SCHERING PLOUGH CORP - 10-Q Quarterly Report

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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2005

COMMISSION FILE NUMBER 1-6571

SCHERING-PLOUGH CORPORATION
(Exact name of registrant as specified in its charter)

New Jersey 22-1918501
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
2000 Galloping Hill Road (908) 298-4000
Kenilworth, NJ (Registrant's telephone number,
(Address of principal executive offices) including area code)
07033
(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

YES X NO
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
--- ---

Common Shares Outstanding as of March 31, 2005: 1,475,081,515

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(UNAUDITED)
(Amounts in millions, except per share figures)

The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.

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SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
(Amounts in millions)

The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.

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SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share figures)
(UNAUDITED)

The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.

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SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

These unaudited condensed consolidated financial statements of Schering-Plough
Corporation and subsidiaries (the Company), included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) for reporting on Form 10-Q. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S.
Generally Accepted Accounting Principles have been condensed or omitted pursuant
to such SEC rules and regulations. Certain prior year amounts have been
reclassified to conform to the current year presentation. These statements
should be read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 2004 Annual Report
on Form 10-K.

In the opinion of the Company's management, the financial statements reflect all
adjustments necessary for a fair statement of the operations, cash flows and
financial position for the interim periods presented.

2. SPECIAL CHARGES

Special charges for the three months ended March 31, 2005 totaled $27 million,
primarily relating to employee termination costs at a manufacturing facility.
Special charges for the three months ended March 31, 2004 totaled $70 million,
comprised of $44 million in employee termination costs and $26 million in asset
impairment charges.

Employee Termination Costs

In August 2003, the Company announced a global workforce reduction initiative.
The first phase of this initiative was a Voluntary Early Retirement Program
(VERP) in the United States. Under this program, eligible employees in the
United States had until December 15, 2003, to elect early retirement and receive
an enhanced retirement benefit. Approximately 900 employees elected to retire
under the program, of which approximately 850 employees retired through year-end
2004 and approximately 50 employees have staggered retirement dates in 2005. The
total cost of this program is approximately $191 million, comprised of increased
pension costs of $108 million, increased post-retirement health care costs of
$57 million, vacation payments of $4 million and costs related to accelerated
vesting of stock grants of $22 million.

Amounts recognized relating to the VERP during the three months ended March 31,
2005 and 2004 were $2 million and $9 million respectively, with cumulative costs
recognized of $186 million as of March 31, 2005.

In addition, the Company recognized $19 million and $35 million of other
employee severance costs for the three months ended March 31, 2005 and 2004,
respectively.

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The following summarizes the activity in the accounts related to employee
termination costs (Dollars in millions):

The balance at March 31, 2005, represents disbursements to be made after March
31, 2005.

Asset Impairment and Related Charges

For the three months ended March 31, 2005 and 2004, the Company recognized asset
impairment and related charges of $6 million and $26 million, respectively. The
charge in the 2004 period related primarily to the exit from a small European
research-and-development facility.

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3. EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE

In May 2000, the Company and Merck and Company, Inc. (Merck) entered into
separate agreements to jointly develop and market in the U.S. (1) two
cholesterol lowering drugs and (2) an allergy/asthma drug. In December 2001, the
cholesterol agreement was expanded to include all countries of the world except
Japan. In general, the companies agreed that the collaborative activities under
these agreements would operate in a virtual mode to the maximum degree possible
by relying on the respective infrastructures of the two companies. These
agreements generally provide for equal sharing of research and development costs
and for co- promotion of approved products by each company.

The cholesterol partnership agreements provide for the Company and Merck to
jointly develop ezetimibe (marketed as ZETIA in the U.S. and Asia and EZETROL in
Europe):

i. as a once-daily monotherapy;

ii. in co-administration with any statin drug, and;

iii. as a once-daily fixed-combination tablet of ezetimibe and simvastatin
(Zocor), Merck's cholesterol-modifying medicine. This combination medication
(ezetimibe/simvastatin) is marketed as VYTORIN in the U.S. and as INEGY in
many international countries.

ZETIA/EZETROL (ezetimibe) and VYTORIN/INEGY (the combination of
ezetimibe/simvastatin) are approved for use in the U.S. and have been launched
in several international markets.

The Company utilizes the equity method of accounting in recording its share of
activity from the Merck / Schering-Plough Cholesterol Partnership (the
Partnership or the joint venture). The cholesterol partnership agreements
provide for the sharing of operating income generated by the Partnership based
upon percentages that vary by product, sales level and country. In the U.S.
market, Schering-Plough receives a greater share of profits on the first $300
million of annual ZETIA sales. Above $300 million of annual ZETIA sales, Merck
and Schering-Plough (the Partners) share profits equally. Schering-Plough's
allocation of joint venture income is increased by milestones recognized.
Further, either Partner's share of the joint venture's income from operations is
subject to a reduction if the Partner fails to perform a specified minimum
number of physician details in a particular country. The Partners agree annually
to the minimum number of physician details by country.

The Partners bear the costs of their own general sales forces and commercial
overhead in marketing joint venture products around the world. In the U.S.,
Canada and Puerto Rico, the cholesterol agreements provide for a reimbursement
to each partner for physician details that are set on an annual basis. This
reimbursed amount is equal to each Partner's physician details multiplied by a
contractual fixed fee. Schering-Plough reports this reimbursement as part of
Equity income from cholesterol joint venture as under U.S. GAAP this amount does
not represent a reimbursement of specific, incremental and identifiable costs
for the Company's detailing of the cholesterol products in these markets. In
addition, this reimbursement amount is not reflective of Schering-Plough's sales
effort related to the joint venture as Schering-Plough's sales force and related
costs associated with the joint venture are generally estimated to be higher.

During the first quarter of 2005 Schering-Plough earned a milestone of $20
million of which $14 million was recognized for financial reporting purposes.
This milestone related to certain European approvals of VYTORIN
(ezetimibe/simvastatin) in the first quarter of 2005.

During the first quarter of 2004 Schering-Plough earned and recognized a
milestone of $7 million related to the approval of ezetimibe/simvastatin in
Mexico in 2004.

Under certain other conditions, as specified in the partnership agreements with
Merck, the Company could earn additional milestones totaling $105 million.

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Costs of the joint venture that the Partners contractually share are a portion
of manufacturing costs, specifically identified promotion costs (including
direct-to-consumer advertising and direct and identifiable out-of-pocket
promotion) and other agreed upon costs for specific services such as market
support, market research, market expansion, a specialty sales force and
physician education programs.

Certain specified research and development expenses are generally shared equally
by the Partners.

The unaudited financial information below presents summarized combined financial
information for the Merck / Schering-Plough Cholesterol Partnership for the
three months ended March 31, 2005:

Amounts related to physician details, among other expenses, that are invoiced by
Schering-Plough and Merck in the U.S., Canada and Puerto Rico are deducted from
income from operations of the Partnership.

Schering-Plough's share of the Partnership's income from operations for the
three months ended March 31, 2005 was $169 million. In the U.S. market,
Schering-Plough receives a greater share of income from operations on the first
$300 million of annual Zetia sales. As a result, Schering-Plough's share of the
Partnership's income from operations is generally higher in the first quarter
than in subsequent quarters. In addition, during the first quarter of 2005, the
Company's share of the Partnership's income from operations includes a milestone
of $14 million.

The following information provides a summary of the components of the Company's
Equity income from cholesterol joint venture for the three months ended March
31, 2005:

Equity income excludes any profit arising from transactions between the Company
and the joint venture until such time as there is an underlying profit realized
by the joint venture in a transaction with a party other than the Company or
Merck.

Due to the virtual nature of the Partnership, the Company incurs substantial
costs, such as selling, general and administrative costs, that are not reflected
in equity income and are borne by the overall cost structure of the Company.
These costs are reported on their respective line items in the Statements of
Condensed Consolidated Operations. The cholesterol agreements do not provide for
any jointly owned facilities and, as such, products resulting from the joint
venture are manufactured in facilities owned by either Merck or the Company.

The allergy/asthma agreement provides for the development and marketing of a
once-daily, fixed-combination tablet containing CLARITIN and Singulair.
Singulair is Merck's once-daily leukotriene receptor antagonist for the
treatment of asthma and seasonal allergic rhinitis. In January 2002, the
Merck/Schering-Plough respiratory joint venture reported on results of Phase III
clinical trials of a fixed-combination tablet containing CLARITIN and Singulair.
This Phase III study did not demonstrate sufficient added benefits in the
treatment of seasonal allergic rhinitis. The CLARITIN and Singulair combination
tablet does not have approval in any country and remains in clinical
development.

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4. ACCOUNTING FOR STOCK BASED COMPENSATION

Currently the Company accounts for its stock compensation arrangements using the
intrinsic value method. No stock-based employee compensation cost is reflected
in Net income/(loss), other than for the Company's deferred stock units, as
stock options granted under all other plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.

In December 2004 the Financial Accounting Standards Board (FASB) issued SFAS
123R (Revised 2004), "Share Based Payment." Statement 123R requires companies to
recognize compensation expense in an amount equal to the fair value of all
share-based payments granted to employees. The Company is required to implement
this SFAS in the first quarter of 2006 by recognizing compensation on all
share-based grants made on or after January 1, 2006, and for the unvested
portion of share-based grants made prior to January 1, 2006. Restatement of
previously issued statements is permitted, but not required. The Company is
currently evaluating the various implementation options and related financial
impacts available under SFAS 123R.

The following table reconciles Net income/(loss) available to common
shareholders and basic/diluted earnings/(loss) per common share, as reported,
to pro forma net income/(loss) available to common shareholders and
basic/diluted earnings/(loss) per common share, as if the Company had expensed
the grant-date fair value of both stock options and deferred stock units as
permitted by SFAS 123, "Accounting for Stock-Based Compensation."

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Basic and diluted earnings/ (loss) per common share are calculated based on net
income/ (loss) available to common shareholders.

5. OTHER EXPENSE, NET

The components of other expense, net are as follows (Dollars in millions):

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6. INCOME TAXES

At December 31, 2004 the Company has approximately $1 billion of U.S. Net
Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S.
taxable income through 2024. The Company generated an additional U.S. NOL during
the first quarter of 2005.

If Congress does not legislate certain technical corrections related to the
American Jobs Creation Act, the Company's total U.S. NOL could be reduced by
approximately $675 million.

The Company's tax provision for the three-month period ended March 31, 2005 is
primarily related to foreign taxes and does not include any benefit related to
U.S. NOLs. The Company has established a valuation allowance on net U.S.
deferred tax assets, including the benefit of U.S. NOLs, as management cannot
conclude that it is more likely than not the benefit of U.S. net deferred tax
assets can be realized.

7. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

The Company has defined benefit pension plans covering eligible employees in the
United States and certain foreign countries, and the Company provides
post-retirement health care benefits to its eligible U.S. retirees and their
dependents.

The components of net pension expense were as follows:

The components of other post-retirement benefits expense were as follows:

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8. EARNINGS PER COMMON SHARE

The following table reconciles the components of the basic and diluted earnings
/ (loss) per share computations:

For the three months ended March 31, 2005 and 2004, the equivalent of 37 million
and 93 million, respectively, of common shares issuable under the Company's
stock incentive plans were excluded from the computation of diluted EPS because
their effect would have been antidilutive. Also, at March 31, 2005, 79 million
of common shares obtainable upon conversion of the Company's 6% Mandatory
Convertible Preferred Stock were excluded from the computation of diluted
earnings per share because their effect would have been antidilutive.

9. COMPREHENSIVE INCOME / (LOSS)

Total comprehensive income / (loss) for the three months ended March 31, 2005
and 2004 was $75 million and $(114) million, respectively.

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10. INVENTORIES

Inventories consisted of the following:

11. OTHER INTANGIBLE ASSETS

The components of other intangible assets, net are as follows (Dollars in
millions):

These intangible assets are amortized on the straight-line method over their
respective useful lives. The residual value of intangible assets is estimated to
be zero.

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12. SHORT AND LONG-TERM BORROWINGS AND OTHER COMMITMENTS

Short and Long-Term Borrowings

At March 31, 2005, short-term borrowings totaled approximately $400 million.
Approximately 75 percent of such borrowings were outstanding commercial paper.

On November 26, 2003, the Company issued $1.25 billion aggregate principal
amount of 5.3 percent senior unsecured notes due 2013 and $1.15 billion
aggregate principal amount of 6.5 percent senior unsecured notes due 2033
(collectively the Notes) . Interest is payable semi-annually. The net proceeds
from this offering were $2.37 billion. Upon issuance, the Notes were rated A3 by
Moody's Investors Service, Inc. (Moody's), and A+ by Standard & Poor's Rating
Services (S&P). The interest rates payable on the Notes are subject to
adjustment as follows: If the rating assigned to a particular series of Notes by
either Moody's or S&P changes to a rating set forth below, the interest rate
payable on that series of notes will be the initial interest rate (5.3 percent
for the notes due 2013 and 6.5 percent for the notes due 2033) plus the
additional interest rate set forth below for each rating assigned by Moody's and
S&P.

