Reasons to Believe in Schering-Plough
02/11/08 - 02:05 PM EST
Robert Steyer
For more than a year, analysts have been tempering their praise of Schering-Plough (SGP Quote - Cramer on SGP - Stock Picks) with a warning that it must reduce its reliance on its cholesterol franchise of Zetia and Vytorin.
Events of the past few weeks, however, weren't what Wall Street had in mind. Schering-Plough's stock has skidded following the long-delayed publication of a Vytorin clinical trial, which produced disappointing results and legislators' calls for investigating how the results were revealed. Between Jan. 11 and Feb. 6, the stock was off by 26%. Many analysts chipped away at their 2008 earnings predictions, but they haven't changed their mostly favorable view of Schering-Plough. Although the picture of the new company may not come into focus for several years, the key test for Schering-Plough depends more on drugs in development than on products in the market. Despite the recent controversy, analysts expect Zetia and Vytorin, sold via a joint venture with Merck (MRK Quote - Cramer on MRK - Stock Picks), to maintain a prominent role for the near future. Vytorin combines Schering-Plough's Zetia with Merck's Zocor. The Merck drug lost U.S. patent protection in mid-2006. Schering-Plough "still enjoys the most robust earnings growth outlook in the sector," says Roopesh Patel, of UBS Securities, even after he scaled back his 2008 earnings-per-share estimate to $1.47 from $1.62 in a recent research report. The company "has a comparatively low-risk growth outlook," in part due to "limited patent exposure" until 2014. Although it's a bit early to predict how well experimental drugs will do, the company has a few promising compounds, adds Patel, who has a buy rating. He doesn't own shares. His firm has had a non-investment banking relationship. "For investors with a multiyear time horizon, we believe Schering-Plough represents a compelling risk-reward [ratio] as the company's pipeline matures," says George Grofik, of Citigroup Global Markets, in a recent report to clients. "[The] pipeline is interesting, but visibility [is] still two to three years away." Noting that Zetia and Vytorin account for more than 60% of Schering-Plough's earnings per share, Grofik says the recent drop in its stock price means "investors are paying virtually nothing" for the company's R&D prospects, "which is a comfortable position for investors." He doesn't own shares. His firm has had a recent investment banking relationship. Grofik is neutral on Schering-Plough, which he considers a high-risk investment. According to Thomson First Call, 14 analysts have buy ratings while six are neutral. The buy-hold ratio was 10-to-7 three months ago. Analysts with hold ratings -- and even those with buy ratings -- are not sure how how deep or how long the impact of the recent Vytorin news will affect Schering-Plough.
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