Merck, Schering To Merge In $41 Billion Deal

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The drug company Merck has announced plans to buy Schering-Plough. It's a deal valued at more than $41 billion in cash and stock. The merger is the second in the pharmaceutical industry in recent weeks, and that reflects a shift to bigger and more diversified companies. NPR's Wendy Kaufman has more.

WENDY KAUFMAN: The deal announced yesterday would make Merck the world's second-largest prescription drug company. Until now, it's relied largely on in-house research and relatively small acquisitions to drive growth. But now in an effort to get more new drugs into the pipeline, broaden its overall product mix and increase its global footprint, it plans to merge with Schering-Plough.

Cornell University's Sean Nicholson says Merck had amassed a sizeable amount of cash, so had Pfizer, which recently announced it would buy Wyeth in a deal valued at $68 billion. That made the deals doable, even in a credit-strapped economy.

Professor SEAN NICHOLSON (Cornell University): These companies have been very profitable for years and years, and even though they have dividends and they've been investing 15 to 20 percent of their sales back into R and D, they've been sufficiently profitable that they've been able to build up cash reserves. So that's what they're using it on.

KAUFMAN: But the challenges for the big traditional drug companies are huge, with or without new partners. Nicholson says investors used to think drug companies were largely recession proof, but that's no longer the case.

Prof. NICHOLSON: For the first time in recent memory, there's been two consecutive quarters of decreases in the number of prescriptions that are filled in the U.S.

KAUFMAN: What's more, when consumers do buy drugs, they're more likely to choose lower-price generics, not the brand name drug. Terry Hisey, vice chairman and the life sciences leader at Deloitte LLP, a consulting firm, says the pharmaceutical industry's old business model of relying on one or two blockbuster drugs is no longer viable. In addition to the generic threat, patents on many blockbusters are about to expire, and there's little in drug companies' pipelines to generate that kind of revenue.

Mr. TERRY HISEY (Vice Chairman, Life Sciences Leader, Deloitte LLP): I think what we'll see as we go forward, particularly with the advent of personalized medicine or targeted therapies - call it what you want - is that we're going to move from an era of blockbusters to an era of niche-busters.

KAUFMAN: And many of those new drugs are likely to come from smaller biotech companies. The most promising ones are likely to become takeover targets. Right now, Swiss drug giant Roche is trying to buy the 45 percent of California-based Genentech it doesn't already own. Genentech is the giant among biotech firms, with roughly $12 billion in revenue. Last week, the Swiss drug maker sweetened its offer for Genentech, and the outcome is still pending.

Professor Mike Nichol at the University of Southern California suggests that the deals involving Merck and Schering-Plough, Wyeth and Pfizer and the possible deal between Roche and Genentech reflect an industry in transition.

Professor MIKE NICHOL (University of Southern California): I think the transformative moment has been happening over the last three or four years, and it's going to get more acute as we look into the future.

KAUFMAN: And he and others say we are likely to see more merger and acquisition activity in the months ahead.

Wendy Kaufman, NPR News.

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