While Schering nominally beat the $0.31 EPS the Street had expected, it did so just as I expected, last week — it gained from disposal of the respiratory joint venture, continued streamlining gains on PTP, and foreign currency tailwinds. These are non-repeating sources of growth — not organic growth.
▲ 15 to 17 cents of EPS, or 12 to 13 percent, of all of Schering’s global 9 months net income growth was driven by currency gains, according to the UBS analyst, Rupesh Patel. Those will very-likely be reversed, and turn into headwinds — in the fourth quarter, based on global financial market conditions thus far in Q4.
▲ In short, earnings quality was poor, in the third quarter, and pock-marked by the Vytorin/Zetia swoon:
▲ More in a moment, but President Carrie Cox just said that
. . . .Cholesterol Franchise sales were down 29 percent for the nine months. . . but we expect that Vytorin/Zetia will retain Tier 2 status with Medicare/Medicaid. . . .
▲ I think she’ll eat those last words on the year end 2008 conference call.
▲ In addition, keeping Tier 2 status for Vytorin/Zetia will be tough, given the recent reimbursement decisions in New York and Illinois.
▲ Moreover, sugammadex, or Bridion (by brand-name; earlier deemed non-approvable by the US FDA), is going to be less than a penny a share of EPS for the year 2008, yet CEO Hassan and Carrie Cox both made it a focal point of their remarks — saying in Europe, the Bridion market will grow “slowly over time“. . . . This is simply embarrassing.
▲ Jamie Rubin, now at Goldman Sachs (no longer with Morgan Stanley) just asked why there was “no gross margin improvement” 2008 over 2007, if in fact, the Organon acquisition should now show at least some synergy benefits to gross margins. She just got a run-around answer.
▲ Tim Anderson, at Sanford Bernstein, just suggested that the AHA may have new data — negative data — out of ongoing SEAS analysis. He also got Carrie Cox to admit that Vytorin/Zetia is experiencing accelerating pressure from generic statins in the United States formularies, Medicare and Medicaid.
▲ I think Schering’s stock will now fall — by NYSE close, at least
open — the management team keeps dancing around the actual questions on currency, overall — and as to whether the swoon in Vytorin/Zetia will result in an additional cutting of spending in the franchise operations. I expect that Merck will be more forthcoming on this — tomorrow morning.
[UPDATED — 10.22.08 — Post the Merck Q3 Call, below]
On Wednesday morning, October 22, 2008, Merck CEO Dick Clark had this to say [Schering CEO Fred Hassan might do well to follow Mr. Clark’s lead, here]:
. . . .We’ve always been straightforward and realistic when speaking to investors about Merck’s business and intend to continue to communicate openly and candidly about where we stand and what we plan to do to accomplish moving forward. The experiences and events of 2008 have been instructive to me and the leadership team. We will be proactive in addressing all challenges facing our business. . . .
. . . .Although we’ve seen an additional 8% decline in new prescriptions since the initial release of the SEAS results, the rate of volume and share declines for the JV has slowed throughout the year.
. . . .[S]ome of those most recent decisions made in Medicare Part D have been not as positive for Vytorin and Zetia but its also important to keep in mind that they represent only 20% of the book of business. So today we reimburse without restriction or about 75%, next year we believe it will be about two thirds. . . .
However, the overall cholesterol market growth has been slower than expected. And while we expected the JV brands will remain competitive in terms of managed care provisioning in 2009, we anticipate a reduction in formulary coverage from 2008 levels. . . .
▲ And that last bit, bolded, immediately above, would mean Carrie Cox will likely eat her words about Tier 2 — before year-end 2008.
The unvarnished truth now emerges — over at Whitehouse Station — just as Kenilworth’s Cheshire Cat-like grins fade away. . . .