infectionsand overall mortality rates. Like many other hospital products, NOXAFIL sales willtake some time to develop. At this stage in its launch, there has beenexcellent progress across Europe and the US, where it was launched just a yearago.

We would like to take thisopportunity to recognize the extraordinary accomplishments of our peopleworldwide. We have succeeded in delivering consistently strong results to fightincreasingly competitive market conditions. Staying focused on maintainingmomentum has served us well, particularly leading up to our planned combinationwith Organon BioSciences, as we built the high performance company for the longterm.

Thanks. And now I will turn thecall back over to Alex.

Alex Kelly

Thanks, Carrie. Now we would liketo open up the call to answer your questions. In order for us to get through asmany as possible, we would like to ask you to limit yourself to one or twoquestions only, and we will not take any follow up questions. If you do haveadditional questions, you are welcome to rejoin the queue.

Well, Ann, we are ready to takequestions.



(Operator Instructions). Your first question comes from SteveScala with Cowen and Company.

Steve Scala - Cowenand Company

Thank you, two questions. First for Dr. Koestler regarding Boceprevir.Can you speak to the RVR data which I do not think was revealed last week? Whatdid you see in terms of RVRs? Secondly, a question for Carrie, do you believethat generic Simvastatin has pretty much penetrated the market as much as it'sgoing to? Or how much more growth in generic simvastatin in terms of share doyou think is yet to come?

Fred Hassan

Great questions. So, Tom?

Thomas Koestler

Yeah. Steve, as far as RVR is concerned, what we reported inour publication or press release was the early virologicresponse data at 12 weeks. And I am sure you know that EVR data is what mostdoctors use as sort of a decision gate, one deciding how to further treat theirpatients. So, it's a very important parameter and we have a lot of experiencein this particular field as you know. So, we think the EVR is very important at12-week point.

We also have rapid virologicresponse data, which is your question. And as we mentioned earlier, we want topreserve these data so that we can get the right opportunity to present them ata scientific symposium. We will say that the data was also very impressive.

Fred Hassan

Okay and Carrie?

Carrie Cox

This is largest market that we all compete in. And you knowthat this is an unprecedented event to have the kind of generic availabilitythat’s been occurring in the cholesterol marketplace. It's a very large market.We see the overall market continuing to grow. But we also believe that genericswill continue to have some increased penetration. The rate of growth, ofcourse, has been slowing. But I think in the low efficacy space, you willcontinue to see further use of generic Simvastatin.

As you know, VYTORIN and ZETIA continue to grow share inthis very competitive market. And we believe that while the trend continues andwill continue to drive towards lower LDL levels, we will continue to bewell-positioned in this very dynamic market.

Steven Koehler

Thank you and next question please?


Your next question comes from Chris Schott with Banc of America.

Chris Schott - Bancof America

Great, thank you, just two quick questions, and maybe justfirst on the VYTORIN side, it seems that you have had a strong year there, butyour share gains do seem to be slowing a bit here. Could you talk a about whatpercent of your sales are now coming from switches in this market, and anychange in that switch-market over the past few months in terms of either, whereyou are getting your share or magnitude of the gains? And then second, on TRAcan you show a little more granularity of how many of the patients in thelatest studies to Phase II were at the 2.5 milligram dose, and just any clarityyou might have in the bleed rate at that dose versus the "askedstandard" of care? Thanks.

Fred Hassan

Okay. Carrie first and then Tom.

Carrie Cox

Yeah, the pattern that you see for the situation withVYTORIN is pretty much the same as it has been over time. We have roughly 60%of the business coming from the new patient market and about 40% coming fromswitches. There has been some changes in that over the last few years, but it'sa fairly steady profile and we believe it also reflects the continued focus ongetting patient's LDL to goal and as you know that continues to be a lower goalthan ever.

Tom Koestler

Yeah, correct as far as the TRA exposure for the 2.5milligram dose is, and we are using the 2.5 milligram doses, our maintenancedose in the trials and the reason we selected that dose is based on all of thedata we've seen now from three Phase II studies. All of these data show veryconsistent PD effects, particularly which is trap induced [whateveraggravation] in the patient where we get greater than 80% or more of [quickeraggravation] in addition to the 2.5 milligram dose, seven days and beyondfollowing dosing and that particular setting. In that latest result that wejust reported in Japan,as I mentioned, the studies are small studies. There are 120 patients overallin the acute coronary syndrome trial and in the prior ischemic stroke trialthere were 90 patients. So again the exposure numbers are not exceedingly highbut the pattern of data that we have seen is very consistent with what we hadseen. We reported this earlier in the year in Oncology Cardiology, so we feelpretty good about that dose selection.

