Adam Feuerstein

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Schering-Plough Says Goodbye to a Brutal Year

Adam Feuerstein

Schering-Plough (SGP) put a horrific 2002 out of its misery Thursday, reporting a 19% drop in earnings per share, hurt once again by vanishing sales of its prescription allergy drug, Claritin.

While 2003 isn't looking much brighter for the Kennilworth, N.J-based drug maker, Schering-Plough is trying to clear the decks to make way for a return to earnings growth in 2004.

Fourth-quarter net income totaled $428 million, or 29 cents per share, compared with earnings of $528 million, or 36 cents per share, in the year-ago quarter, which excludes the $500 million consent decree payment made to U.S. drug regulators. Results beats Wall Street's consensus estimate by a penny per share, as polled by Thomson Financial/First Call, but then there wasn't much drama involved here since Schering-Plough issued a profit warning earlier this month.

Sales in the fourth quarter fell 4% to $2.4 billion. Sales of prescription Claritin were wiped completely off Schering-Plough's books in the fourth quarter, as the company decided instead to take a $51 million inventory reserve charge to reflect the faster-than-expected drop in demand for the product. By comparison, prescription Claritin sales totaled $688 million in the fourth quarter 2001.

Claritin is now sold over the counter, with sales totaling $105 million in the quarter. Schering-Plough has also been trying to get Claritin patients to switch to Clarinex, its new prescription allergy drug,, but results have been mixed. Fourth-quarter Claritin sales totaled $176 million.

Schering-Plough's line of PEG Intron hepatitis C drugs posted sales of $817 million in the quarter, up 62% from the year-ago period. The company now faces competition, however, from Roche's recently approved hepatitis C rival, Pegasys, especially since Roche announced that it would price its drugs at a discount to Schering-Plough's products.

All this bad news adds up to a year to forget for Schering-Plough. The company's $1.42 per share in 2002 earnings represents a 10% fall from 2001 results. Looking ahead, the company did not reiterate its previous guidance for a 2003 earnings range of $1.00 to $1.15 per share. Analysts are expecting 2003 earnings of $1.03 per share.

Furthermore, Schering-Plough is still seeking a new chief executive after current CEO Richard Kogan announced his retirement in November. Various media reports do say, however, that the company is close to naming Pharmacia CEO Fred Hassan as its new leader. Hassan is said to be leaving Pharmacia and interested in a new challenge now that the company's merger with Pfizer is nearing completion.

Deutsche Bank analyst Barbara Ryan believes the key to Schering-Plough's future is Zetia, the new cholesterol-lowering drug that was approved for sale in the U.S. in October. (Zetia is co-marketed by Merck(MRK).) Ryan is forecasting Zetia sales of $350 million in 2003 and peak sales of $2 billion, especially if the companies get approval for a combination a Zetia/Zocor pill. Zetia sales were $23 million in the fourth quarter.

"The 'story' on Schering-Plough is 2004 and beyond, at which point Zetia and Zetia/Zocor could be driving 20%-plus earnings per share growth," she wrote in a recent research note. Ryan rates Schering-Plough a buy and her firm doesn't have a banking relationship with the company.

UBS Warburg analyst C.J. Sylvester is forecasting Zetia revenue of $200 million in 2003, but he rates Schering-Plough a neutral because the 2003 earnings outlook is still rather opaque. Sylvester's firm doesn't have a banking relationship with the company.

Shares of Schering-Plough closed Wednesday at $20.75.