In no event will the interest rate for any of the Notes increase by more than 2
percent above the initial coupon rates of 5.3 percent and 6.5 percent,
respectively. If either Moody's or S&P subsequently upgrades its ratings, the
interest rates will be correspondingly reduced, but not below 5.3 percent or 6.5
percent, respectively. Furthermore, the interest rate payable on a particular
series of notes will return to 5.3 percent and 6.5 percent, respectively, and
the rate adjustment provisions will permanently cease to apply if, following a
downgrade by both Moody's and S&P below A3 or A-, respectively, both Moody's and
S&P raise their rating to A3 and A-, respectively, or better.

On July 14, 2004, Moody's lowered its rating of the Notes to Baa1 and,
accordingly, the interest payable on each note increased by 25 basis points,
respectively, effective December 1, 2004. Therefore, on December 1, 2004, the
interest rate payable on the notes due 2013 increased from 5.3% to 5.55%, and
the interest rate payable on the notes due 2033 increased from 6.5% to 6.75%. At
March 31, 2005 the Notes were rated Baa1 by Moody's and A- by S&P.

The Notes are redeemable in whole or in part, at the Company's option at any
time, at a redemption price equal to the greater of (1) 100 percent of the
principal amount of such notes or (2) the sum of the present values of the
remaining scheduled payments of principal and interest discounted using the rate
of treasury notes with comparable remaining terms plus 25 basis points for the
2013 notes or 35 basis points for the 2033 notes.

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Credit Facilities

The Company has a revolving credit facility from a syndicate of major financial
institutions. During March 2005, the Company negotiated an increase in the
commitments under this credit facility from $1.25 billion to $1.5 billion with
no changes in the basic terms of the pre-existing credit facility. Concurrently
with the increase in commitments under this facility, the Company terminated
early a separate $250 million line of credit which would have matured in May
2006. There was no outstanding balance under this facility at the time it was
terminated.

The existing $1.5 billion credit facility matures in May 2009 and requires the
Company to maintain a total debt to capital ratio of no more than 60 percent.
This credit line is available for general corporate purposes and is considered
as support to the Company's commercial paper borrowings. Borrowings under the
credit facility may be drawn by the U.S. parent company or by its wholly-owned
foreign subsidiaries when accompanied by a parent guarantee. This facility does
not require compensating balances; however, a nominal commitment fee is paid. As
of March 31, 2005 no funds have been drawn down under this facility.

6% Mandatory Convertible Preferred Stock and Shelf Registration

In August 2004, the Company issued 28,750,000 shares of 6% Mandatory Convertible
Preferred stock (the Preferred Stock) with a face value of $1.44 billion. Net
proceeds to the Company were $1.4 billion after deducting commissions, discounts
and other underwriting expenses. The Preferred Stock will automatically convert
into between 2.2451 and 2.7840 common shares of the Company depending on the
average closing price of the Company's common shares over a period immediately
preceding the mandatory conversion date of September 14, 2007, as defined in the
prospectus. The preferred shareholders may elect to convert at any time prior to
September 14, 2007, at the minimum conversion ratio of 2.2451 common shares per
share of the Preferred Stock. Additionally, if at any time prior to the
mandatory conversion date, the closing price of the Company's common shares
exceeds $33.41 (for at least 20 trading days within a period of 30 consecutive
trading days), the Company may elect to cause the conversion of all, but not
less than all, of the Preferred Stock then outstanding at the same minimum
conversion ratio of 2.2451 common shares for each preferred share.

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The Preferred Stock accrues dividends at an annual rate of 6 percent on shares
outstanding. The dividends are cumulative from the date of issuance and, to the
extent the Company is legally permitted to pay dividends and the Board of
Directors declares a dividend payable, the Company will pay dividends on each
dividend payment date. The dividend payment dates are March 15, June 15,
September 15 and December 15.

As of March 31, 2005 the Company has the ability to issue $563 million
(principal amount) of securities under a currently effective SEC shelf
registration.

Interest Rate Swap Contract

The Company previously disclosed an interest rate swap arrangement with a
counterparty bank. The arrangement utilized two long-term interest rate swap
contracts, one between a foreign-based subsidiary of the Company and a bank and
the other between a U.S. subsidiary of the Company and the same bank. The two
contracts had equal and offsetting terms and were covered by a master netting
arrangement. The contract involving the foreign-based subsidiary permitted the
subsidiary to prepay a portion of its future obligation to the bank, and the
contract involving the U.S. subsidiary permitted the bank to prepay a portion of
its future obligation to the U.S. subsidiary. Interest was paid on the prepaid
balances by both parties at market rates. Prepayments totaling $1.9 billion were
made under both contracts as of December 31, 2004.

The terms of the swap contracts, as amended, called for a phased termination of
the swaps based on an agreed repayment schedule that was to begin no later than
March 31, 2005. Termination would require the Company and the counterparty each
to repay all prepayments pursuant to the agreed repayment schedule. The terms
also allowed the Company, at its option, to accelerate the termination of the
arrangement and associated scheduled repayments for a nominal fee.

On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary
each gave notice to the counterparty of their intent to terminate the
arrangement. On March 21, 2005 the Company terminated these swap agreements and
all associated repayments were made by the respective obligors with no material
impact on the Company's Condensed Consolidated Statement of Operations.

13. SEGMENT DATA

The Company has three reportable segments: Prescription Pharmaceuticals,
Consumer Health Care and Animal Health. The segment sales and profit data that
follow are consistent with the Company's current management reporting structure.
The Prescription Pharmaceuticals segment discovers, develops, manufactures and
markets human pharmaceutical products. The Consumer Health Care segment
develops, manufactures and markets OTC, foot care and sun care products,
primarily in the United States. The Animal Health segment discovers, develops,
manufactures and markets animal health products.

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Net sales by segment:

Profit by segment:

Corporate and other includes interest income and expense, foreign exchange gains
and losses, headquarters expenses, special charges and other miscellaneous
items. The accounting policies used for segment reporting are the same as those
described in Note 1 "Summary of Significant Accounting Policies." in the
Company's 2004 10-K.

For the three months ended March 31, 2005, "Corporate and other" included
special charges of $27 million related to the Voluntary Early Retirement
Program, other employee severance costs and asset impairment charges (see
"Special Charges" footnote for additional information). It is estimated that the
special charges relate to the reportable segments as follows: Prescription
Pharmaceuticals - $24 million, Consumer Health Care - $1 million, Animal Health
- - $1 million and Corporate and other - $1 million.

For the three months ended March 31, 2004, "Corporate and other" included
special charges of $70 million related to the Voluntary Early Retirement
Program, other employee severance costs and asset impairment charges (see Note 2
"Special Charges" for additional information). It is estimated that the special
charges relate to the reportable segments as follows: Prescription
Pharmaceuticals - $58 million, Consumer Health Care - $1 million, Animal Health
- - $1 million and Corporate and other - $10 million.

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Net sales of products comprising 10% or more of the Company's U.S. or
international net sales in the three months ended March 31, 2005 were as follows
(Dollars in millions):

14. CONSENT DECREE

On May 17, 2002, the Company announced that it had reached an agreement with the
FDA for a consent decree to resolve issues involving the Company's compliance
with current Good Manufacturing Practices (cGMP) at certain manufacturing
facilities in New Jersey and Puerto Rico. The U.S. District Court for the
District of New Jersey approved and entered the consent decree on May 20, 2002.

Under terms of the consent decree, the Company agreed to pay a total of $500
million to the U.S. government in two equal installments of $250 million; the
first installment was paid in May 2002, and the second installment was paid in
May 2003.

The consent decree requires the Company to complete a number of actions,
including comprehensive cGMP Work Plans for the Company's manufacturing
facilities in New Jersey and Puerto Rico and revalidation of the finished drug
products and bulk active pharmaceutical ingredients manufactured at those
facilities.

Under the decree, the scheduled completion dates are December 31, 2005, for cGMP
Work Plans; September 30, 2005, for revalidation programs for bulk active
pharmaceutical ingredients; and December 31, 2005, for revalidation programs for
finished drugs.

The cGMP Work Plans contain a number of Significant Steps whose timely and
satisfactory completion are subject to payments of $15 thousand per business day
for each deadline missed. These payments may not exceed $25 million for 2002,
and $50 million for each of the years 2003, 2004 and 2005. These payments are
subject to an overall cap of $175 million.

In general, the timely and satisfactory completion of the revalidations are
subject to payments of $15 thousand per business day for each deadline missed,
subject to the caps described above. However, if a product scheduled for
revalidation has not been certified as having been validated by the last date on
the validation schedule, the FDA may assess a payment of 24.6 percent of the net
domestic sales of the uncertified product until the validation is certified.
Further, in general, if a product scheduled for revalidation under the consent
decree is not certified within six months of its scheduled date, the Company
must cease production of that product until certification is obtained.

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The completion of the Significant Steps in the Work Plans and the completion of
the revalidation programs are subject to third-party expert certification, as
well as the FDA's acceptance of such certification.

The consent decree provides that if the Company believes that it may not be able
to meet a deadline, the Company has the right, upon the showing of good cause,
to request extensions of deadlines in connection with the cGMP Work Plans and
revalidation programs. However, there is no guarantee that the FDA will grant
any such requests.

Although the Company believes it has made significant progress in meeting its
obligations under the consent decree, it is possible that (1) the Company may
fail to complete a Significant Step or a revalidation by the prescribed
deadline; (2) the third-party expert may not certify the completion of the
Significant Step or revalidation; or (3) the FDA may disagree with an expert's
certification of a Significant Step or revalidation. In such a case, it is
possible that the FDA may assess payments as described above.

The Company would expense any payments assessed under the decree if and when
incurred.

15. LEGAL, ENVIRONMENTAL AND REGULATORY MATTERS

BACKGROUND

The Company is involved in various claims, investigations and legal proceedings.

The Company records a liability for contingencies when it is probable that a
liability has been incurred and the amount can be reasonably estimated. The
Company adjusts its liabilities for contingencies to reflect the current best
estimate of probable loss or minimum liability as the case may be. Where no best
estimate is determinable the Company records the minimum amount within the most
probable range of its liability. Expected insurance recoveries have not been
considered in determining the amounts of recorded liabilities for
environmental-related matters.

If the Company believes that a loss contingency is reasonably possible, rather
than probable, or the amount of loss cannot be estimated, no liability is
recorded. However, where a liability is reasonably possible, disclosure of the
loss contingency is made.

The Company reviews the status of the matters discussed in the remainder of this
Note on an ongoing basis. From time to time, the Company may settle or otherwise
resolve these matters on terms and conditions management believes are in the
best interests of the Company. Resolution of any or all of the items discussed
in the remainder of this Note, individually or in the aggregate, could have a
material adverse effect on the Company's results of operations, cash flows or
financial condition.

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Resolution (including settlements) of matters of the types set forth in the
remainder of this Note, and in particular under Investigations, frequently
involve fines and penalties of an amount that would be material to the Company's
results of operations, cash flows or financial condition. Resolution of such
matters may also involve injunctive or administrative remedies that would
adversely impact the business such as exclusion from government reimbursement
programs, which in turn would have a material adverse impact on the business,
future financial condition, cash flows or the results of operations. There are
no assurances that the Company will prevail in any of the matters discussed in
the remainder of this Note, that settlements can be reached on acceptable terms
(including the scope of the release provided and the absence of injunctive or
administrative remedies that would adversely impact the business such as
exclusion from government reimbursement programs) or in amounts that do not
exceed the amounts reserved. Even if an acceptable settlement were to be
reached, there can be no assurance that further investigations or litigations
will not be commenced raising similar issues, potentially exposing the Company
to additional material liabilities. The outcome of the matters discussed below
under Investigations could include the commencement of civil and/or criminal
proceedings involving the imposition of substantial fines, penalties and
injunctive or administrative remedies, including exclusion from government
reimbursement programs. Total liabilities reserved reflect an estimate (and in
the case of the Investigations, an estimate of the minimum liability), and any
final settlement or adjudication of any of these matters could possibly be less
than, or could materially exceed the liabilities recorded in the financial
statements and could have a material adverse impact on the Company's results of
operations, cash flows or financial condition. Further, the Company cannot
predict the timing of the resolution of these matters or their outcomes.

Except for the matters discussed in the remainder of this Note, the recorded
liabilities for contingencies at March 31, 2005, and the related expenses
incurred during the three-month period ended March 31, 2005, were not material.
In the opinion of management, based on the advice of legal counsel, the ultimate
outcome of these matters, except matters discussed in the remainder of this
Note, will not have a material impact on the Company's results of operations,
cash flows or financial condition.

During 2002 and 2003, the Company increased its litigation contingent
liabilities by an aggregate amount of $500 million as a result of the
investigations by the U.S. Attorney's Office for the District of Massachusetts
and the U.S. Attorney's Office for the Eastern District of Pennsylvania. As
noted below the Pennsylvania investigation has been settled and payments have
been made. The Company has recorded a liability of approximately $250 million
related to the Massachusetts investigation. It is reasonably possible that a
settlement of the Massachusetts investigation could involve amounts materially
in excess of this accrual. This could have a material adverse impact on the
Company's financial condition, cash flows or operations. As required by U.S.
GAAP, since the Company cannot reasonably estimate the potential final
resolution, the Company has recognized the estimated minimum liability for the
Massachusetts investigation.