Fred Hassan

Thank you, Tom and next question please.


Your next question comes from John Boris with Bear Stearns.

Fred Hassan

Hi, John.

John Boris - BearStearns

Thanks for taking the question. I just have a couple. Fred,can you just comment on, as you are approaching the completion of the OrganonBioSciences transaction. Can you just layout what your priorities are forintegrating that transaction?

And then question for Tom on Phase III for Boceprevir. Canyou give any color on the trial design for Boceprevir, going forward?

And then one for Carrie, with the introduction of Apotex'sgeneric Fluticasone, it looks like the lack pricing on Fluticasone iscollapsing, and its approaching $10 a bottle. Are you anticipating additionalgeneric entrants and is there the possibility of a Fluticasone first programthat could further the shelf-cost deceleration on the NASONEX program orproducts?

Fred Hassan

So John, I think you are asking four questions or so there.So we will try to get to the first couple. John I will be as fast as I cansince there were many questions. I am fortunate to have done many acquisitions.In fact, I think I do have a learning curve history in this area. And the onething I have learned over the years is that you must have a seamless customerexperience or a customer experience that gets better after the transaction. So,really growing the top line is very important. Many transactions fail becausethe cost-cutting synergies do come through, but people lose focus. And if youmiss on the top line by $1 billion or $2 billion you can get all the costs outof the system, but you will still not doing well on the operating profit line.So, we are going to be focusing on the customer experience.

We are also going to be focusing on delivering [profitmargin], because that's one of the big promises of this merger and we are goingto be doing that one right. We are also very excited about the opportunity toadd value here. You have seen this with our past transaction that we did withthe Bayer Primary Care business. There was initially a declining market sharetrend with that business but we turned it around and it's growing very nicely.In fact our market share, without the loss, is now probably double where it waswhen we inherited it from Bayer. So this company knows how to add value, and weare very confident we'll do a good job with Organon BioSciences. And the nextquestion was for Tom and then Carrie.

Tom Koestler

Yeah, John, as far as you know, we have this naive patienttrial which is ongoing. We are looking at 24, 28, and 48, weeks of dosing. So,the Phase II trial that we have reported on, reported on 12 weeks of exposureto the program. Now we have a fast track status with FDA and as you can imaginewe have got everything. We do just about right with FDA in terms of plans forgoing forward. But right now I think it's fair to assume that we are feelingpretty confident about the design of our run-in phase, which is the utilizedinterferon plus [Ribavirin] for four weeks, before dosing with a protease inhibitor. There is couple ofreasons for that. First reason is that it takes four weeks to get the studystate with these molecules, which is important.

You had [hit] theprime immune system and we think that priming helps decrease the viral load,and that we think is important. Also based on our learnings because we wouldlike to be able think this would result in a fewer mutations in that particularpopulation, which is an important clinical parameter.

John Boris - BearStearns

When will you startPhase III, Tom?

Tom Koestler

Okay. So…

Fred Hassan

Right now, we arenot going to comment on that at this point in time. As I said, we are still onPhase II and when we are prepared to initiate Phase III we will let you know.Thank you, and Carrie?

Carrie Cox

NASONEX has continued to growthis year, and in fact we also had very competitive second-tier access. Wethink this is, in some part, based on the fact that we have a unique range ofindications that other competing products don't have, including things like usingpolyps in actually preventing symptoms of allergic rhinitis, and also use-downto children as young as age two. So this is a unique profile that we anticipatewill continue to put us in a good position in the market.

Fred Hassan

We are very proud of NASONEX.This is one of the examples where brand transformation really works and Carrieand her team, I don't think there are too many other companies that can reallymatch us.

And the next question please?


Your next question comes fromTony Butler, with Lehman Brothers.

Fred Hassan


Tony Butler - Lehman Brothers

Yes, hi Fred. Thank you very muchfor the time. Two brief questions, one again on Boceprevir. You showed somereally good Phase II early data. But I am curious with the Liver Meetingsupcoming where you presented some of the robust data that you are talking aboutand if not then, can you give us some idea when you will present that?

And then secondly, as it relatesto TRA, can you make any judgments about how the patients themselves, in bothof those Japan trials, compare with the patients in the US study that waspresented at the ACC? Thanks very much.

