Another mega Merger and Acquisition: something is cocking in Pharma

The trend continues to bring us mega M&A’s. Merck has today consolidated its position as one of the biggest Pharma companies by announcing the acquisition of Schering-Plough Corp. for USD 41.1 billion in stock and cash. The acquisition will give the company more firepower to fight the battle against the drooping sales, generic competition and intense pricing pressures.

Merck and Schering are already partners in a couple of popular cholesterol fighters, Vytorin and Zetia (together these drugs generate USD 4 billion in annual sales) and the two companies is said to be a “perfect match”. The deal will form the world’s second-largest prescription drugmaker, only topped by Pfizer. The planned merger of Pfizer and Wyeth, a deal worth USD 68 billion, is said to be the way out of the major revenue gap that will emerge in 2011, when Pfizer’s blockbuster cholesterol-treatment drug, Lipitor, will begin to face US generic competition.

Merck’s strategy has been to buy small companies and rights to individual experimental drugs, but this has all changed. Merck has long been trying to find suitable strategies to address the falling revenue, as blockbusters like Fosamax and Zocor have seen generic competition hammer sales the last couple of years, and now the company has left “the small company strategy” and acquired a top 20 Pharma company. In addition the deal will improve earnings per share and cash flows as Merck loses patent protection on top brand names like Singulais (allergies) and Cozaar (high blood pressure). Compared to Merck, Schering has relatively few drugs nearing patent expiration and this has, in my opinion, enhanced the strategic fit.

The transaction is expected to close in the fourth quarter and the shared 2008 revenue of the two companies totalled USD 47 billion. The combined company will have a more diverse portfolio across important therapeutic areas, including cardiovascular, respiratory, oncology, neuroscience, infectious diseases, immunology woman’s health and other areas.

The big question is: how will the stock market respond to the deal? When the Pfizer-Wyeth deal was announced the Pfizer share slumped by 10% and I believe the same thing will happen to the Merck share.