Schering stock jumps on job cuts

NEW YORK (CNNMoney.com) -- Schering-Plough's stock jumped Thursday, after the drugmaker's chief executive announced he would cut 10% of its staff.

The cuts were announced by CEO Fred Hassan late Wednesday. They will affect more than 5,000 of Schering's 55,000 employees and are expected to result in savings of $1 billion through 2012.

Schering's (SGP, Fortune 500) stock rose about 9% in afternoon trading. It's welcome news to the company, whose share price has dropped by half since mid-January because of fallout related to one of its lead products, Vytorin.

On Jan. 14, New Jersey-based drugmakers Schering and Merck (MRK, Fortune 500) unveiled study results saying that their combination drug Vytorin was no more effective at reducing arterial plaque than its component Zocor. Merck's Zocor has been available as a generic since 2006, at one-third the cost of Vytorin. Vytorin also contains Zetia, produced by Schering.

Schering's problems worsened on March 30, when a panel of cardiologists at the annual conference of the American College of Cardiology in Chicago said that doctors should use older cholesterol drugs instead of Vytorin. Schering's stock plunged nearly 30% in the first three days of trading this week.

Vytorin was a $4 billion-a-year drug, with sales split between Merck and Schering. Jami Rubin, analyst for Morgan Stanley, expects Vytorin sales to decline 30% this year. Based on that, Rubin lowered the 12-month price target for Schering to $20 a share from $28.

Nonetheless, Rubin in a published report described Schering stock as "fundamentally undervalued and reflects the complete wipe-out of the Vytorin franchise." Without Vytorin, Rubin said the stock is worth $14 to $15 a share, which is where it's currently trading.

"We are buyers on the stock as we believe the pull-back has been too severe especially in light of Schering's attractive base business and pipeline," wrote Rubin. "Moreover, management's take-charge attitude is reassuring and likely at the very least protects the value of the base business, which is where the stock is currently trading."

Michael Krensavage, analyst for investment firm Raymond James, said he rated Schering a "strong buy" and said the market has "gone too far" in driving down the company's share price because of Vytorin.

Krensavage said that Schering's enterprise value - the sum of its market cap, net debt and preferred stock - is 1.64 times its estimated 2008 revenue, excluding sales from Vytorin and Zetia. Krensavage said that's "the cheapest I've ever seen for a large cap pharma stock in my career."

Krensavage also said that investors are ignoring the company's successful products like Remicade, a treatment for seven different inflammatory diseases. Remicade sales jumped by a third in 2007 to $1.6 billion.

But Barbara Ryan, analyst for Deutsche Bank North America, said in a published report that she wasn't budging on her "hold" rating. She said the announced restructuring "reiterates that Schering is no longer a growth story, but a cost cutting one."

Schering's job cut announcement comes just days after Wyeth (WYE, Fortune 500) on March 28 said it would cut 1,200 jobs. The drugmakers Merck, Pfizer (PFE, Fortune 500) and Bristol-Myers Squibb (BMY, Fortune 500) are also laying off thousands of employees in order to cut costs.