Merck agrees to acquire Schering-Plough for $41 billion
By David Jolly
Monday, March 9, 2009
Merck, the U.S. pharmaceutical giant, has agreed to pay $41 billion to acquire its rival Schering-Plough, the two companies said Monday.
The companies said in a joint statement that the merged company would keep the name Merck, and that the deal had been unanimously approved by their boards. Richard Clark, Merck's chairman and chief executive, will lead the combined company.
With the move, Merck is expanding its franchise in cardiovascular, respiratory and cancer drugs and shoring up its research pipeline, which includes a Schering-Plough product called TRA, a promising drug designed to prevent blood clotting.
In addition, Merck will benefit from the worldwide reach of Schering-Plough, which generates about 70 percent of its revenue outside the United States, including more than $2 billion a year from emerging markets.
Under the deal, Schering-Plough shareholders would receive 0.5767 shares and $10.50 in cash for each share of Schering-Plough. Each Merck share would become a share of the combined company. The deal values Schering-Plough at $23.61 a share, or $41.1 billion, a premium of about 34 percent based on the Friday closing price for Schering-Plough.
But David Moskowitz, an analyst at Caris in New York, suggested that the companies might have to raise the price.
"I think it should be at least $12 billion to $15 billion higher," he told Reuters, as investors might not be happy until the share price reached "the high-$20s or $30."
On Monday, Merck slid as much as 11 percent in early New York trading, while Schering-Plough rose more than 14 percent, as analysts suggested that Johnson & Johnson might make a counteroffer. Johnson & Johnson, based in New Brunswick, New Jersey, did not immediately return a call seeking comment.
The companies said they expected the deal, which needs regulatory approval, to close in the fourth quarter. The new company would continue to pay the full Merck dividend, they said. It would be based in Whitehouse, New Jersey, where Merck is based.
The deal marks the second major pharmaceutical acquisition this year. In January, Pfizer, the world's biggest drug maker, bid $68 billion for Wyeth. And Roche, the Swiss pharmaceutical company, is pursuing a full acquisition of the biotechnology company Genentech, in which it already owns a majority stake. On Friday, Roche raised the price of its hostile offer for Genentech to $93 a share, from $86.50.
Merck is among the big pharmaceutical companies facing patent expirations on top-selling drugs in the next decade, with few promising prospects to replace them.
Most pressing is the expiration in 2012 of the Singulair asthma drug, its top-selling product, said Richard Purkiss, an analyst in London at Atlantic Securities. Worldwide sales of Singulair were $4.3 billion last year, about 18 percent of Merck's total revenue.
In contrast, "Schering-Plough doesn't have much exposure to patent expiries in the same time frame," Purkiss said, adding, "This is really about combining to protect earnings."
Shares of Schering-Plough rose more than 8 percent Friday amid speculation that the company was being pursued by either Merck or Johnson & Johnson, with which it operates a joint venture to market the arthritis drug Remicade outside the United States, a deal worth billions of dollars a year.
Clark said in a conference call with analysts and journalists that the companies had discussed the Remicade deal with Johnson & Johnson, and that they expected to be able to continue the arrangement. But Merck and Schering-Plough executives sidestepped whether a deal would still be viable if Remicade were not included.
The 44 percent of the deal that would be paid in cash would be financed with a combination of $9.8 billion from existing cash balances and $8.5 billion from financing provided by JPMorgan Chase.
Merck shareholders would own about 68 percent of the merged company, and Schering-Plough shareholders the rest. Merck said it expected the deal to contribute "modestly" to its earnings in the first year and "significantly" thereafter.
"We are creating a strong, global health care leader built for sustainable growth and success," Clark said in a statement.
"The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly in high-growth emerging markets. The efficiencies we gain will allow us to invest in strategic opportunities, while creating meaningful value for shareholders."
The transaction would be structured as a "reverse merger" in which Schering-Plough, renamed Merck, would continue as the surviving public corporation.
Merck and Schering-Plough, which already have a $4.6 billion cholesterol drug joint venture, said they expected annual cost savings of about $3.5 billion after 2011.
The savings "are expected to come from all areas across the combined company and from the full integration of the Merck/Schering-Plough Pharmaceuticals cholesterol joint venture," the companies said, and are in addition to previously announced cost-cutting measures at the two companies.
In October, Merck announced plans to cut 7,200 jobs, or more than 12 percent of its work force. Schering-Plough has also announced job cuts.http://iht.com/articles/2009/03/09/business/drug.php