Merck & Co - now world's No 2 drugmaker - upbeat about new operation post Schering-Plough merger; but what about J&J?

With the finalization of its $41.1 billion merger first announced in April with fellow US drug major Schering-Plough late on November 3, the new Merck & Co is up and running and has outlined its global plans and financial expectations The new company becomes the world's second-biggest drugmaker by turnover, catapulting the old Merck from number eight worldwide by sales, and it expects to have a cash flow of some $15 billion to make strategic acquisitions. The new firm's share price jumped 6.4% to $32.79 on the first day of trading.

Unlike global number one Pfizer, which has also just completed its $68 billion takeover of Wyeth, not to mention previous giant acquisitions such as Pharmacia for $58 billion in 2003 and Warner-Lambert for $90 billion in 2000, this is the first mega-merger for Merck.

'With our merger now complete, we are ready to deliver on the promise of a new Merck built on a foundation of scientific innovation and dedication to the well-being of patients around the world,' said Richard Clark, chairman, president and chief executive of Merck. 'On 'Day One' for the new Merck, we are stronger and better equipped to make a difference in the lives of people globally through our broadened, diversified portfolio of innovative medicines and vaccines, and products for consumer and animal health,' he stated.

The company's corporate headquarters will be in Whitehouse Station, New Jersey, as previously indicated. In addition, the company's US organization for the Global Human Health division and Merck Research Laboratories will be headquartered in Upper Gwynedd, Pennsylvania. The former Schering-Plough headquarters in Kenilworth, NJ and Merck's operations in Rahway, NJ, will continue to be important sites, with large and diverse operations encompassing marketing, manufacturing and research. At this time, all other sites will continue to operate as they did, the company noted.

But will specter of J&J remain?

Meantime, as Seeking Alpha points out, 'the elephant in the room' remains the ongoing arbitration with Johnson & Johnson over two of Schering's most valuable products: the anti-rheumatic antibodies Remicade (infliximab) and Simponi (golimumab; The Pharma Letter passim). The arbitration was never going to stop the Merck-Schering deal from completing, but the fact that a settlement has not yet been reached suggests the legal process will now have to run its course, with a verdict not expected until the first quarter of next year, it says.

Merck's merger with S-P was constructed as an elaborate reverse-merger, technically allowing Schering to remain the surviving entity under accounting practice, thereby attempting to avoid triggering a change of control clause in the deal with J&J over the two products. However, as J&J is claiming, the practical reality of the situation is that Merck has acquired Schering, and therefore Remicade and Simponi have new owners. The newly-merged company is still called Merck, Merck's original shareholders now control 68% of the enlarged company and there are only three directors from S-P, versus 14 board members from Merck.

Financial highlights

Merck is targeting a high single digit non-GAAP earnings per share compound annual growth rate from 2009 to 2013 (with the 2009 base representing Merck's previous stand-alone non-GAAP EPS guidance of $3.20-$3.30). Additionally, in 2013, it is targeting free cash flow to be approximately $15 billion. The combined company will have a strong balance sheet with cash and investments of approximately $8 billion at the time of the closing. As previously indicated, Merck says it expects the transaction to be modestly accretive in 2010.

Merck also continues to expect to achieve substantial incremental cost savings of approximately $3.5 billion annually beyond 2011 which are expected to come from all areas across the combined company.

The strong cash flow and substantial cost savings will enable the company to continue to invest in some of the best investment opportunities, including pipeline candidates with the greatest probability of success, as well as licensing opportunities. By optimizing its investments, the new Merck will maximize the benefits of strategic growth initiatives and R&D efforts to solidify its position at the forefront of innovation and enhance its scientific and technological leadership, it contends.