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Merck will buy Schering-Plough for $41.1 billion

By , - Last modified: March 1, 2011 at 11:29 AM

Pharmaceutical titans Merck and Schering-Plough this morning announced a $41.1 billion cash and stock merger.

New Jersey pharmaceutical titans Merck and Schering-Plough this morning announced a $41.1 billion cash and stock merger they said will deliver a strong pipeline of new drugs, high single-digit earnings growth and $3.5 billion a year in cost cutting.

Fred Hassan, chief executive at Schering-Plough, which will be acquired at a 34 percent premium over Friday’s closing stock price, said during a conference call with analysts this morning that the “stunning and accelerating changes in the global macro-economic environment are driving stunning and accelerating changes in our own industry’s environment.”

The companies said it’s too early to comment on possible work force reductions as a result of the merge, but announced that a hiring freeze has been put into effect immediately at both companies. Merck has its headquarters in the Whitehouse Station section of Readington; Schering-Plough is based in Kenilworth.

The announcement comes just weeks after Pfizer announced a $68 billion deal for Madison-based Wyeth.

Debbie Hart, president of BioNJ, the association of the state’s biotechnology firms, said she’s concerned that the merge will result in layoffs at the two firms.

“We’re wondering who’s next,” she said. “The industry landscape is changing at the highest levels, and we’re seeing changes in the smaller companies, as well. I think we’ll be looking at a whole new landscape in a year.”

New Jersey has 240 biotech companies, and many are struggling to conserve cash in the current economy, where credit and venture capital are drying up and the stock market crash has closed the initial public offering route to capital formation. Hart said her members “are shelving programs, some have done layoffs, and they are looking at any way they can save money.”

But she said it’s possible that the creation of the new wave of giant pharma companies will create more opportunities for small biotechs to do collaborations with the bigger players.

The merger is likely to result in layoffs in New Jersey from the administrative headquarters staffs of the two companies, said Jim Hughes, an economist at Rutgers University.

“This confirms that the long-awaited drug industry consolidation is now seriously under way, and the overall industry is really confronting the big patent cliff whereby there are very few blockbuster drugs — the older drugs’ patents are running out,” he said.

There will be short-term pain from the layoffs, but in the long run, if the merger succeeds, “it ensures that Merck will be one of the big players, and hopefully be strong enough not to be taken over by an out of state firm,” Hughes said. “We could have a real powerhouse headquarters in New Jersey.”

The deal will double to 18 Merck’s pipeline of drug that are close to commercialization, boost overseas revenue to 50 percent and generate high levels of free cash flow, Merck CEO Richard Clark said.

An issue in the deal is a joint venture between Johnson & Johnson and Schering-Plough to market the drug Remicade, which would be invalidated by a change in control at Schering-Plough. The companies said there is no change in control, because the deal is a “reverse merger” — Schering-Plough will be the surviving corporate entity, and will then change its name to Merck.

Officials of Merck and Schering-Plough downplayed the Remicade issue during the conference call this morning.

“I think that there is very good respect among the three companies in New Jersey and good relationships and good dialogue,” Hassan said. “In fact, I had a cordial conversation with (J&J CEO) Bill Weldon this morning.”

A J&J spokesman said the company would have no comment on the deal.

Write to the Editorial Department at editorial@njbiz.com

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