Merck / Schering-Plough Deal Makes Sense Up to a Point

Includes: MRK, SGP
by: Derek Lowe

So Merck (NYSE:MRK) wasn’t kidding about making a large deal, was it? When I used to work for Schering-Plough (SGP) back in the 1990s, there were constant rumors, the whole eight years I spent there, about the company merging or being taken over. And as far as I know, those have never really ceased – until now, that is. And Merck has always resisted the big merger route – until now.

This deal would seem to have made more sense a few years ago, when Vytorin looked ready to make huge amounts of money (of course, Schering-Plough was more expensive then, and perhaps Merck may have had a bit more confidence in its own pipeline back then, too). But it’s the deal we have today, so does it make sense now?

Well, up to a point. Like many of these, it works the best on paper when you talk about shedding head count and realizing all those cost savings that are supposed to be hiding in the numbers. We’ll have to see how that actually shakes out – the main research sites for the two companies are actually very close to each other in New Jersey, and I’m not sure if that’s a bug or a feature here. One interesting question is what happens to Fred Hassan, Schering-Plough’s wily and ambitious CEO. Back when the two companies first partnered up, the rumor was that Hassan was trying to use this as a springboard into Merck’s upper management, so we’ll see if that’s coming true.

As for the portfolio fit, S-P has been very upbeat about its drug pipeline, and they seem to have convinced them in Rahway. The biggest attraction seems to be the thrombin receptor antagonist program, which I wrote about here from slight personal experience. But there have been stories over the years that Pfizer (NYSE:PFE) was never very happy about what they ended up buying when they purchased Pharmacia/Upjohn, Hassan’s previous company. (They were primarily buying Celebrex, of course, and we all know how well that worked out, but the story is that Pfizer believed that they were getting rather more besides.)

In a way, though, this deal saddens me, and that’s not because I used to work for Schering-Plough. It’s not like I’m worried about the fate of its corporate culture – to be honest, I can’t say that I much cared for a lot of that culture while I was there. But what strikes me is that Merck has been a symbol of a company that’s done well by going it alone, ruling out these kinds of deals for many years. It’s as if they’re breaking down and giving in, and since I’ve never cared much for mergers in this business anyway, seeing them do one is doubly disturbing.

And for those folks who drove Schering-Plough's stock price up 10% last Friday - hey, nice work. The SEC will be in touch with some of you shortly, I should think.