Merck’s plan to buy out Schering-Plough for over $41 billion was more dramatic than Pfizer’s announcement to acquire Wyeth for $68 billion just a few weeks ago.
It was an announcement that shocked many in the global pharmaceutical industry. Merck’s plan to buy out Schering-Plough for over $41 billion was more dramatic than Pfizer’s announcement to acquire Wyeth for $68 billion just a few weeks ago. For decades, the consecutive Merck management had maintained a position that acquisitions had to be innovation-driven and not topline-driven.
Like all its peers, adversities of the present economic environment, acute pipeline challenges and the geographical shift of growth from West to East cracked that cherished claim of Merck.
International business magazine Forbes wrote, “Merck’s decision to purchase smaller rival Schering-Plough for $41.1 billion risks losing much of what made Merck so wonderful in the first place.”
Merck had strongly withstood the temptation of being the top company and let GlaxoSmithKline and then Pfizer take those coveted positions in the nineties, backed by aggressive acquisitions. Big names like Warner Lambert, Pharmacia and Parke Davis vanished in that first wave of mega-mergers steered by cash rich Big Pharma.
Merck, instead of getting into that acquisitive mode, believed in the fundamentals of an innovation led business model and brought out a series of blockbuster drugs like cholesterol reducing Zocor.
Merck is credited with having brought into the market the maximum number of new classes of compounds. Merck did buy smaller companies but those buyouts were mostly to acquire critical assets or technology or accelerate its own research goals.
But in 2004, alleged adverse reactions associated with anti-inflammation drug Vioxx short-circuited Merck’s dream run. The risk of losing billions of dollars in lawsuits threatened the solid position that Merck had for most of its century old history.
To make the going tough, patent expiries burnt a major hole into Merck’s revenues. Merck lost rights over two of its biggest blockbusters Zocor and Fosamax in the last few years. Before the patent expiry, Zocor was the second largest selling global drug brand after Pfizer’s Lipitor.
Next in line to go off-patent could be its other big anti-hypertensive brands like Cozaar and Hyzaar. Added to these patent expiries are tough regulatory environment, pressure on keeping drug prices low and the industry-wide crisis of getting good drugs into the market to keep sales growth intact.
Eventually, Merck had to break the tradition and go for the big deal. Schering-Plough was the closest that it could align and look at a takeover. Merck had been working with Schering-Plough to develop Vytorin, a combination of Zetia or ezetimibe and its own Zocor. That drug may not have worked very well for the two companies for want of additional data, but the two companies seem to have now found some synergies to pursue the goal of having a strong pipeline of new drugs. Taken together, the two claim to have a pipeline of 18 drugs in phase-three clinical trials. While there is no guarantee of the feasibility of these experimental drugs reaching the market, the number definitely looks impressive.
Also, Merck CEO Richard Clarke has stressed a complementary product portfolio, a larger global presence, and less vulnerability of patent-protected drugs from Schering-Plough’s stable. Some of Schering-Plough’s best drugs include Remicade, Nasonex and Temodar. Also, Merck will look at Schering-Plough’s broader presence in the biologicals segment, relatively large operations in animal health and also over-the-counter drugs like Clarinex.
Schering-Plough has been led by Fred Hassan over the last six years with a mandate to strengthen the company. If Hassan has worked quietly and managed to bring the most conservative Merck to the table with an impressive pipeline of drugs and a diversified portfolio, many believe he did a good job. Bloggers now say Hassan is in for a $60 million bounty as part of the package to effect a change of control. That should be quite a handful for him and should leave Merck equally happy with its newest acquisition.
Pillman is an executive closely linked to the global pharma industry. 
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