Merck is now world's No. 2 drug maker

November 4, 2009 8:29:28 AM PST
The new Merck & Co. has become the world's second-biggest drugmaker overnight, with a fat wallet to fund future deals.

That's after the maker of vaccines and cholesterol and diabetes drugs on Tuesday closed its acquisition of New Jersey neighbor Schering-Plough Corp. for $41.1 billion.

With the deal, Merck leapfrogged from No. 8 to No. 2 in the industry by revenue - behind Pfizer Inc. That puts Merck, of Whitehouse Station, N.J., and New York's Pfizer back in the positions they held a decade ago.

In morning trading, Merck shares rose 81 cents, or 2.6 percent, to $31.48.

Merck was the world's top-selling drugmaker in the mid-1990s, but Pfizer took the lead in 1998 when it launched an overnight success, impotence pill Viagra. Repeated mergers among other drugmakers pushed Merck further back in line.

The new Merck will start off with roughly $40 billion in annual sales, more than half its sales from foreign countries - an advantage as U.S. sales have stagnated in recent years.

Schering-Plough, of Kenilworth, N.J., brings a strong pipeline of experimental drugs and some big sellers including hepatitis drugs and allergy spray Nasonex. The two companies already jointly sell cholesterol drugs Vytorin and Zetia.

Merck now has operations in more than 140 countries, a portfolio of 15 drugs in late-stage testing and about $8 billion in cash and investments. It plans to keep putting that money into deals for rights to new drugs.

That's important because generic competition to blockbusters launched in the last decade or so - cholesterol pill Zocor, osteoporosis drug Fosamax and others - mean Merck must keep coming up with innovative, and profitable, new drugs.

About 40 percent of Schering-Plough's top managers are staying on, but its CEO, Fred Hassan, is leaving with a multimillion-dollar retirement package.

"Our integration teams prepared us well for a strong start today, with thorough plans designed to ensure a seamless transition for our customers and employees," Chief Executive Richard Clark said in a prepared statement.

The companies have said they expect to make about 16,000 job cuts out of their now-combined staff of 106,000 people. With no official word on those cuts, many employees are worrying whether the ax will hit them.

Merck says joining the companies will save about $3.5 billion a year after 2011. By next year, it expects the deal to boost profits slightly, and it's forecasting profit growth in the high single digits through 2013.

The new company is organized into five divisions, including its manufacturing operations and Merck Research Laboratories. The others are the prescription drug business and two Schering-Plough businesses, animal health and a consumer health business with well-known brands such as Claritin allergy pills, Miralax laxative, Coppertone sun care items and the Dr. Scholl's footcare line.

Credit Suisse analyst Catherine Arnold wrote to investors that she is dropping her earnings-per-share estimate this year to $3.23 from $3.26, but increasing it to $3.66 from $3.28 next year, because of the inclusion of Schering-Plough revenue and other effects of the deal. Arnold said she's keeping her rating on the stock at "Neutral" and her 12-month price target at $35 a share.

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