Video: Merck to buy Schering-Plough

updated 3/9/2009 7:26:02 PM ET 2009-03-09T23:26:02

Merck & Co. is buying Schering-Plough Corp. for $41.1 billion in a deal that gives Merck key new businesses, access to a promising pipeline of new products and the chance to further cut costs, including eliminating about 16,000 jobs.

Merck hopes the cash-and-stock deal, which would vault it to the world’s No. 2 drugmaker, helps it better compete in a drug industry facing slumping sales, tough generic competition and intense pricing pressures.

The deal announced Monday would unite the maker of asthma drug Singulair with the maker of allergy medicine Nasonex and form the world’s second-largest prescription drugmaker. Merck and Schering are already partners in a pair of cholesterol fighters, Vytorin and Zetia, although concerns about safety and effectiveness have hurt sales.

Schering’s shares skyrocketed and Merck’s fell, typical for a company doing a big acquisition and funding part of it with new shares. Schering shares jumped $2.50, or 14.2 percent, to $20.13, and Merck shares fell $1.75, or 7.7 percent to $20.99.

The companies say the deal will boost earnings per share in the first full year after it closes, and they’ll be able to save $3.5 billion a year after 2011.

The news comes six weeks after Pfizer Inc. announced a $68 billion deal to acquire Wyeth and on the same day as reports that Genentech Inc. is close to striking a $95-per-share sale to cancer drug partner Roche, after rejecting a deal for months.

Erik Gordon, an analyst and professor at University of Michigan’s Ross School of Business, said the Obama administration’s health care plans have much to do with the recent spate of mergers and their focus on cost-cutting.

“If anything, the pressures for these kind of mergers ... are stronger now that people are hearing what the new administration is thinking about for health care reform,” Gordon said.

Merck and Schering-Plough, along with most rivals, are eliminating thousands of jobs and restructuring to cut costs as generic-drug use grows and the recession drives consumers to spend less on drugs.

Merck spokeswoman Amy Rose told The Associated Press there won’t be any immediate changes in staffing, but “eventually, we anticipate an approximate 15 percent reduction in the combined company’s headcount,” she said, implying nearly 16,000 fewer jobs from their current total of 106,000.

About 60 percent of the cuts will come from marketing and administration, and the rest from manufacturing and research and development.

The deal would let Merck do the same thing Lipitor maker Pfizer Inc. is trying to do with its planned $68 billion acquisition of Wyeth — diversify into a broad-based health care company like Johnson & Johnson.

Merck is a top maker of pills and vaccines, and acquiring Schering-Plough will add strength in the prized area of biologic drugs, thanks to its 2007 acquisition of Dutch biopharmaceutical company Organon BioSciences NV. These drugs, made from living cells, command high prices, are insulated from generic competition and are widely seen as the biggest growth area.

The deal also will give Merck one of the world’s biggest animal health businesses and a sizable consumer health line with products such as allergy pill Claritin and the Coppertone sun-care line.

Merck Chairman and CEO Richard Clark told The Associated Press the company will be “well-positioned for sustainable growth.”

“We’ll double Merck medicines in (late-stage development) to 18,” added Clark, 63, who will lead the combined company.

Schering-Plough has patent protection for key products — Nasonex, two other drugs and a contraceptive, as well as the two cholesterol drugs — until the middle of the next decade.

Analyst Steve Brozak of WBB Securities said the deal is mainly about Merck “buying revenue and buying earnings.”

Brozak thinks the next big industry move likely will be a large drugmaker, perhaps Johnson & Johnson, acquiring a medical device maker.

Gordon said he would keep an eye on at least three other drugmakers thought to be in the hunt for an acquisition: Bristol-Myers Squibb Corp., Eli Lilly & Co. and France’s Sanofi-Aventis.

Merck and Schering-Plough had a combined $46.9 billion in revenue in 2008, nearly as much at the largest drugmaker, Pfizer Inc., which posted $48.42 billion last year. Pfizer expects late this year to close its deal for Wyeth, which would add more than $20 billion in revenue.

Schering-Plough shareholders will get $10.50 in cash and 0.5767 Merck shares for each Schering-Plough share they own. That’s a 34 percent premium to Schering-Plough’s closing price Friday.

Schering sells the arthritis drug Remicade outside the U.S. and also has some rights to another in development, golimumab, under a partnership with Johnson & Johnson, which makes Remicade. Because Schering has been making roughly $2 billion a year from that deal, the Merck deal is structured as a reverse merger to avoid triggering provisions in the J&J deal that might cost the new company that revenue.

Thus, Schering-Plough will be the surviving corporation but will take the Merck name and will be based at Merck’s headquarters in Whitehouse Station, N.J.

Schering-Plough CEO Fred Hassan, who will stay on through the integration, said the three companies have a good relationship and that he “had a cordial conversation with Bill Weldon,” New Brunswick, N.J.-based J&J’s CEO, Monday.

Johnson & Johnson spokesman Bill Price said the company is not commenting on whether it might protest or try to block the deal. Any dispute between J&J and Schering-Plough would be decided by binding arbitration, under their deal, according to Merck General Counsel Bruce Kuhlik.

Stock would cover 56 percent of the deal’s funding, with the other 44 percent in cash: $9.8 billion in existing cash balances and $8.5 billion in financing committed by JPMorgan Chase & Co., the companies said. The small amount being borrowed — barely 20 percent of the price — is a sign of the credit crunch.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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