Monday brings Heartburn for Schering-Plough
Filed Under (Company Research) by admin on 31-03-2008
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%.
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 today, 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.
