Schering-Plough: As Cheap an Entry Point as You'll Find

It was a rough Monday morning for stock owners of Merck & Co. (MRK) and Schering-Plough Corp. (SGP) as a panel of cardiologists recommended that Doctors sharply reduce their prescribing of the companies' jointly marketed cholesterol drugs Vytorin and Zetia. The cardiologists based their claim in the results of an “Enhance” study which found that there was no significant benefit to patients who took Vytorin and Zetia over the cheaper Zocor, which is available as a generic. Today, the shares of Merck are off about 15%, while Schering-Plough is down nearly 25% making its year-to-date loss nearly 50%.

As bad as the report from the cardiologists’ panel was for MRK and SGP, it begs the question: has the market overreacted to the news? Were Merck and Schering-Plough counting on this drug for 15% and 25% of future earnings respectively? According to earnings estimates from Goldman Sachs, it appears that the market has overreacted to the news. Goldman revised estimates on SGP after the news broke, and while they revised estimates downward, forward-looking earnings going out as far as 2012 show EPS only 12% lower than prior to the revision. Goldman is on the conservative end of the range of analyst estimates according to Yahoo! Finance, and they still see earnings growing almost 11% per year from 2008-2012 (EPS of $1.40 in 2008 to EPS of $2.11 in 2012).

It seems to us that the concerns about sales in SGP’s cholesterol drugs have been priced into the stock, and earnings growth still looks fairly strong. From a value prospective, SGP is attractive; in fact with a price of $19.47 at the time the market closing last Friday, SGP was a full 54.4% below its average Price-to-Sales ratio at comparable sales levels. Likewise Price-to-Cash Earnings--currently 9.3x--is well-below the normal historically weighted average range of between 29.9x and 44x.

With the sell-off Monday, these measures have only dropped further out of their normal range. Furthermore, Ockham Research has the healthcare sector rated the most attractively valued of the 10 sectors we rank each week. Clearly, from a long-term value prospective, this is about as cheap an entry point into SGP that you will find.

Disclosure: None

Comments

[MDINCT]

I'm not sure the analysts have a clue as to what they're talking about.
As an MD I can tell you would be hard pressed to find a doctor writing scripts for Zetia or Vytorin following this report. I can't tell you how many phone calls we've had already from patients who are looking for another drug.
What is Schering going to make there earnings on? All of their drugs are second-in-class (PEG-Intron is being soundly beaten by Roche's Pegasys for Hep C, Remicade is being rapidly replaced by Abbott's Humira, Viagra beats Levitra, Miralax is generic, etc.) Maybe their Dr. Scholls foot product line can carry them forward. I wouldn't touch this company, expect on a takeover play.

[Wez]

MDINCT, what do you think of Merck's products?

[User 171215]

SCP IS NOT CHEAP.
They are carrying $19 billion in debt, and this disappointment will reduce their earnings for 08'
by 40 %.
No one wants to buy them. Yhe stock has NO catalyst to ignite the stock price.

[crysball]

The 'DEAD CAT BOUNCE' after the decline Monday will be short lived as the CEO remains in 'DENIAL' and plans to continue to PROMOTE the products which have tarnished their image..........he claims his prior experince with the PHARMACIA resue prepares him for the Vytorin /Xetia debacle.............LOL.

[User Insider]

To those of you who are unsure about SGP...you should be following the Vytorin Debacle, however the doctor above leaves out a few major details concerning SGP. For one, SGP has another billion dollar drug, Nasonex, which is patent protected until 2017. There are someother drugs in the primary care market that do well, but without the volume of Nasonex or Vytorin. The pipeline for SGP is what really looks promising...Organon products, asthma combo that will overtake advair, and several others. Problem is that most of these are 1-2 yrs away. I still think this stock is cheap...this will settle down in a few months, but Vytorin/Zetia will never be the same.