Merck to buy Schering-Plough in $41 billion deal

Reported by David Jolly

With the purchase, Merck is expanding its franchise in cardiovascular, respiratory and oncology drugs and shoring up its research pipeline, in particular with a Schering-Plough product called TRA, a promising drug designed to prevent blood  clotting.

In addition, Merck will benefit from the worldwide reach of Schering- Plough, which generates about 70 percent of its sales outside the United States, including more than $2 billion in annual revenue from emerging markets.

The companies said in a joint statement that the merged company would keep the name Merck and that the deal had been unanimously approved by their boards. Richard Clark, Merck’s chairman and chief executive, will lead the combined company.

The deal is the second major pharmaceutical deal this year after Pfizer, the world’s biggest drug maker, agreed in January to pay $68 billion for Wyeth. And Roche, the Swiss pharmaceutical company, is pursuing a full acquisition of the California biotechnology company Genentech, in which it already owns a majority stake.

Merck is among the drug makers that face the hardest time in the next decade because of patent expirations, said Richard Purkiss, a drug sector analyst at Atlantic Securities in London. Most pressingly, it faces the expiration in 2012 of the patent on Singulair, the asthma drug that is its top-selling product.

In contrast, “Schering- Plough doesn’t have much exposure to patent expiries in the same time frame,” he said. “This is really about combining to protect earnings.”

Shares of Schering- Plough rose more than 8 percent Friday amid speculation that the company had been pursuing a deal with either Merck or Johnson & Johnson, with which it jointly produces the arthritis drug Remicade.

Under the terms of the agreement announced Monday, Schering-Plough shareholders will receive 0.5767 share of the combined company and $10.50 in cash for each share of Schering-Plough. Each Merck share will automatically become a share of the combined company. Based on Merck’s closing stock price Friday, the deal values Schering-Plough at $23.61 ar share, or $41.1 billion, a premium to Schering-Plough shareholders of about 34 percent.

The 44 percent of the deal that is being paid in cash will include $9.8 billion from existing cash balances and $8.5 billion from financing provided by JPMorgan Chase.

Merck shareholders will own about 68 percent of the merged company, and Schering-Plough shareholders will own the rest. Merck said it expected the deal to contribute “modestly” to its earnings in the first year and “significantly”  thereafter.

“We are creating a strong, global health care leader built for sustainable growth and success,” Clark said in the statement. “The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly in high-growth emerging markets. The efficiencies we gain will allow us to invest in strategic opportunities, while creating meaningful value for  shareholders.”

The transaction will be structured as a “reverse merger” in which Schering-Plough, renamed Merck, will continue as the surviving public company.

Merck said it expected annual cost savings of about $3.5 billion after 2011. The savings “are expected to come from all areas across the combined company and from the full integration of the Merck/Schering-Plough Pharmaceuticals cholesterol joint venture,” it said, and are in addition to previously announced cost-cutting measures at the two companies.

David Moskowitz, an analyst at Caris & Co. in New York, suggested that the companies might have to raise the offer price above $23.61.

“I think it should be at least $12 billion to $15 billion higher,” he told Reuters, as investors might not be happy until the price reaches “the high $20s or $30” a share.