Fred Hassan


Tom Koestler

Yeah, Tony, thanks for thosequestions. Yeah, let me take the last one first and that was the TRA patientsin the Japantrial. There are two trials, one, that was actually in acute coronary syndromepatients, so these patients were quite robust in terms of what you would expectin the real world going forward with our Phase III program. Now, you have bearin mind that the standard of care in Japanis a little bit different than the standard of care in the US. Now they use an ADP antagonistlike Plavix that use ticlopidine, but Plavix is now just being introduced in Japan.So the standard of care in Japanis ticlopidine, aspirin and heparin, which is usually on board. And that’s theway they treat it. And so, it's very similar to what we see in the westernworld, the US.I assume that the Japanese will begin to catch up once they bring Plavix to usein the marketplace. Your first question was again, Tony?

Tony Butler - Lehman Brothers

I think on the, abstracts andalso our whole process of analyzing data and then communicating data?

Tom Koestler

Yeah, we have been saying that wewere going to give you an update on the status of our Boceprevir program forquite sometime now, and that’s exactly what we wanted to accomplish at thisparticular point. Frankly, these data are new, they are robust, they are verynew, and we did not have an opportunity to meet the deadline for the upcomingmeeting. So, we will find the right form in the New Year.

Fred Hassan

Okay. And next question please?


Your next question comes from TimAnderson with Sanford Bernstein.

Tim Anderson - SanfordBernstein

Thank you, I have a couple ofquestions. VYTORIN, the sales in the US were down sequentially for thefirst time since the product launched in 2004, and that’s not too surprising,given the script trends over the last six months. You mentioned several times,that you will continue to invest in key brands to sustain growth. And I amwondering, do you have plans to investmore behind VYTORIN in the US, or do you think you have maxed out spendingbehind the brand in that market.

And then, on TRA, it is pursuing asingle global filing, like you've mentioned, that it will potentially push outtimelines that you have previously laid out?

Fred Hassan

Okay. And we congratulate Dr.Anderson on his new job. And at this point, let me ask Tom to first take theTRA question, and then return it over it to Carrie.

Tom Koestler

Yeah, it’s a good question. Theglobal trial that we have initiated will in fact be event driven, it will betime dependent. A lot of that will become clearer for us as we go about a yearfrom now, from where we are today. Our anticipation, our plan clearly is toapproach this from a 2010, 2011 launch perspective, so we remain on thatparticular time-line.

Fred Hassan


Carrie Cox

Thanks Tim. There are still a lotof patients who are not at their cholesterol goal and I think we are stillpleased with our performance in the US. We'd have continued to gainshare at a time, as you know when other products are losing share or at best inslight decline.

The investment levels appear tobe adequate at this point, but as you know, we always work to maintain theappropriate share of ways in investments that are needed in the marketplace.And in this quarter, we are also particularly pleased about the growth thatwe've seen outside the US.Both VYTORIN and ZETIA ex-US have grown to be very substantial products. AndZETIA or EZETROL, as it is called overseas, is actually one of the leadingproducts in many countries around the world now, particularly in theestablished markets in Europe.

Fred Hassan

And I think Tim, that's the bigadvantage. We do have a long runway yet in Europe,and as you know that's always a slowbuild area but it has always had a long profile. And we are going to bebenefiting from a leveraged P&L, when it comes to cholesterol there is noquestion about it for the next several years. And next question please?


Your next question comes fromJami Rubin with Morgan Stanley.

Jami Rubin - Morgan Stanley

Thank you. I just had a couple ofBoceprevir follow-up question. My first question Carrie is to you, what impactdo you see Boceprevir having on your PEGINTRON/Ribavirin franchise; it doesseem that these parties' inhibitors may have the effect of cutting in half theduration of the use of PEGINTRON/Ribavirin? And how do we think about that, interm of our models?

My second question is for youFred, on overall R&D spending, you've talked about R&D spending beingabove adjusted sales this quarter and it was almost double that of adjustedsales, and you are now entering Phase III trials of TRA with something like30,000 patients. Obviously, it's going to continue to be strong in the fourthquarter and Bob you'd commented that it will continue to be strong next year.But can you give a little bit more color around the magnitude off-end as youabsorbed, or as you enrolled these patients? And how should we think about thatgoing forward?

