Drugmaker Merck mrk said Monday that it would pay $41.1 billion for rival Schering-Plough sgp in a bid to boost its new drug pipeline and diversify its business.
The cash-and-stock deal will make Merck a dominant player in cholesterol, respiratory and infectious disease drugs, and boost its pipeline for new biologics, which are drugs made from living cells.
The deal follows Pfizer's $68 billion offer for Wyeth in January. Roche Holdings is pursuing biotech company Genentech in an offer to shareholders that is nearing $47 billion. Roche already owns 55.8% of Genentech.
The deals underscore the need for major drugmakers to lower costs and boost revenue as they struggle to launch blockbuster drugs amid tough competition from generics.
More deals are likely, says Michael Levesque, health care analyst for Moody's Investors Service. "There is a lot of excess capacity in the industry," he says.
Merck shares fell 8% Monday to $20.99; Schering's rose 14% to $20.13. Merck is expected to cut 15% of the combined company's 106,000-employee workforce, The Associated Press reports.
Levesque says Schering, maker of allergy drug Nasonex, has one of the strongest drug pipelines in the industry. Drugs in late-stage development include ones to treat inflammatory diseases, hepatitis C and cardiovascular issues. Merck and Schering have a cholesterol joint venture, including Vytorin and Zetia.
Building Merck's pipeline with Schering is "a smart move for Merck," says Bert Hazlett, health care analyst for BMO Capital Markets. But others say it's not a strategy to inspire drug discovery, which often comes from smaller biotech firms. Steve Brozak, health care analyst at WBB Securities, says Merck would do better to partner with dozens of small biotechs rather than get caught up in absorbing Schering, which is slightly smaller. In the short term, Merck, which counts asthma drug Singulair among its best sellers, is "buying earnings and revenue," Brozak says.
Under deal terms, Schering shareholders will receive 0.5767 shares and $10.50 in cash for each Schering share. That represents a 34% premium to Schering's closing price Friday.
Merck says the merger will create annual cost savings of $3.5 billion beyond 2011 and double the number of its drugs in late-stage development to 18. The combined 2008 revenue of the companies totaled $47 billion. Merck CEO Richard Clark will lead the combined company.