Schering pushing hard to diversify

NEW YORK (CNNMoney.com) -- Drugmaker Schering-Plough is a favorite of analysts and investors these days. It's no wonder: The company's flagship product, the cholesterol-fighting Vytorin, is breaking sales records and faces relatively little risk from cheaper generic versions from rivals.

But the company still has to prove it's not a one-trick pony.

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In fact, analysts say that Schering-Plough (Charts, Fortune 500) must break its dependence on Vytorin, which Schering created in a partnership with Merck & Co. Inc. (Charts, Fortune 500)

Schering, based in Kenilworth, N.J., is working on a deal that could help it to do just that - a $14.4 billion acquisition of Organon BioSciences. The deal is expected to close before the end of the year.

The acquistion of Organon - a Dutch company developing lines of drugs not in Schering's pipeline - is "about becoming a company with greater balance in our business and an exciting and productive pipeline," Schering-Plough CEO Fred Hassan said in the company's most recent earnings announcement.

To be sure, Vytorin is the main driver for Schering's earnings. Sales for Vytorin, a combination that contains cholesterol drugs from Schering and Merck, totaled $2.4 billion in the first half of 2007. That revenue is split between the two companies.

"(The) fate of Schering-Plough mirrors the fate of Zetia/Vytorin," analyst Jon LeCroy of Natixis Bleichroeder. LeCroy projects that sales for those drugs will reach $7.6 billion by 2011 and that any problems with the Vytorin would seriously rock the boat.

Investors, for their part, don't seem to be overly worried, having driven the stock up by 34 percent this year. This dwarfs the gains made by some other top-performing members of Big Pharma, like Merck & Co. Inc. (Charts, Fortune 500), which increased 19 percent this year, and Bristol-Myers Squibb (Charts, Fortune 500) with its year-to-date gain of 10 percent.

Schering has a lot going for it. The company has "the fastest growth in the drug industry, with the least patent exposure in the industry," said LeCroy. LeCroy also wrote, in a published note, that "Schering is the only U.S. pharmaceutical company that can replace its patent losses solely with new products by 2011."

The company's drugs with patents expiring soonest - the antihistamine Clarinex, with $818 million in 2007 estimated sales, and Caelyx chemotherapy, with $306 million in estimated 2009 sales - could easily be eclipsed by the potential drugs in its pipeline.

LeCroy said that annual sales for the company's thrombin receptor antagonist, a heart disease treatment also known as TRA, could reach $550 million by 2011, peaking at $2 billion by 2015. He said that Schering's experimental HIV drug could reach $325 million in annual sales by 2011, and its potential treatment for Hepatitis C could total $600 million that year. These potential products are already in Schering's pipeline and not dependant on the Organon deal going through.

But Schering had better be ready to play in a competitive market, said James McDean of Atlantic Equities. The most promising experimental drug in Schering's pipeline - the thrombin receptor antagonist - faces potential competition from the experimental drugs rivaroxaban from Johnson & Johnson (Charts, Fortune 500) and Bayer, and apixaban from Pfizer Inc. (Charts, Fortune 500) and Bristol-Myers Squibb (Charts, Fortune 500).

Securing Organon could help Schering safeguard its future. LeCroy of Natixis Bleichroeder said that Organon's pipeline has late-stage experimental drugs including an anesthetic, a contraceptive, and a treatment for schizophrenia.

"The acquisition of Organon reduced the reliance on Vytorin," said McDean. "Organon brought them to the party."

The analysts interviewed for this story do not own Schering stock.

An earlier version of the story incorrectly described Vytorin as being used in combination with Zetia when it, in fact, is a combination that includes Zetia. CNNMoney.com regrets the error.