19

PATENT MATTERS

DR. SCHOLL'S FREEZE AWAY Patent. On July 26, 2004, OraSure Technologies filed an
action in the U.S. District Court for the Eastern District of Pennsylvania
alleging patent infringement by Schering-Plough HealthCare Products by its sale
of DR. SCHOLL'S FREEZE AWAY wart removal product. The complaint seeks a
permanent injunction and unspecified damages, including treble damages. The
FREEZE AWAY product was launched in March 2004. Net sales of this product
totaled approximately $20 million for the year-ended December 31, 2004 and $4
million and $3 million for the three months ended March 31, 2005 and 2004,
respectively.

INVESTIGATIONS

Pennsylvania Investigation. On July 30, 2004, Schering-Plough Corporation, the
U.S. Department of Justice and the U.S. Attorney's Office for the Eastern
District of Pennsylvania announced settlement of the previously disclosed
investigation by that Office. Under the settlement, Schering Sales Corporation,
an indirect wholly owned subsidiary of Schering-Plough Corporation, pled guilty
to a single federal criminal charge concerning a payment to a managed care
customer. In connection with the settlement:

o The aggregate settlement amount was $345.5 million in fines
and damages. Schering-Plough Corporation was credited with
$53.6 million that was previously paid in additional Medicaid
rebates, leaving a net settlement amount of $291.9 million.
The $291.9 million plus interest was paid during 2004.

o Schering Sales Corporation will be excluded from participating
in federal health care programs. The settlement will not
affect the ability of Schering-Plough Corporation to
participate in those programs.

o Schering-Plough Corporation entered into a five-year corporate
integrity agreement with the Office of the Inspector General
of the Department of Health and Human Services, under which
Schering-Plough Corporation agreed to implement specific
measures to promote compliance with regulations on issues such
as marketing. Failure to comply can result in financial
penalties.

The Company cannot predict the impact of this settlement, if any, on other
outstanding investigations.

Massachusetts Investigation. The U.S. Attorney's Office for the District of
Massachusetts is investigating a broad range of the Company's sales, marketing
and clinical trial practices and programs along with those of Warrick
Pharmaceuticals (Warrick), the Company's generic subsidiary.

20

Schering-Plough has disclosed that, in connection with this investigation, on
May 28, 2003, Schering Corporation, a wholly owned and significant operating
subsidiary of Schering-Plough, received a letter (the Boston Target Letter) from
that Office advising that Schering Corporation (including its subsidiaries and
divisions) is a target of a federal criminal investigation with respect to four
areas:

1. Providing remuneration, such as drug samples, clinical
trial grants and other items or services of value, to managed care
organizations, physicians and others to induce the purchase of Schering
pharmaceutical products;

2. Sale of misbranded or unapproved drugs, which the Company
understands to mean drugs promoted for indications for which approval
by the U.S. FDA had not been obtained (so-called off-label uses);

3. Submitting false pharmaceutical pricing information to the
government for purposes of calculating rebates required to be paid to
the Medicaid program, by failing to include prices of a product
manufactured and sold under a private label arrangement with a managed
care customer as well as the prices of free and nominally priced goods
provided to that customer to induce the purchase of Schering products;
and

4. Document destruction and obstruction of justice relating to
the government's investigation.

A target is defined in Department of Justice guidelines as a person as to whom
the prosecutor or the grand jury has substantial evidence linking him or her to
the commission of a crime and who, in the judgment of the prosecutor, is a
putative defendant (U.S. Attorney's Manual, Section 9-11.151).

The Company has implemented certain changes to its sales, marketing and clinical
trial practices and is continuing to review those practices to ensure compliance
with relevant laws and regulations. The Company is cooperating with this
investigation.

See information about prior increases to the liabilities reserved in the
financial statements, including in relation to this investigation and the other
potential impacts of the outcome of this investigation in the Background section
of this Note.

The Company previously recorded a liability of approximately $250 million
related to this investigation. It is reasonably possible that a settlement of
the investigation could involve amounts materially in excess of this accrual.
This could have a material adverse impact on the Company's financial condition,
cash flows or operations. As required by U.S. GAAP, since the Company cannot
reasonably estimate the potential final resolution, the Company has recognized
the estimated minimum liability.

21

NITRO-DUR Investigation. In August 2003, the Company received a civil
investigative subpoena issued by the Office of Inspector General of the U.S.
Department of Health and Human Services seeking documents concerning the
Company's classification of NITRO-DUR for Medicaid rebate purposes, and the
Company's use of nominal pricing and bundling of product sales. The Company is
cooperating with the investigation. It appears that the subpoena is one of a
number addressed to pharmaceutical companies concerning an inquiry into issues
relating to the payment of government rebates.

PRICING MATTERS

AWP Investigations. The Company continues to respond to existing and new
investigations by, among others, the U.S. Department of Health and Human
Services, the U.S. Department of Justice and certain states into industry and
Company practices regarding average wholesale price (AWP). These investigations
include a Department of Justice review of the merits of a federal action filed
by a private entity on behalf of the U.S. in the U.S. District Court for the
Southern District of Florida, as well as an investigation by the U.S. Attorney's
Office for the District of Massachusetts, regarding, inter alia, whether the AWP
set by pharmaceutical companies for certain drugs improperly exceeds the average
prices paid by dispensers and, as a consequence, results in unlawful inflation
of certain government drug reimbursements that are based on AWP. The Company is
cooperating with these investigations. The outcome of these investigations could
include the imposition of substantial fines, penalties and injunctive or
administrative remedies.

Prescription Access Litigation. In December 2001, the Prescription Access
Litigation project (PAL), a Boston-based group formed in 2001 to litigate
against drug companies, filed a class action suit in Federal Court in
Massachusetts against the Company. In September 2002, a consolidated complaint
was filed in this court as a result of the coordination by the Multi-District
Litigation Panel of all federal court AWP cases from throughout the country. The
consolidated complaint alleges that the Company and Warrick Pharmaceuticals, the
Company's generic subsidiary, conspired with providers to defraud consumers by
reporting fraudulently high AWPs for prescription medications reimbursed by
Medicare or third-party payers. The complaint seeks a declaratory judgment and
unspecified damages, including treble damages.

Included in the litigation described in the prior paragraph are lawsuits that
allege that the Company and Warrick reported inflated AWPs for prescription
pharmaceuticals and thereby caused state and federal entities and third-party
payers to make excess reimbursements to providers. Some of these actions also
allege that the Company and Warrick failed to report accurate prices under the
Medicaid Rebate Program and thereby underpaid rebates to some states. Some cases
filed by State Attorneys General also seek to recover on behalf of citizens of
the State and entities located in the State for excess payments as a result of
inflated AWPs. These actions, which began in October 2001, have been brought by
State Attorneys General, private plaintiffs, nonprofit organizations and
employee benefit funds. They allege violations of federal and state law,
including fraud, antitrust, Racketeer Influenced Corrupt Organizations Act
(RICO) and other claims. During the first quarter of 2004, the Company and
Warrick were among five groups of companies put on an accelerated discovery
track in the proceeding. In addition, Warrick and the Company are defendants in
a number of such lawsuits in state courts. The actions are generally brought by
states and/or political subdivisions and seek unspecified damages, including
treble and punitive damages.

22

SECURITIES AND CLASS ACTION LITIGATION

On February 15, 2001, the Company stated in a press release that the FDA had
been conducting inspections of the Company's manufacturing facilities in New
Jersey and Puerto Rico and had issued reports citing deficiencies concerning
compliance with current Good Manufacturing Practices, primarily relating to
production processes, controls and procedures. The next day, February 16, 2001,
a lawsuit was filed in the U.S. District Court for the District of New Jersey
against the Company and certain named officers alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Additional lawsuits of the same tenor followed. These
complaints were consolidated into one action in the U.S. District Court for the
District of New Jersey, and a lead plaintiff, the Florida State Board of
Administration, was appointed by the Court on July 2, 2001. On October 11, 2001,
a consolidated amended complaint was filed, alleging the same violations
described in the second sentence of this paragraph and purporting to represent a
class of shareholders who purchased shares of Company stock from May 9, 2000,
through February 15, 2001. The complaint seeks compensatory damages on behalf of
the class. The Company's motion to dismiss the consolidated amended complaint
was denied on May 24, 2002. On October 10, 2003, the Court certified the
shareholder class. Discovery is ongoing.

In addition to the lawsuits described in the immediately preceding paragraph,
two lawsuits were filed in the U.S. District Court for the District of New
Jersey, and two lawsuits were filed in New Jersey state court against the
Company (as a nominal defendant) and certain officers, directors and a former
director seeking damages on behalf of the Company, including disgorgement of
trading profits made by defendants allegedly obtained on the basis of material
non-public information. The complaints in each of those four lawsuits relate to
the issues described in the Company's February 15, 2001, press release, and
allege a failure to disclose material information and breach of fiduciary duty
by the directors. One of the federal court lawsuits also includes allegations
related to the investigations by the U.S. Attorney's Offices for the Eastern
District of Pennsylvania and the District of Massachusetts, the FTC's
administrative proceeding against the Company, and the lawsuit by the state of
Texas against Warrick, the Company's generic subsidiary. The U.S. Attorney's
investigations and the FTC proceeding are described herein. The Texas litigation
is described in previously filed 10-Ks and 10-Qs. Each of these lawsuits is a
shareholder derivative action that purports to assert claims on behalf of the
Company, but as to which no demand was made on the Board of Directors and no
decision had been made on whether the Company can or should pursue such claims.
In August 2001, the plaintiffs in each of the New Jersey state court shareholder
derivative actions moved to dismiss voluntarily the complaints in those actions,
which motions were granted. The two shareholder derivative actions pending in
the U.S. District Court for the District of New Jersey have been consolidated
into one action, which is in its very early stages.

23

On January 2, 2002, the Company received a demand letter dated December 26,
2001, from a law firm not involved in the derivative actions described above, on
behalf of a shareholder who also is not involved in the derivative actions,
demanding that the Board of Directors bring claims on behalf of the Company
based on allegations substantially similar to those alleged in the derivative
actions. On January 22, 2002, the Board of Directors adopted a Board resolution
establishing an Evaluation Committee, consisting of three directors, to
investigate, review and analyze the facts and circumstances surrounding the
allegations made in the demand letter and the consolidated amended derivative
action complaint described above, but reserving to the full Board authority and
discretion to exercise its business judgment in respect of the proper
disposition of the demand. The Committee engaged independent outside counsel to
advise it and issued a report on the findings of its investigation to the
independent directors of the Board in late October 2002. That report determined
that the shareholder demand should be refused, and finding no liability on the
part of any officers or directors. In November 2002, the full Board adopted the
recommendation of the Evaluation Committee.

The Company is a defendant in a number of purported nationwide or state class
action lawsuits in which plaintiffs seek a refund of the purchase price of
laxatives or phenylpropanolamine-containing cough/cold remedies (PPA products)
they purchased. Other pharmaceutical manufacturers are co-defendants in some of
these lawsuits. In general, plaintiffs claim that they would not have purchased
or would have paid less for these products had they known of certain defects or
medical risks attendant with their use. In the litigation of the claims relating
to the Company's PPA products, courts in the national class action suit and
several state class action suits have denied certification and dismissed the
suits. A similar application to deny class certification in New Jersey, the only
remaining statewide class action suit involving the Company, was granted on
September 30, 2004. Approximately 96 individual lawsuits relating to the
laxative products, PPA products and recalled albuterol/VANCERIL/VANCENASE
inhalers are also pending against the Company seeking recovery for personal
injuries or death. In a number of these lawsuits punitive damages are claimed.

Litigation filed in 2003 in the U.S. District Court in New Jersey alleging that
the Company, Richard Jay Kogan, the Company's Employee Savings Plan (Plan)
administrator, several current and former directors, and certain corporate
officers breached their fiduciary obligations to certain participants in the
Plan. The complaint seeks damages in the amount of losses allegedly suffered by
the Plan. The complaint was dismissed on June 29, 2004. The plaintiffs' appeal
is pending.

A 2003 lawsuit filed in the New Jersey Superior Court, Chancery Division, Union
County alleging breach of fiduciary duty by the outside directors relating to
the Company's receipt of the Boston Target Letter (described under the
Investigations section in this Note) was dismissed in September 2004 upon
consent of the parties.

