A Pooling of Pills

Last year's speculation that Schering-Plough (SGP ) may end up in Merck's (MRK ) arms is back. Now that Merck has decided to spin off Medco, its pharmacy-benefits management unit, and refocus entirely on drugmaking, it will have to do a big acquisition to bolster its product pipeline, say analysts. Merck is already in partnership with Schering. They're developing a cholesterol-lowering drug that will combine in one pill Merck's existing Zocor product with Schering's Zetia to compete effectively with Pfizer's top-selling drug, Lipitor. Merck's Zocor, with sales of nearly $7 billion in 2001, accounts for one-fourth of Merck's total net income. But its patent expires in 2005, while Schering's patent for Zetia lasts until 2014--which would extend to the combined Zocor/Zetia product. "Acquiring Schering would be a very smart move for Merck," argues Richard Evans of Sanford C. Bernstein Research. Merck needs to add products either approved or near approval to bolster sales in the very near term, he says. Buying Schering "is the best means to achieve this end," says Evans, because it would then reap 100%--rather than just 50%--of profits from the Zocor/Zetia drug. Evans notes that buying Schering would be similar to Pfizer's (PFE ) purchase of Warner-Lambert in 2000 to get Lipitor. He figures Merck could pay 0.71 Merck shares for each Schering share, or 42 a share, about $11 above the current price. Merck declined comment. Schering didn't return calls.

By Gene G. Marcial

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