Schering-Plough

Marketing Strategy Recommendation and Expansion Analysis

Team Acción:

Beth, Diane, Kevin, Don, and Felix

April 2006

Schering-Plough

SWOT Analysis

Strengths Weaknesses

      Newly assembled executive management

 Rebounding from survival mode

      Focused acquisitions & partnerships       Competing with companies w/greater financial resources

      Available funds       Must now implement systemic upgrades

      Premier cholesterol franchise       2002 Consent decree's suspension of 70 products

      Strong R&D teams

Opportunities Threats

      Collaborative research  Competitors eroding market share

      New foreign markets       Generics

      Populated elementary pipeline       Inherent risks of R&D

      Meeting unmet medical needs       Patent challenges

      International expansions  

Corporate Objectives

Provide a steady flow of medicines

and services

Earn trust

Establish long-term relationships

Concentrated focus on research

Strengths and Competitive Advantages

Financial

Business grew in spite of FDA consent decree

American Jobs Creation Act of 2004

Technical

Remicade, Vytorin, Zetia each > $1B in 2005

R&D – triple-digit pipeline growth

HR

New Executive Team

Corporate philosophy

Synergy

Methods

Acquisitions

Partnerships

Advantages

Global

IP

Share the risk

Path to achieve growth over time

Continue current momentum

People Products Processes

Time Line

Summary and RecommendationsGrowth Strategies

Increase market share of each primary product line

Address unmet medical needs

Determine alternative uses of established products (e.g., Remicade)

Partnership to broaden product offerings

Partnerships using in-country salespeople

R&D Collaborations

Narrow-focused ad campaigns

Marketing Collaborations

Current Products New Products

Product Development Strategies

Diversification Strategies

Curr

ent

Mark

ets

New

Mark

ets

Market Penetration Strategies

Market Development Strategies

Summary and RecommendationsFive-Year Plan

Strategy Component SGP Marketing Strategy

Scope & MissionDevelop, manufacture and market medical therapies.

Goals & ObjectivesEarn customer trust, provide innovate strategies, R & D focus.

Strenghts & Competitive Advantages

Financing sources; Technical advantages, Facility capacities; Personnel

Resource AllocationCholesterol franchise focus for highest return; R&D focus

Synergy and Partnering Acqusitions & Partnering

Financially Viable Yes!

Summary of Marketing Recommendations

Examination of Expansion Office Proposal

A small part of the solution? Schering-Plough in Bogotá?

The purpose of this project is to determine the feasibility over five

years for an expansion division of Schering-Plough Animal Health

into Bogotá, Colombia. Products initially offered would be limited

to pharmaceutical services for bovine and large animals.

Examination of Expansion Proposal

Assumptions

A man was injured jumping over this waterfall.

Prior to the plunge, the man yelled, "Watch this!"

How accurate where his assumptions?http://www.wsbtv.com/news/8819343/detail.html

Examination of Expansion Proposal

Assumptions made for financial calculationsFinancial Assumptions

Average of two WACCs is an acceptable compromise.A 5% risk premium for Colombia is reasonable.Analysts’ call of 21% growth per annum for the next 5 years is appropriate.3.75 million heads of cattle can be added to the Schering-Plough customer base readily.Historical cost trends in Bogotá will be predictive of future trends.For Depreciation Tables, MACRS Data UsedTax rate will be the US rate 43% (vs. Colombia’s 35% rate)Inflation will result in

2% increase in sales prices2% increase in variable costs4.9% increase in fixed costs

Examination of Expansion Proposal

CONT. Assumptions for financials

Operating Cost AssumptionsObtain a 3-year lease, followed by 10% increase upon renewal; applies to both monthly lease and admin costsSalaries will increase an average of 4.9% per yearNo significant air freight disruptions will occur between U.S. and Colombia.No unexpected, radical changes in fuel and utility market

Product AssumptionsAll 21 initial cattle products will be legal and have a use in Colombia.12 additional SPAH products can be added each year15% market share in year 1 is obtainable12% sales growth in years 2-5 plausible

Cost of Financing Expansion Proposal

SGP Cost of Capital

INPUTS USED IN THE MODELInput Value

P0 $19.22Shares outstanding common 1,484,000,000Net Ppf (Conv.Maturity:9/14/2007) $51.42Shares outstanding Pf 28,750,000Total dividends paid $86,000,000Dpf $2.99

D0 $0.22est. growth Next 5 Years (per annum) 21%Net Income $497,000,000Taxes $213,000,000

Tax rate 43%SGP Beta 0.31SGP Adjusted Beta 0.77Risk free rate, rRF 4.8%Flotation Costs 2.00%

SGP Cost of Capital Model

Most of the assumptions concern these values, which are used in calculating WACC and other

financials.

