Schering-Plough, Merck Sink

Updated from 12:24 p.m. EDT

OKLAHOMA CITY -- While scientists continue to debate the value of Vytorin and Zetia, two blockbuster drugs marketed by Schering-Plough SGP and MerckMRK, investors have already reached a devastating conclusion.

Based on Monday's stock action, they view both cholesterol-lowering drugs as worthless at best. They issued their negative verdict after reviewing clinical trial results, presented over the weekend to the American College of Cardiology, which indicate that the drugs work no better than other, far cheaper, cholesterol treatments.

Schering-Plough, which relies on the drugs for roughly half of its profits, tumbled 26% to $14.38 on the news. Merck, with less exposure to the franchise, fell 15% to $37.75.

With the value of their joint-venture franchise stripped from their stocks entirely, both Schering-Plough and Merck are now sitting at 52-week lows. But some experts, including Morgan Stanley analyst Jami Rubin, feel that the stocks have fallen too far.

"While we can't predict where the stocks open, SGP at $18 and MRK at $44 reflect the complete wipe-out of Vytorin/Zetia's (value) -- something we will NOT see play out in physician prescribing, in our estimates," Rubin insisted in a research report. "We will watch ensuing script trends post ACC, but the disclosure of no new data coupled with the JV's ability to mount an aggressive defense should limit the damage" down the road.

For now, however, Schering-Plough and Merck face serious challenges as they rush to save their franchise. They had hoped that the recent study, popularly known as ENHANCE, would show that Vytorin, a combination of Zetia and Zocor, works better than Zocor alone. While Vytorin dramatically lowered so-called "bad" LDL cholesterol, it failed to reduce the plaque that leads to actual heart attacks.

Early results of ENHANCE, issued in January, hinted at the same negative outcome. Those results hurt sales of Vytorin and Zetia, but were preliminary in nature, thus minimizing the impact somewhat.

Of course, Schering-Plough and Merck have made plenty of money in the meantime. This weekend, The New England Journal of Medicine offered a telling picture of their success. The U.S., with its liberal marketing rules, has proven to be especially lucrative for the companies. By 2006, the NEJM reported, some 15% of U.S. patients taking cholesterol-lowering drugs were using those with the active ingredient found in Zetia. But in Canada, where direct-to-consumer advertising of drugs is banned, that number reached just 3.4%.

"The U.S. pattern increased overall costs," the journal wrote. "But the effect on clinical outcomes is uncertain." Together, the companies sold more than $5 billion worth of Vytorin last year in the U.S. alone.

Following ENHANCE, Schering-Plough and Merck could face an even tougher sell to physicians skeptical about the power of their cholesterol-lowering drugs. Already, the NEJM has weighed in with some cautious advice. Importantly, it has urged physicians to stick with traditional cholesterol-lowering "statins" -- such as Zocor and Pfizer's PFE Lipitor -- and use the newer drugs only as last resorts until further evidence supports them.

To their credit, Schering-Plough and Merck are working on that proof. They are currently engaged in an extensive study, known as IMPROVE-IT, that is expected to provide a definitive verdict on their new drugs. That trial, though, recently expanded to include 18,000 patients, will not be completed for years.

Meanwhile, Merrill Lynch analyst David Risinger has grown somewhat concerned about that study, as well. Risinger has dwelled on the trial's increased size in particular.

"Even though it may be attributed to a low rate of events due to better patient care, it also raises concern that the magnitude of the benefit (if any) for Vytorin is small," Risinger wrote on Monday. "Additionally, new ENHANCE data presented showed more patients on Vytorin developed new carotid artery plaques vs. Zocor.

"Although it was not statistically significant, we believe it adds to the picture of a worrisome trend for Vytorin," he added.

Risinger remains on the sidelines with a neutral rating on Schering-Plough. He still recommends Merck, however, because the company may soon win approval of a new cholesterol-lowering drug that could offset lost sales of its current blockbusters.

Merck's new drug, Cordaptive, is designed to reduce the flushing sensations caused by niacin. While physicians believe that niacin can help reduce heart attacks, patients have largely avoided it because of its unpleasant side effects.

Regardless, some experts now favor niacin over Zetia and Vytorin. Harlan Krumholz, an outspoken member of the ENHANCE panel, appears to be among that group.

"Interestingly, Krumholz never mentioned a setting where Zetia should be considered as a viable treatment option," observed Lehman Brothers analyst Anthony Butler, who has an overweight rating on Merck's stock. Yet "Krumholz's comments were the final words with no opportunities for rebuttal."

Clearly, the market got that message.

"The harsh panel discussion statements specifically incorporated comments about the significant commercial success of Vytorin/Zetia and raised the possibility that Zetia could turn out to be an expensive placebo," Risinger noted. "It was, unfortunately, not a discussion and came across as an indictment of Vytorin/Zetia."

Ultimately, he concluded, "they thought that the most likely explanation for ENHANCE's failure was that the compound (ezetimibe) did not work" in the end.

The losses in Merck and Schering-Plough dragged the Amex Pharmaceutical Index down 1%.

Most other stocks in the group were trading higher. Pfizer was up 1.3%, and Eli Lilly LLY was gaining 2%. Johnson & Johnson JNJ was up 1.1%. Bristol-Myers Squibb BMY, however, was on the weak side, slipping 1.2%.