Thursday 12 March 2009

Merck Buys Schering-Plough: Some Ruminations

This certainly has been a blockbuster week for Big Pharma. On Monday, Merck announced that is has agreed to acquire smaller drug company Schering-Plough for $41.1 billion. Today, the Swiss pharma company Roche announced its intention to purchase the U.S. biotech icon Genentech for $46.8 billion. 

These two acquisitions come after the January purchase of Wyeth by Pfizer for $68 billion. Because of the different IP/product/technology dynamics of each of these most recent transactions, we will divide our comments into two separate blogs. Today will focus on the Merck-Schering-Plough deal; we will report on the Roche-Genentech acquisition separately.

The structure of the deal is a form of reverse-merger arrangement, in order to a avoid the claim by Johnson & Johnson that the acquisition constitutes a change of control. Should the change of control clause be effective, J&J, via its subsidiary Centocor, would gain rights in the marketing of the anti-inflammatory drug Remicade outside of the U.S. (worth $2.1 billion to Schering-Plough last year) to complement J&J's marketing rights in the product within the U.S. As for the arrangement

While it is Merck that is putting of the money to buy Schering-Plough, the ownership of Schering-Plough technically remains unchanged, and Merck becomes a subsidiary of Schering-Plough, thereby presumably avoiding a claim that there has been a change of control. Of course, J&J can challenge the arrangement in arbitration and claim that the change of control clause should be applied. For those of you who want to follow the corporate law gymnastics of this transaction, look at the New York Time Dealbook Blog of today's date, March 11th.

A reverse merger

As for the substance of the transaction itself, one podcast by New York Times reporter Natashia Singer observed that Merck was facing the prospect of a less than stellar pipeline of developments together the prospect that its leading patent-protected products were close to the end of their patent protection (shades of the Pfizer-Wyeth transaction). By acquiring Schering-Plough, according to Singer in her March 10 written report of the deal, Merck gets access to the allergy spray Nasonex, Schering-Plough's investments in biotech drugs (some of which I think were themselves the result of corporate acquisitions), and certain patented products with expiry dates further down the next decade. As stated succinctly by Singer, this is [a] drug deal that is mainly about drugs."

A somewhat different cast on the transaction was spun by analyst Les Funtleyder on on March 9th, "the two companies have overlapping portfolios for cardiovascular, respiratory,and anti-viral drugs and experimental drugs. ...Schering-Plough will add animal health products and a consumer division toMerck's profile, while bolstering its women's health area, led by Merck's cervical cancer vaccine Gardasil." In that regard, the two companies already have had an agreement with a cholesterol treatment called Zocor, although the advantage of of this combined effort over low cost alternatives remains uncertain.

Permit me to ruminate. Proprietary drug companies are very much about their patent portfolios and their pipeline of future patents. The claim has been made in the business press from time to to time that big pharma has largely exhausted its ability for the blockbuster drug dealing with general health problems, and that the next generation of products will focus on more specific medical problems. If both of these assertions are true, I guess it makes sense to seek mergers in order to spread the effort and resources of R&D over a broader base.

Another view of mergers and synergy

That said, it still remains (at least for me), a bit of black box why bigger will necessarily translate into better product development and innovation by the combined companies. Here as well, though, I suppose that the combined clout of the two companies will also make it easier to cherry-pick the most promising R&D developments of smaller and more nimble pharma companies, allowing such results to be taken to the next level by virtue of the combined company's marketing, distribution and manufacture muscle. If so, the merged company may, at least down the line, following Teece's classic analysis, be rewarded more for its complementary asset position, such as marketing, distribution and manufacture, rather than the strength of its IP per se.

1 comment:

Anonymous said...

I live in Indianapolis. Where Eli Lilly rules. Even though they have taken many precautions to make a hostile takeover difficult one assumes that the pressure to do someting is now enormous. If all the best dance partners have been taken what now? Tart themselves up to be acquired by one of the new conglomerates?
Doesn't it seem odd that the logic driving these mergers is more or less the same logic that worked so well for the banks?
What if the industry could reinvent itself based on competiton rather than blockbuster patents?