Updated from 3:47 p.m. EDT
Standard & Poor's said Friday that
new prescription for fiscal discipline wasn't enough to sway the ratings agency from its recent downgrade of corporate debt or its negative outlook on the company.
S&P's comments, along with an assortment of boos from Wall Street analysts, sent Schering-Plough's stock down 9.2%, or $1.52, to close at $14.96. The stock had fallen as low as $14.16.
Schering-Plough announced late Thursday a series of cost-cutting and money-saving moves that included reducing the quarterly dividend to 5.5 cents from 17 cents; accelerating and expanding by an indeterminate amount the $200 million a year savings goal announced in July; eliminating bonuses and profit sharing at least for this year; encouraging 1,000 U.S. workers to take early retirement; and freezing employee merit wages through 2004.
"These are painful actions but they are necessary," Fred Hassan, the chairman and CEO, said in a Thursday message to employees regarding the actions on bonuses and raises. "Our shareowners would not accept anything less."
Shareholders were as surprised as analysts, who were caught off guard when the company said 2004's earnings per share would be lower than the EPS in 2003. The company also said that the second half of 2003 EPS would be lower than the first half EPS for 2003. "More earnings quicksand," said a Friday report from J.P. Morgan. "Another earnings bombshell."
Consensus estimates compiled by Thomson First Call pegged 2004's EPS at 59 cents and 2003's EPS at 46 cents. For the first six months of 2003, Schering-Plough earned 24 cents a share.
Much of the company's problem has been caused by that dramatic drop in prescription Claritin sales as the antihistamine lost patent protection and was converted to nonprescription status in the U.S. late last year; but the company also faces competitive pressure and weakening sales for its hepatitis drugs.
S&P -- which cut Schering-Plough's corporate credit, short-term corporate credit and commercial paper ratings late last month -- said Friday that it was sticking with those ratings as well as its negative outlook on the Kenilworth, N.J.-based drug company.
S&P said the dividend cut will enable Schering-Plough to save more than $670 million a year, which is "more than enough for the company to both offset the charge for employee reduction and still maintain a solid financial profile." Schering-Plough expects to take a $150 million pretax charge for its early retirement plan.
But S&P suggested that there may be "additional restructuring charges in the near term, and there's still considerable uncertainty" concerning the company's earnings rebound in the future. S&P rates Schering-Plough's corporate credit at A-plus and its short-term corporate credit and commercial paper at A-1.
Two investment banks have cut their ratings on Schering-Plough since the announcement -- Dresdner Kleinwort Wasserstein dropped the stock to hold from buy, and CIBC World Markets downgraded the stock to sector underperform from sector perform.
"The last leg of support appears to have been removed from the shares," said Mara Goldstein, of CIBC World Markets, in a Friday report to clients. She was surprised that the dividend was cut, saying that she had expected the company to keep up the payout through additional borrowing. She doesn't own shares; her firm is a market maker in Schering-Plough's stock and has had an investment banking relationship with the company in the past 12 months.
"While we hope that Fred Hassan is putting all the bad news in the market now, we are not yet confident of why 2004 (earnings per share) figures will be below 2003," said Melissa Hartley, of Dresdner Kleinwort Wasserstein, in a research note to clients on Friday. "And until we have more clarity we do not advise investors to buy Schering-Plough." Hartley doesn't own shares in the company; her firm doesn't have an investment banking relationship.
That clarity wasn't aided by Hassan's absence at an early evening telephone conference call on Thursday for analysts and investors, provoking some Wall Streeters to compare Hassan's no-show performance to the lack of contact that characterized their relationship with his predecessor Richard Jay Kogan.
Hassan joined Schering-Plough in April. He has been emphasizing the distance between his management and the previous regime, using phrases in a Thursday press release and in a message to stockholders such as "the situation we inherited," and the "inherited regulatory and legal issues."
But analysts, who were surprised by the 2004 earnings guidance, also barked at the way the news was presented.
"Absentee landlord" was a headline in a Lehman Brothers report to clients on Friday. The absence of top management for the conference call "was basically a disaster as no additional 'color' was given in any regard -- not a new phenomenon with
the company unfortunately," said a Friday report from Prudential Financial.
Schering-Plough's announcement sent analysts scurrying to recheck and amend their estimates and wonder why there was such a gap in what they predicted and what Schering-Plough revealed.
"We are reviewing our model," said Michael Krensavage, of Raymond James, in a research note Friday. He had predicted 2004 earnings per share of 66 cents; now it will be less than 48 cents.
He suggested that based on 2004 EPS estimates, the company would be worth more as a takeover candidate than as a stand-alone entity. Krensavage rates the stock as market perform. He doesn't own shares; his firm doesn't have an investment banking relationship with Schering-Plough.
Goldman Sachs analyst James Kelly immediately cut his EPS for 2004 to 34 cents from 59 cents, and he cut the 2003 EPS to 42 cents from 48 cents. He continues to rate the stock as underperform; he doesn't own shares but his Friday research note says that his firm expects to receive or seek compensation for services in the next three months from the company.
Schering-Plough is "an absolute mess at present," said Tim Anderson, of Prudential Financial, in a Friday research note, as he cut his 2004 EPS estimate to 30 cents from 63 cents and his 2003 estimate to 36 cents from 45 cents.
But Anderson maintains his buy rating on Schering-Plough, with the good news being the expectations that a joint venture with Merck will produce big sales in a few years with their experimental cholesterol reducing pill that combines Merck's popular Zocor with the new Zetia being co-marketed by the companies. "We believe investors will continue to be intrigued with Schering-Plough's longer-term prospects," said Anderson, who doesn't own shares and whose firm doesn't have an investment banking relationship with Schering-Plough.