Second Time Lucky? Expansion at Last as Merck KGaA Snaps Up Serono for US$13.3 bil.

Germany’s Merck KGaA has at last managed to secure an acquisition target, after buying a majority of shares from the controlling family owners of Swiss biotech company Serono and launching a public offer for the remaining shares. Merck is reported to have paid 100 Swiss francs (US$79.92) per share to the Bertarelli family for their 64.5% of Serono capital and their 75.5% of voting rights, and intends to offer the same price for the publicly-owned shares as well. The total transaction has been valued at 16.6 billion Swiss francs (US$13.3 billion) by Merck, although the Bertarelli family has said the deal is worth 16.1 billion instead.

The combined company will form one unit of Merck KGaA, merging Serono with Merck’s Pharma Ethicals division under the new name of Merck-Serono Biopharmaceuticals. Pro-forma sales of the new unit are expected to be in the region of 3.6 billion euro per year, with the newly enlarged Merck Group (KGaA) seeing its own sales boosted to 7.7 billion euro as a result. With the merger deal expected to be complete by early 2007, Merck-Serono will have a combined global workforce of approximately 35,000 people, with European headquarters to be based in Zurich and U.S. operations centred in Boston, Massachusetts.

Merck is planning to finance the acquisition through cash and bridge financing, and will be refinanced through a combination of a syndicated loan, a bond and capital increase of 2–2.5 billion euro.

Pipeline Potential as R&D Budget Widens

Serono bring with it a number of successful drugs in four main therapeutic areas: multiple sclerosis, reproductive health, dermatology, and growth and metabolism. Of these, it is the multiple sclerosis (MS) area that will be of greatest value to Merck, as it contains Rebif (interferon beta-1a), which was the third-biggest-selling MS drug worldwide in 2005. In the dermatology sector, the Swiss company also holds marketing rights to all countries except the United States and Japan for psoriasis treatment Raptiva (efalizumab), licensed from U.S. drug-maker Genentech. The focus of research at Serono is noticeably different from that at Merck KGaA, which until now has tended to focus on generics, cardiovascular drugs, hormone replacement therapy and oncology treatments, in particular colon-cancer treatment Erbitux (cetuximab). While not leaving much room for sharing ongoing research in the same fields outside of reproductive health, the acquisition of Serono will undoubtedly push the boundaries of Merck's R&D (research and development) ambitions. Earlier this month, Merck's CFO Michael Becker said the company was aiming to increase its R&D budget for prescription drugs from the current 500 million euro per year to 1 billion euro. Now, according to Merck’s latest press release, the combined Merck-Serono Biopharmaceuticals will have exactly this sum to spend on new research projects. According to Merck’s press release, there are currently 28 compounds in various stages of development between the two companies.

Outlook and Implications

For Merck, the acquisition of Serono brings to an end a rollercoaster year in terms of acquisition plans, with a dramatic market battle for the acquisition of Schering AG, which Merck eventually lost to Bayer AG (see Germany: 19 July 2006: Two Become One: How the New Bayer Schering Pharma is Rewriting Germany’s M&A Rulebook). At the time, Merck's hostile takeover bid and last-minute attempt to snatch back Schering from under Bayer's nose left many players on the German pharma market wary of its tactics, and most probably persuaded it to look elsewhere in Europe for a suitable target. Portfolio and pipeline expansion through acquisitions became essential earlier this year, after Merck was forced to abandon its development and regulatory filing plans for Parkinson’s disease drug-candidate Saritozan, which failed to impress in Phase III trials (see Germany: 23 June 2006: Phase III Frustration as Merck KGaA Pulls the Plug on Saritozan). Saritozan was the most advanced drug in Merck’s pipeline, and while sales of Erbitux continue to grow, the company has long needed to diversify its portfolio with a new blockbuster.

The choice of Serono as a takeover target is an interesting one, however, as it will see Merck expand into the biotech sector for the first time. Serono is well established and boasts enough products to distance it from smaller biotech firms in terms of being a risky investment (see Switzerland: 27 July 2006: Serono Delivers Positive Results for Q2 2006). Indeed, until the announcement of the Merck takeover, Serono had raised US$5 billion via a capital increase in order to make an acquisition of its own, a plan the company said it was sticking to until as recently as yesterday. Chief Executive Ernesto Bertarelli told Reuters today that the company’s acquisition plans were now "on hold", following Merck’s surprise offer. However, the Swiss biotech's own acquisition plans were the direct result of its failure to find a buyer to invest in it, after it hired Goldman Sachs in late 2005 to find an interested party. However, with Merck's attentions still focused on Schering at the time, any offers received were reportedly less than what Serono had demanded. As it is, the creation of Merck-Serono Biopharmaceuticals will form one of Europe’s largest hybrid biotech and pharma companies, with significant inroads to be made in markets worldwide.