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| Merck's $41.1 billion Schering bid seeks science |
| Bloomberg / Paris Mar 10, 2009, 00:19 IST |
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Merck & Co’s $41.1 billion purchase of Schering-Plough Corp adds experimental drugs for blood clots, infections and schizophrenia and allows the companies to speed research on biotechnology drugs.
The deal between the two New Jersey-based drugmakers “is about the science,” said Merck Chief Executive Officer Richard Clark, and creates the second-biggest US pharmaceutical company. Schering-Plough holders will get $23.61 a share, a 34 per cent premium to the closing stock price March 6, the companies said in a statement.
The deal comes less than two months after Pfizer Inc, the world’s biggest drugmaker, agreed to buy Wyeth for $62 billion. It may intensify pressure on other companies, including Bristol- Myers Squibb Co, to combine research as big-selling products lose patent protection. Schering-Plough has drugs in late-stage testing that may top $6 billion in annual sales, analysts have said, and its top products don’t face patent expiration.
“It clearly is a year of mergers for pharmaceutical companies,” said Philippe Lanone, an analyst at Natixis Securities in Paris, in a telephone interview. “They don’t have much of a choice if they are to guarantee EPS growth in the years to come.”
Schering-Plough rises
Schering-Plough rose $2.86, or 16 per cent, to $20.49 at 10.14 am in New York Stock Exchange composite trading, the most in nine years in intraday trading. Merck fell $2.47, or 11 per cent, to $20.27, the biggest decline since July 22.
Merck’s offer “seems way too low” and will probably have “significant” dissent among Schering-Plough shareholders, said Moskowitz. Johnson & Johnson, which shares rights to Schering- Plough’s top-selling Remicade anti-inflammatory drug, might also make a bid, said Tim Anderson, an analyst with Sanford C Bernstein & Co.
Schering-Plough has drugs in late-stage testing that may top $6 billion in annual sales, and already has a partnership with Merck to split sales of the Zetia and Vytorin cholesterol pills, which generated $4.6 billion last year. The deal will double the number of medicines Merck has in the final stages of human tests.
Merck’s Clark said he contacted Schering-Plough in December to discuss a potential deal. Merck had research setbacks last year and failed to win US regulatory approval for cholesterol pill Cordaptive. It has also been losing sales in the US of its Gardasil cervical cancer vaccine and will face generic competition to $8 billion in products within five years.
Quality of science
“What convinced me as a CEO of Merck was to have our head of research come back and talk about the quality of the scientific programmes,” Clark said in a telephone interview on Monday. “This is about the science and not just synergies and that is what makes this different than other deals in the past.”
Schering-Plough shareholders will receive 0.5767 Merck shares and $10.50 in cash for each share of Schering-Plough. The cash portion will be financed with a combination of $9.8 billion from existing reserves and $8.5 billion from committed financing from JPMorgan Chase & Co.
Schering-Plough CEO Fred Hassan said that he decided to sell the company because of a more difficult macroeconomic environment.
The companies said they expect to close the deal in the fourth quarter. Clark said he doesn’t expect to make any divestitures at this time and will cut 15 percent of the combined company’s global workforce.
Merck had 55,200 employees as of December 31 and Schering- Plough had 51,000, according to Bloomberg data. A 15 per cent reduction would cut 15,930 jobs.
After closing, Merck shareholders are expected to own about 68 per cent of the combined company, and Schering-Plough shareholders are expected to own approximately 32 per cent. Merck anticipates that the transaction will “modestly” add to earnings in the first full year following completion and “significantly” thereafter.
Merck’s Clark will lead the combined company, which will have about $42 billion in revenue. Merck said it’s committed to maintaining its dividend.
“The price seems way too low,” said David Moskowitz, an analyst with Caris & Co, in a telephone interview on Monday. “It’s a tremendous deal for Merck. Every bank in the world should want to line up and fund this deal at this price. What makes Schering so attractive is the number of drugs in their pipeline and the lack of generic competition.”
Remicade entanglements
The announcement left unresolved the issue of Remicade, the anti-inflammatory drug that was the top-selling medicine last year for both Schering-Plough and its partner, New Brunswick, New Jersey-based Johnson & Johnson. Schering-Plough sells the product outside the U.S., and its agreement allows J&J to claim all rights if Schering-Plough’s ownership changes, said Lawrence Biegelsen, a Wachovia Capital Markets analyst in New York, in a note today.
“It appears to us that Merck and Schering-Plough are pursuing a reverse merger structure to allow the combined companies” to retain rights outside the U.S., he wrote. “What is unclear to us, however, is whether Johnson & Johnson will challenge.”
J&J could claim the deal changes Schering-Plough ownership, giving it Remicade, said Timothy Anderson, a Sanford C. Bernstein & Co. Inc. analyst in New York, in a note to clients today. J&J also may settle Remicade in “some other form of ‘horse trading,’” or make a rival bid, he said.
“The fit between the two companies is as good as -- if not better than -- the fit between” Merck and Schering-Plough, Anderson said.
J&J Reply
Bill Price, a J&J spokesman, declined to comment.
Remicade, a treatment for rheumatoid arthritis, generated $2.19 billion for Schering-Plough last year, 16 percent of company revenue. It was also Johnson & Johnson’s top selling drug, with $3.75 billion in sales. The two companies share rights to golimumab, an experimental successor to Remicade, and their agreements give J&J sole rights to Remicade if Schering is sold, said Linda Bannister, an Edward Jones & Co. analyst in St. Louis, in an interview before the deal was announced.
Schering-Plough’s most promising treatment in development, called TRA, is designed to prevent blood clots with fewer side effects than older drugs and could come on the market as early as 2011. Merck and Schering-Plough also have an agreement to co- develop a combination of Zetia and Pfizer Inc.’s Lipitor when it loses patent protection in 2011.
Sinking Sales
As of Jan. 31, U.S. sales of Vytorin slid 43 percent and Zetia 33 percent since a January 2008 study questioned whether the drugs were better at unclogging arteries than an older generic pill.
Hassan has been firing workers and closing factories to save $1.25 billion by 2010 to recoup some of the cholesterol pill losses.
Concerns over the falling cholesterol pill sales sent Schering’s stock price down 36 percent in 2008.
Hassan, who took the helm at Schering-Plough in 2003, rebuilt crippled Pharmacia Corp. and sold it to Pfizer Inc. for $58 billion, engineered the $37 billion takeover of Monsanto Co., and made Schering-Plough profitable after losses in 2003 and 2004. Hassan, 63, was born in Pakistan and began his career in 1970 as a drug salesman. Schering-Plough’s Remicade deal with Johnson & Johnson allows it to sell the medicine outside the U.S., Japan and parts of Asia.
Mergers Coming Back
“Basically these mega mergers are going to come back because the revenue in the pharma sector have no chance of growing and cost cutting can’t go much further for many companies,” said Navid Malik, an analyst at London-based Matrix Corporate Capital LLP, in an interview. “Any company that misses out on this round of mega mergers runs the risk of losing market share.”
Merck’s financial adviser was J.P. Morgan and legal adviser was Fried, Frank, Harris, Shriver & Jacobson. Schering-Plough’s financial adviser was Goldman, Sachs & Co. and Morgan Stanley. Legal adviser was Wachtell, Lipton, Rosen & Katz.
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