Monday, March 09, 2009

Merck and Schering-Plough: Vive La Difference?

So Merck has overcome its institutional reluctance to commit to large-scale M&A and pulled the trigger on a $41 billion Made-in-New Jersey-deal with Schering-Plough.

Unlike a lot of observers who can lay claim to predicting this one, we counted ourselves among the skeptics that Merck would make this kind of move. That said, it's hardly a shocker, replete with cost-savings, synergies and other happy buzzwords that consolidation-hungry folks bandy about in discussing who's gonna pair up with whom. On to the highlight reel.

The deal specs:

  • Values SGP at $41.1 billion in cash and Merck stock, a 34% premium to SGP's Friday close; Merck will borrow $8.5bb from JPMorgan to finance the deal.
  • Allows Merck to get in on some of the diversity action Pfizer is after in its takeout of Wyeth. Merck gets Schering's animal health biz as well as its consumer unit, and bulks up its overseas presence (53% of the combined company's revenue will come from ex-US, 12% from emerging markets).
  • Streamlines the firms' commercial activities and will account for $3.5 billion in annual cost savings by 2011 on top of what the two companies promised individually up until now.
  • Gives Merck what it deems the necessary "critical mass" to absorb economic- and health-reform-driven shocks to the system, not to mention some interesting projects in a much deeper late-stage pipeline (like boceprevir in HCV and TRA in cardiovascular disease)
  • And consolidates the operations and decision making from the two companies' cholesterol JV.

It also raises some interesting questions, including:

  • Just how will Johnson & Johnson react to the quirky structure of the transaction, seemingly designed to allow "a new Merck" to hang on to the J&J-partnered rheumatoid artritis drugs Remicade and golimumab?
  • Is the premium high enough?
  • Despite being able to describe in detail earnings per share guidance for the combined company, why couldn't CFO Peter Kellogg break out the revenue numbers?
  • For all the talk about very little overlap in the two firms' pipelines in terms of their molecules' mechanisms of action there's certainly plenty of therapeutic area overlap. Will this raise regulatory concerns?
  • And how will adding sunscreen and dog-trackers to the famously science-driven Merck affect the company's DNA? And what was up with that spike in SGP trading volume and price last Friday?

We'll be all over this deal in the Pink Sheet Daily, the Pink Sheet and IN VIVO, tomorrow and in the days and weeks ahead, and of course we'll have some treats for you here on the blog too. Stay tuned!

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