Schering-Plough 2003 Annual Report To earn trust, every day. Schering-Plough 2003 Annual Report Schering-Plough is a global pharmaceutical company with leading prescription, consumer and animal health products. The Company began a fundamental transformation under new leadership in 2003, changing from a decentralized holding company to a centralized global operation focused on meeting the needs of our customers. Today, we are building the foundation for long-term, sustainable growth, while remaining committed to business integrity, quality and compliance in everything we do. Our goal is to provide a steady flow of innovative, science-based medicines and services while earning the trust of the physicians, patients and customers we serve. Contents 1 Letter to Stakeholders 43 Consolidated Balance Sheets 4 Financial Highlights 44 Statements of Consolidated Shareholders’ Equity 5 Champions for the Doctor and Patient 45 Notes to Consolidated Financial Statements 16 An Interview with Fred Hassan 67 Report by Management 18 Business and Science Review 68 Independent Auditors’ Report 24 Key Products 69 Six-Year Selected Financial & Statistical Data 25 Management’s Discussion and Analysis 70 Quarterly Data of Operations and Financial Condition 74 Directors and Senior Management 42 Statements of Consolidated Operations 75 Corporate Information 42 Statements of Consolidated Cash Flows < Margaret van Heek, Ph.D. Scientific curiosity and basic research light the path to discovering new drugs. Dr. Margaret van Heek and her team of scientists were instrumental in determining how ZETIA, the Company’s novel cholesterol absorption inhibitor, works in vivo to lower cholesterol. At her lab in Kenilworth, N.J., she is currently researching new and better ways to help patients lower their cholesterol as well as treat diabetes and other metabolic conditions. The trademarks indicated by CAPITAL LETTERS in this Annual Report are the property of, licensed to, promoted or distributed by Schering-Plough Corporation, its subsidiaries or related companies. As used in this Annual Report, the terms “Schering-Plough” and the “Company” refer collectively to Schering-Plough Corporation, the publicly held parent company, and its domestic and international subsidiaries, which are engaged in the discovery, development, manufacturing and marketing of pharmaceutical products worldwide. Copyright © 2004, Schering-Plough Corporation. All Rights Reserved. 1 / Schering-Plough 2003 Annual Report To Our Stakeholders Our core strategy is People, Products and Processes – and through this we are building the New Schering-Plough. Our Company is now in the midst of a vast change From my previous successful experience with change- process. We are working to transform Schering-Plough management and turnaround actions, I also knew what into a new Company that will become a high-performance can be achieved with clear direction and strong leadership. competitor. We face enormous challenges. However, I am And thus we began the journey to create a new Company. confident that we will succeed. Within three days of my appointment, I held a global Already we are deep into a five-stage Action Agenda that town hall meeting with employees to tell our people of is our map and blueprint for transformational change over my confidence in our future, and to engage them in our the next six to eight years. 2003 was a tough year, and five-stage Action Agenda. First, we would Stabilize the 2004 will be even more challenging. But we intend to volatile situation of our Company. Then we would Repair bridge past these years and build the foundation for long- the damage. After that would come our Turnaround. term financial strength. From our Turnaround we would move to build long-term strength. And then, from a position of strength, we would To understand where we are going, and what we need take a decisive Breakout action to propel the new to do to get there, it is important to know where we Company into a stronger position in our industry. We began. When I joined this Company in April 2003, the summarized this Action Agenda in a single phrase: New organization was suffering from an extraordinary Thinking, New Capabilities, New Urgency. confluence of serious business, regulatory and legal challenges. Today, we are right on track with the Stabilization and Repair phases of this effort, which we expect to continue The high-visibility issues were enormous. They included through 2004. Some of our stakeholders have asked why the U.S. loss of prescription CLARITIN, formerly the we must devote two years to Stabilization and Repair. The Company’s largest profit-driving product; the new market answer is that this is, in fact, a very short period in which volatility and competitive pressure on the Company’s to rebuild and revitalize the organization for long-term other largest product line – the hepatitis C franchise; a high performance. U.S. Food and Drug Administration (FDA) consent decree