4 Reasons To Buy Schering-Plough On This Big Drop

A few firms comment on Schering-Plough (NYSE:SGP) following the ENHANCE trial results:

- Deutsche Bank is lowering their target to $21.50 from $25.50 saying the lack of new insight from theENHANCE results was no surprise, but the tone of the panel "discussion", NEJM commentary and ensuing media coverage was more negative than anticipated. Additional trauma for the JV franchise, with immediate volatility in Rx demand and declines in market share is the likely near term outcome in firm's view.

Based upon the fallout from the NEJM ENHANCE publication, and two published editorials, they suspect a new round of RX declines, and a more negative impact on SGP's earnings outlook. Specifically, the firm expects that the JV, which represents 80% of SGP's net income, may fall 25%, back to its levels in '06. This equates to a decline in '08 estimate from $1.47 to $1.22. Firm has tried to be appropriate, and conservative in their assessment, but obviously, only the RX data over the next several weeks will tell the story.

SGP's EPS may decline 12% this year, while EPS may only recover to a level 4% higher in '09 than the EPS the comany achieved in 2007.

- Lehman: SGP (2-EW/1-Pos, $19.30, PT$20, $29b) A Butler - Downgrade 1-OW to 2-EW - ACC panel commentary neg; greater total Rx decline; uncertainty of managed care formulary position; JV income from Zetia/Vytorin (~60% of ’09 EPS) materially impacted; cut ’08 $1.67 to $1.40 (v $1.52 cons), ’09 init $1.59 (v $1.73 cons); cut tgt $35 to $20.

- Goldman Sachs downgrades to Neutral from Buy. Goldman notes the ENHANCE data were presented this weekend and were not surprising. The big surprise was the professional commentary, which spoke to limiting the use of the drug (until after other cholesterol-lowering medicines have failed) unless it is proved in an outcomes trial (expected to complete in 2012). Given the uncertainty around the franchise, the firm is downgrading Schering-Plough stock to Neutral. SGP shares are down 32.4% since being added to the Americas Buy List on November 26, 2007, while the S&P 500 has fallen 6.5% over the same period. Over the last 12 months SGP shares are down 22.1%, while the S&P 500 is down 7.2%.

Previously, GSCO had been below consensus, assuming that the US cholesterol business would fall 20% in 2008, and recover in 2010. They are now moving to a more prolonged fall, with US cholesterol sales down 24% in 2008, 20% in 2009, 10% in 2010, and 5% thereafter to 2012. They are lowering their estimates, with 2008-2012E EPS now $1.40, $1.46, $1.64, $1.80 and $2.11 from $1.37, $1.52, $1.77, $2.01, $2.39 (2008 rises slightly due to currency adjustments). This new set of estimates reflects modest reductions in SG&A to account for decreasing US promotion.

GSCO is lowering their 12-month price target to $23 (from $28), based on relative P/E and DCF methodology (70%/30% weighting). While they believe that Merck and Schering-Plough will work hard to support the product, the negative revision bias will remain high. Uncertainty around the IMS trends will likely leave the shares range-bound. In the mid- to high teens, they believe that the shares will have priced in the removal of Zetia and Vytorin from the model, and this valuation could represent a floor.

Notablecalls: SGP is down 20% in pre market (trading at $15.80 as I write this). I've been buying around that level. Why?

- The stock has been cut in half, mainly because of concerns regarding Vytorin/Zetia. Yes, sales and EPS will be hit but it's priced in here.

- I believe this is the moment smart money has been waiting for. Last time we had an opportunity to buy SGP was around 2002 when Hassan came in an cut the dividend. I remember buying the stock below $14 in pre-markt. This was the low.

- You gotta buy healthcare here. It's one of the safe havens.

- Goldman's downgrade is just make-up.

Disclosure: Long SGP

Comments

[Douglas Cress:]

Good call. Market seems to be overreacting left and right these days.

2008 Mar 31 10:43 AM

[HedgeTruth:]

the preferred is looking very juicy at these prices...

sgp.prb

at today's prices the preferred pays a safe 10% dividend...

plus sgp has a blockbuster new drug coming out this summer for anesthesia reversal...suggamadex....

i think i will buy the preferred...

2008 Mar 31 02:25 PM

[dkhkch:]

Hey Notable Calls- You could have gotten it cheaper had you waited. You said you were buying around $15.80, closed today at $14.41.... Could have saved yourself some $$$.

Based on your previous calls, (Like ABH call 2/21 at $17 dollars, could have bought it for TEN DOLLARS eight days later!!!) I'll just wait for it to drop much much much much much more.

Seems to be the way your calls go. Nothing personal...

2008 Mar 31 06:22 PM

[dkhkch:]

Closed at $14.75 today, still less then your $15.80 price. Up 34 whole cents on a day when the DOW was up a whopping 391 pts. Wow, how much is this stock going to go up if the DOW only goes up a couple of hundred points, or actually goes DOWN. What's that, I think I hear the sound of cheaper entry prices are ahead...

2008 Apr 01 04:32 PM

[dkhkch:]

Closed at $13.86 today. Could of saved money by waiting...Cheaper prices ahead...

2008 Apr 02 05:14 PM

[masters:]

Eventhough, ENHANCE has hit Schering Plough pretty bad, we need to keep in mind that the share price has been excessively devalued amidst massive panic selling, a knee-jerk reaction that always happens in response to alarming news. But Schering-Plough has some great products that are still its gold mines - Avelox among quinolones, Asmanex,Nasonex and Proventil among Allergy/ Asthma medications, Integrilin and the great Levitra. With all these products, Schering-Plough can certainly do better than $14 a share. But there are cheaper prices ahead because panic selling still continues - infact, with high volumes

2008 Apr 04 12:45 AM