Wednesday, December 16, 2009

2009 Big Pharma DOTY Nominee: Merck/Schering-Plough

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

"What are we on?" you're asking. How can Merck's acquisition of Schering-Plough stand a chance of winning a Big Pharma Roger, when it's up against Pfizer/Wyeth? At $41 billion or so, the Merck deal was considerably smaller than Pfi/Wy, and it wasn't transformative in the way Pfi/Wy is supposed to be (new kind of pharma 'n all that).

Still, we all know size isn't everything, and that details count. Merck might've only been buying time through this deal--time to figure out what on Earth to do about a $4 billion patent-expiry problem--and will be doing the usual, un-prize-worthy cost-slashing (the deal's synergies represent a whopping 40% of sales). But what it lacks in headliners it makes up for, we argue, in behind-the-scenes cleverness.

Firstly, Merck got Schering-Plough for cheap. Less glitzy numbers, then, but less costly for the buyer, too. Merck paid only about 40% more per share than the price when CEO Fred Hassan joined in 2003....and it paid about 60% in stock, unlike both Pfizer and Roche which had to cough up hard cash for their booty.

Yet Schering brings valuable assets to Merck: a marketed portfolio that fits nicely into Merck's current organization, and an R&D palette in the same therapeutic areas but with very little mechanism-of-action overlap. Cheap diversification, then, to create a much more impressive combined pipeline, but within comfortable boundaries.

The second clever bit was the deal's structure, designed to minimize the chance that Johnson & Johnson comes in to spoil the party. Per the companies' 1998 agreement granting Schering ex-US rights to anti-TNF drugs Remicade (and follow-on Simponi), J&J has a change of control clause allowing it to scoop back those rights in the event that Schering-Plough is taken over. (The two drugs in question are potentially worth up to $8 billion together.)

But technically Schering-Plough isn't being taken over: the deal is a reverse-merger in which Schering is the surviving entity--renamed as Merck. And run by Merck's CEO Dick Clark out of Whitehouse Station, N.J. Crafty, eh?

Now okay, J&J has sought arbitration. So that crafty bit may not work out. (And indeed, management at the time of the merger provided guidance both with and without the anti-TNFs.) But good for them, we say, for trying.

Vote for the shrewd under-dog deal, then; the one that appears run-of-the-mill but which may be the smartest, at least in the short-to-mid-term, by going for certainties and not betting on entirely new models. Vote here for the deal that in fact isn't simple or risk-free but which takes a gamble--yet not a crazy, potentially fatal gamble. Vote here for the deal that lets Merck wait and see for a while before committing to anything radical.

(As for what happens when the bought time runs out...well, watch out for DOTY 2012 or thereabouts.)

1 comment:

condor said...


[Even if unintended -- as ironic content -- this is hilarious!]