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Merck to buy Schering-Plough for $41.1 billion
Merck sees $3.5 billion in annual cost savings
By Aude Lagorce, MarketWatch
Last update: 9:41 a.m. EDT March 9, 2009LONDON (MarketWatch) -- Pharmaceutical giant Merck & Co., Inc on Monday said it will buy rival Schering-Plough for $41.1 billion in cash and shares to expand its presence in emerging markets and bolster its pipeline of potential new medicines.
Shares of Merck slid more than 10% in early trading Monday to $20.41 on the news. Schering-Plough was up nearly 12% at $19.68.
The two companies, which announced significant job cuts last fall, already are partners on the cholesterol drugs Zetia and Vytorin. But sales of the drugs fell more than 20% in the fourth quarter on concerns about their effectiveness.
Under the terms of the deal unveiled Monday, each Schering-Plough (SGP:Schering-Plough Corporation
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SGP 17.63, +1.31, +8.0%) share may be swapped for $10.50 in cash and 0.5767 Merck (MRK:Merck & Co. Inc
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MRK 22.74, +0.60, +2.7%) shares. The combined company will be called Merck and led by Merck Chief Executive Richard Clark.
The transaction, valued at $23.61 a share, represents a premium of 34% to Schering-Plough shareholders based on Friday's closing price.
"It's a constructive deal because Merck recognizes that the level of access to Schering-Plough's pipeline is good....Schering-Plough wasn't necessarily in the best position to develop some of these drugs. Overall it's a very sensible move," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe.
Merck will finance the cash component of the deal with a combination of $9.8 billion of existing cash reserves and $8.5 billion from committed financing to be provided by J.P. Morgan.
Upon completion Merck shareholders will own roughly 68% of the combined company and Schering-Plough shareholders the rest.
It is the second mega deal announced in the pharmaceutical sector in recent weeks. Pfizer (PFE:Pfizer Inc
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PFE 12.73, +0.06, +0.5%) announced a $68 billion purchase of Wyeth (WYE:wyeth com
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Synergies, stronger pipeline
Merck expects the tie-up to result in annual savings of $3.5 billion beyond 2011, in part thanks to the full integration of the companies' existing cholesterol joint venture.
The deal is expected to boost earnings from the first full year after completion.
"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," Clark said in a statement.
He added that Schering-Plough's "considerable biologics expertise" would complement Merck's novel proprietary biologics presence to create the best pipeline in the industry. The tie-up will double the number of potential drugs Merck has in Phase III development to 18.
Cantor Fitzgerald's Pope said that the integration should go relatively smoothly as the deal unites two companies with a similar mentality. The absorption of a biotech firm, for instance, could have been more difficult because of the difference in culture.
Schering-Plough generates about 70% of its revenue outside the U.S., including more than $2 billion from emerging markets. The combined company is expected to draw more than 50% of its revenue from outside of the U.S.
Merck said it will maintain its annual dividend at its current level of $1.52 a share.
Once the deal is closed the board of the combined company will be comprised of the Merck board plus three Schering Plough representatives.
Fred Hassan, the CEO of Schering-Plough, intends to participate in the integration until the close, the companies said.
Aude Lagorce is a senior correspondent for MarketWatch in London.