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Schering-Plough (SGP)Stock (Drug Manufacturers Industry, Drug Manufacturers - Major Industry, Pharma & Healthcare Industry)
Schering-Plough (NYSE: SGP) is one of the smaller players in the pharmaceutical industry, with sales of $12.7 billion in 2007. Its two largest products are autoimmune medication Remicade, sold internationally, and Zetia & Vytorin, a joint venture taken with Merck (MRK) that fights cholesterol. While growth of Remicade has been strong, Vytorin has taken a hit after studies questioned its efficacy compared to the older drug it is based on and in treating blockage of the heart valve.[1] Like most companies in the industry, Schering-Plough faces challenges to developing new medications, patent expiration, federal regulation, and changes to insurance plans. Schering-Plough has a particularly small pipeline, with very few drugs currently in development. In the near term, it does however have one of the safest profiles in the industry, with very few major patents coming up for expiration in the coming years. Schering-Plough is currently undergoing a restructuring process that began in 2003 aimed at reducing high operational costs and increasing efficiency. It recently announced the acquisition of Organon for $14.4 billion in 2007, in a bid to increase its footprint in the autoimmune and cholesterol markets.
[edit] Corporate OverviewSchering-Plough began initially as the U.S. subsidiary of a German pharmaceutical and chemical company, Schering AG. In the 1970’s, the company merged with Plough Inc., and by 1980 the company’s revenues had grown significantly. Schering-Plough focused heavily on pharmaceuticals, developing antihistamines, corticosteroids, antibiotics, anti-infectives and antiviral products. Schering-Plough's most successful years followed the release of Claritin, a prescription allergy medication. Following Claritin's transition to over-the-counter distribution, Schering-Plough experienced a large down-turn. After several rough years, Fred Hassan was appointed as Schering-Plough’s CEO in 2003, and the company began a restructuring process aimed at increasing revenues and cutting costs. Hassan is known in the industry for rejuvenating troubled companies. Schering-Plough's headquarters are located in New Jersey. The company posted net sales of $12.7 billion in 2007, with its highest selling product Remicade, an arthritis treatment, bringing in $1.65 billion. Schering-Plough employs 55,000 individuals with locations and sales all over the globe. $2.9 billion was spent on research in 2007 in such areas as cardiovascular and metabolic diseases, central nervous system disorders, infectious diseases, inflammatory diseases, oncology, and respiratory diseases. [edit] Business GrowthSchering Plough posted 2008 second quarter earnings of $398 million, down from $517 million last year. This drop stems from charges related to the Organon Biosciences acquisition. Quarterly revenue increased by 55% percent to $4.92 billion with the additional income from Organon. Growth was also driven by strong sales of arthritis treatment Remicade, which rose 41 percent to $557 million.[2] There has been controversy over the recently released study about the cholesterol drug Vytorin, which Schering-Plough develops jointly with Merck. Vytorin is a combination of Merck's best-selling Zocor, which had lost patent protection in 2006, and Zetia, a newer drug. While sales of the drug are strong, Vytorin has faced controversy over its comparative efficacy and marketing techniques. As a combination drug, Vytorin enjoys patent protection, which allows Merck and Schering-Plough to charge significantly higher prices than its Zocor counterpart. However, the two companies recently released the results of a study that showed Vytorin may not be any more effective than Zocor alone. While the clinical trial was completed in April 2006, the two companies did not release the results of the study until January 2008. During that time, Merck and Schering-Plough had aggressively advertised Vytorin as a better alternative to Zocor. Merck and Schering-Plough are currently defendants in about 50 civil suits related to Vytorin's potentially misleading marketing. U.S. Vytorin sales fell by 5 percent after this result was announced, and may continue to decline as doctors are advised to reconsider prescribing the combination drug. Combined prescriptions of Vytorin and Zetia fell by 23 percent from January to May, but there are indications that the drop may be slowing down. US prescriptions fell by 1.1% to 2.5 month from April to May. Vytorin took another hit in July of 2008 after a study showed that it was not effective in treating aortic stenosis, or blockage of the heart valves.[1] The company is currently restructuring, with plans to cut 10 percent of its 55,000 jobs and save $1.5 billion annually by 2010. [edit] Products and Revenue[edit] Pharmaceuticals ($10.2 Billion)Pharmaceuticals make up the bulk of Schering-Plough's business, accounting for 84% of revenue in 2007. Over the past several years, Schering-Plough has actually been losing money on its pharmaceutical products, with more going into research, clinical trials, and marketing than was coming back in revenue. Here are some of the company's most important pharmaceutical products:
[edit] Cholesterol Joint Venture ($5.2 Billion)Schering-Plough joined forces with Merck (MRK) to produce a medication to combat high cholesterol. This joint venture yielded Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin), two very successful medications with combined net sales of $5.2 billion in 2007. An aging population and increasing obesity in Europe and the United States would lead to higher demand for these medications. Despite the high sales of both drugs, there could be trouble from competitors. In February 2007, a generic drug company filed an Abbreviated New Drug Application (ANDA) for Zetia, an action that is the first step to registering a generic drug. Additionally, the company is challenging Schering-Plough and Merck's U.S patents for Zetia. As of late February, Schering-Plough has yet to respond to the patent challenges. If the company is successful, Schering-Plough could lose market share for high cholesterol drugs as cheaper versions of Zetia are made available. Vytorin would be "safe" from generic competition despite the challenge. [edit] Consumer Health Care ($1.3 Billion)In addition to its pharmaceutical business, Schering-Plough also produces consumer health products. One of the most well known is the Coppertone line of products, a variety of sun-block and insect repellent creams and sprays. Schering-Plough also markets the Dr. Scholl's line of foot care products, including shoe inserts, wart remover, and odor neutralizers for shoes. Schering-Plough's consumer health care sales have remained relatively stable over the past several years; there are no stellar products slated to appear in the next few years, and there is no reason why demand for sunscreen would change drastically in the near future as well. [edit] Animal Health ($1.3 Billion)Schering-Plough's final business unit, animal health products, brings in $1.3 billion a year. Like consumer health, sales of animal care products have remained generally stable over the past several years. Products include pet care, livestock care, and poultry health. A change in trade laws (e.g. tariffs or barriers) on livestock could affect Schering-Plough's sale of livestock growth products. Additionally, an outbreak of mad cow disease in a specific region, resulting in a large decrease in livestock supply, would likely increase Schering-Plough's sale of its livestock growth and health products. Neither of these events appears imminent, but investors should keep an eye out for these as they would likely effect sales of animal health products. [edit] Organon AcquisitionThe company's board of directors has approved the acquisition of Organon BioSciences for $14.4 billion. This represents a major transaction and may very well determine the company's future financial health. Organon BioSciences produces several pharmaceutical and animal health products, with total annual sales of $5 billion. Schering-Plough expects that the merger will result in annual savings of $500 million. Organon has five products in Phase III development, which may bolster Schering-Plough's struggling product pipeline. The division's largest potential new drug is asenapine, which is used to treat bipolar disorder and schizophrenia. Schering-Plough has filed a New Drug Application to the FDA for the drug. If approved, asenapine will compete against Eli Lilly's Zyprexa and Johnson & Johnson's Risperdal. In recent clinical trials, it has shown promising results, performing similarly well but causing less side effects such as weight gain. [edit] Trends and Forces[edit] Research and DevelopmentOne of the biggest driving forces in the pharmaceutical industry is the product pipeline. Drug companies must continuously come up with new drugs in order to remain highly profitable and competitive in the market. Currently, Schering-Plough has many different products in development. These include a thrombin receptor antagonist for acute coronary syndrome, Vicriviroc, an HIV treatment, several new allergy medications, new treatments for autoimmune disorders and inflammation, and two new hepatitis treatments. However, in total, Schering-Plough has only 20 drugs in early-stage development (Phase I), and historically only about 20% of drugs in this stage reach the market. This means that in the future only around four new medications would be released, a very low number when compared to other companies' projected releases. Schering-Plough did recently purchase Organon, but Organon's largest potential new drug, asenapine, did not unambiguously pass its latest round of clinical trials. Prospects for new medications are similarly low for late stage development drugs (Phase II & Phase III}. Only 16 new products are in these final development stages, which means in the next 5-7 years less than 16 new drugs will be launched. Most of Schering-Plough's energy is focused on gaining new markets and indications for existing medications, such as Remicade, which it hopes to win approval for treatment of Pediatric Chron's disease. Thus, Schering-Plough does not have many new treatments likely to hit the market in the next 5-12 years, which means it will have to rely more heavily on existing treatments. [edit] Patent expirations
Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. The patent period begins when the company begins researching the drug and files a patent with the patent office. After clinical trials, the average patent is only in effect for an additional 11-12 years. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, and the lower cost is often a strong incentive for consumers to choose generic over brands. In addition, the presence of a generic alternative may prompt a decrease in the brand name medication price. Schering-Plough faces very few patent expirations in the next few years, especially in comparison to some of its competitors. Additionally, re-releases of "old" medications, such as the Clarinex/Claritin pair and joint ventures, such as combining Zetia with Merck's statin to produce Vytorin help to extend "real" patent life and maintain market share. [edit] Politics and InsuranceLike other global pharmaceutical companies, Schering-Plough faces constant pressure from governments and activist organizations to increase access to medications by either lowering prices substantially or granting generic licenses. While sales would likely increase as a result, prices would decrease along with revenues. Schering-Plough continues to lobby for favorable regulation and access policies. Additionally, changes in health insurance plans would impact sales and revenue. If an insurance program changes its policies and removes coverage for a certain treatment, sales are likely to decrease. In general, insurance programs are more likely to cover essential expenses, such as heart disease medication, and less likely to cover nonessential expenses. Many of Schering-Plough's medications are for pain and symptom management (e.g. Nasonex) and so fall right on the cusp of insurance coverage. Changes in policies or legislation by the federal government could shift the balance and could either result in higher or lower sales depending on the direction. Medicare policies also have an important impact on Schering-Plough's sales. Medicare is the government's health subsidy plan for poor individuals. Policies allow the government to bargain for lower prices; essentially the government caps prices for a large number of plans. This lowers revenues while increasing the amount of medications sold. Over the past few years, many states and the federal government have begun suing multiple pharmaceutical companies because of alleged price fraud. The states are suing based on alleged defrauding of the state health care assistance programs, Medicaid. If the the states win, the pharmaceutical companies will be forced to pay hundreds of millions of dollars and change pricing schemes. While the first trial will not be finished for at least another year, this litigation could easily effect Schering-Plough. Additionally, changes in Medicare legislation could cut into revenues even more in the future, especially if nationalized or cheaper health care advocates come into office. [edit] Comparison to CompetitorsSchering-Plough is one of the smaller companies in the pharmaceutical industry, especially when compared to giants such as Pfizer (PFE) and Novartis AG (NVS). Competition in the health care industry occurs on a codition by condition bases. For example, cholesterol drugs compete with other drugs in the same category. Schering-Plough's Zetia competes directly with Pfizer's Lipitor, and many other companies are developing hypertension and cholesterol medications. Schering-Plough's major competitors include Pfizer, Merck (MRK), and Novartis. As seen in the chart below Schering's profit margins were well below its competitors. This is in part do several years of lost revenue due to lost of Clarinex patent protection. Schering has also suffered from excess production capacity. In 2006 it cut 1,100 jobs and closed a plant in Puerto Rico in order to streamline its operations. Schering-Plough's margins are lower than its competitors largely because it is a smaller company than the others. Net revenue is lower because it has spent much money reorganizing and in clinical testing over the past few years, but once these costs are covered this number could rise. The most significant metric, is, as mentioned above, the very low number of pipeline drugs Schering-Plough has compared to its competitors.
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