Fred Hassan

Okay Jami, I'll answer thatquestion first and then I'll ask Carrie to answer the Boceprevir question. It'svery clear that the industry is evolving very rapidly and we have to understandthat you can't ignore the environment around us. It is very clear that thepressure from the peers and managed care is clearly pointing to the directionthat this industry has to spend more money on R&D, as a percent of salesgoing forward, and we have to find savings elsewhere primarily in SG&A.That is very clear for all the companies as we go forward. We are ratherfortunate at Schering-Plough to have had very little attrition in our Phase Iand Phase II. We have a very, very rich Phase III pipeline. We will beinvesting in this pipeline but also we will explore opportunities to partnerout some of our Phase III projects in a very sensible manner so that we don'thave to do everything by ourselves. But we are fortunate to have this very,very strong Phase III pipeline at this time; it is a pipeline much larger thanour size would normally want. And Carrie on Boceprevir?

Carrie Cox

Jami, we are delighted that asnew therapies are being developed for Hepatitis C treatment, it looks clearlyas if PEGINTRON combination therapy will continue to be the backbone oftherapy, and it will be background therapy in the addition of any new regimensthat come to market. So, this has actually turned out to be a great benefit forthe long-term development of the market, going forward.

Right now, perhaps less than 25%of patients who should be treated are getting treatment today. So, we arehopeful that new therapies coming into the market will help bring in new patientswho are either today undiagnosed or untreated. This has been a beneficialdevelopment for Hepatitis C patients, as more therapy options could beavailable in the future.

The patent situation for PEGINTRONas you will recall in the USis expected to have extended exclusivity until 2018 to 2020. So for us clearly,PEGINTRON combination therapy will continue to be an important part of ourportfolio.

Fred Hassan

Thank you, Carrie. And nextquestion please?


Your next question comes from RoopeshPatel with UBS

Fred Hassan


Roopesh Patel - UBS

Yes, thank you, I just a coupleof questions on TRA. First, can you give us a rough sense of when you expectthe two Phase III studies to complete enrollment? And then, if you could alsoclarify if PRASUGREL whenever available, will be part of the standard of carefor these trials? Thank you.

Fred Hassan

That's a good question, becausewe know that trial has been followed closely by all of you. Dr. Koestler?

Tom Koestler

Roopesh, thanks for those twoquestions. As I just mentioned to the earlier question, this is an event-driventrial, so about a year from now, we will get better sense of that. But thebottom line is, we are still projecting right now 2010 and 2011, inanticipation for the launch of the product. As far as PRASUGREL is concerned,this is also an ADP receptor antagonist just like Plavix. So we would considerthis again, as part of the standard of care, and once PRASUGREL and if PRASUGRELwere to become a reality, we would certainly stratify in our program to be ableto address the safety and tolerability end points.

Fred Hassan

Thank you. And I know there is animportant call, so this is the last question please.


Your final question comes fromCatherine Arnold with Credit Suisse.

Catherine Arnold - Credit Suisse

Thanks for taking my question.First of all Fred, if you could tell us how soon after the Organon dealclosure, you are going to come out from behind the curtain on important topicslike Sugammadex and Organon's pipeline, Integration Synergies Schering [OBS],and some of the things I think the market's been waiting to hear? And then secondly Carrie, Iwondered if you could comment on the REMICADE performance in regards to itsdrivers in foreign exchange, market growth and share gains?

Fred Hassan

That's a very good question, andagain, I can go back to my own experience, Catherine. We will use an initialopportunity to share with you the financial reporting aspects of thetransaction, and as you know there is complexity with all the changes that haveoccurred in recent years. But more importantly we will share with you theassessment that we will have of the R&D portfolio, as well as the marketedproduct portfolio and what we plan to do. I don't think everything is going tocome out in one quarter or in one conference call, I think there will be moreknowledge and more experience gained as we go forward.

We'll have a very good sense ofthe combined company, going forward, by the middle of next year. Also there isan R&D day plan for the Fall of '08. We were planning that R&D day thisFall, but because of OBS we had to postpone it. And we want to again remind youthat we are very confident about our synergies of $0.5 billion in year threeand the $0.10 of share in year one.

And Bob, do have any comments onthis?

Bob Bertolini

I think you hit it on the head,Fred. I think we will go through our integration. We'll provide cover Catherineon the accounting of this as we go forward, and as Fred said we're confidentwith the $500 million dollar synergy number.

Fred Hassan

Thank you, and I would just liketo make closing comments. We expect that this would be our last quarter, asyou've heard from Catherine, that the present Schering-Plough would be talkingabout the results and as we get ready for the next step of our journey, theupcoming acquisition of Organon BioSciences. Our people are very excited andvery committed and our sales and our earnings, and our R&D pipeline havegreatly improved in the past four years. We thank you for your steady support,and we look forward to the continuing success in our company as we go forward.These are very good days for Schering-Plough. Thank you very much.


Thank you for participating intoday's conference call. You may now disconnect.

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