Merck KGaA Launches Bid For Schering AG

Merck KGaA (Darmstadt, Germany, www.merck.de) has launched a €14.6 billion ($17.2 billion) takeover bid for Schering AG (Berlin, Germany, www.schering.de). A Merck KGaA–Schering deal would create a company with proforma annual revenues of €11.2 billion ($13.5 billion), with 50% of those revenues in ethical pharmaceuticals and 16% in generics.

Schering’s executive board has rejected the offer. “This offer significantly undervalues Schering and its prospects as an independent specialized pharmaceutical company,” the company said in a release. Schering confirmed that the bid was unsolicited and “that no negotiations are ongoing with Merck KGaA.”

Merck KGaA offered €77 ($93) in cash for each Schering share, roughly 35% above Schering AG’s average share price over the last three months.

“This is an ideal combination for both companies,” said Michael Roemer, chairman of the executive board of Merck KGaA, in a company statement. “It provides both companies with the unique opportunity to take a quantum leap and become more competitive and continue to thrive in the consolidating global pharmaceuticals industry.”

Combined company would have ethical pharmaceutical sales of €5.6 billion

The combined company would have ethical pharmaceutical sales of €5.6 billion ($6.8 billion). Merck KGaA posted 2005 ethical pharmaceutical sales of €1.7 billion ($2.1 billion) and Schering €3.9 billion ($4.7 billion).

Gynecology and andrology, representing 37% of combined ethical pharmaceutical sales, would be the combined company’s leading therapeutic franchise. This franchise would be headed by Schering’s oral contraceptive “Yasmin” (drospirenone and ethinyl estradiol), which had 2005 sales of €586 million ($708 million).

Central nervous system (CNS) drugs would represent 17 percent, lead by Schering’s multiple sclerosis drug “Betaferon” (interferon beta-1b), with 2005 sales of €867 million ($1.05 billion). Merck’s sarizotan, a drug to treat Parkinson’s disease now in Phase III development, is another potential growth driver in this franchise.

The anticancer therapy Erbitux (cetuximab), for which Merck has marketing rights outside the US and Canada and co-marketing rights with ImClone Systems Inc. (New York, NY, www.imclone.com) in Japan, would be the company’s lead product in its oncology franchise. Oncology would represent 12% of ethical pharmaceutical sales for the combined company. 

Gynecology and andrology, CNS, and oncology would be considered growth drivers of the new company. Merck said it would evaluate the future of the combined company’s cardio-metabolic care franchise, which although representing 19% of combined sales, is a mature product portfolio. This franchise includes Merck’s antihypertensive drug Concor (bisoprolol) and the diabetes treatment Glucophage (metformin).

The combined company would have an R&D budget of €1.3 billion ($1.6 billion) with 30 projects in clinical development.

Annual cost savings of €500 million projected

If the transaction proceeds, Merck says it expects to achieve annual cost savings of €500 million ($604 million) to be realized by 2009.

To fund the transaction, the Merck family, which is the company’s majority shareholder, plans to make a €1 billion ($1.2 billion) equity contribution.

“We strongly support this transaction,” said Merck Family Council Chairman Jon Baumhauer, in a company statement. “It is the right transaction at the right time as it builds on the achievements to date and improves the growth prospects of both companies.”

To oversee the integration of Schering and Merck, Karl-Ludwig Kley has been named as deputy chairman of Merck KGaA’s executive board and general partner of E. Merck OHG, effective September 1, 2006. E. Merck OHG is the company that oversees the 73%-stake the Merck family holds in Merck KGaA. His appointment is contingent on the termination of his current employment contract with Deutsche Lufthansa AG (Frankfurt, Germany, www.lufthansa.com), where he is a member of the executive board.

Merck’s position of deputy chairman of the executive board has remained vacant since Michael Roemer was named chairman of the board in November 2005. Roemer replaced Bernhard Scheuble as chairman in November.