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Big Pharma bulks up with Merck-Schering deal

The proposed merger may counter problems with competition and the development pipeline but could result in 16,000 layoffs. TARP money aids the industry's consolidation trend.

March 10, 2009|William Heisel

Big Pharma got bigger on Monday with Merck Co.'s announcement that it would acquire rival Schering-Plough Corp. in a cash-and-stock transaction worth $41.1 billion. And the deal is being made easier by U.S. taxpayers.

Faced with tough competition from generics, fewer potential blockbuster drugs in development and the prospect of a government overhaul of the U.S. healthcare system, drug makers are consolidating.

In January, the world's largest pharmaceutical company, Pfizer Inc., made a $68-billion bid for Wyeth. Meanwhile, Roche Holding is in hot pursuit of California-based Genentech Inc. On Monday, the Swiss drug maker, which already owns most of the South San Francisco biotechnology company, raised its hostile offer to $93 for each of Genentech's remaining shares.

A deal between Merck and Schering-Plough would create the world's second-largest pharmaceutical company with combined sales of about $47 billion in 2008. Structured as a so-called reverse merger, the transaction would have Schering-Plough continue as the surviving corporation, although the new entity would keep the Merck name. The new firm would be more diversified, have a larger global reach and a fatter array of products in gestation.

"The combined company will benefit from a formidable research and development pipeline," said Merck Chairman and Chief Executive Richard T. Clark, who will lead the combined company.

But what may be good for the drug makers isn't helping the U.S. job market. The pending deals are expected to result in at least 35,000 job losses, mostly in the U.S. -- helped in part by the government's bailout efforts.

Banks that have received billions of federal dollars to encourage them to make loans -- JPMorgan Chase & Co., Goldman Sachs Group, Citigroup Inc. and Bank of America Corp. -- are lending money to Pfizer and Merck, who in turn are planning aggressive cost-cutting.

In the case of Pfizer, a takeover of vaccine specialist Wyeth would be expected to cost at least 19,000 jobs, including some in the companies' overseas operations. A Merck takeover of Schering-Plough should yield about 16,000 layoffs. Combined, the cuts represent about 15% of those companies' total workforces.

The deals would be virtually impossible to complete if the banks had not received money from the Treasury Department under the Troubled Asset Relief Program. The bailout enabled them to lend the drug makers a combined $31 billion.

"These mergers are only happening now because the drug companies can get the money from the banks to make the deals happen," said Dr. John Abramson, a clinical instructor at Harvard Medical School and the author of "Overdosed America."

"The TARP money is supposed to be loosening up credit and keeping Americans employed. They shouldn't be using bailout money to get rid of people."

Consumers aren't likely to benefit either.

Healthcare policy analysts worry about the effect the mergers could have on prices. Drug prices increased 7.4% on average in 2007, according to AARP, about 2.5 times the rate of inflation.

"If the companies are saving money because of these efficiencies, they are not passing the savings on to consumers," said Dr. Sidney Wolfe, director of the health research group for Public Citizen, a consumer advocacy organization based in Washington.

The pharmaceutical industry has long been among the most lucrative industries in the world, regularly posting double-digit profit margins. Among Fortune 500 drug companies, only Schering-Plough lost money in 2008. Pfizer, Merck and Wyeth boasted margins between 13% and 20%.

But Pfizer and Merck have the same problem. They depend heavily on a few big-name drugs for their growth and have few candidates in their pipelines to replace them as patent protection wanes in the coming years.

"It's been hard for these companies to replace those drugs because much of the low-lying fruit has been picked," said Dr. Gary S. Firestein, a dean and professor of medicine at UC San Diego.

As a whole, the industry has been slow to create new drugs. Between 1996 and 2006, the most recent year available, the number of new drug applications received by the Food and Drug Administration remained flat.

Pfizer faces a looming deadline for its cholesterol-lowering drug Lipitor, which will be open to competition from generics in 2011. Merck has had a series of high-profile flameouts, the most famous of which is Vioxx. The arthritis drug was pulled from the shelves in 2004 because of concerns that it caused heart problems.

After being sued by an estimated 50,000 patients, the company agreed in July to pay $4.85 billion to settle the cases.

Both acquiring companies hope that promising drugs being created by their slightly smaller peers could, with a little marketing magic, become blockbusters.

Merck and Schering-Plough already work together under a partnership to market the cholesterol drugs Vytorin and Zetia. Pfizer, already a giant, would grow about 45% with the Wyeth deal.

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