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Merck & Co plans to purchase Schering-Plough
26 Mar 2009
In March 2009, Merck & Co and Schering-Plough announced unanimous approval of a definitive merger agreement. Merck & Co and Schering-Plough are expected to combine in a stock and cash reverse merger transaction. This will leave Schering-Plough, which will be renamed Merck & Co, to continue as the surviving corporation.
Under the terms of the agreement, Schering-Plough shareholders will receive 0.5767 shares and US$10.50 in cash, for each of their shares. Each Merck & Co share will automatically become a share of the combined company. The share purchase price is based on the closing price of Merck & Co stock on 6 March 2009, valued at US$23.61 per share. This brings the total pricetag for Schering-Plough to US$41.1 billion. Once the deal has closed, Merck & Co shareholders will own approximately 68% of the combined company, with the remaining 32% owned by Schering-Plough shareholders. In 2008 the combined revenues of both companies came to US$47 billion.
The reasons behind initiating such a bold acquisition lies partly in the troubled 2008 Merck & Co has experienced. The company has seen weakened sales of its HPV vaccine, Gardasil, and problems in the cholesterol drug area with some negative publicity for Vytorin, the combination drug consisting of Merck & Co's Zocor (simvastatin) and Schering-Plough's Zetia (ezetimibe), generated by a study suggesting Vytorin and Zetia were no more effective than the now-generic Zocor. In the 4th quarter of 2008, Merck & Co posted a US$1.63 billion loss, primarily due to Vioxx (rofecoxib)-related litigation. This follows on from disappointing results in the previous year. In 2007 Merck & Co's net income was US$3.28 billion, down 26% from US$4.43 billion in 2006. At one stage in 2008 Merck & Co saw its stock lose half its value, following publication of concerns regarding its cholesterol drugs and lawsuit controversy regarding Vioxx. Conversely, Schering-Plough saw a 17% increase in its sales, reaching US$4.35 billion in the 4th quarter of 2008, the same quarter in which Merck & Co saw a 3% decrease from the same quarter the year before, achieving sales of US$6 billion. Schering-Plough saw its sales increase primarily due to drugs it acquired from Organon in November 2007, as well as from judicious cost-cutting.
The acquisition is expected to achieve a number of aims, revolving around further reducing costs and accelerating growth. Currently, Schering-Plough has an ongoing cost-cutting plan, initiated in early 2008, aiming to save US$1.5billion by 2012, with more than 80% of the savings expected to be achieved by the end of 2010. Merck & Co announced that it expects to achieve substantial cost savings, once the merger is completed, of approximately US$3.5 billion per year beyond 2011. This is in addition to the ongoing cost reduction initiatives at both companies. Merck & Co states that despite the cost-saving plans, it intends to retain the bulk of Schering-Plough's staff. The merged company will, however, be looking at an overall 15% decrease in headcount across the board.
Aside from a synergistic cost-saving plan, a close analysis of what Schering-Plough's pipeline has huge importance. It is estimated that Schering-Plough potentially has US$6 billion in revenue within its pipeline. A large portion of Merck & Co's pipeline faces generic competition come 2015, meaning the company has an urgent need to bolster its pipeline to fend of generic erosion of its profit margins. For example Singulair, Merck & Co's big antiasthma product, is facing patent expiry in 2012. Schering-Plough has a complementary respiratory portfolio and expertise to help address this particular patent loss, along with several others.
Currently, Merck & Co and Schering-Plough have a long-standing joint venture operation, focused on development and marketing of cholesterol management drugs, including Vytorin. In 2007 the cholesterol-lowering sector generated US$34 billion sales in total, highlighting the huge financial potential of this area. However, there have been pitfalls for many companies investing in cholesterol-lowering drugs, with some late-stage failures such as torcetrapib, and the Merck & Co/Schering-Plough joint venture has also encountered some issues. By taking direct control, it is possible Merck & Co can streamline and maximise the potential of this particular operation.
The Merck & Co pipeline is focused on neurology, oncology, infectious diseases and cardiovascular and musculoskeletal conditions. It is currently bottom-heavy, with 49 drugs in various preclinical stages, 46 drugs in Phase I trials, 37 drugs in phase II trials; dropping to 12 drugs in Phase III trials and 3 approved drugs awaiting launch. Schering-Plough is focused on similar areas as Merck & Co, including immunological, women's health and urological therapy areas. Schering-Plough brings with it 19 preclinical programmes, 10 Phase I drugs, 18 Phase II drugs and a 10 programmes at Phase III. Of these 10 Phase III drugs, 4 are NCEs developed by Schering-Plough, whilst the remainder are drugs for which Schering-Plough holds licenses, including 2 formulations. Schering-Plough also has 3 drugs awaiting approval, one of which is the Johnson & Johnson (J&J)-developed golimumab.
Alongside the substantial overlap between the 2 pipelines, including the under-pressure cardiovascular and respiratory therapy areas in Merck & Co's portfolio, Schering-Plough brings with it drugs outside Merck & Co's pipeline focus areas, such as the successful women's health and urology portfolios it acquired from Organon in 2007. The inflammation package is also of significant interest, as it includes Remicade (infliximab). This drug is both a sticking point of the deal, and a significant asset in Schering-Plough's portfolio. It generates a hurdle to overcome in successful completion of the merger, as Merck & Co must come to an agreement with J&J over the future of Schering-Plough's current licensing agreement for this drug. As it stands, Remicade generated 16% of Schering-Plough's sales last year, and was also J&J's top-selling drug. One final issue is golimumab, the Remicade successor. Under the standing agreement, J&J will walk away with all rights to this drug if Schering-Plough is sold.
So it appears that following a difficult time, Merck & Co has prepared a plan of action to enter into the M&A field with a well thought-out, carefully-orchestrated plan to purchase a similarly-sized company. The neat overlaps between each company, balancing therapy areas, drug types and cost-cutting initiatives appears to offer a healthy combination of synergy and novelty. This means Schering-Plough's drugs and areas of expertise would fit easily with Merck & Co, while simultaneously broadening the pipeline in select therapy areas as well as at the later-stages of development. The deal has every possibility of allowing Merck & Co to see a significant resurgence in future, once the dust has settled.
