Merck & Co in mega-deal with Schering-Plough

C&I Issue 6, 2009

Drug giants Merck & Co and Schering- Plough have announced plans to merge in a $41.1bn deal – just one in a spate of mega-mergers so far this year. Under pressure to increase revenues, large pharmaceutical firms are seeking scale, resources and diversified portfolios less vulnerable to generic competition. While Q1 2009 has seen colossal deals, future consolidation is expected to be smaller and more strategic.


Merck has agreed to pay for Schering-Plough in a cash (44%) and stock transaction that would make Merck the second-biggest drugmaker in the US. According to Merck, the combined company will have greater manufacturing capacity and a wider presence in key international markets, especially high-growth emerging markets. Combined revenues totalled $47bn in 2008, and the merged company will have cash and investments of approximately $8bn. The merger is also expected to result in cost savings of about $3.5bn annually after 2011.


‘We expected pharma industry consolidation to intensify in 2009,’ says Milena Izmirlieva, project manager at IHS Global Insight. ‘However, the size and number of M&A deals – especially so early in the year – has been staggering.’ In January, Pfizer and Wyeth announced $68bn merger plans (C&I 2009, 3, 5).


The deals are happening for a combination of reasons, says Constantine Biller, senior analyst at Clearwater Corporate Finance. Greater scale will help these groups deal with both the recession and the unpredictability of drug development, he says. Moreover, all three combined companies will be more diversified and less reliant on traditional pharmaceutical research. ‘By adding new product lines they will also be able to counteract the poor sales in some of their core drug groups, which are weakening in the current environment,’ Biller says.


A wall of expiring products, for example, will wipe $6.1bn from Merck’s annual sales, leaving its 2013 sales standing $435m below 2008 levels, according to Datamonitor. Singulair, Fosamax and Zocor are among the brands expected to suffer particularly intense generic competition.


By merging with Schering- Plough, Merck will have a stronger, more diversified product portfolio, including consumer health brands, such as Claritin and Dr Scholl’s. Merck says it will have more products with long periods of exclusivity, such as the HPV vaccine Gardasil, and more opportunities to extend patent protection by creating new combinations and formulations of existing products. Moreover, the move significantly boosts Merck’s pipeline by doubling the number of its Phase III products to 18.


‘When you consider the high cost of development and the tough regulations around prescription drugs nowadays, it is clear that its more attractive for large groups to have a broader spread, which also includes biotech products, generics, wider consumer healthcare products and even medical devices,’ Biller says.


Analysts expect further M&A activity in 2009, with Bristol Myers Squibb and Sanofi-aventis among the obvious candidates. But while the appetite for big deals is back, the majority of further consolidation is expected to blur the boundaries between the various sectors of the biopharma industry as branded manufacturers acquire biotech firms and generics producers, large generics companies acquire some biotech capabilities and all seek to expand their access to cheaper active pharmaceutical ingredients and more reliable contract research capabilities, Izmirlieva says.

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