The Merck-Schering Plough Deal Under the Microscope: Why a Reverse Merger?
Some of you may have been wondering why the$41.1 billion Merck-Schering Plough merger announced yesterday was designed as a reverse merger. For those of you who are not familiar with the reverse merger strategy, this is how it works. Generally speaking, a failing or failed publicly traded company that is listed on one stock exchange or another merges with a privately held company. The privately held company takes over the public stock listing and manages the day-to-day operations of the new business. Private companies that engage in reverse mergers are usually looking for cash infusions for product development or a stock listing (without going through an initial public offering) which offers it shareholders immediate cash value. Investors who previously held stock in the public company are either compensated for their shares in cash or given shares (at a negotiated price) in the new entity. Any cash (or assets) left in the public company can be used to develop the formerly private company’s product(s) and if successful, shareholders in the old public company can eventually benefit.
If reverse mergers are designed to bolster the prospects of private companies in need of cash why was the Merck-Schering Plough deal structured as a reverse merger? As I mentioned in a post yesterday, Schering-Plough markets Remicade outside of the US under an agreement with Johnson and Johnson which sells the drug in America. A termination clause in the original marketing agreement stipulates that the ex-US rights to Remicade (and another drug being developed) would revert to Johnson and Johnson if control or ownership of Schering Plough changes. Remicade, a treatment for rheumatoid arthritis, developed by Johnson and Johnson’s subsidiary Centocor, represented $2.1 billion in sales for Schering in 2008. Further, about 70% of Schering Plough’s revenue comes from outside the US. That said, the success or failure of the deal really hinges on whether or not Johnson and Johnson will challenge the change-in-control clause for Remicade. To obviate that possibility, Merck devised an unusual reverse merger strategy in which ownership of Schering Plough will not change hands—at least on paper anyway. Instead, even though Merck is putting up the money to purchase Schering, and Richard Clark, Merck’s Chairman and CEO, will run the newly combined company, Merck would technically become a subsidiary of Schering Plough and consequently there would be no change in Schering Plough management! Recall that Fred Hassan, Schering Plough’s CEO will remain with the newly formed entity during the transition. After the deal closes, Fred would step down as CEO, Merck’s current CEO—Richard Clark—would assume leadership and quietly change the name of the company from Schering Plough to Merck.
Of course, Johnson and Johnson could challenge the deal anyway, and if Merck was to lose in arbitration, it could possibly jeopardize the entire financial upside of the deal. Merck contends that even if it loses the rights to Remicade, the deal still makes sense. Not so, said one Wall St analyst, “I think that is a lot of malarkey. You don’t take out 20 percent of a company’s revenue and their core international growth driver and say it is not worth anything,” he said. Other analysts think that the uncertainty over Remicade puts Schering Plough shareholders at a disadvantage and one response may be for Johnson and Johnson to make a higher bid for the company. Still others believe that, while sale of Schering Plough makes sense, the $41.4 billion price offered by Merck is too low. Johnson and Johnson didn’t comment on the deal.
Schering Plough employees who I talked with yesterday after the deal was announced are not pleased with it either. They feel that Johnson and Johnson would be a more suitable partner and that Fred Hassan, who was under enormous shareholder pressure, had no choice but to sell the company as quickly as possible. It is not surprising that many Schering Plough employees would rather have the company sold to Johnson and Johnson rather than Merck. Unlike most pharmaceutical companies, Johnson and Johnson tends to leave the companies it purchases alone and runs them as wholly-owned after it purchases them. Another reason why a merger with Johnson and Johnson makes more sense than one with Merck is that Johnson and Johnson has a very profitable consumer products division. This would be a better fit for Schering which has several highly visible and profitable consumer products like Coppertone and Dr. Scholl’s. In contrast, Merck sold its consumer products division years ago and will almost certainly divest itself of Schering’s consumer products division after the deal closes.
Now that Schering Plough is no longer in play, all eyes are on Bristol-Myers Squibb (BMS). BMS is about the same size as Schering Plough, has plenty of cash on hand and is thought to have a robust biotechnology pipeline. And, like Schering Plough, it has been rumored to be a takeover target for the past 20 years!
Until next time...
Good Luck and Good Job Hunting!!!!!!!!
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Merck announced today that it was buying Schering Plough, the Kenilworth-New Jersey based drug maker, for $41.1 billion. The deal comes only six weeks after Pfizer said that it would purchase NJ-based Wyeth Pharmaceuticals. Superficially, the deal may make sense for the two struggling drug makers—they co-market the cholesterol-lowering drug Vytorin and also have collaborations in the respiratory diseases area. Also, Schering Plough has the European rights to the anti-arthritis drug Remicade and its 2007 purchase of the Dutch biopharmaceutical company Organon Biosciences NV provides access to several potential biotechnology drugs. Nevertheless, the impending merger will ultimately result in job losses and higher unemployment in the state of New Jersey.
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It looks as though Enzon Pharmaceuticals, the first company to successfully commercialize protein PEGylation, finally buckled under the pressure exerted by Carl Icahn, one of its major shareholders. As I mentioned in a 
Fred Hassan joined Schering Plough as its CEO five years ago. At that time, Mr. Hassan inherited a company that was being investigated by FDA for regulatory compliance violations and the SEC was investigating it former CEO for investing and accounting irregularities. Since his arrival at the company, Mr. Hassan increased sales of key products, filled an empty product pipeline and returned profitability to a company that posted losses in 2003 and 2004. 
