- The Washington Times - Tuesday, March 10, 2009


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 the elimination of about 16,000 jobs.

Merck hopes the cash-and-stock deal helps it to compete better 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 popular cholesterol fighters, Vytorin and Zetia, although concerns about safety and effectiveness have hurt sales.

The deal was reached only a few weeks after Lipitor maker Pfizer Inc. agreed to pay $68 billion for drugmaker Wyeth.

Merck and Schering-Plough, along with most of their rivals, are eliminating thousands of jobs and restructuring operations to cut costs.

“There’ll be no immediate changes” in staffing, Merck spokeswoman Amy Rose said. “Eventually, we anticipate an approximate 15 percent reduction in the combined company’s head count,” implying nearly 16,000 fewer jobs.

The deal also would let Merck do the same thing Pfizer is trying to do with its acquisition: diversify into a more broad-based health care company.

Merck is a top maker of pills and vaccines, and the acquisition of Schering-Plough will add strength in the prized area of biologic drugs, which are made from living cells. It also will give Merck one of the world’s biggest animal-health businesses and a sizable consumer-health division that includes products such as allergy pill Claritin, Dr. Scholl’s foot products and the Coppertone sunscreen line.

Wall Street reacted by sending Merck’s stock down and Schering-Plough’s up. Merck dropped $1.75, or 7.7 percent, to $20.99, while Schering-Plough rose $2.50, or 14.2 percent, to $20.13.

Merck Chairman and Chief Executive Officer Richard Clark said the company will be “well-positioned for sustainable growth through scientific innovation.”

Big drugmakers are facing slumping sales as the blockbuster drugs of the 1990s lose patent protection, complicated by a dearth of new drugs. Schering-Plough, however, has patent protection for key products until the middle of the next decade and what is considered one of the best product pipelines.

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

“It’s a good short-term fix, but it unfortunately makes it more complicated for the long term,” Mr. Brozak said.

He said it now will be more difficult for Merck to continue its strategy of buying or licensing the few promising experimental compounds available from small biotech companies, many of which are on the verge of closing amid the recession and credit crunch.

Mr. Brozak said he thinks the next big move likely will be a large drugmaker, perhaps Johnson & Johnson, acquiring a medical device maker. J&J; already has a huge business in that field and lost a heated battle three years ago to acquire heart implant maker Guidant to Boston Scientific.

Merck and Schering-Plough said the deal will save them about $3.5 billion per year after 2011 and will boost earnings in the first full year after the deal closes. Combined with their current restructuring, they expect a total of $5.95 billion in annual savings after 2011.

“We’ll double Merck medicines in [late-stage development] to 18,” Mr. Clark said.

Schering-Plough CEO Fred Hassan, 63, said Nasonex, Pegintron for hepatitis, cancer drug Temodar, the Nuvaring contraceptive and the two cholesterol drugs all have patent protection until 2014 or later.

The two companies had a combined revenue of more than $42 billion in 2008, compared with drugmaker Pfizer Inc., which posted $48.42 billion last year. Pfizer expects late this year to acquire 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 stock price Friday.

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’s effects.

Mr. Clark, 63, will lead the combined company, which will be a dominant player in treatment areas including cholesterol, respiratory and infectious disease and women’s drugs, as well as vaccines.

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