April 1, 2009: Unlike the companies involved in other recent big mergers, Merck and Schering-Plough have many similarities. Both the companies were founded in the last decades of 19th century by German entrepreneurs, both made it to the US market, which was the New World, around the same time, almost a century ago. And now more than a century later,  survival instincts have brought both the companies together, to attempt another success story in the New World of today—the big emerging markets of Asia.

The first tentative steps were taken by the NYSE-listed Merck & Co, the American arm of the German parent Merck KgaA which became an independent company on the US government orders during the World Wars, in early 20th century. Schering-Plough too moved to test its mettle in the US market in early 20th century. Now the $23.8 billion Merck has acquired the much smaller $18.8 billion Schering-Plough, also of German origin.

Merck is determined to be among the top five pharmaceutical companies in the markets it focuses on—namely China, India, Korea, Russia, Turkey, Poland and Brazil. Its most recent acquisition of American rival Schering-Plough for $41.1billion is a case in point. The company is right on track following the strategy that it first announced in 2005. Summed up as “Building a new Merck” the strategy is to reinvent Merck in order to take advantage of the future growth and possibilities while it negotiates it way through the global economic crisis.

The strategic shift
For those who think Merck is still reeling under Vioxx recall and legal costs and that for recovery Merck is counting on Gardasil, its cervical cancer vaccine, which incidentally is facing some serious questions on efficacy and adverse events—here are some statistics as disclosed by Merck in December 2008: “The company’s R&D efforts includes 47 active clinical programs across its major research franchises spanning bone, respiratory, immunology and endocrine; cardiovascular; diabetes and obesity; infectious diseases; neuroscience; oncology and vaccines. The pipeline includes nine candidates in Phase III, 15 in Phase II and 23 in Phase I.”

Merck & Co Inc., was originally established in 1891 as the US arm of the German family partnership firm, E Merck, which is now Merck KgaA. Merck & Co. was confiscated in 1917 during World War I and set up as an independent company in the US. Today, positioned as a global research-driven pharmaceutical company, Merck & Co is much larger than its German ancestor. As on December 31, 2008, the company had 55,200 employees and clocked 23.8 billion in sales. Its products are sold in more than 140 countries. And the Merck Manufacturing Division employs more than 12,000 people at locations in 25 countries while the company’s Research Laboratories employs approximately 9,500 people at sites in the US, Canada, Europe and Asia. Singulair, the company’s largest selling product along with other products such as Cozaar/ Hyzaar, Fosamax and Zocor are all expected to suffer particularly intense generic competition right through 2013.

The company does business in many countries, globally, as Merck Sharp & Dohme (MSD). The combination of Merck & Co. (NYSE:MRK)  and Schering-Plough Corp. (NYSE:SGP) brings together its two complementary operations in Asia. Merck is mainly in Japan and India, with a big manufacturing operation in Singapore. Schering is more focused on China, with a small, wholly owned skin-care business there (established in 1994 as a JV) and, on the pharma side, it has activities in several therapeutic areas.

In Singapore, Merck Sharp & Dohme (Singapore) Ltd and Merck Sharp & Dohme Technology Singapore Pte Ltd are its wholly owned subsidiaries. Located at Singapore Tuas Biomedical Park, the manufacturing facilities of MSD Singapore comprise a bulk active pharmaceutical ingredient (API) plant and a pharmaceutical formulation plant. Merck & Co. Inc. has also established a local sales and marketing subsidiary in Singapore known as Merck Sharp & Dohme (I.A.) Corp. Singapore, which markets and sells prescription pharmaceutical products to doctors and pharmacists.

In India, MSD was incorporated on December 3, 2004. Here, MSD currently operates within three therapeutic areas, namely critical care, metabolic and vaccines. In addition to setting up a sales and marketing structure to market its best-in-class products in India, MSD is also coordinating research projects with clinical investigators in India’s leading hospitals and universities. The Indian Council of Medical Research (ICMR) has signed the first public private partnership with MSD. The company also does cutting edge R&D work in India through its CRO Advinus Therapeutics.

