By Don Miller
Associate Editor
Money Morning
Merck & Co. Inc. (MRK) today (Monday) agreed to pay $41.1 billion in stock and cash for Schering-Plough Corp. (SGP), forming the world's second-largest prescription drugmaker.
It's the second mega-deal for Big Pharma this year, as Pfizer Inc. (PFE) made a $68 billion offer for Wyeth (WYE) in late January. Large pharmaceutical companies have been bucking a slide in M&A activity that has been exceptionally quiet.
"It clearly is a year of mergers for pharmaceutical companies," Philippe Lanone, an analyst at Natixis Securities in Paris, told Bloomberg News in a telephone interview. "They don't have much of a choice if they are to guarantee EPS growth in the years to come."
The pharmaceutical industry is consolidating now that many of the blockbuster drugs of the 1990s are losing patent protection, negatively affecting sales. And the situation has been made worse by a lack of replacements in the research and development pipeline at big drug companies.
Other big drugmakers, including Bristol-Myers Squibb Co. (BMY), may be forced to merge with rivals to diversify product lines and combine R&D as their biggest-selling products lose patent protection and come under fire from generic competition.
Many biotech companies, including Merck and Schering-Plough, have eliminated thousands of jobs and restructured operations to further cut costs. But most of those moves appear to have run their course.
"Basically these mega mergers are going to come back because the revenue in the pharma sector have no chance of growing and cost cutting can't go much further for many companies," Navid Malik, an analyst at London-based Matrix Corporate Capital LLP, told Bloomberg. "Any company that misses out on this round of mega mergers runs the risk of losing market share."
Merck and Schering were already partners in a pair of cholesterol statins, Vytorin and Zetia. The deal has several other drug synergies uniting Merck's asthma drug Singulair with Shering's allergy medicine Nasonex. Schering also makes the arthritis drug Remicade and a roster of popular consumer products including the Coppertone suntan line and Dr. Scholl's foot products.
"Vytorin and Zetia together are $4.5 billion in annual sales, and it looks like the drugs are stabilizing (after sales declines)," Caris & Co. analyst David Moskowitz, told Reuters. "That's a lot of cash flow, even if the drugs are not growing, which will fund R&D and the deal."
The deal gives Merck a solid pipeline of new drugs to enhance its product line.
Unlike many of Merck's current drugs, Schering-Plough has blockbuster drugs that won't face generic competition for several years. The deal doubles the number of drugs Merck has in late stage development to 18, Chief Executive Officer Richard Clark, said in a conference call with analysts.
For its part, Schering-Plough has been firing workers and closing factories trying to save $1.25 billion as it battles concerns over falling cholesterol drug sales. Schering's stock price spiraled down 36% in 2008.
While the deal may make sense for both companies, some analysts are questioning the price.
Holders will receive 0.5767 Merck shares and $10.50 in cash for each share of Schering-Plough, making the deal worth $23.61 a share, a 34% premium to the stock's Friday closing price.
"The price seems way too low. It's a tremendous deal for Merck. I think it should be at least $12 billion to $15 billion higher," said Moskowitz, noting that Schering-Plough's overseas rights to arthritis drugs Remicade and Golimumab were worth at least that much.
The merger will also result in a round of layoffs, as the companies smooth out redundancies.
"Eventually, we anticipate an approximate 15% reduction in the combined company's headcount," Merck spokeswoman Amy Rose told The Associated Press, implying nearly 16,000 fewer jobs.
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