Merck deal stirs up drug industry

A wave of consolidation in the global pharmaceuticals industry swelled yesterday as Merck bought its United States rival Schering-Plough for US$41.1 billion ($82.6 billion) and the biotechnology pioneer Genentech neared a deal to sell itself to Roche of Switzerland for US$46.7 billion.

Facing an onslaught on high drug prices by the new Obama Administration in the US, and with a shortage of new products to replace ageing blockbusters, Merck promised enormous savings from merging its operations with Schering-Plough, including a 15 per cent reduction in the companies' combined global workforce.

About 16,000 jobs could be lost worldwide, including some in Britain, where the pair employ almost 3000 people.

The cash-and-shares deal unites the makers of cholesterol drugs Vytorin and Zetia, as both pills are losing customers to cheaper, generic competitors. Vytorin is jointly marketed by the two companies.

Merck's other big-selling drugs include Singulair, an asthma medicine that is close to losing patent protection, and the fast-growing cervical cancer vaccine Gardasil. Schering-Plough brings a stronger presence in biotechnology, the manufacturing of drugs based on the human body's own immune system.

Together, the two companies will have US$42 billion in annual sales. The deal is the largest in Merck's 122-year history, and comes less than two months after Pfizer - the maker of Viagra and the cholesterol-buster Lipitor - agreed to pay US$68 billion for vaccines specialist Wyeth.

In the intervening six weeks, the Obama Administration has announced new policies to allow the importation of cheap medicines from abroad to drive down prices, and demanded a price cut on drugs given to patients on the state-funded Medicaid programme.

Fred Hassan, the chief executive of Schering-Plough, said he decided to sell because of "stunning and accelerating changes" in the economy, ever-tougher scrutiny by regulators and pressure from governments to cut prices.

Dick Clark, the chief executive of Merck, who will run the combined group, insisted the move was about more than cost-cutting, citing Schering-Plough's strong quality research operations.

Schering-Plough shareholders will end up with the equivalent of 0.5767 Merck shares and US$10.50 in cash - a premium of more than one-third over the value of their holding at the end of last week - and Merck is also assuming US$8.5 billion of debt, taking the value of the deal to US$41.1 billion.

The agreement prompted a wave of speculative buying of Big Pharma shares and helped to bring some optimism to battered stock markets. Some analysts warned that Johnson & Johnson, which jointly markets Schering-Plough's best-selling arthritis medicine Remicade, could make a competing bid.

The future of the two companies' joint venture could be thrown into doubt as a result of Merck's intervention.

Investors also speculated yesterday about which other drug companies could become takeover targets next, and Bristol-Myers Squibb shares soared 5 per cent on renewed speculation that one of the British players - GlaxoSmithKline or AstraZeneca - could make a bid.

Both companies have said they believe a mega-merger would be a distraction, and have concentrated instead on finding smaller acquisitions.

There were reports last night that an even bigger pharmaceuticals deal could follow involving Genentech, the pioneering biotechnology firm which is already 56 per cent owned by the Swiss giant Roche.

Roche's chairman Franz Humer has been trying for almost a year to take full control of its US-based partner, whose most profitable drugs include Avastin for fighting cancer.

- INDEPENDENT