What Model? Fred Hassan & Vytorin Forecasts
14 CommentsBy Ed Silverman // April 23rd, 2008 // 12:49 pm
At the very end of this morning’s hour-long teleconference with Wall Street analysts, Fred Hassan was asked a question by Jami Rubin of Morgan Stanley about Vytorin income this year. She noted that even her 11-year-old is aware Vytorin sales will drop this year, but she asked Fred if he and his team could be more specific about the amount of income to be received from its joint venture with Merck.
You may recall that, earlier this week, Merck week disclosed it expects equity income from the venture to fall by $700 million this year due to the hoopla over Vytorin. Unlike Merck, Schering-Plough has been unwilling to provide any numbers, probably because Schering-Plough is more vulnerable than Merck to a big drop. So Fred blew her off by insisting there is no way to estimate such a figure. “There is no model we can relate to that can give us any certain prediction,” he told Rubin.
Really? Yesterday, Schering-Plough filed a Frequently Asked Questions document with the Securities and Exchange Commission indicating that its joint venture with Merck has, indeed, developed some kind of model:
Q: What is Schering-Plough’s comment on Merck’s guidance regarding the cholesterol franchise?
A: Schering-Plough does not provide numeric guidance and does not comment on the guidance of other companies. The Merck/Schering-Plough cholesterol joint venture developed potential scenarios about the 2008 equity income. Merck chose an estimate that is within the ranges established in those scenarios.
So has anyone shown those scenarios to Fred? Or does he not read them?
Hat tip to ShearlingsPlowed
Nathan
Ed, I really think you are raking Fred over the coals for nothing here. Sure, SP analysts (internal and external) have certainly come up with some plausible scenarios for future sales of Vytorin. But can he (or anyone) say with ANY degree of certainty which scenario is most likely? The Vytorin scandal is still unfolding. Asking Fred to predict the future sales of Vytorin is something like asking the State Department to predict the future of Iraq. It just can’t be done. There is so much uncertainty that it is better to not even venture guess. Internal guesswork is always going to go on. But unless there is at least marginal certainty, those guesses won’t (and shouldn’t) make their way to investors.
Ed Silverman
Hi Nathan,
I appreciate your point. I’m simply using the same line of reasoning as on Wall Street - if Merck can do so, then Schering-Plough can do so. And their own filing acknowledges scenarios with ranges of estimates were drawn up, from which Merck is able to calculate something. Jami Rubin raised this in the first place. I’m simply reiterating the point. You can visit the SGP web site and listen to the playback to catch her question and his remarks in full. He didn’t really answer the question.
Cheers
ed
Nathan
Here’s my point (restated slightly): You (and Jami Rubin) are criticizing SP for not offering guidance on Vytorin while Merck does seem to be offering some guidance. However, it could be that Merck is the truly foolish party here. Offering guidance with so many unknowns doesn’t seem very prudent to me… Maybe Fred learned from his mistakes and doesn’t want to say anything unless he is truly confident about it.
Chris
The report quotes Hassan saying no model exists “that can give us any certain prediction.” Probably true. Merck chose a number from within a range - not especially accurate but probably smarter than S-P choosing to avoid the question, despite being technically correct. At least that’s how I read it.
Angry
It seems that Schering-Plough and Fred Hassan don’t want to release any guidance because the picture isn’t pretty. They want to bask in the little sun they have left, drive the stock higher, and apparently let Fred and other key executives sell off their shares for profit before the walls come tumbling down.
I am an individual investor and am quite upset about being deceived while top executives cashed in. Whether it was the ENHANCE results or the realization that the party wouldn’t last, the inside people knew much more than the poor sucker on the street. Their net benefit is millions while the small guy is holding the bag. This simply doesn’t seem right to me.
Outside the Box
S-P and Merck certainly have models for the Vytorin situation, just like they have models for all of their marketed and soon to be marketed products. FH is right to say that he has no models that “can give us any certain prediction” - but that is the case with every forecast model for every product upon which he has based every piece of guidance he has ever given. It seems to me that FH is choosing not to disclose the guidance that their internal models show because he knows for sure that it will look very bad and his business cannot absorb a $700m downturn anywhere near as well as Mr Clark up the street.
