High Hopes for Merck, Schering-Plough

Slowly, step by step, Vytorin is expanding its market share and raising the hopes of investors in Merck(MRK Quote) and Schering-Plough(SGP Quote), which have created this cholesterol pill from two separate drugs.

Vytorin's progress has come primarily at the expense of AstraZeneca's (AZN Quote) Crestor, which was approved for the U.S. market in August 2003.

"Vytorin continues to grow while Crestor is pulling back," says Albert L. Rauch of A.G. Edwards. "But Vytorin isn't impacting Zetia or Zocor." Schering-Plough's Zetia and Merck's Zocor are sold separately as cholesterol treatments; they also are the two ingredients in Vytorin.

Analysts have wondered how Vytorin would affect the sales of these two drugs individually, especially Zocor, which is the second-bestselling cholesterol drug and whose U.S. patent expires in mid-2006. For now, their fears appear unwarranted.

A Very Important Product

Vytorin's growth is critical to Schering-Plough. "It is Schering-Plough," says Rauch, who has a buy rating. Vytorin also helps Merck, which has been stung by September's recall of the arthritis drug Vioxx and by the recent and impending patent protection losses of several big drugs. Rauch has a hold rating on Merck, and he doesn't own shares in either company. His firm has had a noninvestment banking relationship with Schering-Plough.

Vytorin and Zetia are sold through a joint venture, whose revenue could increase to $5 billion in 2009 from $1.2 billion last year, according to a recent report by S.G. Cowen & Co.

Schering-Plough's earnings through 2009 "depend most critically upon equity income from the cholesterol joint venture," says Steve Scala, author of the S.G. Cowen analysis. Scala says Schering-Plough's profit from the joint venture could exceed $2 billion in 2009 vs. only $33 million in 2003. Scala doesn't own shares, and his firm does not issue stock ratings; but S.G. Cowen "does and seeks to do business" with companies mentioned in research reports.

Making a Name in a Crowded Field New Prescription Market Share of Cholesterol Drugs
Drug	4th Quarter 2004	1st Quarter 2005 (projected)
Lipitor	47.3%	47.2%
Zocor	17.8	17.5
Pravachol	8.3	7.8
Zetia	7.5	7.6
Crestor	6.7	5.6
Vytorin	3.5	4.9
Sources: IMS Health, Morgan Stanley