Merck Scouts for New Targets as Schering-Plough Deal Completed

The New Merck & Co

As the U.S. pharma major's new logo—"Be Well"—suggests, Merck & Co expects to consolidate its position in the global pharma market, after the merger of Schering-Plough, "being well ahead" of its peers, except for Pfizer, which still holds the number one position. The new combined firm started operations as word trickled in of regulatory clearance from Chinese and Mexican regulatory authorities. The merger gained a crucial approval from the U.S. Federal Trade Commission (FTC), Canada's Competition Bureau, and Switzerland's Competition Commission earlier this week. The firm indicated that, with its operations now expanding to over 140 countries, the new Merck expects to make more than 50% of its overall revenues outside the United States.

Forecast on Financials

Merck has stated that it is targeting a "high single-digit" non-GAAP—Generally Accepted Accounting Principles—earnings per share compound annual growth rate for the next five years. Furthermore, it expects to generate cost savings of US$3.5 billion beyond 2011 as a result of the merger.

In terms of its portfolio, the focus will, apart from innovation, be to pursue life-cycle management of existing products through new formulations and combinations. The animal health business also features strongly in the company's future strategy, with 1,000 marketed products and revenues worth US$3 billion.

The company's research and development (R&D) head Peter Kim has reportedly said that the firm will continue to look for acquisitions of smaller drug makers and will seek licensing options, Reuters reports, with the focus expected to be on the biotechnology sector. The combined firm has 15 late-stage drugs in its research pipeline.

Outlook and Implications

The combined Merck & Co now has its work cut out to foster the continuation of revenue growth through a much-expanded geographical presence. The firm's expectation that about half the revenues will come from outside the United States suggests that, apart from Europe, the primary contributions will come from emerging markets such as India and China. Having gained the required regulatory approvals, the focus will now shift towards speedily executing the integration process. Although the reorganisation of the corporate structure is already evident, the new firm is expected to announce rationalisation of its various manufacturing and research facilities, and also indicate if there would be any redundancies in the process over the next month. It is expected that the firm will cut between 10% and 15% of its combined workforce.

The emphasis on licensing and acquisitions, even after a US$41-billion acquisition has just been completed, demonstrates not only an appetite for sustained growth but also indicates increasing challenges for the top-five firms in the global pharma industry. As Peter Kim has stated in the source, one of the motivations for the Schering-Plough deal was the latter's research pipeline, which has added substantially to Merck's. This is an area where Merck has now shown greater focus, particularly in establishing licences and acquisitions. The shift in strategy is a slight change of direction away from in-house innovation towards inorganic methods that could ensure sustainability of the pipeline potentially at much lower costs. As such operations kick in, the therapeutic focus area in research will continue to be on cardiovascular, neurosciences, and women's health.

Related Articles

• United States: 30 October 2009: Merck and Schering-Plough Secure Regulatory Nods for Merger
• United States: 1 September 2009: Merck & Co Reorganises Company Structure