UPDATE 7-Merck to buy Schering-Plough for $41.1 billion

Mon Mar 9, 2009 6:07pm EDT

 * Deal doubles Merck late-stage drugs to 18
 * Seen as defensive move against U.S. drug price caps
 * Merck offers 0.5767 share plus $10.20 cash/SGP share
 * Analyst raises possible J&J bid
 * SGP up 14.2 pct; Merck down 7.7 percent, CDS widens
 (Adds links to related stories, closing share prices)
 By Edward Tobin and Ransdell Pierson
 NEW YORK, March 9 (Reuters) - Merck & Co Inc (MRK.N) said
on Monday it would acquire Schering-Plough Corp SGP.N for
$41.1 billion, uniting the makers of cholesterol drugs Zetia
and Vytorin in the second megadeal for big pharma in weeks.
 The deal between the New Jersey drugmakers comes amid a
harsher climate for pharmaceutical companies, as they have
failed to produce enough new drugs to replace old ones, and as
the new Obama administration prepares healthcare reforms that
could pressure drug prices.
 It also landed the same day that Roche Holding AG (ROG.VX)
moved closer to acquiring the 44 percent of Genentech Inc
DNA.N that Roche does not already own, with a source telling
Reuters the two sides are discussing a deal for about $46.7
billion. [ID:nN09468207]
 Schering-Plough's earnings and share price have deteriorated
over the past year due to a plunge in sales of Vytorin and
Zetia, its biggest products, even as several of its most
promising drugs move into very costly late-stage trials.
 Merck, which has seen profits and shares battered by
Vytorin's decline and other setbacks, has deeper pockets and
would help fund research on Schering-Plough products, including
promising blood clot and hepatitis C drugs.
 "The deal gives Merck more breathing room," said Mehta
Partners analyst Viren Mehta, as it girds for patent expirations
in 2012 on its $4 billion-a-year Singulair asthma drug and by
next year for its Cozaar blood-pressure treatment.
 The deal, which many analysts have forecast for years given
the Vytorin partnership between Merck and Schering-Plough,
follows Pfizer Inc's (PFE.N) $68 billion planned purchase of
Wyeth WYE.N. Sanford Bernstein analyst Tim Anderson said it
was surprising that Wyeth and Schering-Plough agreed to sell,
given their depressed stocks and their robust long-term
outlooks.
 "What could this imply about how pharma company management
teams view the future of the industry?" Anderson said.
 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.
 Merck and Schering-Plough, which announced significant job
cuts last fall, said about 15 percent of their combined
workforce would be eliminated under the deal, with most job
cuts to take place outside the United States.
 "It seems somewhat inevitable," analyst Jeffrey Holford of
Jefferies in London said of the deal, referring to an industry
coping with generic rivals as 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. There is overcapacity and
(Merck and Schering-Plough) need to take each other's capacity
out of the market."
 It will also double the number of experimental medicines
Merck has in late-stage development to 18 and diversify Merck's
lineup of medicines to include cardiovascular, respiratory,
oncology, neuroscience and infectious disease.
 Schering-Plough shareholders will receive 0.5767 shares of
Merck and $10.50 in cash for each of their shares, valuing each
share of Schering-Plough at $23.61. [ID:nBNG461724]
 Schering-Plough investors have reason to feel
short-changed, said Caris & Co analyst David Moskowitz.
 "I think it should be at least $12 billion to $15 billion
higher," he said. "I don't think investors will be happy until
the price comes up to the high-$20's or $30 (per share)."
 Schering-Plough shares rose 14.2 percent to $20.13, still
below their 52-week high of $22.78. Merck closed down 7.7
percent at $20.99, after hitting a 14-year low of $20.10.
 Merck's 4.75 percent notes due in 2015 traded weaker, with
spreads widening to 149 basis points over Treasuries, yielding
4.4 percent. On March 4, in their last notable trade, the
spread was 124 basis points with a yield of 4.2 percent,
according MarketAxess data.
 ARTHRITIS DRUG RIGHTS IN QUESTION
 A big question is whether Merck will inherit
Schering-Plough's overseas rights to nearly $2 billion-a-year
Remicade and newer arthritis drug golimumab.
 Analysts expressed surprise at Merck's confidence it will
not have to hand back the arthritis drug rights to Johnson &
Johnson (JNJ.N) under a change of control clause.
 Merck, which structured its takeover as a reverse merger
that analysts said may give it some leverage to protect the
arthritis drugs, said it had not discussed the matter with J&J
and that the high-stakes issue would be settled by binding
arbitration if J&J throws up a roadblock. [ID: nN09359732]
  "It is theoretically possible that J&J comes in and bids
for Schering-Plough, because the fit between Schering-Plough
and J&J would be a good one," said Sanford Bernstein analyst
Tim Anderson.
 J&J officials declined to comment.
 The deal is composed of $9.8 billion in cash, $8.5 billion
in financing provided by JPMorgan Chase & Co (JPM.N) and $22.8
billion in Merck stock.
 Merck Chief Executive Richard Clark, who investors initially
considered a caretaker CEO when he took the helm in 2005, will
lead the combined company, with Merck shareholders owning a 68
percent stake. [ID: nN09455138]
 Schering-Plough CEO Fred Hassan, who turned around Pharmacia
Corp before selling it to Pfizer Inc (PFE.N), said his plans
after the Schering-Plough deal is completed are unclear.
 Merck, which vowed to maintain its dividend, expects the
deal to close in the fourth quarter and add modestly to
operating earnings in the first full year following completion
and "significantly" after that.
 The combined 2008 revenue of the two companies totaled $47
billion and Merck believes it will maintain its current credit
ratings.
 Bernstein's Anderson cautioned that such a big company,
with combined revenues close to Pfizer's, could have a much
harder time delivering earnings growth.
 J.P. Morgan acted as financial adviser and Fried, Frank,
Harris, Shriver & Jacobson LLP acted as legal adviser to Merck.
Goldman, Sachs (GS.N) and Morgan Stanley (MS.N) acted as
financial advisers and Wachtell, Lipton, Rosen & Katz acted as
legal adviser to Schering-Plough.
 (Reporting by Edward Tobin, Ransdell Pierson and Walden Siew
in New York and Ben Hirschler in London, Sam Cage in Zurich;
Editing by Lisa Von Ahn, Andre Grenon, Richard Chang)
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