Reasons to Believe in Schering-Plough

Sugammadex reverses the effect of certain muscle relaxants that are used as part of general anesthesia during surgery. This drug "could develop into a blockbuster compound," says Damien Conover, of the independent research firm Morningstar, in a recent research report.

Even under the best circumstances, asenapine and sugammadex won't match the revenue from Zetia and Vytorin. Schering-Plough's share of the 50-50 cholesterol joint venture amounted to $1.84 billion in revenue for the first nine months of 2007, or 17% of adjusted net sales. A recent report by Credit Suisse predicts combined sales of asenapine and sugammadex could reach $773 million by 2011.

Although the Organon deal contributed three other drugs in late-stage clinical testing -- a fertility hormone, an oral contraceptive and an insomnia treatment -- analysts say Schering-Plough has other experimental drugs with greater potential.

Grofik of Citigroup predicts Schering-Plough will seek FDA approval later this year for golimumbab for rheumatoid arthritis. The drug is being developed with Johnson & Johnson (JNJ Quote - Cramer on JNJ - Stock Picks) as an extension of their Remicade franchise. Schering-Plough sells Remicade outside the U.S., excluding Japan and several Asian countries. Remicade is its second-biggest drug with revenue of $1.2 billion for the nine months ended Sept. 30.

In late 2008 or early 2009, Grofik expects Schering-Plough to seek approval of vicriviroc, for patients with a certain type of HIV who are taking other treatments. Several days ago, Schering-Plough said a midstage clinical trial of its drug plus a standard HIV treatment demonstrated "potent and sustained viral suppression" during the 48-week test period. Patients are being enrolled in two late-state clinical trials.

Two potentially big prizes are still several years away -- boceprevir for hepatitis C and the anticoagulant SCH530348. The latter, a once-a-day pill for patients with certain types of heart disease, is in late-stage clinical testing. Grofik expects an application to the FDA in 2010. The hepatitis drug is in midstage clinical testing, and results may be released later this year.

Short-Term Concerns

While analysts ponder the future, investors are worried about the present, caused by what many analysts say was an overreaction to the Vytorin study results released in mid-January.

"We believe the media has blown the results way out of proportion," says Damien Conover of Morningstar in a Jan. 29 research report. He predicts the publicity lead to a 10% cut in Vytorin's U.S. sales this year, adding that "moderate growth" will return in 2010.

The Vytorin test, sponsored by the joint venture, assessed whether Vytorin was better than Zocor in reducing the thickening of certain arteries among patients with a rare disease that produces high cholesterol. The test found no statistically significant difference in the arteries, but it said Vytorin did a statistically significant better job of reducing so-called bad cholesterol. The FDA says it will review the study.

"The media has focused on Vytorin's lack of differentiation in reducing arterial plaque, instead of highlighting its strength in lowering cholesterol," says Conover. "We believe doctors are unlikely to extrapolate these findings to the more general high-cholesterol patient population."

However, there was an immediate hit to prescriptions for both Vytorin and Zetia. An early poll of 109 cardiologists and primary care physicians by UBS Securities implied a 21% reduction in prescribing. "Most doctors understood the limited scope [of the study], but many said they would use Vytorin/Zetia as a second line therapy until [they received] more clarity," UBS says.

UBS analyst Patel adds that the impact on prescriptions "may be short-lived ... once the media hype subsides." Because no safety issues were raised and because Vytorin's ability to cut bad cholesterol wasn't challenged, he forecast limited damage.

Standard & Poor's injected a note of caution after the Vytorin test results were announced. Although the firm isn't changing its A-minus credit rating or its stable outlook for Schering-Plough, it said the study "reduces the Vytorin/Zetia advantage" over brand-name and generic cholesterol drugs. S&P fears this could lead to a "significant slowdown" in sales growth for Zetia and Vytorin.

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