10-QPeriod: Q3 FY2001

Merck & Co., Inc. Quarterly Report for Q3 Ended Sep 30, 2001

Filed November 13, 2001For Securities:MRK

Summary

Schering-Plough Corporation (MRK) reported third-quarter 2001 net sales of $2.382 billion, essentially flat compared to the prior year. For the first nine months of 2001, net sales decreased by 1% to $7.330 billion. While reported sales showed minimal change, adjusted for foreign currency, sales grew 2% in the quarter and 1% year-to-date, though volume declined. Declining U.S. sales were attributed to manufacturing issues and inventory adjustments, while international sales showed stronger growth. Diluted earnings per share (EPS) for the third quarter increased slightly to $0.41 from $0.40 in the prior year, but year-to-date EPS declined to $1.22 from $1.25. The company faces significant headwinds related to patent expirations and potential generic competition, particularly for its blockbuster drug CLARITIN, with the compound patent set to expire in June 2002. The report highlights ongoing legal battles with thirteen generic manufacturers attempting to market loratadine early. Furthermore, manufacturing issues, including deficiencies in Good Manufacturing Practices (GMPs) at U.S. facilities cited by the FDA, have impacted sales and operations. The company is undertaking extensive measures to address these GMP issues, including adding personnel and upgrading facilities.

Key Highlights

  • 1Third-quarter net sales were $2.382 billion, flat year-over-year, while nine-month net sales declined 1% to $7.330 billion.
  • 2Diluted EPS for Q3 2001 was $0.41, up from $0.40 in Q3 2000, but year-to-date EPS decreased to $1.22 from $1.25.
  • 3CLARITIN sales increased 5% for both the quarter and the nine-month period, reaching $828 million and $2.471 billion, respectively, but are at risk due to impending patent expiry in June 2002 and potential generic competition.
  • 4Manufacturing issues, including FDA-cited GMP deficiencies, negatively impacted U.S. sales and led to increased cost of sales.
  • 5International sales showed resilience, growing 7% (13% excluding currency) in the third quarter and 6% (13% excluding currency) year-to-date.
  • 6Significant litigation is ongoing related to patent challenges for CLARITIN and other products, as well as various antitrust and regulatory investigations.
  • 7The company is investing in resolving manufacturing quality issues and strengthening its quality assurance and manufacturing operations.

Frequently Asked Questions

The most significant concern for investors is the upcoming expiration of the compound patent for CLARITIN (loratadine) in June 2002 and the associated risk of generic competition. The company is actively engaged in patent litigation against thirteen generic manufacturers and anticipates a potentially sharp and material decline in CLARITIN sales, similar to what happened with Eli Lilly's Prozac.

Manufacturing issues, including deficiencies in Good Manufacturing Practices (GMPs) at U.S. facilities identified by the FDA, have led to reduced sales of certain products, particularly in the U.S. market. These issues have also contributed to higher cost of sales due to associated expenses and have impacted the sales of products like VANCENASE and VANCERIL.

International sales are showing stronger performance, with a 7% increase (13% excluding currency fluctuations) in the third quarter and a 6% increase (13% excluding currency) for the first nine months. In contrast, U.S. sales decreased by 4% in the third quarter and 5% for the nine-month period, primarily due to the aforementioned manufacturing issues and inventory adjustments.

Schering-Plough is involved in numerous legal and regulatory challenges, including patent litigation to defend its products against generic entry, antitrust lawsuits, investigations into pricing and marketing practices by government entities (e.g., DOJ, HHS), and proceedings related to GMP deficiencies. The company also faces a significant potential tax liability of approximately $195 million plus penalties and interest from the IRS regarding interest rate swaps.