April 1, 2008 / 11:09 AM / 12 years ago

RPT-UPDATE 2-Cholesterol fallout slams Schering, Merck shares

(Repeats without any changes to text) (Adds analysts’ comments, background, updates share prices)

By Lewis Krauskopf

NEW YORK, March 31 (Reuters) - Shares of Schering-Plough Corp SGP.N and Merck & Co (MRK.N) tumbled on Monday to multi-year lows on fears new recommendations critical of the companies’ cholesterol drugs would cripple their sales.

Schering-Plough shares were off almost 26 percent while Merck shares fell about 15 percent after a panel of doctors at a prominent medical meeting urged patients to try older cholesterol drugs before Vytorin and Zetia, which the U.S. companies sell in a joint venture.

“Everyone is going to be watching (prescription) trends,” said David Heupel, portfolio manager with Thrivent Investment Management. “For the next month if not longer, it’s all going to be about how quickly Vytorin and Zetia ... decline.”

Zetia is a newer type of cholesterol treatment that blocks absorption in the intestines in a complementary way to the popular cholesterol class known as statins. Vytorin combines Zetia with Zocor, an older statin from Merck.

But the value of Vytorin and Zetia has been questioned since the results of a controversial study were released in January. The study, known as Enhance, found that Vytorin failed to work any better at reversing heart disease than Zocor, which is now available as a cheaper generic statin.

Investors held out hope that the full results of the study, released on Sunday at the American College of Cardiology medical conference, would help restore growth of the products.

“I think that they just assumed that we would see something in the data set that would allow physicians to hold out some clinical reason for why I can (prescribe) this over Zocor or Lipitor or any of the statins,” Heupel said. “There just wasn’t anything there.”

At least three brokerages — Goldman Sachs, Cowen & Co and Lehman Brothers — downgraded their ratings on shares of Schering-Plough, while others cut their earnings forecasts for the companies on expected lower use of the products.

Zetia and Vytorin are by far Schering-Plough’s biggest-selling products, making them relatively more important to Schering than to Merck.

“We believe Schering-Plough is unlikely to recover for at least 6 to 9 months in the face of significant declines in U.S. Vytorin and Zetia prescription trends,” Leerink Swann analyst Seamus Fernandez said in a research note.

Schering and Merck have also come under fire from the medical community and U.S. lawmakers for a long delay in releasing the results of the clinical trial.

“My guess is that both Schering and Merck are in for some legislative scrutiny at the very least and, depending on what that reveals, there may be some financial penalties down the line,” said Peter Jankovskis, co-chief investment officer of OakBrook Investments.

Goldman Sachs analyst James Kelly cited uncertainty about the cholesterol franchise in downgrading Schering-Plough shares to “neutral” from “buy.”

Kelly previously said Schering’s U.S. cholesterol business would fall 20 percent this year and recover in 2010. But he said in a research note, “we are now moving to a more prolonged fall,” with U.S. cholesterol drug sales down 24 percent in 2008, 20 percent in 2009 and 10 percent in 2010.

Credit Suisse analyst Catherine Arnold characterized the panel discussion as “ezetimibe-bashing,” referring to the generic name for Zetia.

“A Vytorin/Zetia recovery will take more patience,” Arnold wrote in a research note.

Schering shares were down $5, or 25.7 percent, to $14.47 in afternoon trade on the New York Stock Exchange after falling to $14.05, the lowest point in over 11 years. Merck shares were off $6.59, or 14.8 percent, to $37.92 on the NYSE after falling to $36.84, their lowest price since July 2006.

Schering shares have now fallen nearly 48 percent while Merck shares have dropped about 38 percent since the results of the study were released in January. The American Stock Exchange Pharmaceutical index .DRG, a barometer of mostly large drug stocks, is off 17 percent over that time.

Changes in prescribing could benefit the more potent statins, such as Pfizer’s (PFE.N) Lipitor or AstraZeneca’s (AZN.L) Crestor. Shares of those companies were up modestly on Monday. (Reporting by Lewis Krauskopf; Editing by Mark Porter and Steve Orlofsky)

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