Merck moves for Schering in $41bn mega-merger

The year of the mega-merger continues with Merck & Co’s move to buy Schering-Plough for $41.1bn, with the intention of boosting its pipeline, entering new markets and creating a “powerful biologics presence”.

Merck follows Pfizer and Roche to become the third company this year to launch a takeover bid worth over $40bn, drawing on their sizeable cash reserves in an attempt to equip themselves for challenging years ahead. Although critics argue that mergers of scale do not maximise stockholder value and diminish R&D returns, many feel they are necessary to ensure earnings per share continue to grow in the current environment.

Among the proponents of mega-mergers is Merck’s CEO Richard Clark, who believes the acquisition of Schering will create “a strong, global healthcare leader built for sustainable growth and success”. Clark added: "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.”

Merck is expecting the merger to generate annual savings of $3.5bn from 2011 onwards, with some of this probably being a result of integrating operations from their Vytorin (ezetimibe/simvastatin) joint venture. Merck has outlined the factors it believes makes Schering a wise acquisition target, with the companies’ complementary product portfolios and pipelines topping the list.

Through the acquisition Merck will double the number of products it has in Phase III to 18, with this being supported by “high potential” early and mid stage pipelines. In addition the life cycles of existing products could be extended, by creating new combinations or formulations using Merck’s and Schering’s respective therapeutics and technologies.Merck also listed the boost in production capacity as a justification for the takeover, stating that it will realise synergies by looking at all operations in light of its “lean manufacturing and sourcing strategies”, which IBM said cut plant operating expenses by 20 per cent.

Although Merck has indicated that the merger will result in a 15 per cent reduction in staff there is currently no indication whether any manufacturing facilities will be sold, with the company instead focusing on the benefits of having additional biologics and sterile medicines capacity.

Merck, like the majority of the industry, is increasingly focusing on biologics, with the company hoping the combination of its novel proprietary biologics platform with Schering’s expertise will equip it for growth. This expansion into new product markets will be accompanied by a furthering of Merck’s geographic reach, helping it to generate a larger proportion of its revenues from outside the US.

Schering generates 70 per cent of its revenue from countries other than the US and Merck hopes the resulting company will have a 50-50 split with the rest of the world.

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