Schering-PloughSituation Analysis

Team Acción:

Beth, Diane, Kevin, Don, and Felix.

March 2006

Schering-Plough

Company Overview

Source: Schering-Plough.com

Company

Who are we?

What do we sell?

Competitors

How do we compare to the field?

Context

How is the environment changing?

Customers

Who are they?

Appendix and References

Company Highlights

Sources: Prial (2006), Simmons (2003);

2002 Agreement to pay $500 million fine & overhaul of manufacturing operations

2003 Fred Hassan named CEO

2004 Dividends slashed by 2/3, stock dives

2005 Work on legal issues, complete operation overhaul

Company

Source: Schering-Plough.com

Annual Net Sales

$7,000,000,000$7,500,000,000

$8,000,000,000$8,500,000,000

$9,000,000,000$9,500,000,000

$10,000,000,000$10,500,000,000

2000 2001 2002 2003 2004 2005

Company

Source: Schering-Plough.com

Annual Net Income

($1,000,000,000)

($500,000,000)

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

2000 2001 2002 2003 2004 2005

Company

Source: Schering-Plough.com

2005 Consolidated Sales (in millions)

OTC Health Products,

$1,093, 11%

Animal Health, $851, 9%

Pharmaceuticals$7,564, 80%

Competitors

Source: Edgarscan

Pharmaceutical Industry was valued at $550 billion in 2005. The chart shows that the industry leader captured approximately 10% of the market share; the top ten competitors shared nearly 40% of the market share. There are three groups: the big players, the followers, and more than 1000 dwarfs

Pharmaceutical Industry Market Share

3.58%

3.52%

3.19%

2.52%

57.08%

1.50%0.45%

9.55%

8.61%

5.91%

4.09%

PFIZER

JHONSON & JHONSON

NOVARTIS

MERCK

ABBOTT LABORATORIES

BRISTOL MYERS SQUIBB CO

WYETH

LILLY ELI & CO

SCHERING PLOUGH CORP

HOSPIRA INC

Others (over 3000 companies)

Competitors: The Big players

Pfizer (PFE) $ 26.19 -0.41 www.pfizer.com

Merck (MRK) $ 34.86 -0.50 www.merck.com

Note: Stock prices of NYSE in 2/28/06

Johnson&Johnson (JNJ) $ 57.65 -0.26 www.jnj.com

Bayer $ 40.39 -0.50 www.bayer.com

Novartis (NVS) $53.25 -0.41 www.novartis.com

Competitors: The followers

Abbott (ABT) $ 44.18 -0.27 www.abbott.com

Wyeth (WYE) $ 49.80 -0.25 www.wyeth.com

Note: Stock prices of NYSE in 2/28/06

Bristol Myers (BMY) $ 23.10 -0.11 www.bms.com

Eli Lilly (LLY) $ 55.62 -1.11 www.lilly.com

Schering-Plough (SGP) $18.50 -0.45 www.schering-plough.com

Competitors Total Operating Revenue

Source: Edgarscan

Total Operating Revenue

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

2000 2001 2002 2003 2004

Years

Rev

enue

(Mill

ion

of D

olla

rs)

PfizerAbbottBristolWyethLillySchering-PloughJohnson & JohnsonMerck

Competitors Total Operating Revenue

Source: Edgarscan

$0$10,000$20,000$30,000$40,000$50,000$60,000

Pfizer

Abbott

Bristol

Wye

thLil

ly

Scheri

ng-P

lough

John

son &

John

son

Merck

20002001200220032004

Competitors Industry Rank

Source: Edgarscan

Item Value RankFinancing Activities 1,534,000,000 1

Cash 4,767,000,000 2

Accounts Payable 1,078,000,000 3

Net Sales 9,508,000,000 4

Receivables 1,479,000,000 6

Inventory 1,605,000,000 6

Current Assets 9,732,000,000 6

Current Liabilities 4,659,000,000 6

Long Term Debt 2,399,000,000 6

Cost of Goods Sold 3,346,000,000 6

Sales, General and Administrative 4,374,000,000 6

Capital Expenditures 478,000,000 6

Total Operating Revenue 9,508,000,000 7

Net Income 269,000,000 10

Net Income Growth 1.284 11

Inventory Days COGS 175 35

Gross Margin 0.648 53

Collection Period 57 54

Receivables Turnover 6.429 56

Current Ratio (Assets/Liabilities) 2 128

Operating Activities -154,000,000.000 162

This graph shows Schering-Plough’s strengths are strong among its top ten competitors, and also points out its weaknesses. Strong financial activities are a result of selling stocks (2004) and allocating financial resources. These operations also generated additional cash. On the other hand, PS shows poor performance in operational activities, which indicates problems in its core business. Note PS posted a poor current ratio, implying they don’t have sufficient assets to cover current liabilities

Research and Development as Percentage of Revenue

Source: Edgarscan

This graph compares SP’s level of R&D with the average of the top-ten companies. Even though in 2003 and 2004 PS had negative incomes, the total dollar amount spent in R&D increased.

