Merck Buys Schering-Plough To Compete with Pfizer
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In a deal announced early Monday morning, March 10, 2009,
Merck & Co. (MRK) is purchasing Schering-Plough
Corp. (SGP) for $41.1B in cash and stock. As a global research-driven pharmaceutical
company dedicated to putting patients first, Merck is positioning themselves within
the markets to add strength to the company's businesses as the drug industry
continues to face declining sales, an increase in generic competition and higher
pricing pressures.
The company involved in the takeover,
Schering-Plough Corp. (SGP) is engaged in the discovery, development,
manufacturing and marketing of pharmaceutical products worldwide, while operating
primarily in the prescription pharmaceutical marketplace. The proposed deal comes
only a few weeks after Pfizer Inc. (PFE) announced their intentions on purchasing
drug maker Wyeth (WYE) for $68B.
The proposed merger consists of $9.8B in cash, $8.5B in financing provided by
JPMorgan Chase & Co. (JPM), and $22.8B worth of Merck stock. In 2008, the combined
revenues of the companies amounted to $46.9B, almost as much as the largest drug
maker, Pfizer, which had $48.42B in total
sales during the year. With the completion of Pfizer's buyout of Wyeth, the company
is looking to add more than $20B in revenues for the upcoming year.
With the joining of the two companies, Merck will now be in possession of one of
the top-selling allergy medicines, Nasonex, while forming the world's second
largest prescription pharmaceutical company. Merck is already in possession of one
of the best selling asthma drugs, Singulair. The two companies are also
collaborating on a pair of cholesterol fighters, Vytorin and Zetia.
"The deal is structured as a reverse merger in which the surviving parent company
is the existing Schering-Plough corporate entity, which will be renamed Merck,"
stated Merck general counsel Bruce Kuhlik. "And under the expressed terms of the
distribution agreement, this change of control provision focuses on whether there
has been a change in the surviving public company. It doesn't refer to stock
ownership or anything of the sort. As you know, that does appear in other
change-of-control provisions. It's not in this one, and that is why we are
confident in our belief that we will not trigger a loss of rights."
The reason for the reverse merger is that if Schering-Plough were to be absorbed
by Merck, SGP would be in breach of contract with Johnson & Johnson (JNJ)
triggering a "change-in-control" clause that was set up when SGP agreed to sell
JNJ's rheumatoid arthritis medicine Remicade. Schering also has overseas rights to
Golimumab, a promising yet experimental follow-up to Remicade.
"If anything, the pressures for these kinds of mergers are stronger now that people
are hearing what the new administration is thinking about for health care reform,"
stated Erik Gordon, an analyst and professor at University of Michigan's Ross
School of Business.
As the deal heads towards finalization, Johnson &
Johnson could challenge the merger due to the current agreement with
Schering-Plough. Upon challenging the buyout, JNJ could have the controlling rights
of Remicade and Golimumab placed back on them, keeping all proceeds from Merck.
Another possible solution to the proposed buyout would be for JNJ to make its own
bid for SGP. It remains unclear as to which path JNJ is leading towards.
As the companies wait for approval, Merck is looking to benefit from a promising
product line, while cutting costs where applicable. Although the company has stated
that they are not making any immediate changes, they will eventually be looking to
reduce their workforce by upwards of 15% throughout the combined companies. That
number would equate to nearly 16,000 job cuts from their current total of 106,000
employees.
By the close of trading on Monday, March 10, 2009, shares of MRK ended the session
down nearly 8% at $20.99, while SGP shares were higher on optimism of the takeover,
up more than 14% at $20.13, just below their 52-week high of $22.78. At the sound
of the closing bell on Tuesday, shares of SGP were still climbing, adding another
4.7% to close at $21.08, while MRK shares bucked their downward trend, adding
nearly 6% to $22.20.
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