Merck-Schering-Plough
The big news today is the acquisition of drugmaker Schering-Plough by Merck. While it's being called a merger in the press, it is clear that Merck comes out on top in terms of staffing and name. But curiously, it's being structured as a reverse takeover, where nominally Schering-Plough acquires Merck, according to the Financial Times because it allows the company to hold onto an immunological drug it co-developed with Johnson & Johnson (who had been interested in acquiring Schering-Plough itself.)
The deal is for $41 billion in cash and Merck stock. $10 billion of the cash comes from Merck's coffers; $8.5 billion from JP Morgan Chase; and the rest in Merck stock. It's interesting that there is so relatively little financing from a bank, and also that JPMorgan is still healthy enough to participate in that market. In a miserable mergers and acquisitions market, the pharma deals are standouts.
It's the second pharma megadeals in a few weeks. Pfizer has agreed to buy Wyeth for $62 billion, maintaining its position as the #1 drug company in the world. One sector that does have cash aplenty is Big Pharma.
Schering-Plough was desirable because it actually has a promising pipeline of new drugs in late-stage testing, something Merck is desperate to get its hands on. The two companies had already worked together in selling cholesterol drugs Zetia and Vytorin. The new company will have sales over $42 million a year.
The deal helps Merck diversify beyond prescription drugs, Schering-Plough also has holdings in biotechnology, in an animal medicine, and in consumer products (including allergy medicine Claritin, Dr. Scholls foot care products, Lotrimin and Tinactin athlete's foot remedies, and Coppertone tanning lotion), along with a serious presence in emerging markets like China and Brazil.
That's part of a new strategy also seen in the Pfizer deal. According to an article in the Wall Street Journal ("Merck to Buy Rival for $41 Billion ", 3/9/09)
Big pharmaceutical companies are moving away from the strategy they honed in the 1990s, when they concentrated on prescription drugs, then a booming business fueled by a slew of blockbusters in areas such as heart disease. The pace of drug discovery has since slowed amid tougher regulatory scrutiny, and revenue has declined as patents expire. The recession has only increased the urgency of adding new lines of business to offset the weak core drug business.
As usual there are rumors of further deals. One that is very likely is Roche's completion of its purchase of biotech firm Genentech, after the Swiss company sweetened its bid. Also seen as vulnerable are Astra Zeneca and Bristol-Myers-Squibb. The remaining big players (Johnson & Johnson, Sanofi Aventis, Glaxo) may have their hands forced if they want to compete.
