June 25, 2008 / 1:40 PM / 10 years ago

UPDATE 1-JP Morgan starts Merck, Schering-Plough, 4 others

(Changes source; adds details)

June 25 (Reuters) - J.P. Morgan Securities started coverage on major U.S. pharmaceuticals, including Merck & Co Inc (MRK.N) and Schering-Plough Corp SGP.N which it rated “overweight”, saying it saw selected opportunities in the sector following a 20 percent sell-off from the beginning of the year.

JP Morgan said it expects earnings upside for Merck from the rollout of its diabetes drug Januvia and its cervical cancer vaccine Gardasil, coupled with ongoing restructuring efforts, despite recent cholesterol franchise setbacks.

Schering-Plough’s acquisition of Organon BioSciences, the drugs arm of Akzo Nobel (AKZO.AS), creates significant margin leverage potential over the next several years, analyst Chris Schott wrote in a note to clients.

Shares of Merck have fallen more than 36 percent since the start of the year, while Schering-Plough has declined more than 27 percent as of Tuesday’s closing prices.

Despite being cautious on the industry, which faces Food and Drug Administration uncertainty, a wave of upcoming patent expirations and mixed pipeline prospects, Schott said cost cutting and pipeline development would be potential positive drivers.

He also noted that sector valuations are at a multi-decade low.

    The U.S. major pharma group currently trades at roughly 12.5 times forward 2008 earnings, a 15 percent to 20 percent discount to the S&P 500, Schott said.

    The valuation leaves the group open to a short-term rally on a positive datapoint but the challenges facing the sector preclude outperformance longer term, he added.

    Schott started Bristol-Myers Squibb Co (BMY.N), Eli Lilly & Co (LLY.N), Pfizer Inc (PFE.N) and Wyeth WYE.N with a “neutral” rating. (Reporting by Dilipp S. Nag in Bangalore; Editing by Bernard Orr)

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