requiring sweeping, costly compliance actions of an We have moved with exceptional speed to re-engineer unprecedented scale; and major legal actions by the Company and take major actions. We installed a government prosecutors relating to sales and marketing global cost-reduction process called Value Enhancement activities of the past. Initiative (VEI). We reluctantly took the necessary step of reducing the quarterly dividend. We created strong global In conducting my own 360-degree review, we found functions in Finance and Human Resources. We other deep, systemic problems, including downward globalized the supply chain. We built a unified global profit and earnings slopes for many of our other major pharmaceutical business with a new leadership team, profit-making products in addition to CLARITIN. Altogether, replacing a constellation of fragmented units. it was the most challenging situation I had encountered in my more than 30 years in the global pharmaceutical Already we are seeing signs of stabilization in the critical industry. However, I also saw underlying strengths on U.S. business. We are intently focused on driving a which we could build. These strengths included the world-class launch of VYTORIN, our innovative new dedicated force of some 30,500 Schering-Plough people cholesterol product, with our partner, Merck. VYTORIN is around the world, a stable of fundamentally strong currently under regulatory review. With the active products, the exciting potential of a new treatment for ingredients of our innovative cholesterol medication ZETIA cholesterol and an expanding pipeline of innovative and Merck’s statin Zocor, this product attacks cholesterol compounds in early stages of development. in two ways through a unique “dual-inhibition” 2 / Schering-Plough 2003 Annual Report Fred Hassan, Chairman and Chief Executive Officer 3 / Schering-Plough 2003 Annual Report mechanism. It will compete strongly with other in productivity as we all work to create treatments for the treatments currently on the market. Together with ZETIA, most challenging diseases, such as cancer and VYTORIN has the potential to take an important share of the Alzheimer’s disease. global $20 billion-plus cholesterol market. At the New Schering-Plough, we are installing an We are very pleased that we are providing a new sense of unusual, collaborative process between our science and direction to thousands of strong people from the existing commercial units that will help us bring important new organization, while at the same time attracting many of medicines to the people who need them – faster and the best people from our larger competitors. We are better than anyone else. We are hard at work on new installing a strong team at the top. Our philosophy is that treatments for heart disease, for HIV, for cancer and for people are the most important asset in a transformation. many other serious afflictions. We are excited by the We are building great strength in this critical dimension. progress we are seeing and the promise of the good things we can do for doctors and their patients in the future. It is thanks to our people that we are successfully tackling an unprecedented challenge. We are fulfilling our Looking ahead, there are a lot of uncertainties in our extremely demanding FDA consent decree obligations in business environment that can have an unpredictable our manufacturing supply chain, while at the same time impact on our Company. We recognize that over the next producing the medicines our customers and patients few years we will be heavily reliant on our cholesterol need. No company in our industry has ever before franchise for driving growth. Consequently, we must work attempted to execute these two actions in tandem on this very hard to increase the breadth and strength of our scale. We are making good progress – even as we product array. However, I believe that we are doing the recognize that there may be temporary setbacks in such a right things with what is under our control. We are also complex undertaking. We are also determined to resolve focusing on the right areas to build where we need our inherited legal issues, although this is one of the new strengths. toughest tasks in our Action Agenda. As we embark on the next stages of our journey to the On top of all of these immediate actions, we are also New Schering-Plough, we thank all of our stakeholders devoting enormous energy to the creation of a new for their faith and support. We thank our Board colleagues business culture for the new Company. In my experience, for their oversight of our Company. We are grateful for it is the culture that drives the “hard stuff” of high the contributions of David Komansky and Don Miller, who business performance. This is why our culture will both be retiring from the Board, and we welcome transformation has so much of my personal attention Dr. Phil Leder of Harvard Medical School as a new Board and that of our top management team.