(Adds details and background, analysts' reaction to FDA's action and updates stock price.)

By Peter Loftus

Of DOW JONES NEWSWIRES

In another setback for Schering-Plough Corp. (SGP), the U.S. Food and Drug Administration unexpectedly rejected the company's experimental post-surgery drug, going against the advice of a panel of outside experts.

The news sent Schering-Plough shares down 89 cents, or 4%, to $20.19. The stock has been beaten down this year - it's off about 24% year-to-date - primarily by a slowdown in sales of the cholesterol drugs Schering-Plough co- markets with Merck & Co. (MRK) due to questions about their safety and effectiveness.

The drug, sugammadex, is designed to reverse the effects of muscle relaxants given under general anesthesia during surgery. The company describes it as the first and only "selective relaxant binding agent." Schering-Plough of Kenilworth, N.J., inherited the compound with last year's acquisition of Organon BioSciences from Akzo Nobel NV (AKZOY) for about $17 billion.

The FDA cited issues with hypersensitivity and allergic reactions to the drug, sugammadex, according to Schering-Plough, but not any issues related to the drug's effectiveness.

In contrast with the FDA's action, the European Union's drug regulator approved sugammadex earlier this week; it will be marketed under the brand Bridion.

"We were surprised by the action, especially since an FDA panel had previously unanimously approved the drug, and EU regulators cleared it earlier this week," Standard & Poor's analyst Herman Saftlas wrote in a research note.

In the wake of Schering-Plough's cholesterol-drug problems, the FDA's rejection of sugammadex "runs the risk of causing investors to capitulate on SGP after a string of disappointments," Bernstein Research analyst Tim Anderson wrote in a note to clients.

The direct financial impact may be modest. Anderson had been predicting U.S. sales of the drug of $25 million this year, rising to $75 million in 2009 and eventually to $220 million in 2012. Taking U.S. sales out of his company forecast would reduce 2012 earnings by about 6 cents a share, from his estimated base of $2.48 a share.

Anderson rates Schering-Plough "outperform" with a $25 price target.

Deutsche Bank analyst Barbara Ryan was a bit more downbeat, saying " expectations Street-wide for this drug are high, and now forecasts and the multiple will have to come down." Ryan, who has a "hold" rating on the stock, reduced her estimate of 2009 earnings to $1.46 a share from $1.52 a share.

Schering-Plough's research chief, Thomas Koestler, said in a press release the company was "surprised and disappointed" by the FDA's so-called "non-approvable letter," which forestalls approval of sugammadex.

In March, the drug had received unanimous support from an FDA advisory panel, which said it appeared to be safe and effective. At the time, FDA staff had said they were concerned about allergic reactions that appeared linked to the drug in three patients, the possibility it might cause a heart rhythm problem, and a chance the product could interfere with bone healing. The agency, however, noted that there was a possibility of allergic reactions to all drugs and said concern about bone impact is based on animal and not human studies.

The advisory panel said such concerns should continue to be looked at in post- marketing studies.

The product is being reviewed under the FDA's priority review program - an accelerated timetable that the agency reserves for products it believes are an advance over existing products or when no approved product exists.

Schering spokesman Robert Consalvo said the company planned to meet with the FDA to discuss its concerns, and "to find a path forward with sugammadex."

Now, another FDA decision for a Schering drug looms, and it may not be positive. The company applied last year for FDA approval of an experimental anti-psychotic, asenapine, also acquired via the Organon deal. Investor expectations are modest, however, and Schering itself has signaled that the FDA may not grant approval during its first review cycle.

Though investor expectations are low, Bernstein's Anderson says "another rejection could impact sentiment." He expects immediate FDA action for asenapine.

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

(Kevin Kingsbury and Jennifer Corbett-Dooren contributed to this report.)

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  08-01-08 1250ET
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