Tuesday, September 01, 2009

Is it Merck or is it Schmerck?

When is a reverse merger not really a reverse merger? Maybe when Company A, which is acquiring Company B, tries very hard to convince everyone that it really isn't taking over that other company.

In yesterday's announcement about its new management structure, Merck went out of its way to emphasize that "about 40 percent of Schering-Plough's senior leaders will be part of the newly combined company in executive roles." This is an issue, because Merck must convince a lot of people - particularly arbitrators - that it's really not taking over Schering-Plough.

You may recall that, when its $41.1 billion deal was announced last March, Merck insisted Schering-Plough would be the surviving company, even though it would be called Merck. This didn't hold water with Johnson & Johnson, which is Schering-Plough's U.S. partner in selling Remicade, the anti-TNF agent for treating arthritis and, importantly, the recently approved Simponi follow-up drug.

By May, J&J filed for arbitration, arguing that Merck and Schering-Plough are simply trying to avoid triggering a change of control provision that would allow J&J to gain ownership of the drugs. Given Remicade's blockbuster sales - it generated $2.1 billion last year - it's not surprising that J&J would want 100% ownership of a valued product or that Merck and Schering-Plough would work so hard to keep it.

And so this week's announcement appears to be a carefully calibrated attempt to blunt that argument by pointing out that several Schering-Plough execs will be heavily involved in top-tier decision making. These include Raul Kohan, the head of the Intervet Animal Health unit, and Stan Barshay, as head of the Consumer Health business, although his status is listed as interim. For now, though, just two of five primary divisions will be run by Schering-Plough people.

Who else from Schering-Plough's upper stratosphere will survive the process? There's Richard Bowles, who is actually a veteran of both drug makers and will become the newly annointed chief compliance officer. A handful of folks will continue to run various manufacturing operations and report to Willie Dees, Merck's manufacturing czar, while another eight people will run research sites or operations and report to Peter Kim, who oversees Merck's labs.

There was, however, no mention of any role for Fred Hassan, the perennially upbeat Schering-Plough chief executive. Perhaps if Merck's board really wants to make good on its contention that this is a reverse merger, the top job will be handed over. Dick Clark, Merck's chief executive, could finish his career comfortably as chairman. Whether investors would be pleased is another matter. But there's no arguiing that would push the managerial change beyond 40 percent in a very symbolic way.

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