24

ANTITRUST AND FTC MATTERS

K-DUR. K-DUR is Schering-Plough's long-acting potassium chloride product
supplement used by cardiac patients. Schering-Plough had settled patent
litigation with Upsher-Smith, Inc. (Upsher-Smith) and ESI Lederle, Inc.
(Lederle), which had related to generic versions of K-DUR for which Lederle and
Upsher Smith had filed Abbreviated New Drug Applications (ANDAs). On April 2,
2001, the FTC started an administrative proceeding against Schering-Plough,
Upsher-Smith and Lederle. The complaint alleged anti-competitive effects from
those settlements. In June 2002, the administrative law judge overseeing the
case issued a decision that the patent litigation settlements complied with the
law in all respects and dismissed all claims against the Company. The FTC Staff
appealed that decision to the full Commission. On December 18, 2003, the full
Commission issued an opinion that reversed the 2002 decision and ruled that the
settlements did violate the antitrust laws. The full Commission issued a cease
and desist order imposing various injunctive restraints. By opinion filed March
8, 2005, the federal court of appeals set aside that 2003 Commission ruling and
vacated the cease and desist order. The FTC has filed a petition with the Court
of Appeals that the Court vacate its March 8, 2005 decision.

Following the commencement of the FTC administrative proceeding, alleged class
action suits were filed in federal and state courts on behalf of direct and
indirect purchasers of K-DUR against Schering-Plough, Upsher-Smith and Lederle.
These suits all allege essentially the same facts and claim violations of
federal and state antitrust laws, as well as other state statutory and/or common
law causes of action. These suits seek unspecified damages. Discovery is
ongoing.

SEC INQUIRIES AND RELATED LITIGATION

On September 9, 2003, the SEC and the Company announced settlement of the SEC
enforcement proceeding against the Company and Richard Jay Kogan, former
chairman and chief executive officer, regarding meetings held with investors the
week of September 30, 2002, and other communications. Without admitting or
denying the allegations, the Company agreed not to commit future violations of
Regulation FD and related securities laws and paid a civil penalty of $1
million. Mr. Kogan paid a civil penalty of $50 thousand.

On September 25, 2003, a lawsuit was filed in New Jersey Superior Court, Union
County, against Richard Jay Kogan and the Company's outside Directors alleging
breach of fiduciary duty, fraud and deceit and negligent misrepresentation, all
relating to the alleged disclosures made during the meetings mentioned above.
The Company removed this case to federal court. The case was remanded to state
court. The Company has filed a motion to dismiss.

OTHER MATTERS

EMEA Pharmacovigilance Matter. During 2003 pharmacovigilance inspections by
officials of the British and French medicines agencies conducted at the request
of the European Agency for the Evaluation of Medicinal Products (EMEA), serious
deficiencies in reporting processes were identified. Schering-Plough continues
to work on its action plan to rectify the deficiencies and provides regular
updates to EMEA. The Company does not know what action, if any, the EMEA or
national authorities will take in response to these findings. Possible actions
include further inspections, demands for improvements in reporting systems,
criminal sanctions against the Company and/or responsible individuals and
changes in the conditions of marketing authorizations for the Company's
products.

25

Biopharma Contract Dispute. Biopharma S.r.l. filed a claim in the Civil Court of
Rome on July 21, 2004 (docket No. 57397/2004, 9th Chamber) against certain
Schering-Plough subsidiaries. The matter relates to certain contracts dated
November 15, 1999, (distribution and supply agreements between Biopharma and a
Schering-Plough subsidiary) for distribution by Schering-Plough of generic
products manufactured by Biopharma to hospitals and to pharmacists in France;
and July 26, 2002 (letter agreement among Biopharma, a Schering-Plough
subsidiary and Medipha Sante, S.A., appointing Medipha to distribute products in
France). Biopharma alleges that Schering-Plough did not fulfill its duties under
the contracts.

TAX MATTERS

In October 2001, IRS auditors asserted, in reports, that the Company is liable
for additional tax for the 1990 through 1992 tax years. The reports allege that
two interest rate swaps that the Company entered into with an unrelated party
should be recharacterized as loans from affiliated companies. In April 2004, the
Company received a formal Notice of Deficiency (Statutory Notice) from the IRS
asserting additional federal income tax due. The Company received bills related
to this matter from the IRS on September 7, 2004. Payment in the amount of $194
million for income tax and $279 million for interest was made on September 13,
2004. The Company filed refund claims for the tax and interest with the IRS on
December 23, 2004. The Company was notified on February 16, 2005, that its
refund claims were denied by the IRS. The Company believes it has complied with
all applicable rules and regulations and intends to file a suit for refund for
the full amount of the tax and interest. The Company's tax reserves were
adequate to cover the above-mentioned payments.

ENVIRONMENTAL

The Company has responsibilities for environmental cleanup under various state,
local and federal laws, including the Comprehensive Environmental Response,
Compensation and Liability Act, commonly known as Superfund. At several
Superfund sites (or equivalent sites under state law), the Company is alleged to
be a potentially responsible party (PRP). Except where a site is separately
disclosed, the Company believes that it is remote at this time that there is any
material liability in relation to such sites. The Company estimates its
obligations for cleanup costs for Superfund sites based on information obtained
from the federal Environmental Protection Agency (EPA), an equivalent state
agency and/or studies prepared by independent engineers, and on the probable
costs to be paid by other PRPs. The Company records a liability for
environmental assessments and/or cleanup when it is probable a loss has been
incurred and the amount can be reasonably estimated.

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Schering-Plough Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of
Schering-Plough Corporation and subsidiaries (the "Corporation") as of March 31,
2005, and the related statements of condensed consolidated operations for the
three-month periods ended March 31, 2005 and 2004, and the statements of
condensed consolidated cash flows for the three-month periods ended March 31,
2005 and 2004. These interim financial statements are the responsibility of the
Corporation's management.

We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Schering-Plough Corporation and subsidiaries as of December 31, 2004,
and the related statements of consolidated operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated March 8, 2005, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2004 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.

/s/Deloitte & Touche LLP

Parsippany, New Jersey
April 25, 2005

27

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

EXECUTIVE SUMMARY

OVERVIEW OF THE COMPANY

Schering-Plough (the Company) discovers, develops, manufactures and markets
medical therapies and treatments to enhance human health. The Company also
markets leading consumer brands in the over-the-counter (OTC), foot care and sun
care markets and operates a global animal health business.

As a research-based pharmaceutical company, Schering-Plough's core strategy is
to invest substantial funds in scientific research with the goal of creating
important medical and commercial value. Research and development activities
focus on mechanisms to treat serious diseases. There is a high rate of failure
inherent in such research and, as a result, there is a high risk that the funds
invested in research programs will not generate financial returns. This risk
profile is compounded by the fact that this research has a long investment
cycle. To bring a pharmaceutical compound from the discovery phase to the
commercial phase may take a decade or more. Because of the high-risk nature of
research investments, financial resources typically must come from internal
sources (operations and cash reserves) or from equity-type capital.

There are two sources of new products: products acquired through acquisition and
licensing arrangements, and products in the Company's late-stage research
pipeline. With respect to acquisitions and licensing, there are limited
opportunities for obtaining or licensing critical late-stage products, and these
limited opportunities typically require substantial amounts of funding. The
Company competes for these opportunities against companies often with far
greater financial resources than that of the Company. Due to the present
financial situation, it may be challenging for the Company to acquire or license
critical late-stage products that will have a positive material financial
impact.

28

During the period 2002 to 2004, the Company experienced a
number of negative events that have strained and continue to
strain the Company's financial resources. These negative
events included, but were not limited to, the following
matters:

o Entered into a formal consent decree with the U.S. Food and
Drug Administration (FDA) in 2002 and agreed to revalidate
manufacturing processes at certain manufacturing sites in the
U.S. and Puerto Rico. Significant increased spending
associated with manufacturing compliance efforts will continue
through the completion of the FDA consent decree obligation.
In addition, the Company has found it necessary to discontinue
certain older profitable products and outsource other
products.

o Switch of CLARITIN in the U.S., beginning in December 2002
from prescription to OTC status. This switch coupled with
private label competition has resulted in a much lower average
unit selling price for this product and ongoing intense
competition. The Company's exposure to powerful retail
purchasers has also increased.

o Market shares and sales levels of certain other Company
products have fallen significantly and have experienced
increased competition. Many of these products compete in
declining or volatile markets.

o Investigations into certain of the Company's sales and
marketing practices by the U.S. Attorney's Offices in
Massachusetts and Pennsylvania. During 2004 the Company made
payments totaling $294 million to the U.S. Attorney's Office
for the Eastern District of Pennsylvania in settlement of that
investigation. The Massachusetts investigation is continuing
and poses significant financial and commercial risks to the
Company.

In response to these matters, beginning in April 2003 the
Company appointed a new management team that formulated, and
has begun to implement, a six- to eight-year Action Agenda to
stabilize, repair and then turn around the Company. Throughout
2004, Schering-Plough moved to stabilize its primary business
franchises; secure cost savings through a Value Enhancement
Initiative (VEI) and reinvest much of those savings into more
productive areas. In 2005, the Company continues to make
progress on its Action Agenda as evidenced by recent product
approvals and launches and performance in certain key
products.

During the first quarter of 2005, the Company began
repatriating previously unremitted foreign earnings at a
reduced tax rate as provided by the American Job Creation Act
of 2004 (the Act).

29

Repatriating funds under the Act is benefiting the Company in the following
ways:

o The Company's U.S. operations currently incur significant
negative cash flow. The Company believes the repatriations
being made during 2005 under the Act are providing the Company
with greater financial stability and the ability to fund the
U.S. cash needs for the intermediate term.

o The negative cash flow from U.S. operations results in U.S.
tax net operating losses (U.S. NOL's). Under the Act,
qualifying repatriations do not reduce U.S. tax losses. As
such the Company will have both the cash necessary to fund its
U.S. cash needs as well as maintaining the potential benefit
of being able to carry forward U.S. NOL's to reduce U.S.
taxable income in the future. This potential future benefit
could be significant but is dependent on the Company achieving
profitability in the U.S.

CURRENT STATE OF THE BUSINESS

First quarter 2005 net sales of $2.4 billion were 21 percent higher than the
2004 period. The first quarter 2005 sales increase was driven by U.S. and
international product growth, 6 percent of which relates to the U.S. sales
contribution from the antibiotics AVELOX and CIPRO under an agreement with Bayer
that became effective in October 2004, and a 4 percent positive impact from
currency exchange.

Sales and marketing costs have increased due to the need to reinvest in the
business and to launch new products as well as a need to stabilize market shares
of the Company's remaining pharmaceutical products.

The Company recorded Net income available to common shareholders of $105 million
in the first quarter of 2005 as compared to a loss in the first quarter of 2004.

While the first quarter 2005 results improved versus the 2004 period, they may
not be indicative of future periods, as certain favorable circumstances helped
benefit the first quarter. These factors included a higher proportional share of
ZETIA profits from the Company's cholesterol joint venture, a milestone earned
from its cholesterol joint venture partner, timing of R&D expenses, positive
impact of foreign exchange and certain other items.

During 2003 and 2004 and continuing into 2005, the Company's cash flow has
declined significantly. The overriding cause of this was the loss of marketing
exclusivity for two of the Company's major pharmaceutical products, CLARITIN and
REBETOL as well as increased competition in the hepatitis C market.

Many of the Company's manufacturing sites operate well below optimum production
levels primarily due to sales declines and to a lesser extent the reduction in
output related to the FDA consent decree. At the same time, overall costs of
operating manufacturing sites have significantly increased due to the consent
decree and other compliance activities. The Company continues to review the
carrying value of these assets for indications of impairment.

The Company continues to pursue its core strategy of supporting its marketed and
new products in its research and development pipeline and plans to invest in
sales and marketing and scientific research at historical levels. However, this
level of investment is not sustainable without a significant increase in profits
and cash flow from operations. The ability of the Company to generate profits
and significant operating cash flow is directly and predominantly dependent upon
the increasing profitability of the Company's cholesterol franchise (which
includes VYTORIN and ZETIA) and to a much lesser extent growing sales and
profitability of the base pharmaceutical business products, developing or
acquiring new products and controlling expenses. If the Company cannot generate
significant operating cash flow, its ability to invest in sales, marketing and
research efforts at historical levels may be negatively impacted.

30

ZETIA is the Company's novel cholesterol absorption inhibitor. VYTORIN is the
combination of ZETIA and Zocor, Merck & Co., Inc.'s statin medication. These two
products have been launched through a joint venture between the Company and
Merck. The cholesterol-reduction market is the single largest pharmaceutical
market in the world. VYTORIN and ZETIA are well positioned in this market, but
these products compete against other well established cholesterol management
products marketed by companies with financial resources much greater than that
of the Company. In addition, the Company expects generic forms of cholesterol
lowering products to be introduced as existing products lose patent protection.
The impact of this on the cholesterol lowering market is not yet known. The
financial commitment to compete in this market is shared with Merck and profits
from the sales of VYTORIN and ZETIA are also shared with Merck.

Management cannot provide assurance that profits in the near-term will be
sufficient for the Company to maintain its core marketing and research
strategies. If a sufficient level of profit and cash flow cannot be achieved,
the Company would need to evaluate strategic alternatives. With regard to an
examination of strategic alternatives, the contracts with Merck for VYTORIN and
ZETIA and the contract with Centocor, Inc. for REMICADE (exhibits 10 (r) and 10
(u), respectively, to the Company's 2003 Form 10-K) contain provisions related
to a change of control, as defined in those contracts. These provisions could
result in the aforementioned products being acquired by Merck or reverting back
to Centocor, Inc.

