Assistant Managing Editor

Feeling the crunch of the tough economic times and threat of patent expirations looming ahead, the wave of big pharma consolidation - expected for years by industry experts - looks like it could happen this year, with the latest deal involving a merger of pharma powerhouse Merck & Co. Inc. with Schering-Plough Corp. in a cash-and-stock deal valued at $41.1 billion.

The news, which follows about six weeks behind Pfizer Inc.'s $68 billion bid for fellow pharma firm Wyeth, garnered a mixed reaction - as a merger that would resolve some of Merck's immediate patent expiration issues but is not expected to address the increasing pressure on the drug industry for innovative products.

It also marks a departure from Whitehouse Station, N.J.-based Merck's previous strategy of growing its internal pipeline and in-licensing biotech products, but company Chairman, President and CEO Richard T. Clark said the deal "makes great strategic sense."

During a conference call with investors, Fred Hassan, chairman and CEO of Kenilworth, N.J.-based Schering-Plough, called it the "right transaction at the right time," adding that by joining forces, the combined firm would be better equipped to "absorb the bigger and bigger shock" that the industry is having to withstand in today's economy.

A consolidation such as this offers immediate benefits to both firms in terms of cost control, said analyst John Sullivan, of Leerink Swann & Co. "And as they get close to that patent cliff, management teams are doing what's necessary to be able to maintain their bottom line and deliver earnings to shareholders," he said.

But biotechs are facing their own sets of troubles, struggling to find money in tight capital markets, with many actively seeking lucrative partnerships or even potential investor exits via M&A. So does big pharma consolidation mean that it's going to be tougher for smaller biotech firms to attract their own deals?

Sullivan doesn't think so. "There are two types of deals," he told BioWorld Today. "Deals like [the Merck and Schering-Plough merger] are out of necessity because [companies] have to become more efficient." The second type of deal involves transactions "for the drug industry to achieve growth," he added, and biotech products represent the industry's "long-term revenue growth."

Sullivan said Merck "could be a little distracted by the [Schering-Plough] deal" in the short term, but the firm likely will be turning its eye toward biotech once again.

Already this year, Merck has signed a potential $230 million early stage deal with Mechelen, Belgium-based Galapagos NV to discover and develop obesity and diabetes drugs. And last month, it offered $130 million to buy the follow-on biologics assets of Richmond, Va.-based Insmed Inc. (See BioWorld Today, Jan. 12, 2009, and Feb. 13, 2009.)

Under the terms of the merger deal - structured as a reverse merger in an attempt to avoid hassles regarding distribution rights with Johnson & Johnson, Schering-Plough's joint venture partner on Remicade (infliximab) and golimumab - Merck will give Schering-Plough shareholders 0.5767 shares and $10.50 each for each share of Schering-Plough stock. Merck intends to fund the cash portion - about 44 percent of the deal - with about $9.8 billion from its existing cash balances plus $8.5 billion in committed financing from J.P. Morgan.

The deal's total value is equal to about $23.61 per share, a 34 percent premium to Schering-Plough's Friday closing price, which puts it slightly higher than the nearly 30 percent premium in New York-based Pfizer's January bid for Wyeth, of Madison, N.J. (See BioWorld Today, Jan. 27, 2009.)

Other similar big pharma deals could follow Pfizer/Wyeth and Merck/Schering-Plough, at least "if the credit markets remain open and become more open," Sullivan said. "Then you'll see more consolidation."

Though not strictly a big pharma consolidation, Basel, Switzerland-based Roche Holdings AG is trying to buy out its minority stake of South San Francisco-based Genentech Inc. Late last week, the pharma firm upped its offer from $86.50 to $93 per share, and Genentech has asked shareholders to hold off on any action before the company's board can review the revised bid. (See BioWorld Today, March 9, 2009.)

If the Merck/Schering-Plough deal goes through - it's expected to close in the fourth quarter - Merck shareholders will own 68 percent of the combined firm, which will continue operating under the Merck name and be headed by Merck's chief executive, Clark.

The combined company will allow the firms to consolidate their cholesterol joint venture, which markets the drugs Zetia (ezetimibe) and Vytorin (ezetimibe and simvastatin) and has seen a sales drop since disappointing efficacy and safety data emerged regarding Vytorin last year.

Merck, which has a strong financial position but is facing patent expirations starting in 2012 with blockbuster asthma drug Singulair, will be able to boost its portfolio with Schering-Plough's healthy late-stage development pipeline, which includes a thrombin receptor antagonist in cardiovascular indications, as well as boceprevir, a protease inhibitor for hepatitis C infections and vicriviroc, a CCR5 receptor antagonist, in HIV.

Schering-Plough also has golimumab, which is partnered with Centocor, a division of New Brunswick, N.J.-based J&J. That product, an antibody targeting tumor necrosis factor-alpha, is under FDA review in rheumatoid arthritis, ankylosing spondylitis and psoriatic arthritis, and is in Phase III development in ulcerative colitis.

Both firms currently are involved in ongoing cost-cutting moves and anticipate a hiring freeze and possibly a headcount reduction once the merger closes.

Shares of Merck (NYSE:MRK) fell $1.75 to close Monday at $20.99, while shares of Schering-Plough (NYSE:SGP) gained $2.50, or 14 percent, to close at $20.13.