Merck Is Buying Schering-Plough for $41B

The deal will help Merck bulk up its R&D pipeline and protect against patent-loss hits

Drug giant Merck (MRK) is buying fellow New Jersey company Schering-Plough (SGP) for $41.1 billion in the second major pharmaceutical merger of the year. The cash-and-stock deal, which values Schering-Plough shares at 23.61 each, is a 34% premium on Schering's Mar. 6 closing price.

The deal—which had been rumored since Pfizer's Jan. 26 acquisition of Wyeth for $68 billion—is expected to help Merck weather patent expirations and buttress its research and development pipelines. The two companies had a combined $46.9 billion in 2008 sales, and have extensive portfolios in cholesterol, respiratory, infectious disease, and women's drugs.

Like many other drug companies, Merck has been under pressure to come up with deals that would buttress revenue streams which have been falling as blockbuster drugs go off patent. Merck's patent on the asthma drug Singulair expires in 2012, and the patent for hypertension drug Cozaar expires next year. Among the drugs under development by Schering that Merck will acquire in the deal are the anti-clotting drug TRA and the hepatitis C treatment boceprevir.

Schering shareholders will get $10.50 in cash and 0.5767 Merck shares for each Schering-Plough share they own. The deal is being structured as an unusual reverse merger, in which the surviving corporation will be Schering-Plough, to be renamed Merck. The companies indicated that this route was being taken to protect the merged companies from change-of-control provisions involving two Johnson & Johnson (JNJ) drugs for which Schering holds marketing rights. When the deal is completed, Merck shareholders will own approximately 68% of the combined company, and Schering-Plough shareholders 32%.

Only $8.5 Billion of the Deal Is Debt

Merck CEO Richard T. Clark will head the combined company, which will be located in Merck's headquarters of Whitehouse Station, N.J. Schering CEO Fred Hassan, who sold Pharmacia to Pfizer in 2003 for $60 billion, "intends to participate in the integration planning until the close" of the deal, the companies said.

"The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly high-growth emerging markets," Clark said in a news release announcing the deal.

Hassan, in a conference call with analysts, said: "It's a transaction that delivers value to our shareholders. It creates a company with the critical mass to absorb the bigger and bigger shocks being driven in our environment."

In what some analysts note is a sign of the difficult credit environment, only $8.5 billion of the deal is debt. The remainder of the cash portion of the deal, $9.8 billion, will come from Merck's existing cash. The deal is expected to close in the fourth quarter of 2009.

Already Partners in Joint Ventures

"Merck is getting Schering at a good price, and the merger should help Merck through challenging patent expirations over the next two years," said Morningstar (MORN) analyst Damien Conover. "Further, Schering's strong pipeline fills some holes in Merck's R&D efforts, which hit a major setback last year with the nonapproval of cardiovascular drug Tredaptive."

Conover said it was unlikely that a competing offer would emerge, because Merck and Schering already have a joint venture involving the cholesterol drugs Vytorin and Zetia. That partnership generated revenue of $4.6 billion in 2008, the companies said.

One wild card facing the merged companies could be the marketing deal that Schering has with J&J involving marketing outside the U.S. for drugs Remicade and Golimumab. The agreement with J&J would be in jeopardy if Schering was acquired. "We believe the transaction is structured so that Schering-Plough's rights are not affected by the merger," Clark said.

Merck shares were down 10% in midday trading, to 20.39. Schering gained 15%, to 20.26.

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