Schering-Plough to Beat Estimates, but Manufacturing Woes Continue - TheStreet

Schering-Plough to Beat Estimates, but Manufacturing Woes Continue

Management was reticent about manufacturing problems and guidance beyond the second quarter.
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Embattled drug maker



said Thursday that second-quarter earnings will exceed analysts' expectations, but well-publicized manufacturing problems are still not close to being solved.

During a presentation to Wall Street analysts, Schering-Plough Chairman and CEO Richard Jay Kogan said the company is expected to report July 25 that it will earn 43 cents per share in the second quarter, which is flat with results from one year ago.

Wall Street was expecting the company to earn 41 cents per share in the second quarter, according to consensus estimates compiled by

Thompson Financial/First Call


The earnings "surprise" was the best news that came out of Thursday's meeting, and should help Schering-Plough avoid a dubious honor: Becoming the only major drug company to post negative earnings growth in the second quarter. Even so, the fact that Schering-Plough is posting flat earnings illustrates the company's problems.

Kogan refused to offer any financial guidance beyond the second quarter. Wall Street analysts expect the company to earn $1.63 per share in 2001, which is a penny below last year's earnings of $1.64 per share.

Analysts and fund managers were anxious to hear how Schering-Plough is dealing with its manufacturing problems, especially considering Wednesday's surprise resignation of President and COO Raul Cesan. Company executives offered more details than in the past, but many questions were left unanswered.

The company said more than $60 million has already been spent to remedy problems found by the

U.S. Food and Drug Administration

at its plants in New Jersey and Puerto Rico. Kogan said that more money would be spent to get the problems behind the company.

"We are working through our priorities, believe we are making progress, but there is still much to do," he said, without offering a prediction for when the work will be completed.

Schering-Plough's fight with the FDA over its manufacturing plants dates back several years. On June 22, Schering-Plough revealed that FDA inspectors toured its manufacturing plants in May and June and were not satisfied with the results. In fact, new problems were found. The FDA will not approve Clarinex, the company's new allergy-fighting drug and successor to Claritin, until the manufacturing issues are cleared up. The supply of several smaller drugs in the company's portfolio also is being affected.

"Clearly, no one feels any better about the manufacturing problems," says

Sanford Bernstein

drug analyst Richard Evans, adding that there was a "lack of diplomacy" during the Q&A session of the meeting as angry fund managers asked questions and company executives repeatedly refused to answer.

"Under a best case scenario, Schering-Plough might clear up the issues by August, but no one expects that. I really don't think it will happen until November," he adds.

Still, Evans has an outperform rating on the stock because the company, despite all the roadblocks, has shown that it can still post the earnings to meet Wall Street expectations. More importantly, he says, Schering-Plough's drug development efforts look really strong. Evans' firm doesn't do underwriting.

In particular, Evans believes that ezetimibe, a experimental drug that prevents the absorption of "bad" cholesterol, looks like a big winner. Schering-Plough is developing the drug in a joint venture with


(MRK) - Get Report

, and the company shared very positive research results with analysts Thursday.

If approved by the FDA, ezetimibe will give Schering-Plough a piece of the multibillion dollar "statin" or cholesterol-fighting drug market dominated by


(PFE) - Get Report

Lipitor and Merck's Zocor, says Evans. Ezetimibe inhibits the absorption of bad cholesterol in the intestine, unlike statin drugs, which block the production of cholesterol in the liver.

Schering-Plough intends to market ezetimibe as a stand-along drug, but under its venture with Merck, the drug will also be marketed in combination with Zocor, which may produce even stronger cholesterol-lowering results.

Shares of Schering-Plough were off 38 cents, or 1%, to $36.60 in Thursday trading.