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The Merck acquisition of Schering-Plough may have surprised few, the approach has raised some eyebrows. Rather than buy the company outright, Merck going through a convoluted reverse merger deal to keep Schering's licensing deals secure. Was it the right move?
Merck’s announcement Monday morning that it would merge with Schering-Plough in a $41.1 billion deal took many analysts and investors by surprise. As did one interesting aspect of the proposed deal structure.
If Merck–Shering-Plough goes through, it will take the form of a “reverse merger.” Technically, Schering-Plough will absorb Merck rather than vice versa, though the merged entity will take the Merck name.
While Merck hasn’t commented on the rationale behind the reverse merger, most analysts feel that it had to do with an existing international marketing agreement between Schering and Johnson & Johnson. Under the current agreement, Schering has the EU rights to sell J&J’s Remicade (infliximab) and golimumab (a once-a-month anti-inflammatory currently awaiting approval)-a deal that has proven lucrative for the company. But a clause in the agreement states that if Schering is acquired by another company, all rights revert to J&J.
“Reverse mergers are a common thing [in other industries], and it’s always a question of what tax or licensing agreements that a merger would trigger,” said Mike Luby, co-founder of TargetRx. “If it ends up strategically beneficial to have Merck merge into Schering and then change the name to Merck, then that’s the way it gets done. The vehicle for the merger simply depends on circumstances.”
Use of the tactic is especially common when smaller companies merge. “It’s far more inexpensive for small firms to do a reverse merger to a shell company,” explained Les Funtleyder, healthcare strategist at Miller Tabak. “You save a lot of financing costs.” The New York Times noted on Tuesday that reverse mergers are also used to help failing publicly held companies purchase private businesses, with the private company taking over the stock listing.
Three’s a Crowd
The great unknown in this mega-merger is what part Johnson & Johnson will play. Remicade is a top seller in the rheumatoid arthritis category, and was projected by Research and Markets to have sustained growth for Schering into 2012. Forbes, however, noted in January that Remicade sales for J&J dipped 2.4 percent, to $886 million, in the last year.
Rumors are now swirling that Johnson & Johnson could throw a monkey wrench into Merck’s plans by entering its own bid for Schering. UBS analyst Catherine Arnold sparked speculation yesterday when she stated that a bid by J&J “shouldn’t be ruled out.”
“I’ll be very surprised if J&J makes a counteroffer,” said Ian Wilcox, global head of life sciences for Hay Group. “Ortho Biotech had some serious financial issues, and J&J had to merge Ortho with Centocor last year. They lost a billion dollars in revenue with a bad FDA outcome. For them to pay a premium to take control of the Remicade market when their focus is heavily domestic would be surprising.”
Remicade is well into its lifecycle and is considered an aging technology, so a move to buy Schering based solely on the rights of one drug might seem impractical. “I can’t imagine J&J putting more money into that franchise to lock it up,” Wilcox said. “It wouldn’t make much sense.”
“We believe that J&J is likely to make the next move via a potential lawsuit [against the companies] to claim the international rights, or by negotiating a payment to reacquire them,” stated Caris and Co. analyst David Moskowitz, in a note to investors.
However, Peter Young, president of Young & Partners, told Pharm Exec that he expects to see more reverse mergers in the biotech industry, as well as with small pharma firms as smaller M&A actions take place in the next few years.
“At the end of the day, reverse mergers do not change the shareholder’s situation,” Young said. “Is it unusual in the pharma industry? Yes. But is there a logical reason for doing it? Absolutely.”