Merck v Schering

Merck's shares have doubled over the past two years and Schering's shares had risen 55 per cent over the past 12 months. But investors, used to solid performance by both drug makers, knocked Schering down by 13.5 per cent when it missed revenue, margin and profit estimates. Schering's shares now trade at about 17.5 times expected 2008 earnings. Merck's shares, up 1.8 per cent after it issued results, trade at 16 times.

Volume gains from the companies' joint venture for blockbuster cholesterol drugs Vytorin and Zetia are tapering. Schering bore the brunt of that blow, after its underperformance in other segments prompted investors to dwell on its thinner near-term pipeline. Schering has made efforts to reduce its dependence on cholesterol drugs, particularly with its $14bn acquisition of Organon BioSciences. Its pipeline of late-stage compounds is now relatively solid and diverse. But Merck's shorter-term pipeline, highlighted by Gardasil, a new cervical cancer vaccine, and diabetes drug Januvia, is stronger. Merck shrugged off a $70m Vioxx-related charge and the patent expiration of its Zocor cholesterol drug as its ongoing restructuring helped boost gross margins to 77 per cent.

Merck has dodged a bullet over its share of the cholesterol venture, as investors focused on its strong overall results. But, with more than 40 per cent of its sales losing patent protection by 2012, the industry's latest favourite cannot afford to rest on its laurels.