0%2%4%

6%8%

10%12%14%

16%18%20%

2000 2001 2002 2003 2004

Pfizer

Abbott

Bristol

Wyeth

Lilly

Schering-Plough

Johnson & Johnson

Merck

Average

Cost of Goods Sold as a Percentage of Revenue

Source: Edgarscan

Schering-Plough’s result is higher than Pfizer, Johnson & Johnson, and Merck, as well as the industry average. SP must obviously revise its costs structure to become more competitive.

0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004

Pfizer

Abbott

Bristol

Wyeth

Lilly

Schering-Plough

Johnson &Johnson

Merck

Average

Sales Cost as a Percentage of Revenue

Source: Edgarscan

Note the sales costs of SP are again above the industry average. This may be due to SP employing more salespeople or investing in more advertising. Results indicate the greater spending has not resulted in improved financials.

0%5%

10%

15%20%25%30%35%

40%45%50%

2000 2001 2002 2003 2004

Pfizer

Abbott

Bristol

Wyeth

Lilly

Schering-Plough

Johnson & Johnson

Merck

Average

Cash as a Percentage of Revenue

Source: Edgarscan

Data depicts SP ranks the highest in this category. Results may be due to the stocks sold in 2003 and 2004.

0%

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004

Pfizer

Abbott

Bristol

Wyeth

Lilly

Schering-Plough

Johnson & Johnson

Merck

Average

Customer Demographics

Who is the Customer?Business Unit SP's Response SP vs Top Ten

Pharaceuticals Doctors, Hospitals & Clinics, Consumers, Int'l Aid Orgs

SP selects narrow target markets for certain products

Animal Science Farmers, Ranchers, Vets, Vet Hospitals Similar targets

OTCConsumers, Doctors, Pharmacists Similar targets

Customer Geographics

Where is the Customer?Business Unit SP's Response SP vs Top Ten

Pharmaceuticals Int'l, esp US, W EuropeSP less integrated

in Asia, Africa, and S. America

Animal Science US, Int'l SP far less integrated in ROW

OTC US, W EuropeSP less visible in

int'l venue

Customer Behaviors

25% of patients request a brand name drug from their doctors (69% of requests are granted)

Noncompliance with prescription regimens

Ranchers desire easy methods of vaccinations

Sources: Patients request (2002), Hughes (2001), Zenk (2004)

Context

Source: AMEX Index

Amex Pharmaceutical Index

The Amex Pharmaceutical Index (DRG) is a market-capitalization weighted index designed to represent a cross section of widely held, highly capitalized companies involved in various phased of the pharmaceutical industry. The DRG Index was developed with a base value of 200.00 on July 31, 1991. (The index value was later split 2-for-1 on March 23, 1999).

AMEX Pharma Index

Context

Sources: Martinez (2005), Meyers (2005), Prial (2006)

SWOT

StrengthsCholesterol venture with Merck resulted in $512 million in sales (not reflecting in accounting numbers because of joint venture)

Completed operations manufacturing overhaul

WeaknessesSignificant litigation charges Clarinex patent expirationLack of any ‘stars’ in R&D pipeline

Context

Source: Simons (2003), Nagappa (2005)

SWOT

ThreatsGobbled up by Pfizer or Merck (less likely)

Cheap generics and overseas patent infringement

Potential for loss in legal battles

OpportunitiesForeign markets

Joint ventures for specific pharmaceuticals

Conclusions

Source: Simons (2003), Nagappa (2005)

