Merck & Co’s proposed acquisition of Schering-Plough seems to have the backing of most industry analysts and S-P shareholders, although a slide in Merck’s share price suggests some investors are less than happy.
News of the $41.1 billion deal caused Merck stock to fall 7.7% to $20.99, but most observers feel that the bigger of the two New Jersey-based firms has done a good job of coping with some major patent expiries at a very reasonable price. Sales of the osteoporosis blockbuster Fosamax (alendronate) are shrinking following the introduction of generics in the USA, and the same will happen in a few years’ time to the $4 billion-a-year asthma drug Singulair (montelukast).
On the conference call that followed the announcement, Merck’s head of R&D, Peter Kim, said that S-P’s presence in oncology and neuroscience will help his firm expand in an area where it has not been strong before and the deal will also boost Merck’s biologics pipeline. He added that the two pipelines are “remarkably complementary” and combined, they will be “the best in the industry by far.”
Questions over Remicade rights
However much of the call concentrated on what is going to happen to Remicade (infliximab), the rheumatoid arthritis blockbuster S-P markets outside the USA in an agreement with Johnson & Johnson. Under a termination clause in that deal, the rights to Remicade and Simponi (golimumab), a once-monthly anti-inflammatory in Phase III, could revert to J&J if control or ownership of S-P changes.
Merck countered several questions from analysts on this topic by noting that the deal is a reverse merger, with S-P as the surviving public company. Merck general counsel Bruce Kuhlik said “we are very confident in our belief that this will not be a change in control”.
The companies noted that by 2011, the merger should generate $3.5 billion in annual cost savings and the current work force of more than 100,000 could be reduced by up to 15%. Most of those cuts are likely to come mainly from outside the USA.
Overall, the response on Wall Street has been positive. Steve Scala of Cowen & Co issued an investor note saying that the combined company “appears better than Merck stand-alone.” However, he cautioned, “much hinges” on keeping hold of Remicade and golimumab,
John Boris of Citigroup said that the deal makes “strategic and financial sense for shareholders”, adding that it will help Merck navigate patent expirations, as well as diversify its product base and geographical footprint. However he warned that J&J could possibly come in with an offer for S-P.
