Big pharma just keeps getting bigger and bigger.
“Patent cliffs” (read: revenue-starved development
pipelines) and synergies (read: layoffs) continue to spur major
industry deals. The most recent is the $41.1 billion merger of Merck
and Schering-Plough, which was announced this week. Roche’s
pursuit of Genentech is also heating up with an increased offer and
reports of friendly negotiations. Not to be forgotten, there was also
the $68 billion tie-up of Pfizer-Wyeth in January. Still, the
shadow of the credit crisis looms large in all deals, especially the
mammoth ones we are talking about here, and financing continues to be a
major concern.
Merck and Schering-Plough are planning a merger for cash and stock
consideration. As currently structured, Schering-Plough will be a
surviving entity, but Merck shareholders will own the majority of the
combined entity. The deal will be financed with a combination of $9.8
billion from Merck’s existing cash balance and $8.5 billion from
J.P. Morgan. The megabank (notably, a Troubled Asset Relief Program, or
TARP, participant) has committed to a $3 billion, 364-day bridge term
loan and $5.5 billion in new and amended revolving credit facilities.
TARP brings us to another financing question: were the banks bailed out
to fund pharma deals? Probably not, but expect banks to continue
financing these pharma mergers for the foreseeable future.
Pharma companies are seen as safe lending bets
because of their stellar credit ratings and cash hoards. Also, despite
the ominous sounding “patent cliff” at some companies, most
do have products in development. As long as banks are willing to
underwrite and syndicate loans for pharma M&A, expect consolidation
to continue in the industry. Merck is the latest deal, but there are
plenty of other big pharma companies that could still be interested in
getting bigger. If the last few weeks are any indication, watch
for possible activity with Johnson & Johnson (which is rumored to
have lost out on the Schering deal), Eli Lilly, GlaxoSmithKline,
Novartis, Sanofi-Aventis, and many more pharma companies of all sizes
in the coming months.
Published: March 10, 2009
