10-QPeriod: Q1 FY2006

Merck & Co., Inc. Quarterly Report for Q1 Ended Mar 31, 2006

Filed April 27, 2006For Securities:MRK

Summary

Schering-Plough Corporation reported net sales of $2.55 billion for the first quarter of 2006, a notable increase of 8% compared to the same period in 2005. This growth was primarily driven by strong performance in its Prescription Pharmaceuticals segment, with key products like REMICADE, NASONEX, and TEMODAR showing significant year-over-year sales increases. The company also reported substantial growth in equity income from its cholesterol joint venture with Merck & Co., Inc., which contributed positively to the bottom line. Despite an increase in research and development spending, the company's net income available to common shareholders surged to $350 million from $105 million in the prior year, aided by the equity income from the joint venture and a one-time accounting change benefit. However, the company faces ongoing challenges including increased R&D investment, potential generic competition for some products, and the resolution of long-standing legal and regulatory matters. Financially, Schering-Plough demonstrated improved profitability and a stronger cash flow from operations, although investing activities consumed a significant amount of cash due to net purchases of short-term investments. The company's liquidity remains adequate, supported by operating cash flows and existing cash reserves. Investors should monitor the company's ability to manage its substantial R&D pipeline, the impact of regulatory scrutiny, and the continued success of its key products, particularly those within the cholesterol franchise, as these factors will be critical to future performance.

Key Highlights

  • 1Net sales increased by 8% to $2.55 billion in Q1 2006 compared to Q1 2005.
  • 2Net income available to common shareholders significantly increased to $350 million from $105 million in the prior year.
  • 3Equity income from the cholesterol joint venture with Merck & Co. rose by 42% to $311 million.
  • 4Research and Development expenses increased by 25% to $481 million, reflecting investment in the product pipeline.
  • 5The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, resulting in a $22 million cumulative effect of change in accounting principle.
  • 6Cash flow from operating activities was $168 million, a decrease from $200 million in the prior year, largely due to timing of payments.
  • 7Significant investments were made in short-term investments, leading to a substantial use of cash in investing activities ($1.785 billion).

Frequently Asked Questions

Revenue growth was primarily driven by strong performance in the Prescription Pharmaceuticals segment, with significant sales increases reported for REMICADE, NASONEX, TEMODAR, and PEG-INTRON. Additionally, sales outside the U.S. for REMICADE and NASONEX saw notable gains. The company's cholesterol franchise, marketed through a joint venture with Merck, also contributed significantly through increased equity income.

The adoption of SFAS 123R (Share-Based Payment) effective January 1, 2006, required the company to recognize compensation expense for all share-based payments. In the first quarter of 2006, this adoption resulted in a one-time cumulative effect of a change in accounting principle of $22 million (net of tax) to income, related to two long-term compensation plans classified as liability plans.

Schering-Plough is involved in several ongoing investigations and legal proceedings, including those related to sales and marketing practices (Massachusetts Investigation, AWP Investigations), patent matters (DR. SCHOLL’S FREEZE AWAY), pricing, securities litigation, and antitrust matters. The company has recorded a liability of $500 million related to certain investigations. While the company has completed significant work under the FDA Consent Decree, final certification is still pending. The resolution of these matters, individually or in aggregate, could have a material adverse effect on the company's financial condition, results of operations, or cash flows.

The company anticipates continued growth in sales and profits from its cholesterol joint venture with Merck (VYTORIN and ZETIA). However, they acknowledge uncertainties due to the potential entry of generic products. R&D expenses are expected to increase faster than net sales, driven by the progression of the company's early-stage pipeline and increased clinical trial activity, particularly for key compounds like the Thrombin Receptor Antagonist, vicriviroc, and the HCV protease inhibitor.