Nathan
Those assertions are true, but the stock price has already tanked. From what I’ve read of the analysts, the going stock price for SP has essentially discounted the Vytorin sales to nearly zero. That isn’t an accurate estimate, certainly. I don’t think that any FH says about Vytorin sales could sink the stock price much lower than it currently is. In other words, (in my opinion) his lack of an estimate about Vytorin is not artificially proping up the stock price.
Bruce
Nathan,
Here is a different perspective coming from someone who worked on a brand in a co-promotion. They probably have had individual company forecasts developed by their teams and they have not had a co-promotion meeting to approve their forecast model.
Someone from Merck probably did not get the notice that it wasn’t approved by both parties, as of yet.
This happens a lot in co-promotes either by ignorance or intent.
Outside the Box
Bruce
Good point;
Nathan
I wasn’t suggesting that he is trying to bolster the share price, just that he was being obviously disingenuous by with his comments about the model. In fact you are probably right that the current price has Vytorin factored too low and so FH could probably make a case for an increase based on at least some sales. Of course he won’t want to do this as I am sure he is trying to make the whole story go away as fast as possible and the Merck announcement won’t have helped (I can imagine some interesting conversations going on in the partnership team).
Doc
Hassan was on CNBC this morning and flatly stated that there was no hanky panky with ENHANCE, Vytorin or Zetia - and no insider trading based on the trial results. Does anyone believe him?
rainnn
First — Thanks for the Hat Tip, Ed.
I am late to this party, but let me add — since I am probably the reason Ed is doing the “raking,” here — that the SEC, in Item 303(a)(3)(ii) of Reg. S-K, requires that he disclose all material “known trends” and “uncertainties”, in a few weeks, in his first quarter Form 10-Q, MD&A section. Moreover, he has effectively SWORN to the SEC (in the Form 8-K of Tuesday) that an entity over which he exerts “common control” [a term of art in SEC parlance], the 50/50 J/V with Merck, has developed a RANGE of what this will cost each partner — at the EQUITY INCOME line.
It will cost AT LEAST $700 million in 2008 earnings. To Schering, that is about $0.55 of 2008 EPS. That is definitively material. [The SEC guidance does not allow one to "net" the PTP $1 billion from this. Cites available.]
Many SEC accounting pronouncements REQUIRE that — when a material range of loss is BOTH probable, and estimable — it simply MUST be disclosed.
The point is NOT that he thinks it all too uncertain — the point is — NOW that the range exists (he’s sworn it does!) — HE MUST DISCLOSE IT in the 10-Q.
Stupidly, perhaps, his lawyers tranformed that “forward looking statemet” by Merck into a “probable range of loss” by filing those FAQs, in the harsh tone they used, with the SEC on Tuesday.
For Mr. Hasssan to now say it doesn’t EXIST — is going to raise eybrows — if not subpoenas — at the SEC.
Just my humble opinion. But it should be yours, too.
Cheers!
– the rainnn
rainnn
One more point, if I may:
I have to disagree with Bruce (above) about it simply being a case of “crossed-wires”.
Merck put the $700 million out because at twice Schering’s size on the revenue line, Merck WILL cover that “hole”. Merck wants the Street to know that it has the number for 2008 in hand.
That statement CANNOT be made by Schering — this one J/V is over 55 percent of ALL Schering profitability.
So — IF it was crossed wires — Mr. Hassan ought to be fired for not paying attentiton to one account that drives 55 percent of all SGP profits.
Thus I plainly suspect he is simply avoidng the inevitable — and that is momumentally unwise (it will cost his credibility at the SEC — though that may already be shot) — because he’ll have to disclose it (the audit firm will push for it, now), anyway, in the Form 10-Q, in a few weeks.
Cheers!
Matty
It appears that Mr. Hassan hasn’t learned anything from his recent PR nightmare and is resorting to what he knows best - spin, spin, spin until your listeners get dizzy and don’t know which way is up. I believe that the executives knew plenty well in advance of when the ENHANCE news came out in january and that they know plenty about what their models say regarding their sales of Zetia and Vytorin this year. I think that Mr. Hassan is simply afraid to say and will not utter a thing until his lawyers tell him he has to do so.
Fooled Once
I simply cannot believe anything that Mr. hassan says. After being taken to the cleaners on SP stock while his executives apparently made some incredibly spontaneous investment decisions of their own, my finances can’t take it any more.