Merck KGaA to buy Serona and Altana for $19B

Merck KGaA to buy Serona and Altana for $19B

Merck KGaA to buy Serona and Altana for $19B

Midsize European drug makers unveiled two deals, valued at a total of more than €15 billion, or $19 billion, that underscored the pressure building on these companies to grow to stay competitive with industry titans.

German drug maker Merck KGaA agreed to buy Swiss biotechnology company Serono SA for €10.6 billion. A few hours later, Germany's Altana AG said it would sell its pharmaceutical business to Danish drug maker Nycomed for €4.5 billion.

Midsize drug companies have found it hard to compete with the likes of Pfizer Inc. and GlaxoSmithKline PLC, which have larger research budgets and sales forces. Midsize companies also often find themselves too reliant on one or two drugs, making their sales vulnerable when generic copies of their products are launched. Merck, Serono and Altana are all family-controlled companies that have been seeking merger partners. Nycomed is owned by private-equity firms.

Merck, which isn't affiliated with the American drug maker of the same name, is 73%-controlled by the Merck family of Germany. It has agreed to pay 1,100 Swiss francs ($879) a share for a 64.5% stake in Serono owned by the Bertarelli family of Switzerland, and plans a public tender offer for the shares outstanding at the same price. The offer represents a 20% premium to Wednesday's closing price of 915 francs.

Merck said the deal would transform its pharmaceuticals division, creating a "critical mass in research and development," with a combined total of 28 compounds in development. Merck said it would combine its prescription-drug business with Serono's and call it Merck-Serono Biopharmaceuticals, with global headquarters in Geneva and U.S. headquarters in Boston. Merck-Serono Biopharmaceuticals will have annual sales of €3.6 billion, a research and development budget of €1 billion and 7,000 salespeople world-wide. Merck also sells generic drugs, consumer health-care products, liquid crystals and chemicals. It will continue to manage these businesses separately.

By buying Serono, Merck will gain a larger foothold in the U.S. prescription-drug market, where it has a minimal presence. Serono booked $767 million in sales last year in the U.S., and has a sales and marketing staff of more than 500 people in North America.

Both Merck and Serono have been on the sidelines in recent months after failed attempts to consolidate with other companies. Serono put itself up for sale late last year but didn't seal a deal with any buyers. In April, Serono Chief Executive Ernesto Bertarelli said the company was taking itself off the block and seeking acquisition opportunities instead.

Merck lost a battle with Bayer AG earlier this year for control of fellow German drug company Schering AG. In March, Merck ruled out a bid for Serono. But Merck's chief financial officer, Michael Becker, told analysts on a conference call yesterday that the company changed its mind after a bidding war failed to develop for the Swiss firm. "We were expecting a competition between the big pharma firms with the deep pockets," he said.

Altana, based in Bad Homburg, Germany, is controlled by the Quandt family, which also owns a large stake in BMW AG. The company has been trying to sell its pharmaceutical unit since last year, and the €4.5 billion it accepted from Nycomed is short of the €6 billion it originally sought. Altana has been under pressure since mid-2005, when Pfizer terminated its partnership with the company to jointly develop an experimental respiratory drug.

Nycomed, based in Roskilde, Denmark, sells a variety of drugs for osteoporosis, pain and heart disease.

The need to pool resources and products has motivated other European drug mergers in recent years, including Bayer's $21.3 billion purchase of Schering this year, and Belgium-based UCB SA's $2.7 billion takeover of Celltech Group PLC of the United Kingdom in 2004.

Serono's biggest product is its Rebif treatment for multiple sclerosis, which accounted for 49% of its sales in 2005. Its other main franchise is infertility treatments, with its Gonal-f generating 21% of sales. Merck sells cancer therapies, including the bowel-cancer drug Erbitux, and treatments for cardiovascular diseases and diabetes.

Shares in Merck fell 4.7% to €74.70 in Frankfurt as some investors feared the company was overpaying for Serono. Serono shares rose 18% to 1,076 Swiss francs in Zurich.

Analyst views on the Merck-Serono deal were mixed. Some said the combination appeared to be a sign of desperation for both companies after they failed to find other merger partners.

"The synergies between the two pharmaceutical businesses look minimal, as there is very little product overlap, and even in marketing, the Serono sales force is highly specialized and therefore unsuitable to be used for more general therapeutic areas," Andrew Fellows, an analyst with Helvea, said in a note to clients.

But other analysts said that by combining their research budgets, the companies would improve the chance of discovering new drugs.

Merck said it will finance the deal initially through existing cash and a loan. The all-cash transaction will be refinanced through a combination of a syndicated loan, a bond and a capital increase of €2 billion to €2.5 billion, in which the Merck family will participate with an amount of €1 billion.