German pharmaceutical takeover battle
A merger melodrama developed this week over the last week as a hostile bid and a white knight have shook up the German pharmaceutical industry. First Merck KGaA made a $17.9 billion hostile bid for rival Schering AG. Soon after came the white knight bid of $19.6 from drug and chemical company Bayer, at the invitation of Schering management. Merck has now backed out of the bidding.
Don't confuse privately-held Merck KGaA with the US drug conglomerate Merck & Company. That company was split off from the German parent after World War I., when the company's US assets were confiscated. The German Merck specializes in drugs for cardiovascular disease and cancer, along with some over-the-counter medicines. It also makes specialty chemicals. It is the oldest pharmaceutical company in the world, with origins in 1668.
Likewise, don't confuse Schering AG with US-based Schering-Plough. The US company was also the result of a confiscation, this one after World War II. Schering AG specializes in gynecology, diagnostic imaging, and oncology. It is a leading supplier of birth control pharmaceuticals.
Bayer AG is a wide-ranging company with businesses in pharmaceuticals (including for animals), chemicals, and materials science. It recently bought the over-the-counter drugs unit of Swiss pharma company Roche, and it spun off much of its chemical operations in 2004 into a new company named Lanxess with $9 billion in sales. Bayer now has lots of cash for further investment.
The combined Bayer-Schering company will become a major player in the world drug market. Both companies have a good recent record of developing new drugs. German Merck can't make such a claim. The company derives about half its revenue from generic drugs, and was trying to buy development through the Schering move.
As Mark Lander, writing in the New York Times ("A Rare Takeover Attempt in Germany's Drug Industry", 3/22/06) notes that the German drug indfustry has shrunk in importance as other comapnies have made big mergers:
The takeover tussle is shaping up as landmark battles in corporate Germany - as well as an illustration of how far this country's once-mighty drug companies have fallen in an era of global giants… Once known as the world's pharmacy for inventing aspirin and other household drugs, Germany missed out on most of the blockbuster mergers of the last 15 years that created behemoths like Pfizer of the United States, GlaxoSmithKline of Britain and Sanofi-Aventis of France.
Indeed, German drug comapny Hoechst, combined in 1998 with French company Rhône-Poulenc to make up Sanofi, was swallowed up two years ago by French company Sanofi to amke up the world's #3 drug company.
A Smartmoney.com article ("Germany's Merck Ends Bid for Schering", 3/24/06) notes the desire (and need) for size and leverage:
Merck's bid for Schering was aimed at creating a German drug company of a scale that could better compete with global giants such as Pfizer Inc. (PFE) of the U.S. and GlaxoSmithKline PLC (GSK) of the U.K. A combination of Bayer and Schering would create an even bigger company by sales.
Indeed all mid-sized drug companies are in trouble, according to a Financial Times article ("Pharmas face up to pressure to combine", 6/14/06), which states that:
the proposed €14.6bn ($17.4bn) deal highlights a growing trend internationally, whereby mid-sized pharmaceutical companies are coming under increasing pressure to combine, as rising research costs and falling growth make it more difficult to compete. Serono of Switzerland and Altana of Germany are among other mid-sized companies seeking buyers at a time when businesses that are cash-rich in the short term are seeking new ways to sustain long-term business as research productivity declines.
