Merck & Co, Schering-Plough in US$41.1-bil. Acquisition Deal

A surprise announcement on Monday (9 March 2009) from U.S. pharma majors Merck & Co and Schering-Plough indicated the intention to merge to create one of the largest pharmaceutical firms in the United States. The agreement, which has the endorsement of both companies' board of directors, will see shareholders of Schering-Plough receive 0.5767 shares and US$10.50 in cash for each share from Merck & Co. The total financial consideration of the deal is estimated at US$41.1 billion. The terms of the deal will see the combined entity operated under Merck & Co, with Merck's shareholders holding the majority 68% stake in the firm, while Schering-Plough shareholders will hold 32%.

Synergies and Rationale

The combined entity will have net sales of US$42.35 billion, according to their full-year financial results ending 31 December 2008 with a net income of US$9.60 billion. The strength of the entity will be in building better efficiencies, a stronger research pipeline, and established presence in more markets.

The concept of such a transaction is bolstered by the existing relationship between the firms in the form of a joint venture, for cholesterol drugs Vytorin and Zetia. The two drugs brought forth revenues of US$4.56 billion in 2008. While the joint venture could have served as a starting point, it is significant to note that the two firms ended their agreements with respect to respiratory drugs in June last year. Now of course, Merck & Co will inherit Schering-Plough's entire pipeline.

The synergies according to Merck & Co are as follows:

• Joint research and development (R&D) pipeline, with strong candidates in all development phases doubles the number of late-stage compounds to 18.
• Broader product portfolio in critical therapeutic areas.
• Expanded global presence, including high-growth emerging markets.
• Expected to be significantly accretive, increase efficiencies, and result in cost savings of approximately US$3.5 billion annually.

In terms of the R&D pipeline, the additions to the cardiovascular, respiratory, oncology, infectious disease, and neuroscience therapeutic areas of Merck & Co's pipeline in the Phase III clinical trials and regulatory filed applications will provide the most benefit.

Outlook and Implications

The merger announcement will no doubt create a mammoth organisation, with better marketing muscle, and an established wider presence in certain markets. As a result, it will create the second-largest pharmaceutical firm with combined sales of US$42.35 billion after Pfizer-Wyeth, which together has net sales of US$71.12 billion. The value of the deal also follows a similar trend, second to that of the US$68 billion Pfizer-Wyeth deal announced in late January, this year.

Lying behind the rationale for the transaction, while the existing relationship over the cholesterol drug joint venture could have initiated the deal, the past year saw the two firms rocked by the growing controversy over Vytorin and Zetia efficacy and safety. The two firms also ended the respiratory drugs joint venture, which was formed with the intention of commercialising a Singulair-Claritin combination drug. However, the relationship soared with growing regulatory failure with respect to Vytorin, as well as the combination drug. Hence, in a way, the announcement of such a deal was a bit of surprise. Still, it is not totally out-of-the-blue, as market conditions clearly suggest that Merck & Co was in need of some fresh injection of Schering-Plough's research pipeline. Apart from that, the addition of Organon Biosciences, which bolstered Schering's revenues in 2008, provides a stronger product portfolio.

No Credit Crunch in Pharma M&As?

The size of the deal underscores the intense activity among Big Pharma firms for acquisition. The Pfizer-Wyeth and Merck-Schering-Plough deals clearly have set the platform for other merger deals in the pharmaceutical market. While there is still some uncertainty over whether Pfizer can raise the debt necessary to finance its US$68-billion deal, clearly the interest underlines the fact that the pharmaceutical industry is viewed as one of the growth industries, at a time when recessionary conditions have dried up credit. Needless to say, the Merck-Schering-Plough deal will spark further consolidation in the industry, with deals such as Roche-Genentech expected to gain momentum. There is also speculation of a possible merger between GlaxoSmithKline (GSK) and AstraZeneca, two British pharma giants, recently denied by GSK.