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12:00 AM
 | 
Mar 16, 2009
 |  BioCentury  |  Strategy

Merck's challenges

The merger of Merck & Co. Inc. and Schering-Plough Corp. combines complementary pipelines that could make shareholders happy in the short term by maintaining Merck's dividend and delaying the loss of revenues from patent expirations.

But Merck can't expect much of a near-term pop from new products Schering-Plough brings. Of the four in registration, one is a me-too, two have regulatory issues and one might be disputed by a partner. Thus long-term growth will depend on clinical and regulatory execution, particularly for a Schering-Plough compound in the increasingly competitive HCV space and of both companies' compounds in the cardiovascular space, where FDA has been raising the regulatory hurdles.

Prior to Schering-Plough, Merck's largest acquisition in the drug space was $1.5 billion for the 49% of Banyu Pharmaceutical Co. Ltd. it did not already own in 2003. It also bought RNAi company Sirna Therapeutics Inc. in 2006 for $1.1 billion (see BioCentury, Nov. 6, 2006).

The short-term goal of last week's deal is to fill the revenue gap created by expiration of patents covering Merck's biggest drugs, and to reduce costs through synergies.

Merck sales fell 1% from $24.2 billion in 2007 to $23.9 billion last year, largely as a result of generic competition for osteoporosis drug Fosamax alendronate. Schering-Plough had $18.5 billion in sales for 2008, up 46% from $12.7 billion in 2007. The increase was mainly due to products obtained with the 2007 acquisition of Organon Biosciences N.V.(see BioCentury, March 19, 2007).

The combined company would have had $46.9 billion in 2008 sales.

Merck did not give revenue guidance, but did say it expects to save $3.5 billion a year after 2011 while achieving high single-digit compound annual growth in non-GAAP EPS from 2009 to 2013 and preserving its dividend.

Minding the gap

In the short term, Schering-Plough's marketed products will help fill a revenue gap that Merck could not plug internally.

The deal also will reduce Merck's dependence on any one drug, as Chairman, President and CEO Richard Clark said on a conference call that no product will represent more than 10% of the combined company's sales.

Asthma drug Singulair montelukast and hypertension drugs Cozaar losartan and Hyzaar losartan/hydrochlorothiazide accounted for 18% and 15% of Merck's 2008 sales, respectively. Autoimmune drug Remicade infliximab accounted for 11% of Schering-Plough's 2008 sales.

Cozaar/Hyzaar, which together had $3.6 billion in sales in 2008, lose patent protection in 2010. Singulair, which had $4.3 billion in sales in 2008, comes off patent in 2012.

All told, drugs that account for about half of Merck's 2008 sales will be off patent by 2013 (see "Merck's Patent Cliff").

"Merck needed to plug the gaps from loss of sales due to losing patent protection on its two biggest products, plus the problems with Vytorin and slow Gardasil sales. And setbacks from its pipeline means it can't do it internally," said Gemma Game, senior fund manager for AXA World Health Fund, which has positions in both pharmas.

Viren Mehta of Mehta Partners, which...

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