In Japan, as well, MSD increased its presence through completing the acquisition of Banyu Pharmaceuticals in 2004. Even though MSD is present in major Asian countries the size of its operation is small in the overall scheme, typically, with a little over 10 percent of its revenue coming from Asia Pacific.

Schering-Plough has a similar profile. Established in late 1800s as the US subsidiary of Schering AG, a German-based pharmaceutical and chemical company, it was incorporated in New York City in 1928 and in New Jersey in 1935. Today, Schering-Plough sells its products in 140 countries, employs 51,000 people and closed the year 2008 with revenues of $18.5 billion. Most recently, the company reinvented itself in 2007 by buying Organon BioSciences, which also brought along its animal health business Intervet to Schering-Plough.

In the Asia context, the company is said to be more focused on China—with a small, wholly owned skin-care business there (established in 1994 as a JV) and, on the pharma side, it has activities in several therapeutic areas. In Singapore, where Schering-Plough is present since 1994, it has seven manufacturing plants. In India, Schering-Plough is active through its subsidiary Fulford India Limited. Apart from other Asian countries the company also has presence in Vietnam.

Schering-Plough’s largest selling products include Vytorin, Zetia, Remicade, Masonex and Temodar. Its Vytorin and Zetia are managed through joint venture with Merck. 

Post merger Merck’s revenues total $47 billion giving the combined company a strong balance sheet with a cash and investments balance of approximately $8 billion.

Best move so far!
The decision to acquire Schering Plough has been Merck’s best move so far on its reinvention journey to find new products and become an efficient producer and marketer. According to market analyst Datamonitor, the merger with Schering-Plough will succeed in returning Merck to a positive sales growth outlook. That is if the management delivers on its promise of an additional $3.5 billion of annual cost savings beyond 2011 through reductions in spending on marketing and administration, manufacturing and R&D.

“To really appreciate the scale of the touted $3.5 billion cost saving you have to remember that it will flow directly into the operating profit line – and with a typical pharma operating margin of 25 per cent, these savings would be equivalent to creating 14 new blockbusters at the top line,” says Datamonitor head of company analysis Dr Chris Phelps.

Along with synergy opportunities this deal offers an opportunity to acquire new portfolios. According to Datamonitor, Merck stands to benefit significantly by acquiring the substantial women’s health and urology portfolio that Schering-Plough built following the purchase of Organon. The most prominent acquisition, however, will be within the immunology & inflammation portfolio, where Remicade (infliximab) is expected to add annual sales in excess of $2 billion.

Indeed, the immunology and inflammation arena is particularly significant to the deal, as the acquisition of Schering-Plough’s products will bolster a failing portfolio and signify a sharp change in therapy area focus for Merck. However, Johnson & Johnson’s involvement may cause problems for the combined entity going forward.

Schering-Plough has exclusive worldwide marketing rights to anti-TNF Remicade in all markets outside of the US, Japan and portions of the Far East. J&J’s subsidiary Centocor brokered this deal in 1998 and, as of a renegotiation in December 2007, the agreement now extends beyond 2014. Schering-Plough reported 2008 Remicade sales of $2,118 million, so this is a substantial deal taken on its own. However, the original 1998 deal also included Remicade ‘follow-on’ molecule Simponi (golimumab). In 2005, Schering-Plough exercised its rights to develop and market Simponi, which is expected to launch during 2009 and to reach blockbuster status, creating a vital future source of revenue for Merck.

Ground impact
Market analysts say it is too early to assess the ground level impact of this deal. To effect a saving of  $3.5 billion it is being speculated that about 16,000 jobs will be axed, globally. Fate of some of the subsidiaries also hangs in balance as Merck is likely to expand its Asia operations as part of its cost cutting exercise closing down inefficient operations elsewhere.

Merck already has a good presence in Japan, Korea, India, China & Singapore through subsidiaries and development partners and is expected to build on it. It is banking heavily on Asian geographies for its
future growth.