Until recently, brisk sales of cholesterol drugs Vytorin and Zetia were helping their marketers, Merck & Co. (MRK) and Schering-Plough Corp. (SGP), bounce back from separate challenges.

But now the ride has hit a major bump in the form of a negative study of the drugs, plus accompanying calls by some heart doctors to curtail their use. Prescriptions for the drugs - after recently stabilizing - could take a prolonged hit, forcing the companies to make some hard choices such as cost cuts.

A prolonged downturn could even lead to Schering-Plough being put on the selling block, with its stock down 45% year-to-date, giving it a $23.6 billion market value that is more digestible than before.

"There's a lot of pharma companies looking to make an acquisition of a company with a decent pipeline and prospects for growth," said Linda Bannister, analyst with Edward Jones. "Schering-Plough fits that, in our view."

Merck is probably better positioned to weather any downturn than Schering- Plough because it depends less heavily on the cholesterol joint venture for its profitability than Schering-Plough does. The cholesterol-drug joint venture was expected to generate about 60% of Schering-Plough's earnings in 2009, estimated Lehman Brothers analyst Tony Butler.

Schering-Plough Chief Executive Fred Hassan has hinted that cost cuts could be in store if prescriptions for Vytorin and Zetia were to take another downturn. Analysts say that possibility looms larger following Sunday's presentation of the full data of the negative "Enhance" study, plus the recommendation to limit the drugs' use from a panel of cardiologists.

"I think it's prudent to assume that we're going to see a negative impact on prescriptions," Bannister said. If Schering-Plough decides to lower its forecast for the drugs, "we could start to see some cost reductions to stabilize profits from the business."

Having said that, the outlook for both companies also hinges on other factors, such as the performance of other products as well as the progress of their respective pipelines of experimental drugs. Merck, for instance, has seen growth in its vaccine business, which could help offset the cholesterol-drug weakness if it continues. And Schering-Plough is awaiting regulatory action for a proposed surgical drug that could help its fortunes.

Bannister rates Schering-Plough shares at buy, believing its long-term prospects are good because it has a "decent pipeline." She thinks the stock is attractively valued after Monday's huge decline. Schering-Plough shares recently traded at $14.48, down $4.99, or 26%.

But it could be rough riding in the near term. Bannister sees 2008 prescriptions for Vytorin and Zetia falling 20% versus 2007, then dropping another 10% to 15% in 2009. Prescriptions could stabilize after that, and possibly begin growing again. Prescriptions had declined sharply after the Jan. 14 release of preliminary study data - February prescriptions were off 13% from January - but seemed to stabilize in recent weeks.

Others Less Upbeat

Other analysts are less upbeat about Schering-Plough. Cowen & Co. downgraded its rating to neutral from outperform, saying use of the cholesterol drugs would probably be curtailed. Cowen analyst Steve Scala said the market opportunity for Vytorin and Zetia could be limited until a more definitive study about its effectiveness comes out around 2012.

Lehman's Butler cut his stock price target for Schering-Plough to $20 from $ 35, citing an expected prescription decline. Butler also said it is unclear whether drug-benefit plans would unfavorably change their reimbursement policies for Vytorin and Zetia.

Potentially working in Schering-Plough's favor is its acquisition last year of Organon Biosciences. The deal brought Schering existing products that reduced its reliance on Vytorin and Zetia, while also adding experimental drugs to its pipeline. The Food and Drug Administration is now reviewing Schering-Plough's application for one of these drugs, sugammadex, which is to be used in surgery.

Merck also is awaiting FDA word on new-drug applications, including Cordaptive, a cholesterol-modifying drug that works by a different mechanism than Vytorin or Zetia. If both companies are successful in getting these and other new drugs on the market, the pain of Vytorin and Zetia would be lessened.

Despite the setbacks, Credit Suisse analyst Catherine Arnold considers Merck to be an "undervalued" stock. She estimates the stock should be worth $50 if the cholesterol venture's results in 2008 are flat with 2007, and $42 if the cholesterol venture were "totally removed" from the equation. Merck shares recently traded at $37.75, down $6.76, or 15%.

Venture Backs Vytorin

In any case, the Merck/Schering-Plough partnership isn't rolling over, and the venture isn't accepting that prescriptions will significantly decline. The company is in the process of sending letters to health-care professionals that emphasizes the importance of lowering bad cholesterol, and that Vytorin and Zetia can help patients reach cholesterol goals. Also, the company is running newspaper ads to help spread the message.

Deepak Khanna, general manager of the Merck/Schering-Plough venture, said it's too early to tell what effect the full Enhance results will have on prescription trends, and he is optimistic that marketing efforts could counter the negative publicity surrounding the drugs.

"I do not think that physicians will change their prescribing habits because this provides them a way to lower" bad cholesterol, Khanna told Dow Jones Newswires Monday. "The fundamental need to get to cholesterol goals, we're just going to continue to communicate."

Khanna said he isn't aware of any drug-benefit plans changing their reimbursement policies for Vytorin or Zetia, because they understand the importance of getting patients to cholesterol goals.

He declined to say whether Merck and Schering-Plough would adjust the size of their sales force for the drugs if prescriptions were to take a prolonged downturn.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com

  (END) Dow Jones Newswires
  03-31-08 1432ET
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