BioWorld International Correspondent

Merck KGaA agreed to acquire a controlling stake in Serono SA by purchasing the Bertarelli family's shares in the company, which represent 64.5 percent of its equity and 75.5 percent of its voting rights.

The all-cash deal, priced at CHF1,100 per share, values Serono at CHF16.6 billion (US$13.3 billion). Merck plans to proceed with a public tender offer for the remaining shares and aims to gain outright ownership of Serono during the first half of 2007.

For both companies, the deal represents a second attempt at transformative consummation.

Geneva-based Serono put itself on the auction block late last year with a reported asking price of around $15 billion. Having failed to attract a satisfactory bid, it decided in April that it would instead seek growth via acquisition, in an effort to reduce its dependency on its multiple sclerosis franchise, which is under threat from several quarters. (See BioWorld International, April 26, 2006.)

In March, Darmstadt, Germany-based Merck's initial hostile €14.6 billion (US$18.7 billion) bid for Schering AG was trumped by a higher offer from rival Leverkusen, Germany-based Bayer AG, which is in the process of completing its €16.9 billion takeover.

Merck plans to integrate Serono with its "Ethical" - or proprietary - pharmaceuticals division, which posted €1.7 billion in sales last year.

The combined entity will be known as Merck-Serono Biopharmaceuticals, and it will be based in Geneva. On a pro-forma basis, that organization had €3.6 billion sales in 2005, and it has 28 drug candidates in clinic development.

Merck's deputy chairman, Karl-Ludwig Kley, will lead the integration effort. Merck's executive chairman, Michael Roemer, said during a press conference that the "focus is not on synergies or cost cutting," but said the integration should "generate more value."

Serono satisfies three of the five criteria Merck wanted in an acquisition candidate, said Elmar Schnee, head of Merck's Ethicals division. It enhances the scale and competitiveness of its pharmaceutical research effort and "will have R&D expenditures of €1 billion per year," he said. It also offers an entry into the U.S. market, where Serono has 500 employees in sales, marketing and distribution. And through its positions in multiple sclerosis and reproductive health, adds additional specialist therapeutic areas to Merck's existing strengths in oncology and cardiovascular and metabolic disease.

The merger fails to satisfy the last two outstanding criteria, though: It does not strengthen Merck's oncology franchise, and it does not provide a route to the Japanese market.

As well as bringing a biologics development and manufacturing capability to the enlarged entity, Serono is supplying it with its two biggest sellers, the multiple sclerosis drug Rebif (interferon beta-1a), which generated almost $1.3 billion in sales in 2005, and the fertility drug gonal-f, which generated $547 million in 2005.

Those two drugs "guarantee to our people that we are going to be an important part of this venture," said Serono CEO Ernesto Bertarelli.

There is more in Serono's pipeline, such as oral cladribine, which Serono said Thursday was designated a fast-track product by the FDA in relapsing forms of multiple sclerosis. The product is in a Phase III study called CLARITY (Cladribine Tablets Treating MS Orally), involving 1,200 patients. Complete enrollment is expected by the end of 2006.

The purchase price represents a 20 percent premium to Serono's share price, which Wednesday closed at CHF915. (Shares closed at $18.30 in the U.S. on the New York Stock Exchange.) The shares (NYSE:SRA) jumped $3.19 Thursday, or 17.4 percent, to close at $21.49.

The premium exceeds valuations on the stock set by a range of European analysts. Cannaccord Capital, which is recommending shareholders to accept the forthcoming tender offer, previously had set a target price of CHF964.

"We believe that this is a good price for Serono holders, and while it does not match some market expectations, we have previously suggested that Serono would not fetch the CHF19 billion that had been suggested," analysts Mike Booth and Karl Keegan wrote in a research note.

"We think - yeah, it's a good premium," Bob Pooler, analyst at Lombard Odier Darier Hentsch, told BioWorld International.

Lombard Odier had a fair-value estimate of the company's worth at CHF890 per share. Pooler said the company's acquisition ambitions would have been difficult to realize - Serono had been seeking a U.S.-based target, with significant sales in the oncology market. "It's exactly in the pool in which big pharma is fishing, as well," he said.

Bank Sal. Oppenheim had valued the company at CHF740 on a stand-alone basis.

"I think it's an excellent exit opportunity for current Serono shareholders," Tilman Dumrese, analyst at Bank Sal. Oppenheim jr. & Cie (Schweiz) AG, of Zurich, Switzerland, told BioWorld International. "I don't see any growth drivers in the short to medium term."

Bertarelli, a well-known sailor, would not comment on his future plans during the press conference, saying only that he's "looking forward to having some time to think about" what's next.

"The likelihood of Switzerland winning the America's Cup for the second time has increased since this morning," Pooler said.