The bloodbath in biotech stocks I predicted this morning grew only too real for two of the world's largest biopharm companies, Merck & Co. and Schering-Plough.

I went back and forth on earlier posts on who made the drug and who didn't, but the skinny is this: Vytorin is actually a hybrid drug developed by a joint venture between Merck and Schering-Plough. Technically speaking, Vytorin is a combination of Merck's Zocor and Scheing-Plough's Zetia cholesterol-fighting drugs.

According to a story off the AP wire this afternoon, both of the bio-giants marketed Vytorin through a joint venture, "but earlier this year, partial results from a clinical study showed that it was no more effective at limiting plaque buildup than Merck's Zocor, a drug that is already available in generic form."

Investors were livid that the official clinical results weren't released until Sunday (yesterday), although the two companies seemingly had ample time to release the information. How livid? Both company's stocks hit two-year lows in Monday trading, with Schering-Plough plummeting to $14 per share and Merck falling to $36.

It's a shocker not only in the medical community but in the advertising market as well. The AP points out that, in a report published by TNS Media Intelligence, over $472.8 million was spent on Vytorin advertising in recent years.

Meanwhile, analysts are killing the drug's chances of making money for either company.
After the news came out today, Lehman Brothers analyst Charles Butler slashed his price target on Schering-Plough by more than 40 percent.

So what happened? According to the AP, the clinical trial report urged physicians to recommend more conventional cholesterol-fighting drugs, known as statins, before resorting to premium prescription drugs like Vytorin. The report debunked some doctors' fears that the statin drugs might trigger some significant side effects that Vytorin wouldn't.

"There was an irrationality to begin with," Dr. John LaRosa, president of State University of New York Downstate Medical Center, told the AP.

Both Merck and Schering-Plough appear to be in a heap of trouble with federal and state regulators. Already, New York's attorney general's office is investigating why it took two years to release the clinical study data, which was obviously unfavorable to both companies. The FDA is reportedly looking at ways to tighten regulatory standards so drugs can't be approved so quickly - an investigation, if it amounts to anything, that won't help either company's reputation on Wall Street or in the boardrooms of other biopharm firms who'll soon be under the same scrutiny.

Look for the news to get worse before it gets better for both companies. Day one of any corporate scandal, if I can call it that, is always a trigger for both the lawyers and the news media to begin deeper in the dirt.

Let's see what they find in the next few days. No matter what they find, steer clear of biotech stocks until the bleeding stops at Merck - and at Schering-Plough.