On Monday morning, before NYSE open, I’ll take a shot at live-blogging the first quarter earnings conference call of Merck & Co. — we should learn more about Vytorin and Zetia ‘script-trends — and the status of any write-downs to be taken inside the Schering/Merck Joint Venture, as well as an update on the status of the pending Congressional, and governmental, investigations and all that litigation. I expect that CEO Richard T. Clark will be pretty free-wheeling, much as he was on the 2007 Year-End Conference call.
This link should anchor directly to a log-in for a Windows Media feed of the call on Monday.
It will likely go “live” — at Merck — around 8:30 am EDT.
[UPDATED APRIL 21 @ 5:55 AM EDT]
From Merck’s First Quarter 2008 Earnings Release:
“. . . .The $700 million decrease in equity income guidance [for the full year 2008] is solely attributable to the lower anticipated contribution from the Merck/Schering-Plough joint venture. . . .”.”
Editorial — Wow! So, take at least $700 million out of Schering’s 2008 expected profitability!
Schering’s share of the Joint Venture downturn may be greater than a 50/50 split, though, as Schering picks up more of the expenses from the venture, and — if certain levels of profitability are acheived, then Merck & Co. reimburses those expenses, fully.
I’ll go see if this sized-down-turn will mean Yep — This means less reimbursement of expenses for Schering, and thus an increase Schering’s effective “share” of the downturn may turn out to be to more like $900 million in 2008.
Remember, the new 2008 Schering cost-cutting program will likely bring only $400 million “back into” Schering’s 2008 EPS (only 40 percent of the incremental $1 billion will be completed/realized in 2008).
So — I still see, at a mininum, a $500 million reduction to Schering’s profitability.
We’ll know much more on Wednesday, but on 1.62 billion share-equivalents outstanding, that will drop 2008 EPS, on a net-net basis, by at least $0.30 per share — which means the new low 2008 EPS estimate ought to be closer to $1.10, for all of 2008. At 14 times $1.10 2008 EPS, Schering is worth $15.40. And, a multiple of 14 is very generous, in a market where Merck can only muster 1 percent sales growth. At a 13 multiple, Schering is worth $14.30 per share, today.
More from the press release:
. . . . .Combined worldwide sales of ZETIA (ezetimibe) and VYTORIN (ezetimibe/simvastatin), as reported by the Merck/Schering-Plough joint venture, were $1.2 billion for the first quarter of 2008, representing a 6 percent increase compared with the first quarter of 2007. Worldwide sales of ZETIA, marketed as EZETROL outside the United States, were $582 million in the first quarter of 2008, an increase of 7 percent compared with the previous year’s first quarter. First-quarter 2008 worldwide sales of VYTORIN, marketed outside the United States as INEGY, were $651 million, an increase of 4 percent compared with the first quarter of 2007. The Company records the results from its interest in the Merck/Schering-Plough joint venture, which totaled $393 million in the first quarter of 2008 compared with $347 million in the same quarter a year earlier, in equity income from affiliates. . . .”
Remember three important things not stated above: (1) ACC didn’t happen until the last day of Q1 — so this is all pre-ACC — modest growth from Q1 2007 to Q1 2008 — but, overall, compared to Q4 2007 — the LAST quarter, sequentially, J/V sales are off 30 percent — $1.5 billion v. $1.2 billion. (2) And even that “modest growth” is quite a far fall from the “up 30 percent” expected at the end of 2007. And, (3) the Street expected sales of $6.1 billion from Merck for Q1 — Merck missed on the sales line this morning. It was only able to muster a 1 percent sales gain (even with the benefit of foreign currency “tailwinds“!), overall — or $5.82 billion, up 1 percent from $5.77 billion in the first three months of 2007.
Now to the truly ugly:
ENHANCE Study Litigation Update
“. . . .As previously disclosed, since December 2007, the Company and its joint-venture partner, Schering-Plough, have received several letters addressed to both companies from the House Committee on Energy and Commerce, its Subcommittee on Oversight and Investigations, and the Ranking Minority Member of the Senate Finance Committee, collectively seeking a combination of witness interviews, documents and information on a variety of issues related to the ENHANCE clinical trial, the sales and promotion of VYTORIN, as well as sales of stock by corporate officers. On Jan. 25, 2008, the companies and the Merck/Schering-Plough Partnership (MSP Partnership) each received two subpoenas from the New York State Attorney General’s Office seeking similar information and documents. Merck and Schering-Plough have also each received a letter from the Office of the Connecticut Attorney General dated Feb. 1, 2008 requesting documents related to the marketing and sales of VYTORIN and ZETIA and the timing of disclosures of the results of ENHANCE. Merck and Schering-Plough also recently received subpoenas dated April 4, 2008 from the Office of the New Jersey Attorney General seeking documents related to the ENHANCE trial and the sales and marketing of VYTORIN. The Company is cooperating with these investigations and is working with Schering-Plough to respond to the inquiries. In addition, since mid-January 2008, the Company has become aware of or been served with approximately 115 civil class action lawsuits alleging common law and state consumer fraud claims in connection with the MSP Partnership’s sales and promotion of VYTORIN and ZETIA. Certain of those lawsuits allege personal injuries and/or seek medical monitoring. Also, on April 3, 2008, a Merck shareholder filed a putative class action lawsuit alleging that Merck and its Chairman, President and Chief Executive Officer, Richard T. Clark, violated the federal securities laws. . . .”
