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New Merck & Co stands fully behind Vytorin

This article was originally published in Scrip

Executive Summary

Merck & Co has reinforced its commitment to treating cardiovascular disease, most notably through simplifying its Zetia (ezetimibe), Vytorin and (ezetimibe plus simvastatin) joint venture with Schering-Plough.

Yesterday, Merck & Co announced its $41.1 billion buyout of Schering-Plough to create the US's second-largest pharmaceutical company (, March 9th, 2009). The second mega-merger so far this year will consolidate Merck and Schering-Plough's $4.6 billion cholesterol franchise.

In 2008, the joint venture generated revenues of $4.6 billion, and Merck believes that full ownership may allow "streamlined decision-making ability" and opportunities for new medicine combinations with Zetia. In addition, Schering-Plough's other products currently enjoy long periods of exclusivity.

The combined company will have 18 products in Phase III clinical trials and 27 in Phase II studies.

Catherine Arnold, an analyst at Credit Suisse, says that Schering-Plough could have commanded a higher value but the deal makes strategic and financial sense. Schering-Plough reported strong 2008 figures and expects 5% growth in stand-alone earnings between 2009 and 2013, boosting Merck's outlook of –6% for the same period.

Therapeutic areas highly complement each other, with little conflict, she adds. The two companies have complementary programmes in CNS, oncology, women's health and cardiology.

Schering-Plough has the least patent exposure and the most attractive expected earnings growth between 2009 and 2015 of its peers, estimated at 10% compound annual growth.

It has several late-stage products that could drive medium to long-term growth. These include the blood-thinning thrombin receptor antagonist to prevent acute cardiovascular events for those at risk, boceprevir for hepatitis C, and golimumab, in development with J&J's Centocor for arthritis.

However, J&J could add a thorn in the side of the deal if it decides to take control of the autoimmune franchise from Merck and Schering-Plough. Centocor has exclusive US marketing rights to Remicade (infliximab) and golimumab. J&J has yet to make a formal statement on the deal.

Merck name

The combined company will adopt the Merck name and Richard Clark, Merck's CEO and chairman, will take the reins. The boards of the two companies have approved the deal, which is subject to shareholder and financial regulator approval. The offer is expected to be completed before the year-end.

Richard Clark
Merck's CEO and chairman

Schering-Plough's CEO Fred Hassan said that the deal was driven by "stunning and accelerating changes" in the global macro-economic environment, which was transforming the industry's setting.

"Merck came to us at the very time these changes were unfolding. [Our board] concluded that the accelerating challenges of our environment and the attractiveness of the Merck offer meant that this was the right transaction at the right time," added Mr Hassan, who will participate in the integration.

The proposal will be funded through a combination of cash, stock and debt. 44% of the offer will be cash, with $8.5 billion of committed financing from JP Morgan Chase and $9.8 billion from existing cash. The remaining $22.8 billion will be in stock with shareholders receiving 0.5767 of Merck stock for each Schering-Plough share.

The announcement underlines the nascent culture of mega-mergers in the pharmaceutical industry. Just six weeks ago, Pfizer bought Wyeth for $68 billion to help the firm fight off a litany of pressures it faces post-2012 (, January 26th, 2009). Meanwhile Genentech is still fighting off the overtures of Roche (, March 9th, 2009).

The buyout is expected to achieve annual savings of $3.5 billion after 2011, in addition to cost-reduction initiatives previously announced by both companies that total $2.4 billion. Around 60% of the savings will be made from marketing and administration, while the remainder will come from manufacturing and R&D.

Although Merck expects that a "substantial majority" of Schering-Plough employees will remain with the group, Mr Clark told the Wall Street Journal that the integration is likely to reduce the workforce by 15%, with most of the cuts coming from outside the US.

According the SEC filings, Merck has around 55,200 worldwide employees and Schering-Plough has 51,000 employees.

Hassan to depart

The deal means that Mr Hassan is likely to move on after spending six years at Schering-Plough. He recently told Scrip that the firm would be positioned for an exit towards the end of his radical "Productivity Transaction Programme", which was in the fourth of five stages.

Mr Hassan joined the company as CEO in 2003 and inherited a morass of challenges, including two federal investigations (into improper marketing practices, including alleged kickbacks) and a $500 million fine for the US FDA for breaching good manufacturing processes.



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