March 9 (Bloomberg) -- Merck & Co.’s $41.1 billion purchase of Schering-Plough Corp. adds experimental treatments for arthritis, cancer and blood clots that brace the drugmaker for competition to its biggest product in three years.

The deal between the two New Jersey-based companies “is about the science,” said Merck Chief Executive Officer Richard Clark in an interview today. Schering-Plough has drugs in late- stage testing that may top $6 billion in annual sales, analysts have said, and its top products aren’t nearing patent expiration.

The transaction, the largest in Merck’s 122-year history, comes six weeks after Pfizer Inc. agreed to buy Wyeth for $62 billion and as Roche Holding AG tries to conclude a $45.7 billion takeover of Genentech Inc. It may intensify pressure on other companies, including Bristol-Myers Squibb Co., to combine research as big-selling products lose patent protection.

“These mega-mergers are going to come back because the revenue in the pharma sector has no chance of growing and cost- cutting can’t go much further,” said Navid Malik, an analyst at London-based Matrix Corporate Capital LLP, in an interview. “Any company that misses out on this round of mega-mergers runs the risk of losing market share.”

Schering-Plough, based in Kenilworth, rose $2.50, or 14 percent, to $20.13 at 4 p.m. in New York Stock Exchange composite trading, the biggest gain since October 1987. Merck, of Whitehouse Station, fell $1.75, or 7.7 percent, to $20.99, the biggest loss since Nov. 5.

SEC Response

Schering-Plough also rose 8 percent on March 6 as investors reacted to speculation about a deal, said Barbara Ryan, an analyst at Deutsche Bank Securities Inc. in New York. Trading of options to buy Schering-Plough shares surged that day as well.

John Nester, a Securities and Exchange Commission spokesman, declined to comment.

Schering-Plough holders will get $23.61 a share in cash and stock, a 34 percent premium to the closing stock price March 6, the companies said in a statement today.

Merck’s offer “seems way too low” and will probably have “significant” dissent among Schering-Plough shareholders, said David Moskowitz, an analyst with Caris & Co., in a telephone interview today. Johnson & Johnson, which shares rights to Schering-Plough’s top-selling Remicade anti-inflammatory drug, might also bid, said Tim Anderson, an analyst with Sanford C. Bernstein & Co. in New York.

Schering-Plough already has a partnership with Merck to split sales of the Zetia and Vytorin cholesterol pills, which generated $4.6 billion last year.

Pipeline Doubles

The acquisition will double the number of medicines Merck has in final stages of human tests to 18. With the deal, Merck is considering the sale of an animal health partnership with Sanofi- Aventis SA, according to people familiar with the transaction. The animal business had $2.6 billion in sales last year. Merck also gets Schering-Plough’s consumer products, including the allergy medicine Claritin.

Merck’s Clark said he contacted Schering-Plough in December to discuss a potential deal.

Merck had research setbacks last year and failed to win U.S. regulatory approval for cholesterol pill Cordaptive. Merck also been losing sales in the U.S. of its Gardasil cervical cancer vaccine and will face generic competition to $8 billion in products within five years.

The company’s biggest drug, asthma treatment Singulair, was 18 percent of the company’s revenue last year and faces generic competition in 2012.

Scientific Programs

“What convinced me as a CEO of Merck was to have our head of research come back and talk about the quality of the scientific programs,” Clark said in a telephone interview today. “This is about the science and not just synergies and that is what makes this different than other deals in the past.”

Schering-Plough shareholders will receive 0.5767 of a Merck share and $10.50 in cash for each share of Schering-Plough. The cash portion will be paid with $9.8 billion from existing reserves and $8.5 billion in committed financing from JPMorgan Chase & Co.

The companies said they expect to close the deal in the fourth quarter and will cut about 16,000 jobs, or 15 percent of the combined company’s global workforce.

Schering-Plough CEO Fred Hassan said he decided to sell because of “the stunning and accelerating changes” in the economy, heightened scrutiny by regulators and pressure from governments to cut prices.

Hassan, 63, came to Schering-Plough in 2003 from Pharmacia Corp., which he sold to Pfizer Inc. for $58 billion.

J&J Factor

Merck said the acquisition won’t affect Schering-Plough’s agreement to share revenue from the rheumatoid arthritis treatment Remicade with New Brunswick, New Jersey-based Johnson & Johnson. Merck said it will keep the rights because the deal is structured as a reverse-merger.

Schering-Plough sells Remicade outside the U.S., and its agreement allows J&J to claim all rights if Schering-Plough’s ownership changes, said Lawrence Biegelsen, a Wachovia Capital Markets analyst in New York, in a note today.

“We’re not going to be commenting on today’s announcement or the speculation that’s out there,” Bill Price, a J&J spokesman, said in an interview today.

J&J fell $1.37, or 2.9 percent, to $46.60 in New York Stock Exchange composite trading as the Standard & Poor’s 500 Pharmaceuticals index of 13 drug companies declined 1.4 percent.

Remicade generated $2.19 billion for Schering-Plough last year, 16 percent of company revenue. It was also Johnson & Johnson’s top selling drug, with $3.75 billion in sales.

Next Generation Drug

Schering-Plough and J&J also share rights to golimumab, an experimental successor to Remicade.

The agreement between Schering-Plough and J&J calls for binding arbitration in a dispute, said Bruce Kuhlik, Merck’s general counsel, in a call with analysts today. Merck will “vigorously defend” the rights to Remicade, he said.

Once the transaction closes, Merck shareholders will own about 68 percent of the combined company, and Schering-Plough shareholders will own about 32 percent with three representatives on the board. Merck anticipates the purchase will “modestly” add to earnings in the first full year following completion and “significantly” thereafter.

Merck’s Clark will lead the combined company, which will have about $42 billion in revenue. Merck said it is committed to maintaining its shareholder dividend.

Schering-Plough’s most promising treatment in development, called TRA, is designed to prevent blood clots with fewer side effects than older drugs and could come on the market as early as 2011. Merck and Schering-Plough also have an agreement to co- develop a combination of Zetia and Pfizer Inc.’s Lipitor when it loses patent protection in 2011.

Schering-Plough’s Research

Schering-Plough is developing treatments for cancer and brain disorders, two areas where Merck has been trying to increase expertise, said Peter Kim, Merck’s head of research, in today’s conference call with analysts. Merck is starting a division to copy biotechnology drugs and Schering-Plough has research and manufacturing that can help, Kim said.

As of Jan. 31, U.S. sales of Vytorin slid 43 percent and Zetia 33 percent since a January 2008 study questioned whether the drugs were better at unclogging arteries than an older generic pill. Hassan has been firing workers and closing factories to save $1.25 billion by 2010 to recoup some of the cholesterol pill losses.

Merck’s financial adviser was J.P. Morgan and legal adviser was Fried, Frank, Harris, Shriver & Jacobson. Schering-Plough’s financial adviser was Goldman, Sachs & Co. and Morgan Stanley. Legal adviser was Wachtell, Lipton, Rosen & Katz.

To contact the reporter on this story: Shannon Pettypiece in New York at spettypiece@bloomberg.net.

Last Updated: March 9, 2009 17:34 EDT