I started reading over the Schering-Plough (SGP: chart, web, Y!) 2007 financial report in an effort to do some more research.

Interestingly enough, I’m starting to rethink my position on Schering. SGP had really fallen out of favor with me since the whole Vytorin mess really blew up, and the stock price sunk to $13.83 per share for its 52 week lows.

After digesting some of the numbers though, I don’t think things look all that bad… at least not bad enough to justify the $18 share price.

Back in November of last year, Schering bought Organon BioSciences (OBS) for about $16.1 billion.  Effectively, that entire acquisition went on the books for the entire year.

With that purchase came $3.8 billion worth of acquisition in-process research and development stemming from Organon’s women’s health and animal research.  Effectively this was the cost of doing the research for up and coming drugs relating to women’s health and animal health.

Effectively, this in-process research and development cost was reflected in the $1.04 per share loss for fiscal 2007.  If you look past those costs, Schering turns a healthy profit.

The fact is, you do have to weigh in those R&D costs when refining the value of a company, and as such whether or not to buy stake in the company.  However, so long as there is a return on your R&D, it’s money well spent.

And there-in lies the big dilemma:  Will Schering see appreciable returns on the $3.8 billion R&D hit from 2007?

My gut says yes, but the headlines say no.

The FDA is in the drivers seat right now, as they should be.  I’m not too wound up about the Vytorin study, as the company has diversified its product line enough to make up for those lost sales.  However, recent headlines from Merck make it all too obvious that standards are being tightened in the pharma sector.

The short story is that I think Schering Plough is undervalued below $25, and I think I’ll start buying in small chunks.  If it crosses the $25 mark before next quarters earnings report, I’ll sell half my stake and let the rest ride through earnings.

The company reported Q1 2008 earnings of $0.53 per share, which blew away the estimates of $0.37.  I like that, and I think that trend will continue.

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Schering Plough (SGP: chart, web, Y!) just can’t win, and I’m happy I decided to sit on the sidelines to watch the show. The more they try to pump the Vytorin drug, the lower the stock sinks.

Last week the stock got ploughed after doctors revealed they wouldn’t recommend the drug to their patients. Ouch!

So now Schering has resorted to cutting jobs in order to save money. Not good. Not good at all.

This certainly doesn’t look like a good buy-it and forget-it stock.

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I’ve been watching Schering-Plough (SGP: chart, web, Y!) since I started looking for my next buy-it and forget-it stock. The stock price has fallen considerably since then on news that a company study produced disappointing results on the effects of Vytorin, a next generation cholesterol drug.

They study showed that Vytorin had no benefit on the buildup of artery plaque over the older drug Zocor. The silver lining to this story that is easily glanced over is that Vytorin cut bad cholesterol 40% more than Zocor or Zetia (Vytorin is a combo pill of Zetia and Zocor).

Opportunity Knocks?

I view these situations as opportunities. Schering is a strong company, whose stock price is being affected by panic selling stimulated by an initial communication from the FDA concerning the results of this inter-company study.

The fact is, Schering isn’t relying on the success of Vytorin to keep the company afloat, just like Merck (MRK: chart, web, Y!) didn’t bet the farm on Vioxx (which they ended up with tens of thousands of liability claims).

Schering is sitting on a P/E of 14.8, which is fairly low for big-pharma players, and the stock price has been driven down by higher than average volume on the news. I suspect that a good portion of the money that’s fleeing the company stock belongs to institutional investors already gun shy about overall market health.

The downside to SGP is that it doesn’t have the return on revenue that other, bigger pharmaceutical players like Pfizer (PFE: chart, web, Y!), GlaxoSmithKline (GSK: chart, web, Y!) and Merck, sitting at just 10.6% compared to 22.8%, 23.2% and 19.8%, respectively.

Buy-it and Forget-it?

I’m still not sure this is a buy-it and forget-it stock. The financial health of the company is good, but there are others out there that are better. However, it may be prudent to take advantage of the stock price while it’s down. Once the whole Vytorin issue blows over, like the Vioxx debacle did, I think there is some considerable upside to the stock itself. After all, there is an inherent upside of nearly 70% if you consider the recent highs of $32 per share.

Schering Plough has been beaten down by over reaction to headlines and overall market sentiment. This could be the kind of opportunity you want to take advantage of in times like these.

Investing, Stock Thoughts pharmaceuticals, schering-plough, SGP, Stock Thoughts