Merck to buy Schering-Plough for $41.1 billion

NEW YORK (Reuters) - MERCK (MRK.NY)& Co Inc said on Monday that it would acquire SCHERING (SCH.XE)Plough Corp for $41.1 billion, uniting the makers of cholesterol drugs Zetia and Vytorin in the second megadeal for Big Pharma in weeks.

The two New Jersey-based drugmakers, which announced significant job cuts last fall, have been striving to become more efficient amid setbacks to Vytorin and Zetia, whose combined fourth-quarter sales slumped 26 percent.

The transaction offers a premium of 34 percent for Schering-Plough shareholders based on Friday's closing price and will generate savings of $3.5 billion annually after 2011.

It will also double the number of experimental medicines Merck has in late-stage development to 18, and diversify Merck's portfolio of medicines to include cardiovascular, respiratory, oncology, neuroscience and infectious disease.

Schering-Plough shares were up 12 percent at $19.75 before the market opened, while Merck fell 12 percent to $20. But the huge deal failed to instill confidence and ignite a rally in the broader market, which was set to open lower.

The Merck/Schering-Plough marriage follows on the heels of Pfizer's $68 billion purchase of Wyeth, another New Jersey-based pharmaceutical company. It finally consummates a deal that has been speculated upon for years, given the marketing partnerships and cost savings opportunities between Merck and Schering-Plough.

"It seems somewhat inevitable," said analyst Jeffrey Holford of Jefferies in London, referring to an industry coming to grips with patent expirations on top-selling medicines as major cost cuts have run their course.

"The industry needs to shrink because there is just not the same market for branded pharmaceuticals going forward as there has been over the last 10 years," he said. "There is overcapacity, and (Merck and Schering-Plough) need to take each other's capacity out of the market."

Under the agreement, Schering-Plough shareholders will receive 0.5767 shares of Merck and $10.50 in cash for each of their shares. Each Merck share will automatically become a share of the combined company.

The deal will be financed with $9.8 billion in cash, $8.5 billion in debt and $22.8 billion in Merck stock.

Merck Chief Executive Richard Clark will lead the combined company, with Merck shareholders owning a stake of about 68 percent.

Merck, which said it would maintain its dividend, expects the deal to add modestly to operating earnings in the first full year following completion and "significantly" after that.

The combined 2008 revenues of the two companies totaled $47 billion, and Merck believes it will maintain its current credit ratings.

Schering-Plough earnings have stalled over the past year due to a plunge in sales of Vytorin and Zetia, its biggest product, at a time when the company's experimental medicines are going into extremely costly late-stage trials.

Merck's deeper pockets will help fund research on Schering-Plough drugs, according to Viren Mehta, a principal of Mehta Partners in New York, including its so-called Thrombin Receptor Antagonist for preventing blood clots and a treatment for hepatitis C called boceprevir.

"The deal gives Merck more breathing room," Mehta said, as it girds for patent expirations in 2012 on its $4-billion-a-year Singulair asthma drug and by next year for its blockbuster Cozaar blood-pressure treatment. Company profits have already suffered from the arrival of cheaper copycats last year for its Fosamax osteoporosis drug.

PRICE ISSUE

The deal already has come under fire when it comes to price.

"I think it should be at least $12 billion to $15 billion higher," said Caris & Co analyst David Moskowitz. "I don't think investors will be happy until the price comes up to the high-$20's or $30 (per share)." He noted that Schering-Plough's overseas rights to arthritis drugs Remicade and golimumab were worth that much.

He expressed surprise at Merck's ability to maintain rights to the drugs and not having to hand them back to Johnson & Johnson under a change of control clause.

"There will be sparks today," he predicted, as shareholders share his disappointment with the price.

But there was little excitement in the broader market, as Dow Jones futures fell 1.6 percent and S&P 500 futures declined 1.9 percent before the opening bell.

"In any other market, this would be really bullish news," said Peter Kenny, managing director at Knight Equity Markets. "The fact that you're seeing a muted response -- none at all, really -- speaks to the overall weight that this market feels because of the decelerating macroeconomic environment.

"This is a cost-saving move for both companies," he added. "It makes sense as a combination for future growth, but the futures aren't paying attention."

CHOLESTEROL SETBACKS

Vytorin and Zetia sales plunged last year, along with the share prices of the two companies, after a pair of clinical trials led to questions about the safety and effectiveness of the medicines.

One of the studies contained data that suggested a possible association with increased cancer risk, but the drugmakers and some researchers have said that data was likely due to chance.

Vytorin combines Zetia with Merck's Zocor, which is now available in generic form as simvastatin.

Analysts have said the cloud hanging over the medicines will likely remain until long-term data on their ability to prevent heart attacks becomes available from a major study in 2011 or 2012.

Analyst Andrew Weiss of Swiss bank Vontobel said the deal was probably about cost savings from integrating the Vytorin franchise.

That sentiment was shared by Caris & Co's Moskowitz, who said that despite his frustration on price, the deal makes sense on other levels.

"They'll get Schering's allergy products, which can be sold alongside Merck's Singulair asthma drug, and they'll now own Vytorin and Zetia outright," Moskowitz said.

"Vytorin and Zetia together are $4.5 billion in annual sales, and it looks like the drugs are stabilizing (after sales declines)," he added. "That's a lot of cash flow, even if the drugs are not growing, which will fund R&D and the deal."

(Reporting by Edward Tobin in New York and Ben Hirschler in London, Sam Cage in Zurich; Editing by Lisa Von Ahn)