- The Washington Times - Monday, March 9, 2009

TRENTON, N.J. — 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 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 drug manufacturer. 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.

Shares of the two companies traded furiously after the announcement, with Schering’s shares skyrocketing and Merck’s dropping, typical for a company doing a big acquisition. In early afternoon trading, Schering shares jumped $2.63, or 15 percent, to $20.26, and Merck shares fell $2.19, or 9.6 percent, to $20.55.

The deal comes only a few weeks after Lipitor maker Pfizer Inc. agreed to pay $68 billion for drug maker 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 told the Associated Press. “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 acquiring Schering-Plough will add strength in the prized area of biologic drugs, which are made from living cells. It will also 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 sun-care line.

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

Big drug makers 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 will now 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 shutting down amid the recession and credit crunch.

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

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 added.

Schering-Plough CEO Fred Hassan, 63, said in an interview that Nasonex, hepatitis drug Pegintron, 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 $47 billion in revenue in 2008, nearly as much at the largest drug maker, 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.

Merck has about 55,200 employees, and Schering-Plough, which grew significantly with its November 2007 acquisition of Dutch biopharmaceutical company Organon BioSciences NV, has about 50,800.

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, infectious-disease and women’s drugs, as well as vaccines.

Schering sells the arthritis drug Remicade outside the U.S. and also has some rights to another in late-stage development, golimumab, under a partnership with Johnson & Johnson, which makes Remicade.

Because Schering has been making roughly $2 billion a year from that deal, Merck’s acquisition of Schering-Plough is structured as a reverse merger to avoid triggering provisions in the J&J deal that might cost the new company that revenue.

As a result, 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.

Hassan 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 morning.

Brozak, the analyst, said “it’s always possible” J&J could throw a wrench in the deal, but it’s too soon to say.

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 analysts have long pressured Clark to do a major deal to address falling sales, as blockbusters including Fosamax and Zocor for high cholesterol have seen generic competition hammer sales in the past 2½ years.

Mr. Hassan will participate in planning how to combine the companies until the deal closes, expected in the fourth quarter.

Merck’s sales fell 3 percent in the fourth quarter, to $6 billion, while Schering-Plough’s rose 17 percent to $4.35 billion, mainly because of Organon’s products.

Moody’s Investors Service backed its Aa3 credit rating for Merck but revised its outlook on the rating to negative from stable. Standard & Poor’s reaffirmed Merck’s ‘AA,’ long-term rating. Both are high grades. Both Moody’s and S&P put Schering-Plough’s ratings on review for possible upgrade.

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