Moody's Investors Services cut Schering-Plough's ( SGP) senior unsecured debt rating to its third-lowest investment-grade rating on Wednesday, but shares shrugged off the news and held onto gains.

The credit-rating agency dropped Schering's long-term debt rating to "Baa1" from "A3", saying the company's free cash flow, or cash flow from operations minus all expenses, will be negative in 2004, 2005 and 2006. Given the uncertainty around Schering's ability to produce free cash flow going forward, Moody's said its outlook was negative.

Specifically, Moody's said it was concerned about the launch of Vytorin, a cholesterol fighter created by combining Schering's Zetia and Merck's ( MRK) Zocor into a single pill. Schering has a lot riding on Vytorin, which is expected to be approved by the Food and Drug Administration sometime this month. And if anything goes wrong, it could materially alter the strategic outlook for the company.

"Over a longer time period, upward pressure on the rating could eventually occur based on greater resolution of government investigations, free cash flow estimates significantly higher than Moody's current estimates, and greater diversification away from Vytorin and Zetia either through internal development or collaborations," said the ratings agency, in a statement.

Despite the downgrade, Schering shares rose 40 cents, or 2.2%, to $18.61, spiking to $18.94 intraday, not far from its 52-week high of $19.09.

On a more positive note, Moody's said that Schering has made progress with regards to corporate governance, noting that its board has been actively replacing the company's senior management team over the last year or so. Furthermore, Moody's cheered the company's hiring of a Senior Vice President of Global Compliance and Business Practices.

"Moody's believes that the company's methodology to assessing enterprise-wide risk factors appears very comprehensive and impressive compared to other approaches being taken in the pharmaceutical industry," the ratings agency said.