Risks Keep Schering-Plough a Hold

We expect a significant decline in sales of on Schering-Plough Corporation’s (SGP) cholesterol drugs Vytorin and Zetia, following recent negative comments at American College of Cardiology. While we continue to be believers in the long-term future of the company, we see a significant amount of near-term risk and recommend that investors Hold at the current price.

Aside from the problems with the cholesterol business, Schering-Plough does offer compelling reasons for investors to remain interested. The company is forming alliances, acquiring products, and maintaining prudent cost-control.

Assuming the integration of Organon BioSciences produces the incremental revenue and cost-synergies management hopes for and Schering delivers on its productivity initiatives, we think EPS can grow at a CAGR of 11 percent through 2012.

Its aggressive plan to rein in costs, if successful, should grow EPS in the double digits through 2012. In order for this to materialize however, management will need to cut headcount and trim resources all the while integrating Organon.

It is very difficult to gauge where prescriptions are headed in the cholesterol JV, and until there s more clarity on this we feel it’s unlikely the shares will show a significant move up. The stock currently trades at 12.9x our 2008 EPS estimate of $1.49. While this is a discount to the industry average of 13.6x, based on the significant near-term risks, we believe the discount is justified. We see fair value at $20, or about 13.5x our 2008 EPS estimate of $1.49.

Jason Napodano, CFA, contributed to this report.

Read the full analyst report on SGP