REGULATORY ENVIRONMENT IN WHICH THE COMPANY OPERATES

Government regulatory agencies throughout the world regulate the Company's
discovery, development, manufacturing and marketing efforts. The U.S. Food and
Drug Administration (FDA) is a central regulator of the Company's business.
Since 2001, the Company has been working with the FDA to resolve issues
involving the Company's compliance with current Good Manufacturing Practices
(cGMP) at certain of its manufacturing sites in New Jersey and Puerto Rico. In
2002, the Company reached a formal agreement with the FDA to enter into a
consent decree. Under the terms of the consent decree, the Company made payments
totaling $500 million and agreed to revalidate the manufacturing processes at
these sites. These manufacturing sites have remained open throughout this
period; however, the consent decree has placed significant additional controls
on production and release of products from these sites, including review and
third-party certification of production activities. The third-party
certifications and other cGMP improvement projects have resulted in higher costs
as well as reduced output at these facilities. In addition, the Company has
found it necessary to discontinue certain profitable older products. The
Company's research and development operations have also been negatively impacted
by the decree because these operations share common facilities with the
manufacturing operations.

In the U.S., the pricing of the Company's pharmaceutical products are subject to
competitive pressure as managed care organizations seek price discounts and
rebates. Also in the U.S., the Company is required to provide statutorily
defined rebates to various government agencies in order to participate in
Medicaid, the veterans' health care program and other government-funded
programs. In most international markets, the Company operates in an environment
of government-mandated cost-containment programs.

31

Recently, clinical trials and post-marketing surveillance of certain marketed
drugs within the industry have raised safety concerns that have led to recalls,
withdrawals or adverse labeling of marketed products. In addition, these
situations have raised concerns among some prescribers and patients relating to
the safety and efficacy of pharmaceutical products in general. The Company
maintains a process for monitoring and addressing adverse events and other new
data relating to its products around the world. In addition, Company personnel
have regular, open dialogue with the FDA and other regulators and review product
labels and other materials on a regular basis and as new information becomes
known.

Many pharmaceutical companies, including Schering-Plough, have been the subject
of government investigations at the federal, state and local levels into sales
and marketing practices. These matters are discussed in more detail under
"Additional Factors Influencing Operations."

32

DISCUSSION OF OPERATING RESULTS

NET SALES

Consolidated net sales for the three months ended March 31, 2005 totaled $2.4
billion, an increase of $406 million or 21 percent compared with the same period
in 2004. Consolidated net sales reflected higher volumes, the inclusion of the
sales of AVELOX and CIPRO coupled with a favorable foreign exchange rate impact
of 4 percent.

Net sales for the three months ended March 31, 2005 and 2004 were as follows:

- ----------
N/M -- Not a meaningful percentage.

(a) Amounts shown for 2005 and 2004 include international sales of CLARITIN
Rx only.

(b) Includes OTC CLARITIN of $116 million and $117 million in 2005 and
2004, respectively.

International net sales of REMICADE, for the treatment of rheumatoid arthritis,
psoriatic arthritis, Crohn's disease and ankylosing spondylitis, were up $55
million or 33 percent in the first quarter of 2005 to $220 million due to
greater medical use and expanded indications in European markets.

Global net sales of NASONEX Nasal Spray, a once-daily corticosteroid nasal spray
for allergies, rose 30 percent to $183 million in the first quarter of 2005
primarily due to market share gains in

33

the U.S., helped by the launch and related promotion of NASONEX SCENT-FREE,
coupled with U.S. and international market growth.

Global net sales of PEG-INTRON Powder for Injection, a pegylated interferon
product for treating hepatitis C, increased 14 percent to $170 million for the
first quarter of 2005 due primarily to the launch in Japan in late 2004. Sales
in Japan also benefited from the significant number of patients who were waiting
for approval of PEG-INTRON before beginning treatment ("patient warehousing").
Comparisons in 2006 will be unfavorably impacted by the absence of this patient
warehousing. Sales and market share of PEG-INTRON in the U.S. have declined
compared to the prior year due to increased competition and market decline.

Global net sales of CLARINEX (marketed as AERIUS in many countries outside the
U.S.) for the treatment of seasonal outdoor allergies and year-round indoor
allergies were $144 million for 2005, an increase of 11 percent versus the first
quarter of last year. Sales outside the U.S. increased 26 percent to $77 million
in 2005 due to market share gains and conversions from prescription CLARITIN. In
the U.S., CLARINEX continued to experience reduced market share in a declining
market. As a result, sales decreased 3 percent to $67 million from an unusually
weak comparable period in 2004.

Global net sales of TEMODAR Capsules, for treating certain types of brain
tumors, increased $45 million or 52 percent to $131 million in 2005 due to
increased market penetration. In March 2005, TEMODAR received U.S. FDA approval
for use with radiation in treating patients with newly diagnosed glioblastoma
multiform (GBM), the most prevalent form of brain cancer. This treatment has
been rapidly adopted by U.S. physicians and many patients with GBM in the U.S.
are already being treated with TEMODAR.

International net sales of prescription CLARITIN increased 22 percent to $111
million in 2005 from $91 million in 2004 due to a severe Japanese allergy season
and the launch of CLARITIN REDITABS in Japan.

Global net sales of INTEGRILIN Injection, a glycoprotein platelet aggregation
inhibitor for the treatment of patients with acute coronary syndrome, which is
sold primarily in the U.S. by Schering-Plough, increased 3 percent to $75
million in the first quarter of 2005 due to increased patient utilization.

Millennium Pharmaceuticals, Inc. ("Millennium") and the Company have a
co-promotion agreement for INTEGRILIN. Millennium notified the Company that it
intends to exercise its right under the agreement to assume responsibilities for
customer service, managed care contracting, government reporting and physical
distribution of INTEGRILIN. As a result, based on the final assumption
agreement, as early as the fourth quarter of 2005, the Company may be required
to cease the recording of sales of INTEGRILIN and record its share of
co-promotion profits as alliance revenue. Currently, the Company anticipates
that this change in recording sales of INTEGRILIN would have no impact on
earnings.

Global net sales of INTRON A Injection, for chronic hepatitis B and C and other
antiviral and anticancer indications, increased 6 percent to $73 million versus
the first quarter of 2004, reflecting favorable trade inventory comparisons in
the U.S.

34

Net sales of AVELOX, a fluoroquinolone antibiotic for the treatment of certain
respiratory and skin infections, which is sold primarily in the U.S. by
Schering-Plough as a result of the Company's license agreement with Bayer in
October 2004, were $73 million in the first quarter of 2005.

Global net sales of REBETOL Capsules, for use in combination with INTRON A or
PEG-INTRON for treating hepatitis C, decreased 35 percent to $64 million due to
the launch of generic versions of REBETOL in the U.S. in April 2004 and
increased price competition outside the U.S.

International net sales of SUBUTEX Tablets, for the treatment of opiate
addiction, increased 16 percent to $51 million due to increased market
penetration. SUBUTEX may be vulnerable to generic competition in the future.

International sales of CAELYX, for the treatment of ovarian cancer, metastatic
breast cancer and Kaposi's sarcoma, increased 27 percent to $43 million
reflecting further adoption of the metastatic breast cancer indication in
patients who are at increased cardiac risk.

Global net sales of ELOCON cream, a medium-potency topical steroid, increased 6
percent to $41 million. A generic version of this drug was introduced in the
U.S. in the first quarter of 2005. Generic competition in the U.S. is expected
to adversely affect sales of this product. Net sales of ELOCON in the U.S.
during the first quarter of 2005 were $4 million.

Net sales of CIPRO, a fluoroquinolone antibiotic for the treatment of certain
respiratory, skin, urinary tract and other infections, which is sold primarily
in the U.S. by Schering-Plough as a result of the Company's license agreement
with Bayer in October 2004, were $37 million in the first quarter of 2005.

Other pharmaceutical net sales include a large number of lower sales volume
prescription pharmaceutical products. Several of these products are sold in
limited markets outside the U.S., and many are multiple source products no
longer protected by patents. The products include treatments for respiratory,
cardiovascular, dermatological, infectious, oncological and other diseases.

Global net sales of Consumer Health Care products, which include OTC, foot care
and sun care products, increased $18 million or 6 percent in 2005 to $330
million. Net sales of foot care products increased $8 million or 10 percent in
2005 due primarily to the new Memory Fit Insole and Freeze Away products. Net
sales of sun care products increased $5 million or 5 percent in 2005, primarily
due to the timing of shipments coupled with the launch of new Coppertone
Continuous Spray products. Sales of OTC CLARITIN were $116 million in 2005, a
decrease of $1 million or 1 percent from 2004. OTC CLARITIN continues to face
competition from private label and branded loratadine.

Global net sales of Animal Health products increased 14 percent in 2005 to $193
million. The increased sales reflected solid growth across core brands and a
favorable foreign exchange impact of 4 percent.

35

COSTS, EXPENSES AND EQUITY INCOME

A summary of costs, expenses and equity income for the three months ended March
31, 2005 and 2004 follows:

N/M -- Not a meaningful percentage.

Cost of sales as a percentage of net sales decreased from 37.7 percent in 2004
to 37.5 percent in 2005. This decrease was due to product mix and some benefit
of foreign exchange.

Substantially all the sales of cholesterol products are not included in the
Company's net sales. The results of the operations of the joint venture are
reflected in equity income and have no impact on the Company's gross and other
operating margins.

Selling, general and administrative expenses (SG&A) increased 18 percent to $1.1
billion in the first quarter of 2005 versus $0.9 billion in 2004 primarily due
to the expansion of the sales field force and higher promotional spending. The
ratio of SG&A to net sales was 45.6 percent in 2005 as compared to the ratio of
46.6 percent in 2004.

The Company has had several regulatory product successes in recent months,
including the approval of ASMANEX, which have resulted in new promotional
opportunities. This may increase promotional spending during the remainder of
2005.

Research and development (R&D) spending increased 3 percent to $384 million,
representing 16.2 percent of net sales in the first quarter of 2005, compared
with 19.0 percent in 2004. Generally, changes in R&D spending reflect the timing
of the Company's funding of both internal research efforts and research
collaborations with various partners to discover and develop a steady flow of
innovative products. The Company expects R&D spending in subsequent quarters to
be higher reflecting the timing of clinical trials and the progression of the
Company's early-stage pipeline.

In the first quarter of 2005, the decrease in other expense, net, is primarily
the result of higher interest income.

36

SPECIAL CHARGES

The components of Special Charges for the three months ended March 31, 2005 and
2004 are as follows:

Employee Termination Costs

In August 2003, the Company announced a global workforce reduction initiative.
The first phase of this initiative was a Voluntary Early Retirement Program
(VERP) in the U.S. Under this program, eligible employees in the U.S. had until
December 15, 2003 to elect early retirement and receive an enhanced retirement
benefit. Approximately 900 employees elected to retire under the program, of
which approximately 850 employees retired through year-end 2004 and
approximately 50 employees have staggered retirement dates in 2005. The total
cost of this program is approximately $191 million, comprised of increased
pension costs of $108 million, increased post-retirement health care costs of
$57 million, vacation payments of $4 million and costs related to accelerated
vesting of stock grants of $22 million. For employees with staggered retirement
dates in 2005, these amounts will be recognized as a charge over the employees'
remaining service periods. Amounts recognized in the first quarter of 2005 and
2004 for this program were $2 million and $9 million, respectively. The amount
expected to be recognized in the remainder of 2005 is $5 million.

Termination costs not associated with the VERP totaled $19 million and $35
million in the first quarter of 2005 and 2004, respectively. The termination
costs in 2005 related primarily to employee termination costs at a
manufacturing facility.

37

The following summarizes the activity in the accounts related to employee
termination costs
(Dollars in millions):

The balance at March 31, 2005, represents disbursements to be made after March
31, 2005.

Asset Impairment and Related Charges

The Company recorded asset impairment and related charges of $6 million and $26
million in the first quarter of 2005 and 2004, respectively. The charge in 2004
related primarily to the shutdown of a small European research-and-development
facility.

38

EQUITY INCOME FROM CHOLESTEROL JOINT VENTURE

Global cholesterol franchise sales, which include sales made by the Company and
the cholesterol joint venture with Merck of VYTORIN and ZETIA, totaled $509
million and $189 million during the three months ended March 31, 2005 and 2004,
respectively. VYTORIN has been approved in 29 countries and has been launched in
13 countries, including the U.S. in July 2004. ZETIA has been approved in 74
countries and was launched in the U.S. and over 60 international markets since
November 2002.

The Company utilizes the equity method of accounting for the joint venture.
Sharing of income from operations is based upon percentages that vary by
product, sales level and country. Schering-Plough's allocation of joint venture
income is increased by milestones earned. The partners bear the costs of their
own general sales forces and commercial overhead in marketing joint venture
products around the world. In the U.S., Canada and Puerto Rico, the joint
venture reimburses each partner for a pre-defined amount of physician details
that are set on an annual basis. Schering-Plough reports this reimbursement as
part of equity income as under U.S. GAAP this amount does not represent a
reimbursement of specific, incremental and identifiable costs for the Company's
detailing of the cholesterol products in these markets. In addition, this
reimbursement amount is not reflective of Schering-Plough's sales effort related
to the joint venture as Schering-Plough's sales force and related costs
associated with the joint venture are generally estimated to be higher.

