Schering Plough – Organon: Who Benefits?

Schering’s recent deal to buy Organon came as a surprise to many, though the fact that Fred Hassan has been looking for deals is well known. Most analysts and the market in general (based on SGP’s price movements following the announcement) seem to be neutral (David Risinger of Merrill Lynch being the lone exception; Is Merrill vying for more business from Schering?). Most of the praise for the deal seems to be around the $500 million cost-savings that Fred has promised the street. However as a growth strategy, this does not seem to make much sense (see comments from the pipeline blog here).

In the women’s health area, Organon has good competition from J&J’s ortho division. The anti-psychotic asenapine’s prospects seem questionable too. For one, Pfizer decided to walk away from their joint development efforts. Second, by the time asenapine comes to market, many of today’s leaders would be probably go generic (Seroquel, Geodon?).Managed care will aggressively push to try Clozaril, Risperdal and these new generics as first-line therapy. Unless asenapine shows unusual value thru a great efficacy & safety profile, the prospects for this drug appear to be mediocre at best. Another promising anesthesia/hospital-use pipeline drug probably has the roughly the same market size as something like say Lilly’s Xigris.

In a nutshell, this is a neutral deal and that leads one to look at who is really benefiting from this transaction. It appears that Fred & Schering’s board would be the biggest beneficiaries of such a deal. Schering bulks up (current market cap: 36B) and makes it unattractive to acquirers by taking on more debt (which, to be sure, can be covered given the cash flows involved). Who would want to buy Schering? Pfizer and Astra Zeneca. Aside from pipeline problems, both would like to make a Lipitor or Crestor combo with Zetia. Any such moves by PFE or AZ would of course also cause Merck to enter the fray to protect its Vytorin franchise. One feels that rather than take a rich payout again (a la Pharmacia), Fred likes being Schering’s CEO.

Last but not least, Schering’s relatively low market cap & decent cash flows also probably make it attractive to private equity. While this would leave still leave Fred in control, he surely operates on a longer time frame and does not want any meddling by the private equity guys. Think branded pharma biz is too regulated, scientific, unpredictable, long-term oriented for private equity? Think again. According to the WSJ Health Blog, one of Hank McKinnell’s new wannabe areas is private equity (besides selling time-shares :-)). Another Hank & Fred pharma deal….gee I wonder how the last one turned out!