Approval for Merck-SGP Merger

Recently, Merck (MRK - Analyst Report) and Schering-Plough (SGP) received approval from the US Federal Trade Commission (FTC), the Swiss Competition Commission and the Canadian Competition Bureau for their proposed merger. However, the transaction has yet to receive approval from other regulators, including China and Mexico.

The deal was approved by the European Union antitrust regulators last week. Shareholders of both the companies have already approved the deal in August. Merck expects to close the proposed merger by year end.

The FTC approval has come with the condition that both companies will sell some assets. As a result, Schering-Plough has agreed to sell its rolapitant drug, meant to be used for the treatment for nausea and vomiting in chemotherapy patients to Opko Health Inc.

In addition, Merck agreed to sell its interest in Merial Ltd, an animal health joint venture, to its French partner, Sanofi-Aventis (SNY - Analyst Report). In September 2009, Merck had already sold its interest in Merial to Sanofi-Aventis. The FTC decision was taken to avoid Merck from becoming a dominant player in the markets for animal-health and anti-nausea drugs.

As a reminder, earlier this year Merck had decided to acquire Schering-Plough in a $41.1 billion deal, which would create the world's second-largest producer of prescription medicines, with about $42 billion in annual sales. The merged company would be placed behind Pfizer (PFE - Analyst Report), which acquired Wyeth for $68 billion.

Merck is faced with significant patent challenges over the next four years while Schering has relatively little exposure to patent expirations through 2013. We feel that the deal is a clear attempt by Merck to address certain impending patent issues and pipeline failures. Merck is also contending with softening sales of some of its key drugs including Gardasil that have hampered earnings in the last few quarters.

Given the minimal product overlap and relative ease in combining the cholesterol business, we would expect the combination to provide significant synergistic opportunities with combining sales, marketing, research and other back-office functions. The deal should also help geographically diversify revenue sources as Schering currently has about 70% of revenues coming from overseas, versus only 44% for Merck.