Thursday, February 5, 2009

Marcial: Why Schering-Plough is Alluring

Marcial: Why Schering-Plough is Alluring

Global pharmaceutical company Schering-Plough (SGP) has taken wing since Oct. 27, when its stock traded at a 52-week low of 12 a share. Some analysts expect the stock, now at 18, to fly even higher.

One reason: positive earnings news. The company's profits have been steadily rising in the past five years. On Feb. 3, Schering reported fourth-quarter diluted profits that beat analysts' expectations—39 a share vs. the Wall Street consensus forecast of 30 and year-ago profits of 27. Another positive: Schering's relatively robust pipeline of new drug prospects. The company's well-stocked cupboard is raising investor hopes that a blockbuster drug or two may be in the making.

But what's really catching investor attention these days: fresh speculation that Schering may become the next pharmaceutical takeover candidate after Pfizer's (PFE) acquisition of Wyeth (WYE) in January.

A Buyout Target?

Analysts who are aware of such a possibility, including health-care analyst Dr. Timothy Anderson of Sanford C. Bernstein (AB), don't think that such a deal is in the offing yet. Nonetheless, the idea has gained some currency on the Street, even though a takeover could be complicated by a joint venture Schering has with Merck (MRK) for the sale of two cholesterol drugs.

"There is a possibility that Schering-Plough will be acquired," says Anderson. "However, because of prior business arrangements, this may only occur if Johnson & Johnson (JNJ) and Merck were able to split up the company," says Anderson, with Merck buying out Schering's cholesterol-lowering drugs,

Through its joint venture with Merck, Schering gets part of the profits from two cholesterol drugs, Zetia and Vytorin. Zetia is a lipid-lowering agent that blocks the absorption of cholesterol in the intestine. Vytorin is a combination of Zetia and Merck's Zocor statin cholesterol agent. Schering took in profits of $2 billion in 2007 from the joint venture.

Even with these links, or maybe because of them, it's possible that J&J may bid outright to buy Schering, figures Anderson, who believes Schering could fetch a bid price higher than the targets (ranging from 20 to 23) that analysts have for the stock. In such an event, J&J may have to sell Schering's share of the cholesterol drug joint venture to Merck.

Promising Pipeline

Anderson recalls that Schering Chairman and CEO Fred Hassan was the CEO of Pharmacia when he sold the company to Pfizer in 2003. Right after that deal Hassan joined Schering. "Who knows, he might just do the same thing again and sell Schering," says Anderson, who rates Schering a buy. He expects to raise his price target of 20 because of the "positive" fourth-quarter results. Schering has several compelling investment attributes, says Anderson, including low exposure to competition from generic drugmakers through 2015 because few of its patents are set to expire before then.

George Rho of investment research outfit Value Line (VALU) is also bullish on Schering: "We like these shares for both the short term and the long haul," he says. "Year-over-year bottom line comparisons have been positive for 15 straight quarters," he notes.

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