Cost of Financing Expansion Proposal

WACC Development

Estimate Market Risk Premium:(Using forward-looking method)

Input ValueD0 $0.22

P0 $19.22g 6.1%

Rm = [Do/Po (1+ g)] + g = 7.31%

CAPMUS Treasury Bond (30 year) 5.11%Equity (Market) Risk Premium 7.31%Beta 0.77Cost of Equity\WACC by CAPM 10.76%

Bond Equity plus Risk PremiumComponent Weight Cost Weighted CostCommon Equity 0.911946613 28,522,480,000$ 9.81%Debt 0.085303717 2,668,000,000 0.52%Preferred Stock 0.00274967 86,000,000 0.02%WACC 10.35%

Average of WACC: 10.56%

Risk-adjusted WACC: (+5% for Colombia) 15.56%

Proposed Products in South American Line

Preventives & Treatments

Rabdomun

Centurion

Atroban

Saber

Levosal

Piliguard

Guardian

Colostrx

Banamine

Electroid

Siteguard

Covexin

Others:

Tri Merit (verification

and tracking program)

Ralgro Implants

Estrumate

Bo-Se

Mu-Se

Vital E

AVERAGE PRICE PER DOSE 2.69$

AVERAGE COST PER DOSE (60%) 1.61$

Operational Costs of Expansion Proposal

Position Salary Number Line Total

Director 150,000 1 $150,000

Office Manager 30,000 1 $30,000

Regional Sales Reps 25,000 5 $125,000

Admin Asst 20,000 5 $100,000

Customer Service Reps 12,000 10 $120,000

Warehouse Workers 9,000 20 $180,000

Total Personnel Salaries 42 $705,000

Colombia Office Postiions with Annual Salaries(in U.S. dollars)

Proposed Location:Size, including office

spaces: 2225 m2.Monthly rent:

US $8,700Admin costs:

US $450

Salaries

Capital Investment Outlays

Furniture $ 19,470

Computers $ 30,300

Copiers $ 10,000

Forklifts $ 50,000

Vehicles $ 170,000

Total   $ 279,770

Scenario Analysis of Expansion Proposal

Distinguishing between, bad, worse and worst.

Deviationfrom Sales Variable Growth Year 1 Fixed

Base Case Price Cost/Unit Rate Units Sold Cost WACC-30% ($500,983) ($700,192) ($359,698) ($500,983) ($700,192) ($549,083)-15% ($431,259) ($700,192) ($450,885) ($431,259) ($700,192) ($485,748)0% ($431,259) ($700,192) ($450,885) ($431,259) ($700,192) ($485,748)

15% ($490,524) ($700,192) ($736,307) ($490,524) ($700,192) ($539,965)30% ($626,833) ($700,192) ($947,688) ($626,833) ($700,192) ($649,195)

Range 125,850 0 587,990 125,850 0 100,113

NPV at Different Deviations from Base

Scenarios for Base Case, Worst Case and Best Case

Outcome is predictable and almost certain.

THE BADTHE GOOD

THE UGLY

Making the Decision on the Expansion Proposal

Fiscal Responsibility Indicates SGP Animal Health Bogotá Not Viable

Financials

NPV, IRR, MIRR all agree

Better use of SGP debt

Alternatives

Other S. American Locations

Different Product Mix

Larger Scale

Partner with Pfizer

Questions & Answers

References

Anonymous. 2006. Schering-Plough Meets FDA Deadline for CGMP Improvements. Pharmaceutical Technology, February, Vol. 30, Iss. 2, pg. 24.

Editor. 2006. Compound from Pharmacopeia Collaboration Shows Clinical Activity for COPD in Phase I Trial. Health Insurance Law Weekly, 16 April, pg. 100.

Editor. 2006. Schering Plough Announces Changes in Executive Finance Positions. Healthcare Mergers, Acquisitions & Ventures Week, 15 April, pg. 101.

Editor. 2006. Schering-Plough targets Europe, Latin America, Asia-Pacific With new Appointments, Actions. Obesity, Fitness & Wellness Week, 8 April, pg. 220.

References

Editor. 2006. Drug Makers Agree to Share Test Data. The Wall Street Journal, 17 March, pg. A1.

Editor. 2006. Michael D. Boyd Named VP of International Public Affairs by Global Healthcare Company. Health Insurance Week, 5 February, pg. 98.

Iskowitz, Marc. 2006. While ED Ads Take a Direct Approach. Medical Marketing and Media, February, Vol. 41, Iss. 2, pg. 11.

Lublin, Joann and Thurm, Scott. 2006. How Companies Calculate Odds in Buyout Offers. The Wall Street Journal, 27 March, pg. B1.