RULE MAKER PORTFOLIO
Schering-Plough, T. Rowe Price Update

Rule Makers Schering-Plough and T. Rowe Price posted good third-quarter numbers this week, with earnings rising 14% and 10%, respectively. Schering-Plough is hard at work developing drugs to replace its blockbuster allergy medicine Claritin, which comes off patent in June 2002. Meanwhile, T. Rowe Price wrapped up the acquisition of Rowe Price-Fleming, preventing a competitor from getting hold of valuable customers.

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By Zeke Ashton (TMF Centaur)
October 27, 2000

As earnings season starts winding down, we've once again seen the power Rule Makers have to move the market -- whether up or down. Today, I'd like to focus on two companies that don't usually cause reverberations throughout the market with their earnings reports. But since they each make up about 5% of our Rule Maker Portfolio, let's take some time and review the reports from Schering-Plough (NYSE: SGP), one of our two drug makers, and T. Rowe Price (Nasdaq: TROW), our lone mutual fund company.

First, neither of these companies gets a good-housekeeping seal from The Motley Fool when it comes to the presentation of the financial information. Schering-Plough only provides income statement data, and T. Rowe Price provides only an income statement and a couple of selected balance sheet items. Compare this to Yahoo! (Nasdaq: YHOO), which this quarter provided full income sheet, cash flow statement, and balance sheet data (minus only full breakouts of current assets and liabilities).

Let's hit Schering-Plough first. We haven't looked hard at this company since a review in March. Since that time, Schering-Plough's stock price has gone from the low 30's to more than $52 a share today.

On Tuesday it reported third-quarter sales of $2.4 billion, up 7% from the previous year's third quarter, and announced earnings per share of $0.40, up 14%. Schering-Plough CEO Jay Kogan also announced expectations that the company would likely meet consensus earnings expectations for the year of $1.64 per share -- which would be the 15th consecutive year of double-digit earnings growth. That's amazing consistency.

Of course, what's got Schering-Plough investors worried is Claritin, the blockbuster allergy drug that accounts for almost a third of revenues. The drug will be coming off patent in 2002 and generic drug manufacturers are ready to move in. The company wisely conducted clinical trials for the pediatric use of Claritin, thereby earning a six-month addition to Claritin's market exclusivity from the Food and Drug Administration. With the patent for Claritin expiring in June 2002, the six-month extension to the end of 2002 will likely mean an additional $800 million in sales -- not a bad investment, I'd say. But generic competition for Claritin is now only about 26 months away, and we need to know what Schering-Plough has in the pipeline to make up the difference.

The heavy hitter in the lineup is the antiviral/anticancer agent Intron-A in its various formulations, including combination therapy Rebetron. Worldwide sales of Intron-A products were $338 million in the third quarter, and could exceed $1.5 billion in 2001.

Beyond that, there are a few new products with great early sales. Sales of Nasonex, a once-a-day allergy spray, jumped 44% in the third quarter to $98 million. Nasonex could hit $500 million in sales in 2001, and has a trajectory that makes $1 billion in annual sales a possibility by 2003. Integrilin, which is licensed from biotech CORR Therapeutics (Nasdaq: CORR), hit $52 million in the third quarter, and brain tumor treatment Temodar added $37 million in sales for the quarter.

Fortunately, Schering-Plough also has a bunch of drugs in late-stage clinical trials or waiting for regulatory approval. Desloratadine, the second-generation drug of the chemical used in Claritin, was recommended for approval by the EU regulatory authorities earlier this month. The drug is also under review for launch in the U.S., and could be on the market in the next couple of months. Schering-Plough also announced that Caelyx, a treatment for advanced ovarian cancer, received European Union approval this week. The company still has two more years to advance the rest of their clinical pipeline and get a few more drugs to market before generic competition starts to eat into Claritin sales. In the meantime, our company is growing the bottom line at an impressive rate -- so we'll just keep our eyes open for news on its research and development pipeline.

T. Rowe Price holds steady
T. Rowe Price turned in another quarter of solid performance. The main change here is the acquisition of the half of Rowe Price-Fleming, T. Rowe's international joint venture operation, that it didn't previously own. This acquisition was completed in August, and the new company will be creatively called T. Rowe Price International. I'll have more on this in a second.

