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A Message from the CEO
A Message from Chairman and CEO Fred Hassan
To Our Stakeholders
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In 2004, we made great progress on our six - to eight-year Action Agenda to transform Schering-Plough into a new kind of health care company - a company that can deliver long-term, high performance in the challenging new environment of the 21st century.
As we continue our work in 2005, we are completing the Stabilize and Repair phases of that Action Agenda.
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And we anticipate beginning the Turnaround phase later this year.
In short, we continue on track with the program of transformational change that we began in the spring of 2003.
We are reinventing our Company on two levels. We are building an organization that will be able to respond with exceptional innovation, speed and flexibility to the intensifying competitive challenges of our business environment. And we are building an organization that strives to be in tune with the fast-changing needs and expectations of our stakeholders.
There are encouraging signs that we are on track to achieve our goals. One of the most important has been in slowing, then stabilizing and finally reversing the negative sales momentum facing our Company.
As we went into the end of last year and began this year, our sales trend had begun moving into positive territory.
We take special satisfaction in this achievement because it is very difficult for any corporation to halt downward sales momentum and turn it into upward momentum.
The tangible signs of progress that we are beginning to see are the result of focused effort on many fronts. They reflect important, long-term investments. And they reflect the impact of a solid, long-term strategy for positive change.
Our industry is now in the most challenging environment in its history. Despite this, we believe that we will begin to see our Company's top-line sales growth beginning to drive bottom-line growth, later in 2005.
We have been setting the foundation for this anticipated Turnaround through three major change actions.
The first area of change has been re-engineering the Company. For example, we have been continuing our work to upgrade our global top management team - and to retain and install "A" players at every level. We have been continuing our work to build a strong, sustainable product flow system. And we have been continuing our work to embed quality, compliance and business integrity worldwide.
Our Value Enhancement Initiative (VEI) is a key component of our re-engineering actions. This initiative has enabled us to free up hundreds of millions of dollars in savings that have been reallocated to growth-driving priorities - priorities such as the successful launch in 2004 of our innovative new cholesterol treatment VYTORIN into the world's largest and most competitive market. We are also using VEI to accelerate positive change within the organization at every level - to make this organization more innovative, flexible and speedy.
The second area of change has been our strong, steady progress addressing the legal and regulatory issues from the past. We have put certain critical legal issues behind us. And we have made significant progress in fulfilling the requirements of the wide-ranging consent decree entered into with the U.S. Food and Drug Administration (FDA) in 2002.
The challenge of this consent decree is unprecedented among our peer companies. It is unprecedented for its size, for its complexity, and for the fact that we continue to run affected plants while remediating them at the same time.
The consequences of our manufacturing issues have extended far beyond the impact on our supply chain alone. For example, customer service has been affected; we've experienced supply disruptions; products have had to be deleted or outsourced; and important new products have been delayed by the impact of the consent decree on our R&D and manufacturing operations.
Thanks to exceptional work by our people, as of year-end 2004 we had completed 161 of 212 significant steps and 22 of 33 validation actions in the consent decree. This progress was achieved without incurring any additional payments to the FDA for missing a deadline.
The third area of positive change in 2004 was on the product front.
We face a continuing challenge with our base businesses of allergy and hepatitis C treatments, which compete mainly in markets that are contracting and relatively volatile, particularly in the U.S. Still, during 2004 we achieved market share stabilization in certain areas, and even signs of market share growth in others. We are starting to see a gratifying increase in U.S. market share for our NASONEX nasal-inhaled steroid. In Europe, we are pleased with the performance of our PEG-INTRON and REBETOL combination therapy for hepatitis C. We are also launching the PEG-INTRON and REBETOL combination therapy in Japan, offering us a growth opportunity.
We took significant steps to deliver on our pipeline projects and to strengthen our array of marketed treatments. In spite of the Company's stressed situation, our newly formed management team had the credibility to bring in important business development and license partnering projects. These included the significant marketed pharmaceutical products of Bayer in the U.S., as well as a new antibiotic agent from Toyama Chemical Co. Ltd. and a respiratory compound from ViroPharma Incorporated.
We also continued to make progress with our specialty products. About half of our pharmaceutical focus is on specialty products - and we have designated oncology, in particular, as a priority for our future. We are pleased with the continued progress on TEMODAR, our treatment for certain types of brain tumors, and with the work of our oncology team to build a truly global franchise in cancer care.
Our cholesterol franchise, which we operate as a joint venture with Merck & Co., Inc., is critical to our future. The pivotal product for our Company is our innovative cholesterol treatment VYTORIN, which lowers cholesterol through a unique dual-inhibition mechanism.
As mentioned earlier, we were successful in the on-time FDA approval of VYTORIN in the U.S. and we subsequently launched it successfully during the second half of 2004. We are especially proud of the relatively fast rate of penetration we have achieved with managed care formularies. At the same time, we continue to drive the success of our other important cholesterol treatment, ZETIA. In 2004, ZETIA sales worldwide exceeded $1 billion for the first time since its U.S. launch in 2002. These two products are competing in a global cholesterol treatment market approaching $30 billion annually.
We look to our future with growing confidence.
We are intensely focused on our science. The lifeblood of a health care company such as ours is the quality of our science and our ability to drive a steady flow of important new treatments. We made key regulatory filings in 2004 and have a strong early stage pipeline, especially for a company our size, including promising compounds for treating arterial thrombosis, HIV/AIDS, hepatitis C and other diseases. In February 2005, we acquired most of the assets of NeoGenesis Pharmaceuticals Inc., an innovative biopharmaceutical company based in Cambridge, Mass. This addition should further strengthen our discovery capabilities in the area of small molecule drugs.
We are making strong progress in building an even more efficient product flow system to get these and other treatments to patients and doctors faster and better than our competitors. Development excellence is a well-understood core priority. To help us achieve this and other priorities, we are building a new Company culture that expects all our people to operate cross-functionally, with shared accountability for ultimate results.
Along with all of our peers, Schering-Plough faces intensifying challenges in the health care environment, including moves to erode patent rights and a new caution among regulators, physicians and patients about the safety of medications. In this fast-changing environment, we are working to distinguish ourselves by the quality of our relationships with doctors, patients and other stakeholders. We are putting quality, compliance and business integrity at the center of our Company. We are striving to operate in ways that earn trust, every day.
Our colleagues in Schering-Plough are rising to the challenge of change. Their passion, courage and tenacity give us a special advantage. We have learned from our experiences and developed strength through adversity. We confront our future with resolve, but also with humility and the knowledge that we must always keep improving. We are proud of the people of Schering-Plough.
In summary: We are truly building a new kind of health care company. We have many challenges ahead of us. But we have already accomplished more positive change, on more fronts, more quickly, than we have seen in any other company in our global industry.
We thank our Board members for their service to Schering-Plough during these challenging times and for their diligent and careful oversight. We thank our shareowners and other stakeholders for their faith in the new Company that we are creating. We believe that we are on the right track to reward that faith - with long-term, high performance.
FRED HASSAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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