Merck, Schering-Plough In $41B Merger

The pharmaceutical giant Merck announced Monday it is acquiring rival Schering-Plough in a deal valued at $41 billion. Merck will pay a hefty premium for Schering in the cash and stock deal, which has already been approved by both boards.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, Host:

And I'm Robert Siegel. With the credit markets in such bad shape, the number of big corporate mergers has slowed to a trickle, but not in the pharmaceutical business. Today, Merck and Schering-Plough said they were joining forces. The deal is valued at more than $41 billion. Meanwhile, there were reports that Genentech and Roche are close to a deal of their own. NPR's Jim Zarolli looks at why the drug business is changing so fast.

JIM ZAROLLI: Back in the days when stock prices were high and companies could get all the capital they needed, every Monday seemed to bring news of another big merger. So the announcement today that Merck is buying Schering-Plough brought a feeling of deja-vu to Wall Street. Here is Merck chairman Richard T. Clark, who will lead the new company.

RICHARD CLARK: This will be a powerhouse in the health care industry as we move forward on a global basis. There is no better combination than Merck and Schering-Plough.

ZAROLLI: This is the second big drug merger in six weeks; the other was Pfizer's acquisition of Wyeth. What's driving this is a combination of factors. Veran Mehta(ph), who runs an investment advisory company, says the pharmaceutical business is in a lot of trouble; the patents on a lot of important drugs are expiring. Mehta says researching into new drugs isn't going as well as the companies had hoped.

VERAN MEHTA: All of these are converging to create some pretty unusual times for the pharma industry managements that are not used to such challenges, and they're trying to buy some more breathing room here.

ZAROLLI: Mehta says Merck has had its own set of problems. It teamed up with Schering-Plough to sell the cholesterol drugs Vytorin and Zetia, but the drugs have been less effective at fighting heart disease then originally thought.

MEHTA: So what was supposed to become a $10 billion franchise has stalled at $4 billion, and that was one of the crown jewels in their portfolio.

ZAROLLI: Both Merck and Schering-Plough had to lay off employees last fall. Now by merging outright they're hoping to be able to cut expenses even further and survive the economic storm. Merck said today that the merger would save it $3.5 billion out of annual revenue of about 47 billion. Merck is also getting something else. Schering-Plough has a strong presence overseas and some promising drugs in its pipeline. Steve Brozak heads WBB Securities, a broker dealer firm that specializes in health care.

STEVE BROZAK: They're obviously getting a significant portfolio of revenue items today, and they are getting some later stage products for tomorrow.

ZAROLLI: But Brozak notes that the merger could be bad in one important sense. In recent years Merck has partnered with a lot of biotechnology companies. Brozak says these are where a lot of the most important new drugs will be discovered. And with the credit markets hurting, a lot of these biotech companies are struggling.

BROZAK: Probably the majority of public and private biotech companies don't have enough cash to get through the end of the year. So their needs are immediate.

ZAROLLI: When big companies merge, Brozak says, they have less money to put into these kinds of partnerships. And that will make the plight of the biotech companies more dire. But pharmaceutical giants like Merck and Pfizer are mired in troubles of their own right now. And merging is one way for them to survive and keep their shareholders happy until their fortunes change.

Jim Zarolli, NPR News, New York.

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