T. Rowe reported results on Thursday. Revenues increased a healthy 17% to $304 million. Due in part to the international expansion, expenses rose faster than sales for the quarter, meaning earnings came in at $0.53 per share, only 10% higher than last year. The company is also increasing promotional efforts in an attempt to drive growth. Assets under management were $179.6 billion -- $600 million higher than last quarter.

Since the acquisition of Rowe Price-Fleming was paid for in cash instead of stock, we'll see T. Rowe's cash-to-debt ratio decline dramatically when the 10-Q comes out. According to the press release, T. Rowe financed the acquisition by paying $483 million in cash, and they will borrow another $300 million. This will likely pull T. Rowe's cash-to-debt ratio to under 1, below our Rule Maker benchmark of 1.5.

As I wrote in April, I believe T. Rowe Price had no real alternative to making this acquisition as a result of Chase Manhattan's (NYSE: CMB) purchase of Robert Fleming. Handing over customers to competitors just isn't very Foolish. The price wasn't a bargain, but it wasn't horrible either. I expect T. Rowe's cash balance and cash-to-debt ratio to show improvement in 2001 and beyond.

Before I go, I'd like to ask -- on behalf of T. Rowe Price and Schering-Plough shareholders everywhere -- if the managers of these companies would consider providing a balance sheet and statement of cash flows in future earnings reports. Now that would be Foolish!

Have a great day.


 




Rule Maker Portfolio


10/27/00 as of ~8:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AXPAMER EXPRESS1.382.53%55.81
CSCOCISCO SYSTEMS(2.88)(5.37%)50.69
INTCINTEL CORP1.693.78%46.38
JDSUJDS UNIPHASE CORP2.813.78%77.25
KOCOCA-COLA CO0.250.43%58.94
MSFTMICROSOFT CORP3.255.04%67.69
NOKNOKIA CORP ADS0.812.11%39.38
PFEPFIZER, INC(1.25)(2.75%)44.13
SGPSCHERING-PLOUGH(0.81)(1.54%)51.81
TROWT.ROWE PRICE ASSOC0.811.95%42.56
YHOOYAHOO INC(0.75)(1.34%)55.25

  Day Week Month Year
To Date
Since
1/6/1998
Annualized
Rule Maker0.09%(3.42%)(4.79%)(21.12%)30.08%9.81%
Comparable S&P 500n/an/an/an/a26.90%8.85%
S&P 5001.11%(1.24%)(3.96%)(6.10%)41.19%13.07%
S&P 500 (DA)1.10%(1.23%)(3.92%)(6.03%)42.97%13.57%
NASDAQ0.19%(5.88%)(10.74%)(19.44%)105.65%29.26%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
6/23/98182CSCO24.7250.69104.46%
2/13/98130INTC26.8846.3872.52%
2/3/9866PFE27.4344.1360.85%
5/26/9866AXP36.0055.8155.04%
2/3/9859MSFT49.3567.6937.15%
2/3/9856TROW33.6742.5626.40%
8/21/9844SGP47.9951.817.96%
2/15/00102NOK42.1039.38(6.48%)
2/27/9827KO69.1158.94(14.72%)
2/15/0032JDSU100.7577.25(23.33%)
2/17/9961YHOO74.9855.25(26.31%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
6/23/98182CSCO4,498.759,225.134,729.40
2/13/98130INTC3,494.556,028.752,534.20
5/26/9866AXP2,375.953,683.631,307.67
2/3/9866PFE1,810.572,912.251,101.68
2/3/9859MSFT2,911.793,993.561,081.77
2/3/9856TROW1,885.702,383.50497.80
8/21/9844SGP2,111.702,279.75168.05
2/27/9827KO1,865.891,591.31(274.58)
2/15/00102NOK4,294.544,016.25(278.29)
2/15/0032JDSU3,224.002,472.00(752.00)
2/17/9961YHOO4,573.603,370.25(1,203.35)
 
Cash: 
Total: 
28.42
41,984.80
 


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.