Costs of the joint venture that the partners contractually share are a portion
of manufacturing costs, specifically identified promotion costs (including
direct-to consumer advertising and direct and identifiable out-of-pocket
promotion) and other agreed-upon costs for specific services such as market
support, market research, market expansion, a specialty sales force and
physician education programs.

Certain specified research and development expenses are generally shared equally
by the partners.

Equity income from cholesterol joint venture, as defined, totaled $220 million
and $78 million in the first quarter of 2005 and 2004, respectively.

During the first quarter of 2005 Schering-Plough earned a milestone of $20
million of which $14 million was recognized for financial reporting purposes.
This milestone related to certain European approvals of VYTORIN
(ezetimibe/simvastatin) in the first quarter of 2005.

During the first quarter of 2004 Schering-Plough earned and recognized a
milestone of $7 million related to the approval of ezetimibe/simvastatin in
Mexico in 2004.

Under certain other conditions, as specified in the partnership agreements with
Merck, the Company could earn additional milestones totaling $105 million.

39

In addition to the milestone recognized in the first quarter of 2005,
Schering-Plough's equity income in the first quarter of 2005 was favorably
impacted by the proportionally greater share of income allocated from the joint
venture for the first $300 million of annual ZETIA sales and a modest increase
in trade inventory buying patterns.

It should be noted that the Company incurs substantial costs such as selling
costs that are not reflected in Equity income from cholesterol joint venture and
are borne entirely by the Company.

PROVISION FOR INCOME TAXES

Tax expense/(benefit) was $64 million and $(18) million for the three months
ended March 31, 2005 and 2004, respectively.

At December 31, 2004 the Company has approximately $1 billion of U.S. Net
Operating Losses (U.S. NOLs) for tax purposes available to offset future U.S.
taxable income through 2024. The Company generated an additional U.S. NOL during
the first quarter of 2005.

If Congress does not legislate certain technical corrections related to the
American Jobs Creation Act, the Company's total U.S. NOL could be reduced by
approximately $675 million.

The Company's tax provision for the three-month period ended March 31, 2005 is
primarily related to foreign taxes and does not include any benefit related to
U.S. NOLs . The Company has established a valuation allowance on net U.S.
deferred tax assets, including the benefit of U.S. NOLs, as management cannot
conclude that it is more likely than not the benefit of U.S. net deferred tax
assets can be realized.

NET INCOME/(LOSS)

Net income of $127 million for the first quarter of 2005 includes higher equity
earnings due in part to a higher proportion of annual profit sharing from the
Cholesterol Joint Venture and the recognition of a milestone of $14 million. Net
income also includes special charges of $27 million and a favorable impact of
foreign exchange.

NET INCOME/(LOSS) AVAILABLE TO COMMON SHAREHOLDERS

The first quarter 2005 Net income available to common shareholders includes the
deduction of preferred stock dividends of $22 million related to the issuance of
the 6% Mandatory Convertible Preferred Stock in August 2004.

40

LIQUIDITY AND FINANCIAL RESOURCES

DISCUSSION OF CASH FLOW

In the first three months of 2005, operating activities generated $200 million
of cash. Investing activities included $83 million of capital expenditures and
$33 million in cash receipts related primarily to the sale of an administrative
office facility. Uses of cash for financing activities includes the payment of
dividends on common and preferred shares aggregating $103 million and the
repayment of approximately $1.2 billion of commercial paper borrowings.

During 2004 operating activities on a worldwide basis generated insufficient
cash to fund capital expenditures and dividends. Due to the geographic mix of
product sales and profits and the corporate and R&D cash requirements in the
U.S., this annual cash flow deficit is particularly pronounced when
disaggregated on a geographic basis. Foreign operations generate cash in excess
of local cash needs. The U.S. operations must fund dividend payments, the vast
majority of research and development costs and U.S. capital expenditures. The
Company borrowed funds and issued equity securities during 2004 to finance U.S.
operations, and continued to accumulate cash in its foreign-based subsidiaries.

On an annual basis in 2005, management expects that dividends and capital
expenditures on a worldwide basis will again exceed cash generated from
operating activities and that U.S. operations will continue to generate negative
cash flow. Payments regarding litigation and investigations could increase cash
needs. Cash requirements in the U.S. during the first three months of 2005
including operating cash needs, capital expenditures and dividends on common and
preferred shares approximated $350 million. During the first quarter of 2005 the
Company began the process of repatriating approximately $9.4 billion of
previously unremitted foreign earnings pursuant to the American Jobs Creation
Act of 2004 (the Act). Tax charges (at a reduced tax rate) associated with the
repatriations under the Act were recognized in 2004. In 2005 the Company will be
required to make tax payments for the tax liability associated with
repatriations of foreign earnings being made under the Act. The funding of
additional anticipated repatriations under the Act during 2005 will require the
utilization of substantially all of the Company's current and anticipated 2005
foreign cash and short-term investments. The Company has the ability to utilize
its $1.5 billion revolving bank credit facility to provide additional liquidity
or working capital to its foreign subsidiaries until such time as non-U.S. cash
and short-term investment balances are restored. The repatriations of qualified
funds under the Act are expected to fund U.S. cash needs for the intermediate
term.

Total cash, cash equivalents and short-term investments less total debt was
approximately $1.9 billion at March 31, 2005. The Company anticipates this
amount to decline during the balance of 2005, but remain positive.

41

BORROWINGS AND CREDIT FACILITIES

On November 26, 2003, the Company issued $1.25 billion aggregate principal
amount of 5.3% senior unsecured notes due 2013 and $1.15 billion aggregate
principal amount of 6.5% senior unsecured notes due 2033 (collectively the
Notes). Proceeds from this offering of $2.4 billion were used for general
corporate purposes, including repaying commercial paper outstanding in the U.S.
Upon issuance, the Notes were rated A3 by Moody's Investors Service (Moody's)
and A+ (on Credit Watch with negative implications) by Standard & Poor's (S&P).
The interest rates payable on the Notes are subject to adjustment. If the rating
assigned to the Notes by either Moody's or S&P is downgraded below A3 or A-,
respectively, the interest rate payable on that series of notes would increase.
See Note 12 "Short and Long-Term Debt and Other Commitments" to the Condensed
Consolidated Financial Statements for additional information.

On July 14, 2004, Moody's lowered its rating on the Notes to Baa1. Accordingly,
the interest payable on each note increased 25 basis points effective December
1, 2004. Therefore, on December 1, 2004, the interest rate payable on the notes
due 2013 increased from 5.3% to 5.55%, and the interest rate payable on the
notes due 2033 increased from 6.5% to 6.75%. This adjustment to the interest
rate payable on the Notes will increase the Company's interest expense by
approximately $6 million annually.

The Company has a revolving credit facility from a syndicate of major financial
institutions. During March 2005, the Company negotiated an increase in the bank
commitments under this credit facility from $1.25 billion to $1.5 billion with
no changes in the basic terms of the pre-existing credit facility. Concurrently
with the increase in commitments under this facility, the Company terminated
early a separate $250 million line of credit which would have matured in May
2006. There was no outstanding balance under this facility at the time it was
terminated.

The existing $1.5 billion credit facility matures in May 2009 and requires the
Company to maintain a total debt to capital ratio of no more than 60 percent.
This credit line is available for general corporate purposes and is considered
as support to the Company's commercial paper borrowings. Borrowings under the
credit facility may be drawn by the U.S. parent company or by its wholly-owned
foreign subsidiaries when accompanied by a parent guarantee. This facility does
not require compensating balances; however, a nominal commitment fee is paid. As
of March 31, 2005 no funds have been drawn down under this facility. The Company
may utilize this facility to fund repatriations under the American Jobs Creation
Act of 2004 or to provide additional liquidity or working capital to its foreign
subsidiaries until such time as non-U.S. cash and investment balances are
restored. However, any borrowing under the facility to fund repatriations will
occur only to the extent the facility is not otherwise necessary to support
commercial paper borrowings.

42

At March 31, 2005, short-term borrowings totaled approximately $400 million.
Approximately 75 percent of such borrowings were outstanding commercial paper.
The commercial paper ratings discussed below have not significantly affected the
Company's ability to issue or rollover its outstanding commercial paper
borrowings at this time. However, the Company believes the ability of commercial
paper issuers, such as the Company, with one or more short-term credit ratings
of P-2 from Moody's, A-2 from S&P and/or F2 from Fitch Ratings (Fitch) to issue
or rollover outstanding commercial paper can, at times, be less than that of
companies with higher short-term credit ratings. In addition, the total amount
of commercial paper capacity available to such issuers is typically less than
that of higher-rated companies. The Company maintains sizable lines of credit
with commercial banks, as well as cash and short-term investments held by U.S.
and foreign-based subsidiaries, to serve as alternative sources of liquidity and
to support its commercial paper program.

The Company's credit ratings could decline below their current levels. The
impact of such decline could reduce the availability of commercial paper
borrowing and would increase the interest rate on the Company's long-term debt.
As discussed above, the Company believes that the repatriation of funds under
the American Jobs Creation Act of 2004 will allow the Company to fund its U.S.
cash needs for the intermediate term.

FINANCIAL ARRANGEMENTS CONTAINING CREDIT RATING DOWNGRADE TRIGGERS

The Company had an interest rate swap arrangement in effect with a counterparty
bank. The arrangement utilized two long-term interest rate swap contracts, one
between a foreign-based subsidiary of the Company and a bank and the other
between a U.S. subsidiary of the Company and the same bank. The two contracts
had equal and offsetting terms and were covered by a master netting arrangement.
The contract involving the foreign-based subsidiary permitted the subsidiary to
prepay a portion of its future obligation to the bank, and the contract
involving the U.S. subsidiary permitted the bank to prepay a portion of its
future obligation to the U.S. subsidiary. Prepayments totaling $1.9 billion were
made under both contracts as of December 31, 2004.

The terms of the swap contracts, as amended, called for a phased termination of
the swaps based on an agreed repayment schedule that was to begin no later than
March 31, 2005. Termination would require the Company and the counterparty each
to repay all prepayments pursuant to the agreed repayment schedule. The Company,
at its option, was allowed to accelerate the termination of the arrangement and
associated scheduled repayments for a nominal fee.

On February 28, 2005, the Company's foreign-based subsidiary and U.S. subsidiary
each gave notice to the counterparty of their intent to terminate the
arrangement. On March 21, 2005 the Company terminated these swap agreements and
all associated repayments were made by the respective obligors. The termination
of this arrangement did not have a material impact on the Company's Statement of
Condensed Consolidated Operations.

43

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the FASB issued Statement of Financial Accounting Standard
(SFAS) 151 "Inventory Costs". This SFAS requires that abnormal spoilage be
expensed in the period incurred (as opposed to inventoried and amortized to
income over inventory usage) and that fixed production facility overhead costs
be allocated over the normal production level of a facility. This SFAS is
effective for inventory costs incurred for annual periods beginning after June
15, 2005. The Company does not anticipate any material impact from the
implementation of this accounting standard.

In December 2004 the FASB issued SFAS 123R (Revised 2004) "Share Based Payment."
Statement 123R requires companies to recognize compensation expense in an amount
equal to the fair value of all share-based payments granted to employees. The
Company is required to implement this SFAS in the first quarter of 2006 by
recognizing compensation on all share-based grants made on or after January 1,
2006, and for the unvested portion of share-based grants made prior to July 1,
2005. Restatement of previously issued statements is allowed, but not required.
The Company is currently evaluating the various implementation options available
and related financial impacts under SFAS 123R.

44

CRITICAL ACCOUNTING POLICIES

Refer to "Management's Discussion and Analysis of Operations and Financial
Condition" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 for disclosures regarding the Company's critical accounting
policies.

Rebates, Discounts and Returns

Rebate accruals for Federal and state governmental programs were $161 million at
March 31, 2005 and $155 million at December 31, 2004. Commercial discounts and
other rebate accruals were $138 million at March 31, 2005 and $123 million at
December 31, 2004. These and other rebate accruals are established in the period
the related revenue was recognized resulting in a reduction to sales and the
establishment of liabilities, which are included in total current liabilities.

The following summarizes the activity in the accounts related to accrued
rebates, sales returns and discounts:

Management makes estimates and uses assumptions in recording the above accruals.
Actual amounts paid in the current period were consistent with those previously
estimated.

45

ADDITIONAL FACTORS INFLUENCING OPERATIONS

In the U.S., many of the Company's pharmaceutical products are subject to
increasingly competitive pricing as managed care groups, institutions,
government agencies and other groups seek price discounts. In most international
markets, the Company operates in an environment of government-mandated
cost-containment programs. In the U.S. market, the Company and other
pharmaceutical manufacturers are required to provide statutorily defined rebates
to various government agencies in order to participate in Medicaid, the
veterans' health care program and other government-funded programs. Several
governments have placed restrictions on physician prescription levels and
patient reimbursements, emphasized greater use of generic drugs and enacted
across-the-board price cuts as methods to control costs.