Schering-PloughCompany is rebounding a little financially

Competition is formidable

Legal conflicts are resolving slowly

Industry is high-growth and high-change

SP’s high priority on R&D is key to maintain company viability

Appendices

Source: Edgarscan

Research and Development

Company 2000 2001 2002 2003 2004Pfizer $4,374 $4,776 $5,208 $7,487 $7,684

Abbott 235 228 1475 1624 1697

Bristol $1,878 $2,183 $2,206 $2,279 $2,500

Wyeth $1,688 $1,870 $2,080 $2,094 $2,461

Lilly $2,019 $2,235 $2,149 $2,350 $2,691

Schering-Plough $1,333 $1,312 $1,425 $1,469 $1,607

Johnson & Johnson $3,000 $3,400 $3,957 $4,684 $5,203

Merck $2,344 $2,456 $2,677 $3,280 $4,010

Revenue

Company 2000 2001 2002 2003 2004Pfizer $26,045 $29,024 $32,294 $44,736 $52,516

Abbott $3,539 $3,787 $15,280 $17,280 $19,680

Bristol $17,538 $17,937 $16,208 $18,653 $19,380

Wyeth $13,081 $13,984 $14,584 $15,851 $17,358

Lilly $10,862 $11,543 $11,078 $12,583 $13,858

Schering-Plough $9,775 $9,762 $10,180 $8,334 $8,272

Johnson & Johnson $34,000 $36,298 $41,862 $47,348 $50,003

Merck $40,363 $21,199 $21,446 $22,486 $22,931

Appendices

Source: Edgarscan

Cost of Goods Sold

Company 2000 2001 2002 2003 2004Pfizer $3,755 $3,823 $4,014 $9,589 $7,541

Abbott $881 $939 $6,821 $7,774 $8,884

Bristol $4,730 $5,453 $4,691 $5,406 $5,989

Wyeth $3,269 $3,389 $4,075 $4,590 $4,947

Lilly $2,056 $2,160 $2,177 $2,675 $3,224

Schering-Plough $1,902 $2,078 $2,505 $2,833 $3,070

Johnson & Johnson $9,000 $10,000 $10,447 $12,176 $13,421

Merck $22,444 $3,625 $4,005 $4,437 $4,690

Sales Cost

Company 2000 2001 2002 2003 2004Pfizer $9,000 $10,000 $10,829 $15,108 $16,903

Abbott $1,100 $1,467 $3,725 $4,808 $4,922

Bristol $3,852 $3,894 $4,081 $4,620 $5,016

Wyeth $4,851 $5,031 $5,011 $5,468 $5,800

Lilly $3,228 $3,417 $3,424 $4,055 $4,284

Schering-Plough $3,445 $3,444 $3,681 $3,474 $3,811

Johnson & Johnson $9,500 $11,000 $12,216 $14,131 $15,860

Merck $6,168 $6,224 $5,652 $6,395 $7,346

Appendices

Source: Edgarscan

Cash

Company 2000 2001 2002 2003 2004Pfizer $1,099 $1,036 $1,878 $1,520 $1,808

Abbott $914 $478 $218 $606 $621

Bristol $3,182 $5,500 $3,978 $2,549 $3,680

Wyeth $2,644 $1,745 $2,944 $6,070 $4,744

Lilly $4,115 $3,100 $2,900 $2,756 $5,365

Schering-Plough $2,397 $2,716 $3,000 $4,218 $4,984

Johnson & Johnson $4,278 $3,758 $2,894 $5,377 $9,203

Merck $2,537 $2,144 $2,243 $1,201 $2,879

References

Anonymous. 2002. Patients request Brand Name Drusgs from Doctors, Workspan, Scottsdale: July 2002. Vol. 45, Iss. 7, pg 10.

Anonymous.  2004. Bayer in Marketing Pact With Schering-Plough; Chemical Market Reporter New, York:Sep 20, 2004.  Vol. 266,  Iss. 9,  p. 2 (1 pp.)

Anonymous. 2005. Schering-Plough Corporation; Study shows addition of Integrelin to oral platelet therapy more effective at reducing inflammation. Lab Business Week, 25 December, pg. 183.

Anonymous. 2006. Schering-Plough Corp.; U.S. FDA approves new indication for Avelox, Nursing Home & Elder Business Week, 1 January, pg. 101.

The Economist, London: Jun 18, 2005 Vol.375, Iss. 8431;  pg. 3

EdgarScanTM Benchmarking: Schering-Plough and Pharmaceutical Industry.http://edgarscan.pwcglobal.com/cgi-bin/EdgarScan/edgarscan_java

Health Brief -- Bayer AG: Schering Marketing Agreement To Trim Global Sales 5% to 7% Wall Street Journal (Eastern Edition). New York, N.Y.:Nov 29, 2004.  p. B.6 

Hensley, S. and Greil,A. 2006. Drug Makers Deliver Weak Earnings; Generics Weigh on Pfizer, Wall Street Journal (Eastern edition), 20 January, pg A2.

Herskovits, B. 2005. Schering-Plough Looks to Remedy and Ailing Image, PRweek, Vol. 8, Iss. 49, pg. 8.

References Cont.

Hoovers’ Online Report Builder: Schering-Plough Corporation, http://www.hoovers.com/free/tools/report/builder/form.xhtml?ID=11326(31 January 2006).

Hughes, D.A., Bagust, A., Hacox, A., & Walley, T. 2001. Accounting for Noncompliance in Pharmacoeconomic Evaluations, PharmacoEconomics, Vol. 19, Iss., 12, pg. 1185, 12 pgs.

Meyers, M. 2005. Three Drug Stocks are Ripe for Recovery, Kiplinger’s Personal Finance, Vol. 59, Iss. 2, pg. 40.

Nagappa, A. 2005. The Patens (Amendment) Act, 2005 – Fears and Challenges, Pharmabiz, 27 April.

Prial, D. 2006. Schering Completes Production Overhaul, Knight Ridder Tribune Business News Washington: January 4, 2006, pg 1.

-------------. 2006. Schering-Plough Reports FDA Grants Fast Track Designation to Oral HCV Protease Inhibitor SCH 503034. PR Newswire Europe Including UK Disclose. 30 January.

Simons, J. 2003. Is it too late to save Schering, Fortune, Vol148, Iss. 5, pg. 145

Thomaselli, R. 2004. Schering, Merck fire drug-war salvo, Advertising Age (Midwest Region Edition). Chicago:Aug 2, 2004.  Vol. 75,  Iss. 31,  p. 1, 2 pgs.

Zenk, P. 2004. Vaccinating as Cows Ruminates, Farm Industry News, Vol. 37, Iss. 2.