Schering still strong after earnings miss

(Fortune) -- Things aren't as bad as they look at Schering-Plough. The company's shares fell more than 13% yesterday, after its third quarter earnings failed to match Wall Street's expectations. But the company's future, despite the investor sell-off, remains promising.

Schering reported adjusted third quarter earnings per share of $0.28, slightly below the street's consensus of $0.30. Revenues for the quarter rose 9% over the same quarter last year to $2.81 billion, which also fell below consensus expectations of $2.87 billion.

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The cause of the shortfall: Schering's cholesterol franchise, which faces steep competition in a crowded market of cholesterol-lowering medicines, is seeing increased competition from relatively new generic treatments. So, although Schering's Zetia and Vytorin (for which the company splits revenues of both with partner Merck (Charts, Fortune 500)) are growing sales and gaining market share, they're not doing so as fast as analysts expected.

So, what happened yesterday?

Schering (Charts, Fortune 500), a company in turnaround over the last five years, has a slightly higher than peer-average forward P/E of 20. The rest of Big Pharma carries an average 17. Schering has maintained its P/E by meeting or exceeding Wall Street's quarterly earnings estimates.

In the midst of yesterday's miss, says Standard & Poor's analyst Herman Saftlas, "institutional investors saw an opportunity to take some of their winnings off the table." Indeed, before yesterday's share price dip, Schering's stock had risen 44% in the last year. Saftlas believes all the fundamentals that sparked that increase are still in place. "I'm expecting that the stock will come back," he contends.

The future does look bright for Schering. As Big Pharma companies struggle to get into the market for higher priced biotech medicines, Schering is already there. Schering's $14.4 billion purchase of Organon Biosciences will add considerable heft to the company's raft of current products, as well as its late stage pipeline.

Organon, whose acquisition should be complete by the end of this year, posted 2006 sales of $3.4 billion. The biotech's major products include contraceptives NuvaRing and Implanon, the antidepressant Remeron, muscle relaxant Esmeron, and fertility treatment Puregon/Follistim.

Organon also brings with it five medicines in the final stages of clinical testing. That will raise the total number of Schering's "phase III" projects to 12, which is remarkable in an industry that's been hampered by a dearth of new drugs. One of the highlights in Organon's near-term pipeline is a compound known as sugammadex, for use after surgical procedures performed under anesthetic. The treatment counteracts the muscle-deadening effects of anesthesia, allowing patients to recover from surgery faster.

"Sugammadex appears to be safer and more effective than the drug that is currently used," notes John Cogan, an analyst with Daiwa Securities America. The drug is seen as a key to helping hospitals increase efficiency, says Cogan, since its quick onset of action may help move patients out of the operating room faster.

Organon is expected to file for approval of sugammadex in U.S., Europe, and Japan before the end of the year. Analysts project sugammadex to garner annual sales of between $400 million and $700 million at its peak.

With a new position in biotech, a promising late-stage pipeline, and a still-growing cholesterol franchise, Schering is in a better position than most of its peers. Yesterday's profit-takers may regret their hasty moves.