Since the Company is unable to predict the final form and timing of any future
domestic or international governmental or other health care initiatives,
including the passage of laws permitting the importation of pharmaceuticals into
the U.S., their effect on operations and cash flows cannot be reasonably
estimated. Similarly, the effect on operations and cash flows of decisions of
government entities, managed care groups and other groups concerning formularies
and pharmaceutical reimbursement policies cannot be reasonably estimated.

The Company cannot predict what net effect the Medicare prescription drug
benefit will have on markets and sales. The new Medicare Drug Benefit (Medicare
Part D), which will take effect January 1, 2006, will offer voluntary
prescription drug coverage, subsidized by Medicare, to over 40 million Medicare
beneficiaries through competing private prescription drug plans (PDPs) and
Medicare Advantage (MA) plans. Many of the Company's leading drugs are already
covered under Medicare Part B (e.g., TEMODAR, INTEGRILIN and INTRON A). Medicare
Part B provides payment for physician services which can include prescription
drugs administered incident to a physician's services. Beginning in 2005 the
Medicare Part B drugs will be reimbursed in a manner that may limit
Schering-Plough's ability to offer larger price concessions or make large price
increases on these drugs. Other Schering-Plough drugs have a relatively small
portion of their sales to the Medicare population (e.g., CLARINEX, the hepatitis
C franchise). The Company could experience expanded utilization of VYTORIN and
ZETIA and new drugs in the Company's R&D pipeline. Of greater consequence for
the Company may be the legislation's impact on pricing, rebates and discounts.

A significant portion of net sales is made to major pharmaceutical and health
care products distributors and major retail chains in the U.S. Consequently, net
sales and quarterly growth comparisons may be affected by fluctuations in the
buying patterns of major distributors, retail chains and other trade buyers.
These fluctuations may result from seasonality, pricing, wholesaler buying
decisions or other factors.

The market for pharmaceutical products is competitive. The Company's operations
may be affected by technological advances of competitors, industry
consolidation, patents granted to competitors, new products of competitors, new
information from clinical trials of marketed products or post-marketing
surveillance and generic competition as the Company's products mature. In
addition, patent positions are increasingly being challenged by competitors, and
the outcome can be highly uncertain. An adverse result in a patent dispute can
preclude commercialization of products or negatively affect sales of existing
products. The effect on operations of competitive factors and patent disputes
cannot be predicted.

46

The Company launched OTC CLARITIN in the U.S. in December 2002. Also in December
2002, a competing OTC loratadine product was launched in the U.S. and
private-label competition was introduced.

The Company continues to market CLARINEX (desloratadine) 5 mg Tablets for the
treatment of allergic rhinitis, which combines the indication of seasonal
allergic rhinitis with the indication of perennial allergic rhinitis, as well as
the treatment of chronic idiopathic urticaria, or hives of unknown cause. The
ability of the Company to capture and maintain market share for CLARINEX and OTC
CLARITIN in the U.S. market will depend on a number of factors, including:
additional entrants in the market for allergy treatments; clinical
differentiation of CLARINEX from other allergy treatments and the perception of
the extent of such differentiation in the marketplace; the pricing differentials
among OTC CLARITIN, CLARINEX, other allergy treatments and generic OTC
loratadine; the erosion rate of OTC CLARITIN and CLARINEX sales upon the entry
of additional generic OTC loratadine products; and whether or not one or both of
the other branded second-generation antihistamines are switched from
prescription to OTC status. CLARINEX is experiencing intense competition in the
prescription U.S. allergy market. The prescription allergy market has been
shrinking since the OTC switch of CLARITIN in December 2002.

The switch of CLARITIN to OTC status and the introduction of competing OTC
loratadine have resulted in a rapid, sharp and material decline in CLARITIN
sales in the U.S. and the Company's results of operations. U.S. sales of
prescription CLARITIN products were $25 million or 0.3 percent of the Company's
consolidated global sales in 2003 and $1.4 billion or 14 percent in 2002. Sales
of CLARINEX in the U.S. and abroad have also been materially adversely affected
by the presence of generic OTC loratadine and OTC CLARITIN. In light of the
factors described above, management believes that the Company's December 2002
introduction of OTC CLARITIN, as well as the introduction of a competing OTC
loratadine product in December 2002 and additional entrants of generic OTC
loratadine products in the market, had a rapid, sharp and material adverse
effect on the Company's results of operations in 2003 and 2004.

PEG-INTRON and REBETOL combination therapy for hepatitis C has contributed
substantially to sales in 2003 and 2002 and to a lesser extent in 2004. During
the fourth quarter of 2002, a competing pegylated interferon-based combination
product, including a brand of ribavirin, received regulatory approval in most
major markets, including the U.S. The overall market share of the hepatitis C
franchise has declined sharply, reflecting this new market competition. In
addition, the overall market has contracted. Management believes that the
ability of PEG-INTRON and REBETOL combination therapy to maintain market share
will continue to be adversely affected by competition in the hepatitis C
marketplace.

Generic forms of ribavirin entered the U.S. market in April 2004. In October
2004, another generic ribavirin was approved by the FDA. The generic forms of
ribavirin compete with the Company's REBETOL (ribavirin) Capsules in the U.S.
Prior to the second half of 2004 the REBETOL patents were material to the
Company's business.

As a result of the introduction of a competitor for pegylated interferon and the
introduction of generic ribavirin, the value of an important Company product
franchise has been severely diminished and earnings and cash flow have been
materially and negatively impacted.

47

In October 2002, Merck/Schering-Plough Pharmaceuticals announced that the FDA
approved ZETIA (ezetimibe) 10 mg for use either by itself or together with
statins for the treatment of elevated cholesterol levels. In March 2003, the
Company announced that ezetimibe (EZETROL, as marketed in Europe) had
successfully completed the European Union (EU) mutual recognition procedure
(MRP). With the completion of the MRP process, the 15 EU member states as well
as Iceland and Norway can grant national marketing authorization with unified
labeling for EZETROL. EZETROL has been launched in many international markets.

The Merck/Schering-Plough Cholesterol Partnership also developed a once-daily
tablet combining ezetimibe with simvastatin (Zocor), Merck's
cholesterol-modifying medicine. This product is marketed as VYTORIN in the U.S.
and INEGY in many international markets. Ezetimibe/simvastatin has been approved
for marketing in several countries, including Germany in April of 2004 and in
Mexico in March of 2004. On July 23, 2004, Merck/Schering-Plough Pharmaceuticals
announced that the FDA had approved VYTORIN. INEGY completed the MRP in Europe
on October 1, 2004.

In September 2004, the Company announced that it entered into an agreement with
Bayer intended to enhance the companies' pharmaceutical resources. The agreement
was entered into by the Company primarily for strategic purposes.

Commencing in October 2004, in the U.S. and Puerto Rico, the Company began
marketing, selling and distributing Bayer's primary care products including
AVELOX and CIPRO under an exclusive license agreement. The Company pays Bayer
royalties in excess of 50 percent on these products based on sales, which has an
unfavorable impact on the Company's gross margin percentage.

Also commencing in October 2004, the Company assumed Bayer's responsibilities
for U.S. commercialization activities related to the erectile dysfunction
medicine LEVITRA under Bayer's co-promotion agreement with GlaxoSmithKline PLC.
The Company reports its share of LEVITRA results as alliance revenue.

Additionally, under the terms of the agreement, Bayer supports the promotion of
certain of the Company's oncology products in the U.S. and key European markets
for a defined period of time.

In Japan, upon regulatory approval, Bayer will co-market the Company's
cholesterol absorption inhibitor ZETIA. This arrangement does not include the
rights to any future cholesterol combination product. ZETIA was filed with
regulatory authorities in Japan during the fourth quarter of 2003. The Company
believes that this approval for ZETIA is not likely to be completed until 2006
due to a slow down in the regulatory review process in Japan.

This agreement with Bayer potentially restricts the Company from marketing
products in the U.S. that would compete with any of the products under the
strategic alliance. As a result, the Company expects that it may need to
sublicense rights to garenoxacin, the quinolone antibacterial agent that the
Company licensed from Toyama. The Company is exploring its options with regard
to garenoxacin and will continue to fulfill its commitments to Toyama under its
arrangement, including taking the product through regulatory approval.

48

Uncertainties inherent in government regulatory approval processes, including,
among other things, delays in approval of new products, formulations or
indications, may also affect the Company's operations. The effect of regulatory
approval processes on operations cannot be predicted.

The Company is subject to the jurisdiction of various national, state and local
regulatory agencies and is, therefore, subject to potential administrative
actions. Of particular importance is the FDA in the U.S. It has jurisdiction
over all the Company's businesses and administers requirements covering the
testing, safety, effectiveness, approval, manufacturing, labeling and marketing
of the Company's products. From time to time, agencies, including the FDA, may
require the Company to address various manufacturing, advertising, labeling or
other regulatory issues, such as those noted below relating to the Company's
current manufacturing issues. Failure to comply with governmental regulations
can result in delays in the release of products, seizure or recall of products,
suspension or revocation of the authority necessary for the production and sale
of products, discontinuance of products, fines and other civil or criminal
sanctions. Any such result could have a material adverse effect on the Company's
financial position and its results of operations. Additional information
regarding government regulation that may affect future results is provided in
Part I, Item I, Business, in the Company's 2004 Form 10-K. Additional
information about cautionary factors that may affect future results is provided
under the caption Cautionary Factors That May Affect Future Results (Cautionary
Statements Under the Private Securities Litigation Reform Act of 1995) in this
Management's Discussion and Analysis of Operations and Financial Condition.

As included in Note 14 "Consent Decree," to the Condensed Consolidated Financial
Statements, on May 17, 2002, the Company announced that it had reached an
agreement with the FDA for a consent decree to resolve issues involving the
Company's compliance with current Good Manufacturing Practices at certain
manufacturing facilities in New Jersey and Puerto Rico. The U.S. District Court
for the District of New Jersey approved and entered the consent decree on May
20, 2002.

Under terms of the consent decree, the Company agreed to pay a total of $500
million to the U.S. government in two equal installments of $250 million; the
first installment was paid in May 2002 and the second installment was paid in
May 2003. As previously reported, the Company accrued a $500 million provision
for this consent decree in the fourth quarter of 2001.

The consent decree requires the Company to complete a number of actions. In the
event certain actions agreed upon in the consent decree are not satisfactorily
completed on time, the FDA may assess payments for each deadline missed. The
consent decree required the Company to develop and submit for the FDA's
concurrence comprehensive cGMP Work Plans for the Company's manufacturing
facilities in New Jersey and Puerto Rico that are covered by the decree. The
Company received FDA concurrence with its proposed cGMP Work Plans on May 14,
2003. The cGMP Work Plans contain a number of Significant Steps whose timely and
satisfactory completion are subject to payments of $15,000 per business day for
each deadline missed. These payments may not exceed $25 million for 2002, and
$50 million for each of the years 2003, 2004 and 2005. These payments are
subject to an overall cap of $175 million.

49

In connection with its discussions with the FDA regarding the Company's cGMP
Work Plans, and pursuant to the terms of the decree, the Company and the FDA
entered into a letter agreement dated April 14, 2003. In the letter agreement,
the Company and the FDA agreed to extend by six months the time period during
which the Company may incur payments as described above with respect to certain
of the Significant Steps whose due dates are December 31, 2005. The letter
agreement does not increase the yearly or overall caps on payments described
above.

In addition, the decree requires the Company to complete programs of
revalidation of the finished drug products and bulk active pharmaceutical
ingredients manufactured at the covered manufacturing facilities. The Company is
required under the consent decree to complete its revalidation programs for bulk
active pharmaceutical ingredients by September 30, 2005, and for finished drugs
by December 31, 2005. In general, the timely and satisfactory completions of the
revalidations are subject to payments of $15,000 per business day for each
deadline missed, subject to the caps described above. However, if a product
scheduled for revalidation has not been certified as having been validated by
the last date on the validation schedule, the FDA may assess a payment of 24.6
percent of the net domestic sales of the uncertified product until the
validation is certified. Any such payment would not be subject to the caps
described above. Further, in general, if a product scheduled for revalidation
under the consent decree is not certified within six months of its scheduled
date, the Company must cease production of that product until certification is
obtained. The completion of the Significant Steps in the Work Plans and the
completion of the revalidation programs are subject to third-party expert
certification, as well as the FDA's acceptance of such certification.

The consent decree provides that if the Company believes that it may not be able
to meet a deadline, the Company has the right, upon the showing of good cause,
to request extensions of deadlines in connection with the cGMP Work Plans and
revalidation programs. However, there is no guarantee that FDA will grant any
such requests.

Although the Company believes it has made significant progress in meeting its
obligations under the consent decree, it is possible that (1) the Company may
fail to complete a Significant Step or a revalidation by the prescribed
deadline; (2) the third-party expert may not certify the completion of the
Significant Step or revalidation; or (3) the FDA may disagree with an expert's
certification of a Significant Step or revalidation. In such a case, it is
possible that the FDA may assess payments as described above.

