Merck deal ups merger pressure

Bloomberg

Merck’s $41.1 billion takeover of Schering-Plough puts pressure on product-hungry drugmakers Sanofi-Aventis and AstraZeneca to make megamergers of their own.

Merck’s agreement, which follows Pfizer’s $68 billion bid for Wyeth and Swiss drugmaker Roche Holding’s $45.7 billion offer for Genentech, will propel other drugmakers fearful of missing opportunities, said David Moskowitz, an analyst with Caris & Co. in Washington.

The world’s biggest drugmakers, armed with about $100 billion in cash and short-term investments, are seeking acquisitions to replace $84 billion in sales from products nearing the end of their patent life. The takeover of Schering-Plough by Merck would give Merck a larger experimental pipeline and products unhindered by imminent patent losses.

"Most companies now are pretty cheap, really, and anyone sitting on cash can make a bid," said Nick Turner, a Mirabaud analyst in London, in an interview Monday. "This could be a trigger for a wave of mergers and acquisitions."

Paris-based Sanofi may target Bristol-Myers Squibb of New York, which sells the French company’s Plavix blood thinner and Avapro hypertension treatment in the U.S. Other possible suitors for Bristol-Myers include AstraZeneca of London and Johnson & Johnson of New Jersey, Moskowitz said. J&J may also make a bid for Schering-Plough, Sanford C. Bernstein analyst Tim Anderson said in a note to clients.

Market speculation

Bristol-Myers rose 66 cents, or 3.6 percent, to $19.01 in New York Stock Exchange composite trading Monday on investor speculation it may be a target, Moskowitz said. The U.S. drugmaker has bolstered its pipeline of experimental drugs, making it a candidate for acquisition, he said.

J&J Chief Executive Officer William Weldon said in a Jan. 20 interview he has a list of takeover targets and is evaluating "unique opportunities" and "big mergers and acquisitions."

Sanofi Chief Executive Officer Chris Viehbacher, while not ruling out a large deal, has said he will seek "small to medium-sized" acquisitions to replace revenue that will be lost to generic competition. He told CNBC in a March 5 interview the French company’s partnership with Bristol-Myers is "sufficient" for now.

Other drugmakers have also said they will avoid large mergers. Andrew Witty, chief executive officer of London-based GlaxoSmithKline, said last month that a megamerger would "distract" the company. Glaxo will rely on agreements valued from about $50 million to the "low billions," Witty said in a January interview.

Chief Executive Officer John Lechleiter of Eli Lilly & Co. said his company is shopping for small to mid-sized acquisitions after buying ImClone Systems in November for $6.3 billion.



Novartis also shopping

Novartis CEO Daniel Vasella said that the Swiss drugmaker will continue to make small acquisitions to replace products facing generic competition. AstraZeneca CEO David Brennan has also said he favors smaller licensing deals to shore up its pipeline of new products. The heads of Bristol-Myers Squibb and Abbott Laboratories have made similar statements.

Licensing entanglements between pharmaceutical companies may complicate future deals.

Schering-Plough sells the anti-inflammatory drug Remicade outside the U.S., and its agreement allows J&J to claim all rights if Schering-Plough’s ownership changes, said Lawrence Biegelsen, a Wachovia Capital Markets analyst in New York. Remicade generated $2.19 billion for Schering-Plough last year, 16 percent of company revenue.

Merck said the acquisition won’t affect Schering-Plough’s agreement to share revenue on Remicade with J&J. Merck said it will keep the rights because the deal is structured as a reverse merger, meaning that for accounting purposes, Schering-Plough rather than Merck will be the surviving corporation.

A bid by J&J is unlikely, as J&J isn’t known for hostile bids, said Les Funtleyder, a Miller Tabak & Co. analyst in New York. Schering-Plough’s products seem a better fit for Merck, though a fight can’t be ruled out, he said.

"J&J has been oddly silent in this sort of megamerger festival we’ve had," Funtleyder said. "J&J, I’m sure at this moment, is looking at their options, legal and strategic."

Pfizer has lost 60 percent of its value since completing its acquisition of Pharmacia in 2003. Glaxo’s shares have declined 46 percent since the U.K. drugmaker bought SmithKline Beecham in 2000.