Fitch Affirms & Removes Schering-Plough's 'BBB+' IDR From Watch Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed and removed Schering-Plough Corp.'s (Schering-Plough) ratings from Rating Watch Negative, as follows:

--Long-term Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured debt 'BBB+';

--Bank loan rating 'BBB+';

--Convertible preferred stock 'BBB-';

--Short-term IDR 'F2';

--Commercial paper rating 'F2'.

Fitch originally placed Schering-Plough on Rating Watch Negative on April 2. The ratings apply to approximately $9.5 billion of outstanding debt and $2.5 billion of mandatorily convertible preferred stock. The Rating Outlook is Stable.

The rating action reflects more certainty pertaining to the level of leverage, total debt-to-EBITDA, over the intermediate-term in light of incremental debt needed for the acquisition of Organon Biosciences N.V. (OBS) coupled with current demand pressures on key pharmaceuticals, Zetia and Vytorin, sold through Schering-Plough's joint venture (JV) with Merck & Co. The debt load necessary to complete the acquisition of OBS in November 2007 drove leverage, total debt to EBITDA, to 3.2 times (x) at the end of 2007. Leverage has eased considerably to 2.3x for the latest 12-month period ending June 30, 2008, without yet fully annualizing the OBS assets. Fitch believes that Schering-Plough is on target to reach Fitch's original estimated leverage of below 2.0x by the end of 2009, as a combination of meaningful debt reduction and solid operational performance is expected to mitigate a decrease in equity income due to lower revenues from the cholesterol-lowering drugs sold through the Merck/Schering-Plough JV.

Fitch adds equity income derived from the Merck/Schering-Plough JV to operating income to reflect the current importance to the overall credit profile of Schering-Plough. The OBS assets have reduced Schering-Plough's heavy reliance on the success of the JV for improvement to its credit profile. The reliance will be further eased with the potential commercialization of Schering-Plough's research and development portfolio and continued solid growth of the consumer health and animal health businesses. However, Fitch expects EBITDA margins to compress in the intermediate-term from a projected drop of equity income, offset somewhat by OBS synergies and cost savings from Schering-Plough's new productivity initiative.

Equity income will be compressed from sustained sales declines of Vytorin and Zetia as the products have faced intense media and political scrutiny since January corresponding with the release of results of the ENHANCE study which did not meet its primary endpoint. U.S. total prescriptions of the drugs have fluctuated this year but have collectively dropped by more than 25% overall in January to June, as the situation was further complicated by a recommendation in March from an article in the New England Journal of Medicine and a panel at the American College of Cardiologists (ACC) meeting which called for switching patients away from Vytorin and Zetia to other statins, including lower-cost generics. The negative trend, isolated to the U.S., has been somewhat offset by strong growth of international sales which presently represent one-third of total JV revenues. Fitch will continue to monitor sales trends of the cholesterol-lowering products, which may be further affected by new information released in July from another clinical trial, SEAS, which also did not meet its primary endpoint.

Schering-Plough maintains solid liquidity provided by a $2 billion revolving credit facility expiring August 2012, greater than $500 million available lines of credit, and sustained free cash flow generation. Free cash flow was $2.11 billion for the LTM period ending June 30, 2008. Additionally, the company had cash and equivalents and short term investments of $2.73 billion at the end of the second quarter.

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