SecProbe.io

CORRESP
1
filename1.htm

RESPONSE LETTER

[Schering-Plough Letterhead]

June 15, 2007

Mr. James Rosenberg

Senior Assistant Chief Accountant

Division of Corporation Finance

US Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

         Re:

    Schering-Plough Corporation

Form 10-Q for the Quarterly Period Ended March 31, 2007

Dear Mr. Rosenberg:

     Set forth below is Schering-Plough’s response to the Staff’s comment on Schering-Plough’s Form
10-Q for the Quarterly Period Ended March 31, 2007 by letter dated June 5, 2007.

SEC Comment:

Form 10-Q for the Quarterly Period Ended March 31, 2007

Statements of Condensed Consolidated Cash Flows, page 2

    1.

    Please provide us your analysis related to the decision to report the “Purchase of
derivative instruments” related to the purchase of Organon BioSciences as an operating
cash flow. Include any references to the specific paragraphs in the authoritative
literature upon which you relied that supports this classification.

1

Schering-Plough Response:

     In March 2007, Schering-Plough submitted a final and binding offer of approximately 11.0
billion Euros to Akzo Nobel to acquire Organon BioSciences N.V. The parties have committed to
execute a fully negotiated share purchase agreement upon completion of customary consultation
procedures in the Netherlands, including with social partners. The transaction is subject to
certain closing conditions, including regulatory approvals, and is expected to close by the end of
2007. As part of its overall risk management strategy and in consideration of various financing
scenarios, Schering-Plough purchased a Euro denominated currency option (derivative) for US $130
million to mitigate its foreign currency exposure in the event there was a significant
strengthening of the Euro as compared to the US Dollar. It should be noted that the derivative was
not designated as a hedge for accounting purposes and all changes in fair value of the derivative
are recognized each period in the Statement of Operations.

     In analyzing the cash premium paid related to this derivative for proper classification in
the Statement of Condensed Consolidated Cash Flows, management considered paragraphs 15 through 20
of Statement of Financial Accounting Standard No. 95, Statement of Cash Flows, (SFAS 95), which
provides guidance on activities that constitute an investing or financing item. Cash payments for
derivatives are not specifically discussed in the guidance on investing activities in paragraphs 15
through 17, but are discussed in subpart d. of paragraph 20 on financing activities, which states:

“Cash outflows for financing activities are:

Distributions to counterparties of derivative instruments that include
financing elements (other than a financing element inherently included in an
at-the-market derivative instrument with no prepayments) at inception.” [footnote
8a omitted, footnote 8b included herein in parenthesis]

     The company determined that no financing element existed in the derivative since it was a
purchased option with a strike price that was out-of-the money at inception and there were no
prepayments. Therefore, based upon paragraphs 15 through 20 of SFAS 95 management did not believe
it was appropriate to classify the derivative as either an investing or financing activity. In
making this determination management recognized that there is no authoritative literature which
specifically addresses the classification in the cash flow statement of such a premium on a
purchased option.

2

     In addition, management considered footnote 4 to paragraph 14 of SFAS 95, which provides an
exception to classifying an item pursuant to its nature and states, in part:

“Generally, each cash receipt or payment is to be classified
according to its nature without regard to whether it stems from an
item intended as a hedge of another item. For example, the
proceeds of a borrowing are a financing cash inflow even though
the debt is intended as a hedge of an investment, and the purchase
or sale of a futures contract is an investing activity even though
the contract is intended as a hedge of a firm commitment to
purchase inventory. However, cash flows from a derivative
instrument that is accounted for as a fair value hedge or cash
flow hedge may be classified in the same category as the cash
flows from the items being hedged provided that the derivative
instrument does not include an other-than-insignificant financing
element at inception, other than a financing element inherently
included in an at-the-market derivative instrument with no
prepayments (that is, the forward points in an at-the-money
forward contract) and that the accounting policy is disclosed.”

     As previously stated, this derivative was not designated as a hedge for accounting purposes,
therefore these provisions of footnote 4 are not applicable to this derivative contract.
Additionally, as discussed above, no financing element exists in the derivative contract.

     When considering the nature of the cash payment for the derivative, management analyzed the
factors behind the determination of the notional amount and the currency risk that was mitigated by
the derivative. The notional amount of the derivative was approximately 7.7 billion Euros and was
determined based upon preliminary financing scenarios for the acquisition. At the inception and
throughout the duration of the derivative contract, management’s view of this derivative is that,
depending upon market conditions, management may enter into contracts that either fully or
partially offset the notional amount of the derivative. Because of the short duration of the
derivative contract and the possibility of offsetting the notional amount during the contract
period, management considers the derivative analogous to a “trading” security in Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, (SFAS 115).

3

     Management
considered the possibility of classifying the derivative cash payment as a
financing activity since the notional amount of the derivative was determined based upon
preliminary financing scenarios. Management concluded that the nature
of the cash payment was not a financing activity because (i) the derivative did not contain a financing
element other than the time value of money inherently contained
within the option; (ii) the derivative
was not designated as a hedge; and (iii) there was the possibility the derivative could be terminated
early or economically offset with other derivatives within a short
period of time.

     Management then considered whether the derivative cash payment was an investing activity,
however the fact that the notional amount was determined based upon the preliminary amount of
financing for the transaction (e.g., at the outset the derivative economically mitigated the
principal amount of a forecasted financing amount and not the forecasted business combination) and
the fact that the derivative was purchased primarily for risk mitigation purposes and not as an
investment, led management to conclude that the nature of the cash payment was not an investing
activity.

     Therefore, after considering the nature of the cash payment as well as the absence of any
guidance in SFAS 95 that specifically states that the cash payment should be classified as a
financing or investing activity, management considered paragraph 21 of SFAS 95, which states:

“Operating activities include all transactions and other events
that are not defined as investing or financing activities in
paragraphs 15-20.”

     Additionally, as stated above, management considers the derivative to be analogous to a
trading security and therefore this circumstance warrants an analogy to paragraph 8 of Statement of
Financial Accounting Standards No. 102, Exemption of Certain Enterprises and Classification of Cash
Flows from Certain Securities Acquired for Resale, (SFAS 102), which states, in part:

“Cash receipts and cash payments resulting from purchases and
sales of securities classified as trading securities...shall be
classified as operating cash flows.”

     Based upon this analysis and diversity in practice, management concluded that the cash payment related to this derivative should be classified
as a cash flow from operations. This presentation established the company’s accounting policy for
this type of instrument and related risk management strategy.

4

* * * * *

     We acknowledge that: (1) Schering-Plough Corporation is responsible for the adequacy and
accuracy of the disclosure in the filing; (2) staff comments or changes to disclosure in
response to staff comments do not foreclose the Commission from taking any action with respect
to the filing; and (3) Schering-Plough Corporation may not assert staff comments as a defense
in any proceeding initiated by the Commission or any person under the federal securities laws
of the United States.

     I can be reached at (908) 298-7274, and if I am not available, please contact Susan Wolf,
Corporate Secretary and Associate General Counsel, at (908) 298-7354. Thank you.

    Very truly yours,

    /s/ Steven H. Koehler

    Steven H. Koehler

    Vice President and Controller

    cc:

    Jim Atkinson, SEC Accounting Branch Chief

Kei Ino, SEC Staff Accountant

5