Engineering News

Merck at the crossroads after drug flop, Schering
Tue Jun 27, 2006 4:44am ET

FRANKFURT, June 27 (Reuters) - After profiting from a game of brinkmanship with rival Bayer in a takeover battle for Schering, German drugs and chemicals group Merck needs to come up with a deal of its own, analysts say.

Merck Chief Executive Michael Roemer is likely to face a barrage of questions at the annual shareholders' meeting on Friday, a fortnight after Merck said it had made a profit of 400 million euros ($504 million) from selling its Schering stake, and a week since it said a key drug hope had failed.

In a move criticised by some analysts as more befitting a hedge fund, Merck built a stake of over 21 percent in Schering, threatening to scuttle a takeover bid for Schering by Bayer.

But it relented just as Bayer's offer to Schering shareholders was due to run out, selling its stake to Bayer at a big profit.

Now Merck has more ammunition for a transaction of its own and analysts say shareholders will be keen to hear if there is anything on the drawing board. If no acquisition comes to pass, demands may grow for the bounty to be paid out as a special dividend.

"Merck can afford to wait until the fourth quarter this year or until early next year before making a decision on the dividend," said Equinet analyst Martin Possienke. "They can look around for a suitable target in the meanwhile."

Another incentive to acquire emerged soon after the Schering windfall was announced: Merck had to end development of Parkinson's disease drug sarizotan due to poor trial results, dealing a big blow to its development pipeline.

"This increases pressure on Merck to do a deal," said Sal. Oppenheim analyst Peter Duellmann, who had forecast annual sales of up to 700 million euros for sarizotan. "Now their pipeline is made up of oncology drugs that are years away from the market."

The company's management under Roemer, who took over last November, and Karl-Ludwig Kley, hired from airline Lufthansa and charged with overseeing the integration with Schering, will be scanning the market for deals.

BENCHMARKS SET

Merck put Schering in play by bidding 77 euros a share, or 14.6 billion euros, for its German rival. It pulled its offer after Bayer came along with a higher bid, but started buying shares on the market.

Analysts said that affair gave the measure of deals Merck could attempt.

"Merck has shown it is prepared to do a deal of this size, to raise the money, tell investors the story and get the backing of the owner family," said Duellmann.

"But the benchmark in terms of strategic fit is also high following the Schering bid. That would have been a good deal, especially to fill gaps in marketing in the U.S. and Japan."

Duellmann added that Merck's management had been prepared to buy Schering because of its location in Germany, and that doing a similar-sized deal even as close as Scandinavia or the United Kingdom could be a big organisational challenge.

Landesbank Rheinland-Pfalz analyst Alexander Groschke said in a note that Merck could target the small biotech business of German healthcare group Fresenius.

And analysts say Merck could buy licences to prescription products, strengthen its already robust generics business or bolster its prescription-free drugs unit.

Roemer acknowledged in a newspaper interview after the Schering affair that the pharmaceuticals business had gaps in it, and indicated that he was keeping up the pressure both on his business development and M&A teams.

Even the feverish stake building in Schering has won Merck some friends, said Duellmann. "The perception of Merck among U.S. investors has changed dramatically. They are impressed that a family-controlled German company could be so pushy."

Source: Reuters

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