In one of those truly-priceless CNBC “twinning” moments, yesterday afternoon, while the markets were melting before our very eyes, Schering-Plough CEO Fred Hassan appeared on not just one, but two video segments. In the second, he served as a “guest TV-journalist” (What?!), questioning officials about the State of California’s ovetures for a federal loan — should it experience an instant liquidity crunch.
Tellingly, Mr. Hassan opined that the markets are literally “awash in cash” — that liquidity is no problem — and that California ought to look to “pare its balance sheet“, before borrowing, or seeking to otherwise raise capital (can one own stock in California? I think not. And even if one could, why would one want to? — I wonder). Well now, that’s interesting advice, coming from a guy who tapped the debt and equity markets extensively last Fall (September 2007) to acquire Organon, while his balance sheet was breaking out with a case of increasingly-doubtful-asset “chicken pox” (think Vytorin/Zetia and “no good news” from ENHANCE). But I digress.
Mr. Hassan’s other interview is the one most-relevant here. In it, Mr. Hassan opined that Russia would be the engine (CNBC video link) to cover what was assumed-but-unstated as Schering’s United States market shortfalls in 2008. One Hassan soundbite:
. . . .We are seeing good growth in Russia, and we are increasingly able to get reimbursement for our products, there. . . .
Okay. Let us decode that decidely cheerful-sounding talking point, into its four far less-than-cheerful actual component-truths:
(1) Mr. Hassan’s use of the word “reimbursement” means Schering is not running a “cash on delivery” drug business in Russia, but is applying for — and waiting on — Russian government payments for all the drugs it provides — in many cases, wating more than 180 days, before it gets “paid“. . . . so it is short funds, out-of-pocket, during that gap period.
(2) The word “paid” is in quotes above, because the Russian government certainly pays for those long-ago delivered Schering-Plough drugs in local currency — Roubles, not United States dollars. We already know that Schering is increasingly exposed to currency volatility, given that it chose to go largely “unhedged” — back when it was easier, and cheaper, to purchase such currency hedges (prior to the present crisis).
(3) While Mr. Hassan flatly states he is seeing “good growth” in Russian sales — he neglects to mention that given the extreme weakness of the Rouble, vis-a-vis the Dollar (or even the euro), Schering may actually report declining sales in Russia, overall, on a constant currency basis, this year. Without hedges, applicable GAAP rules will require Schering — when it consolidates its worldwide results at year-end — to value these Russian sales at a assumed (not a “spot“) conversion rate.
(4) That nominal-accrual/currency-exchange-rate is very-likely to reflect the weakness of the Russian currency, as compared to the dollar. Thus, it is highly likely that Mr. Hassan effectively “gave away” a very substantial portion of his pricey drug inventory to the Russian markets — once all is reconciled, and expensed on the 2008 year-end income statement — taking into account the US GAAP-required currency conversions.
So — all I can say is “You’re doin’ a heckuva’ job, there, Fred!” Here’s how the “rubber meets the (Russian) road” — on this folly:
Said another way, he’ll need between 48 and 43 billion Roubles of new sales in Russia, to generate the above equity income levels:
Two words, here: “No way!” — and, “No how“.
Mark this day — October 6, 2008 — on CNBC, Fred Hassan told the investing public to look for real growth — on Schering’s 2008 bottom-line — from Russia.
Mark also, now, my prediction — it will actually look like like “bottom line contraction“, once the inevitable delays in payment, relative-dearth of protective hedges, and erosive currency conversions are all factored in. Schering just engaged, unwittingly, in a drug product “giveaway” in Russia.
Are you plaintiffs’ lawyers taking notes, here? I hope so. This would seem to be an ongoing-securities count, for your to-be amended class-action complaints.