Monday, March 09, 2009

Breaking News: Merck to Buy Schering-Plough in $41.1 Billion Cash, Stock Deal

New Jersey-based drug makers Merck & Co. and Schering-Plough Corp. announced plans to combine in a $41.1 billion cash-and-stock deal that comes six weeks after rivals Pfizer Inc. and Wyeth unveiled their engagement.

The announcements come as the world's biggest pharmaceutical companies face a litany of pressures -- from product pipelines that likely won't be able to offset companies' blockbusters that will lose patent protection in the coming years to the potential of increased government pressure to lower prices. Merck and Schering-Plough already had a relationship through their cholesterol-drug joint venture, which has seen its sales slump.

"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 in high-growth emerging markets," Merck Chairman and Chief Executive Richard T. Clark said in a joint press release. (Read the companies' statement.)

In discussing Merck's quarterly earnings last month, Mr. Clark had said the drug maker was open to buying a big rival, signaling a shift for a company that long maintained its research prowess was enough to keep it growing.

Mr. Clark would oversee the combined company, which will retain the Merck name. Three Schering-Plough board members would join Merck's board. Schering-Plough Chairman and Chief Executive Fred Hassan said he "intends to participate in the integration planning until the close."

In an interview, Mr. Clark said the integration is expected to result in a work-force reduction of about 15%, with a high percentage of the job eliminations happening outside the U.S.

Merck, of Whitehouse Station, N.J., has about 55,200 employees world-wide, with 28,000 in the U.S., according to a regulatory filing. Kenilworth, N.J.-based Schering-Plough has about 51,000 global employees, with just 15,000 in the U.S.

Both companies had been laying off employees even before the acquisition deal was struck. Like other major drug makers, they have been contending with lackluster sales growth, hurt by competition from generic drug makers and now the economic downturn.

"Of course when the market is in a mood of desolation, this is often the best time to effect a merger or acquisition," said David Buik of BGC Partners. He added the deal "seems to make huge sense with a cost-cutting exercise imperative, with the Obama administration hell bent on giving the drug companies a very hard time, offering the generic operators a brilliant opportunity."

Some $3.5 billion a year in cost savings are anticipated beyond 2011. Schering-Plough is expected to "modestly" add to Merck's earnings, excluding charges related to the deal, in the first year after its completion and "significantly" thereafter.

Under the deal, Schering-Plough shareholders would get 0.5767 share of Merck and $10.50 in cash for each share they own. That values Schering-Plough at $23.61 a share, a 34% premium to Friday's closing price. Merck shareholders would own 68% of the combined company.

In premarket trading, Schering-Plough jumped 18% to $20.80 while Merck fell 4.4% to $21.75. Mr. Buik noted that Schering-Plough shares advanced nearly 10% in a Friday afternoon rally.

Some 44% of the deal will be cash, with $9.8 billion coming from existing balances and $8.5 billion from committed financing from J.P. Morgan Chase & Co. Merck said its board is committed to keeping its dividend at current levels, which is triple the payment Schering-Plough holders now get. Merck's vow contrasts with Pfizer, which will halve its dividend, the yield of which had been the highest of the major drug makers.

Pfizer's deal for Wyeth, valued at $68 billion when it was unveiled in January, represents the largest takeover in the pharmaceutical sector since Glaxo Wellcome PLC acquired SmithKline Beecham PLC for $76 billion in 2000.

The two companies' cholesterol-drug joint venture has been under pressure for a year following an early 2008 study raised questions about the effectiveness of Zetia. The results sent prescriptions of Zetia and sister drug Vytorin, which combines Zetia with Merck's Zocor, plummeting.

Mr. Hassan took over Schering-Plough six years ago as chairman and CEO at a time when the company has dealt with manufacturing troubles which led to a $500 million fine. At the time, it was said taking over Schering-Plough would test his mettle as a turnaround expert.

Now while the company is in stronger financial shape, its stock sits at the same level it did when Mr. Hassan took charge amid 50% price drop the past 18 months.

Write to Kevin Kingsbury at

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