115 Suits. Wow.
Now we wait for the call, and the analysts’ questioning of Clark. My sense of all of the conversations is that Merck is very lucky to be twice as large as Schering, at the revenue line, and to have the AstraZeneca partnership distribution to effectively fill the now-admitted “~ $700 million hole” that the ENHANCE results have recently-revealed, at Merck’s J/V equity income line.
Schering, plainly, will have no such luck — it has no other relationship on any remotely comparable scale, to back-fill with. As I type this, more than 55 percent of Schering’s 2008 profitability hinges on the Joint Venture with Merck. So, the question becomes, is that newly-announced $1.5 billion cost cutting going to be enough to fill Schering’s “~ $900 million hole” in 2008 profits? I — for one — strongly doubt it.
Next up, a live-blog of Schering’s Q1 call, on Wednesday.
[UPDATED APRIL 21 @ 5:35 AM EDT]
Now this is a Big Pharma to admire — and go long on — the ADRs are a good bet — Novartis’ Q1, per the Wall Street Journal:
“. . . .Novartis, based in Basel, said net profit attributable to shareholders rose to $2.32 billion in the three months ended March 31 from $2.17 billion in the year ago period. Net income from continuing operations — the company had sold its Gerber baby-food brand and its medical-nutrition business to Nestle SA last year — rose 10% to $2.31 billion, beating analysts’ estimates of a decline. . . .”
I do still see a decline for Schering-Plough today — based on what should be rather downbeat comments by Clark on the Merck & Co. Q1 conference call — about the Vytorin/Zetia Joint Veture.
[END, UPDATED PORTION.]
See here, below the line, on Monday, the 21st, for insta-analysis:
To get things started, I have to point out how “spotty” some of the published reports get — with respect to understanding the impact of Vytorin on each company — Merck & Co., in contrast to Schering Plough. Merck is double the size of Schering, at the revenue line, and only one-third as levered, at the debt to equity line, yet otherwise “learned people” write goofy stuff, like this:
“. . . .The Street is looking for Merck to report EPS of 86 cents on $6.1 billion in revenue on Monday before the bell. Oddly, the estimates have hardly budged despite the routing of Vytorin, in which Merck shares revenue and earnings in a joint venture with Schering-Plough. Only a penny has come out of the first quarter’s estimate during the last three months, and only 10 cents out of the year. Either the market is greatly overreacting to the Vytorin blowup, or analysts are underestimating the ultimate impact as scripts dry up. . . .“
Or. . . . the market’s reaction is appropriate — for Merck — and the analysts are about right as to its impact on Schering. Two separate notions — two separate companies.
Don’t get me wrong, we all know Merck enjoys the Cholesterol Joint Venture profitability, but on the 2007 Merck year-end-earnings call, Richard T. Clark indicated that Merck then-expected to be able to fill “almost all” of the Vytorin J/V’s 2008 shortfall, at the net-income line, with other collaborative ventures, which are just now coming on-line.
So “the press” about how bad this all has been — is accurate, insofar as the stories refer to Schering’s future results of operations. And yet, at the same time, the relatively muted market-response, lately-seen in Merck’s stock price-performance, is appropriate for Merck’s much larger size, lower-leverage and higher earnings-quality/diversity — than Schering-Plough.
Said another way, then, Schering-Plough is likely very-fully-valued at anything over $15, unless Merck unambiguously signals that it has seen only scant fall-off in scripts for Vytorin/Zetia, on Monday morning. And that would seem very-nearly-impossible, given that IMS has consistently reported between 28 percent and 39 percent daily, and weekly, Vytorin/Zetia declines (in year over year comparables), post the March 30, 2008 ACC Panel Discussion of the ENHANCE results.
It will be a very rocky NYSE open, indeed, for Schering — if Clark indicates that the J/V scripts are off more — by Merck’s internal calculations — than the third-party IMS data has thus far revealed. Schering would be very lucky to stay above $14.50 territory, should that be what Clark has to say.
I would hope that all of the above becomes more widely-understood, over on Wall, at Broad Sreet, after Monday morning. We shall see.