Unexpected Blow to Vytorin/Zetia; Maintain Buy for MRK, Hold for SGP

3/31 - "Zetia/Vytorin Sales Estimates Reduced — We believe that today’s outcome will have a meaningfully negative impact on the prescribing habits in the US, and, to a lesser extent, in non-US markets. Consequently, our 2007-10E cholesterol franchise sales CAGR decreases to -3% (previously +4%) for WW sales and - 11% (previously -2%) for US sales."

"We believe the panel’s recommendation to shift the therapeutic focus away from Zetia creates a real need for viable alternatives in the cholesterol reduction market. This may potentially expand the opportunity for MRK’s Cordaptive, and mitigate some of the negative impact from the ENHANCE study’s fallout...we forecast WW sales approaching $2 billion by 2013."

"While the ENHANCE setback will pressure the stock in the near-term and tempers the company’s growth prospects, we see upside for MRK shares from: (1) potential FDA approval of Cordaptive in 2Q08; (2) subsiding concerns over an “at risk” Nexium generic launch; (3) stronger than expected Gardasil growth from robust non-US uptake and a new indication for women 27-45 yrs old."

"We maintain our Hold rating on SGP shares; upside seems largely contingent on further late stage pipeline visibility, although launches for TRA & boceprevir are still at least a couple years away. However, the possibility of a major cost cutting program (in response to cholesterol franchise pressures) and potential takeout speculation may set a floor on the stock around $16-$17."