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Schering-Plough Crumbles
to Seven-Year Low

August 25, 2003

Shares of Kenilworth, N.J.-based Schering-Plough (SGP: news, chart) plunged lately by $1.74, or 10.6 percent, to $14.74 on volume of 20.1 million. Earlier, the shares sank as low as $14.16, their lowest level since September 1996.

The pharmaceutical company said late Thursday that it expects second-half earnings per share to be lower than the first half of 2003. It also expects 2004 earnings to be lower than the level of earnings anticipated for this year.

Schering-Plough has been beset with numerous problems, including punishing generic competition for its flagship drug, the Claritin allergy medication. Schering-Plough's marketing practices have also come under the scrutiny of federal prosecutors. Last week, the company cautioned that it's suffering from insufficient cash flow.

Following the announcement, brokers slashed their earnings estimates and voiced hard-hitting criticisms of management.

"Schering-Plough's update to the investment community provided some important information... but was clearly lacking in answers and direction for shareholders," Goldman Sachs said.

Goldman lowered its 2003 earnings-per-share estimates to 42 cents from 48 cents and slashed 2004 projections.

Goldman noted that Chief Executive Fred Hassan didn't take part in the company's conference call held late Thursday, calling this "surprising, given the gravity of the message."

Dresdner Kleinwort Wasserstein cut its rating to "hold," telling clients the dividend cut was not entirely unexpected. But the brokerage characterized the company's new outlook for 2004 earnings per share as "shocking... the market had been expecting 28 percent growth."

Serious measures

Schering-Plough's cost-cutting moves come on the heels of a company review overseen by Hassan, who took over as CEO three months ago. The board of directors, according to the company, requested the review upon Hassan's hiring.

Schering-Plough said it was reducing its quarterly dividend, to 5.5 cents a share from 17 cents, in a move that it expects to implement as of the fourth quarter. The 17-cent third-quarter dividend will be paid next Tuesday, as planned, according to company executives who answered questions on the conference call.

"The previous dividend level is not realistic given the company's reduced revenues, the need to conserve cash for inherited regulatory and legal issues, and the need to invest for future growth," said Hassan in a company statement.

The company is also eliminating standard bonuses for 2003, freezing most of its employment merit increases and ceasing payouts of its profit-sharing program.

And, Schering-Plough said it plans to launch a voluntary retirement program, through which is expects to cut staff by about 1,000 or more.

The company will take a pre-tax charge of about $150 million in the fourth quarter related to the program. Executives said during the call that the company expects other cost-cutting charges to be recorded as well.

Finally, Schering-Plough said it will pare down executive privileges, closing its executive dining room and selling the company executive jet.

Carolyn Pritchard is a reporter for in San Francisco.



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