The Company would expense any payments assessed under the decree if and when
incurred. As of March 31, 2005 the Company has not made any payments for missed
deadlines.

In addition, the failure to meet the terms of the consent decree could result in
delays in approval of new products, seizure or recall of products, suspension or
revocation of the authority necessary for the production and sale of products,
fines and other civil or criminal sanctions.

The Company is subject to pharmacovigilance reporting requirements in many
countries and other jurisdictions, including the U.S., the European Union (EU)
and the EU member states. The requirements differ from jurisdiction to
jurisdiction, but all include requirements for reporting adverse events that
occur while a patient is using a particular drug in order to alert the
manufacturer of the drug and the governmental agency to potential problems.

50

During 2003 pharmacovigilance inspections by officials of the British and French
medicines agencies conducted at the request of the European Agency for the
Evaluation of Medicinal Products (EMEA), serious deficiencies in reporting
processes were identified. The Company is taking urgent actions to rectify these
deficiencies as quickly as possible. The Company does not know what action, if
any, the EMEA or national authorities will take in response to these findings.
Possible actions include further inspections, demands for improvements in
reporting systems, criminal sanctions against the Company and/or responsible
individuals and changes in the conditions of marketing authorizations for the
Company's products.

The Company sells numerous upper respiratory products which contain
pseudoephedrine (PSE), an FDA-approved ingredient for the relief of nasal
congestion. The Company's annual North American sales of upper respiratory
products that contain PSE totaled approximately $305 million in 2004 and $80
million and $70 million for the three months ended March 31, 2005 and 2004
respectively. These products include all CLARITIN-D products as well as some
DRIXORAL, CORICIDIN and CHLOR-TRIMETON products. The Company understands that
PSE has been used in the illicit manufacture of methamphetamine, a dangerous and
addictive drug. As of April 2005, 17 states, Canada and Mexico have enacted
regulations concerning the sale of PSE, including limiting the amount of these
products that can be purchased at one time, or requiring that these products be
located behind the pharmacist's counter, with the stated goal of deterring the
illicit/illegal manufacture of methamphetamine. An additional eight states have
enacted limits on the quantity of PSE any person can possess. In addition the
U.S. Federal government has proposed legislation placing restrictions on the
sale of this product. Further, major U.S. retailers that are customers of the
Company have announced that they will voluntarily place products containing PSE
behind the pharmacist counter at all of their stores, whether or not required by
local law. To date, the regulations have not had a material impact on the
Company's operations or financial results. However the Company continues to
monitor matters in this area that could have a negative impact on operations or
financial results.

The Company sources an OTC product with annual net sales of approximately $50
million from a third party manufacturer. Recently the third party manufacturer
informed the Company that they have encountered manufacturing problems in the
facility producing this product. As a consequence, the Company is assessing
alternative sourcing plans to meet market requirements. There is a potential
that supplies of this OTC product may not be available in sufficient quantities
to fully meet demand over the next several months until an alternate
manufacturing supply can be established.

51

As described more specifically in Note 15 "Legal, Environmental and Regulatory
Matters" to the Condensed Consolidated Financial Statements, the pricing, sales
and marketing programs and arrangements, and related business practices of the
Company and other participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative, prosecutorial and
administrative entities. These entities include the Department of Justice and
its U.S. Attorney's Offices, the Office of Inspector General of the Department
of Health and Human Services, the FDA, the Federal Trade Commission (FTC) and
various state Attorneys General offices. Many of the health care laws under
which certain of these governmental entities operate, including the federal and
state anti-kickback statutes and statutory and common law false claims laws,
have been construed broadly by the courts and permit the government entities to
exercise significant discretion. In the event that any of those governmental
entities believes that wrongdoing has occurred, one or more of them could
institute civil or criminal proceedings, which, if instituted and resolved
unfavorably, could subject the Company to substantial fines, penalties and
injunctive or administrative remedies, including exclusion from government
reimbursement programs, and the Company also cannot predict whether any
investigations will affect its marketing practices or sales. Any such result
could have a material adverse impact on the Company, its financial condition,
cash flows or results of operations.

DISCLOSURE NOTICE

Cautionary Factors That May Affect Future Results (Cautionary Statements Under
the Private Securities Litigation Reform Act of 1995)

Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report and other written reports and oral
statements made from time to time by the Company may contain forward-looking
statements within the meaning of the Securities Litigation Reform Act of 1995.
Forward-looking statements relate to expectations or forecasts of future events.
They use words such as "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "project," "intend," "plan," "potential," "will," and other words
and terms of similar meaning in connection with a discussion of potential future
events, circumstances or future operating or financial performance. You can also
identify forward-looking statements by the fact that they do not relate strictly
to historical or current facts.

In particular, forward-looking statements include statements relating to future
actions, ability to access the capital markets, prospective products, the status
of product approvals, future performance or results of current and anticipated
products, sales efforts, development programs, estimates of rebates, discounts
and returns, expenses and programs to reduce expenses, the cost of and savings
from reductions in work force, the outcome of contingencies such as litigation
and investigations, growth strategy and financial results.

Any or all forward-looking statements here or in other publications may turn out
to be wrong. Actual results may vary materially, and there are no guarantees
about Schering-Plough's financial and operational performance or the performance
of Schering-Plough stock. Schering-Plough does not assume the obligation to
update any forward-looking statement.

52

Many factors could cause actual results to differ from Schering-Plough's
forward-looking statements. These factors include inaccurate assumptions and a
broad variety of other risks and uncertainties, including some that are known
and some that are not. Although it is not possible to predict or identify all
such factors, they may include the following:

o A significant portion of net sales are made to major
pharmaceutical and health care products distributors and major
retail chains in the U.S. Consequently, net sales and
quarterly growth comparisons may be affected by fluctuations
in the buying patterns of major distributors, retail chains
and other trade buyers. These fluctuations may result from
seasonality, pricing, wholesaler buying decisions or other
factors.

o Competitive factors, including technological advances attained
by competitors, patents granted to competitors, new products
of competitors coming to the market, new indications for
competitive products, and new and existing generic,
prescription and/or OTC products that compete with products of
Schering-Plough or the Merck/Schering-Plough Cholesterol
Partnership (such as competition from OTC statins, like the
one approved for use in the U.K., the impact of which in the
cholesterol reduction market is not yet known).

o Increased pricing pressure both in the U.S. and abroad from
managed care organizations, institutions and government
agencies and programs. In the U.S., among other developments,
consolidation among customers may increase pricing pressures
and may result in various customers having greater influence
over prescription decisions through formulary decisions and
other policies.

o The potential impact of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003; possible other U.S.
legislation or regulatory action affecting, among other
things, pharmaceutical pricing and reimbursement, including
Medicaid and Medicare; involuntary approval of prescription
medicines for over-the-counter use; and other health care
reform initiatives and drug importation legislation.
Legislation or regulations in markets outside the U.S.
affecting product pricing, reimbursement or access. Laws and
regulations relating to trade, antitrust, monetary and fiscal
policies, taxes, price controls and possible nationalization.

o Patent positions can be highly uncertain and patent disputes
are not unusual. An adverse result in a patent dispute can
preclude commercialization of products or negatively impact
sales of existing products or result in injunctive relief and
payment of financial remedies.

o Uncertainties in the regulatory and approval process in the
U.S. and other countries, including delays in the approval of
new products and new indications and uncertainties in the FDA
approval process; and uncertainties concerning regulatory
decisions regarding labeling and other matters.

53

o Failure to meet current Good Manufacturing Practices
established by the FDA and other governmental authorities can
result in delays in the approval of products, release of
products, seizure or recall of products, suspension or
revocation of the authority necessary for the production and
sale of products, fines and other civil or criminal sanctions.
The resolution of manufacturing issues with the FDA discussed
in Schering-Plough's 10-Ks, 10-Qs and 8-Ks are subject to
substantial risks and uncertainties. These risks and
uncertainties, including the timing, scope and duration of a
resolution of the manufacturing issues, will depend on the
ability of Schering-Plough to assure the FDA of the quality
and reliability of its manufacturing systems and controls, and
the extent of remedial and prospective obligations undertaken
by Schering-Plough.

o Difficulties in product development. Pharmaceutical product
development is highly uncertain. Products that appear
promising in development may fail to reach market for numerous
reasons. They may be found to be ineffective or to have
harmful side effects in clinical or pre-clinical testing, they
may fail to receive the necessary regulatory approvals, they
may turn out not to be economically feasible because of
manufacturing costs or other factors or they may be precluded
from commercialization by the proprietary rights of others.

o Post-marketing issues. Once a product is approved and
marketed, clinical trials of marketed products or
post-marketing surveillance may raise efficacy or safety
concerns. Whether or not scientifically justified, this new
information could lead to recalls, withdrawals or adverse
labeling of marketed products, which may negatively impact
sales. Concerns of prescribers or patients relating to the
safety or efficacy of Schering-Plough products, or other
companies' products or pharmaceutical products generally, may
also negatively impact sales.

o Major products such as CLARITIN, CLARINEX, INTRON A,
PEG-INTRON, REBETOL Capsules, REMICADE, TEMODAR and NASONEX
accounted for a material portion of Schering-Plough's 2004
revenues. If any major product were to become subject to a
problem such as loss of patent protection, OTC availability of
the Company's product or a competitive product (as has been
disclosed for CLARITIN and its current and potential OTC
competition), previously unknown side effects; if a new, more
effective treatment should be introduced; generic availability
of competitive products; or if the product is discontinued for
any reason, the impact on revenues could be significant. Also,
such information about important new products, such as ZETIA
and VYTORIN, or important products in our pipeline, may impact
future revenues. Further, sales of VYTORIN may negatively
impact sales of ZETIA.

o Unfavorable outcomes of government (local and federal,
domestic and international) investigations, litigation about
product pricing, product liability claims, other litigation
and environmental concerns could preclude commercialization of
products, negatively affect the profitability of existing
products, materially and adversely impact Schering-Plough's
financial condition and results of operations, or contain
conditions that impact business operations, such as exclusion
from government reimbursement programs.

o Economic factors over which Schering-Plough has no control,
including changes in inflation, interest rates and foreign
currency exchange rates.

54

o Instability, disruption or destruction in a significant
geographic region -- due to the location of manufacturing
facilities, distribution facilities or customers -- regardless
of cause, including war, terrorism, riot, civil insurrection
or social unrest; and natural or man-made disasters, including
famine, flood, fire, earthquake, storm or disease.

o Changes in tax laws including changes related to taxation of
foreign earnings.

o Changes in accounting and auditing standards promulgated by
the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, the SEC, or the Public
Company Accounting Oversight Board that would require a
significant change to Schering-Plough's accounting practices.

For further details and a discussion of these and other risks and
uncertainties, see Schering-Plough's past and future SEC reports and
filings.

55

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk primarily from changes in foreign currency
exchange rates and, to a lesser extent, from interest rates and equity prices.
Refer to "Management's Discussion and Analysis of Operations and Financial
Condition" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 for additional information.

Item 4. Controls and Procedures

Management, including the chief executive officer and the chief financial
officer, has evaluated the Company's disclosure controls and procedures as of
the end of the quarterly period covered by this Form 10-Q and has concluded that
the Company's disclosure controls and procedures are effective. They also
concluded that there were no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There were no material legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Company, or any of its subsidiaries,
became a party during the quarter ended March 31, 2005, or subsequent thereto,
but before the filing of this report. All material pending legal proceedings
involving the Company are described in Item 3 of the 2004 10-K.

56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

This table provides information with respect to purchases by the
Company of its common shares during the first quarter of 2005.

ISSUER PURCHASES OF EQUITY SECURITIES

(1) All of the shares included in the table above were repurchased
pursuant to the Company's stock incentive program and represent shares
delivered to the Company by option holders for payment of the exercise
price and tax withholding obligations in connection with stock options
and stock awards.

57

Item 6. Exhibits

Exhibit Number Description

10(e)(xi) The Company's Severance Benefit Plan (as amended and
restated effective December 17, 2004 with amendments
through April 18, 2005)

12 Computation of Ratio of Earnings to Fixed Charges

15 Awareness letter

31.1 Sarbanes-Oxley Act of 2002, Section 302 Certification
for Chairman of the Board, Chief Executive Officer
and President

31.2 Sarbanes-Oxley Act of 2002, Section 302 Certification
for Executive Vice President and Chief Financial
Officer

32.1 Sarbanes-Oxley Act of 2002, Section 906 Certification
for Chairman of the Board, Chief Executive Officer
and President

32.2 Sarbanes-Oxley Act of 2002, Section 906 Certification
for Executive Vice President and Chief Financial
Officer

58

SIGNATURE(S)

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Schering-Plough Corporation
---------------------------
(Registrant)

Date April 25, 2005 /s/ Douglas J. Gingerella
------------------------------
Douglas J. Gingerella
Vice President and Controller
(Duly Authorized Officer and
Chief Accounting Officer)

59