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Merck digs deep for Serono

Another mid-tier pharma merger will create $10bn European powerhouse

German drug manufacturer, Merck KGaA, has surprised the investor market by agreeing to buy Swiss biotech firm, Serono, for $13.3bn in a move that will create a major new player in European pharmaceuticals.

Merck said it had agreed with Serono's founding Bertarelli family to buy a controlling 64.5 per cent stake, and would make a public offer for the rest of the shares at the same price of SwFr1,100 ($879) per share in cash. The bid valued Serono 20 per cent above its closing share price.

The potential merger has raised a few eyebrows within the industry, not least because both companies have suffered recent setbacks in their efforts to restructure their respective businesses.

In March, Merck failed in its bid to buy rival Schering, which rejected its Ä14.6bn offer and was eventually bought by Bayer. Earlier in the year, Serono CEO, Ernesto Bertarelli, abandoned attempts to sell the biotech firm after failing to find a buyer, and instead announced a plan to raise capital to finance potential acquisitions.

Buying the Bertarelli stake gives Merck 75.5 per cent of the voting rights in Serono, and will add to its earnings from next year. Combined, the two companies would become one of Europe's largest pharma groups with a market value of almost $10bn.

Merck chief executive, Michael Rˆmer described the merger of the two companies as ìa perfect fitî.

ìThis acquisition transforms Merck's pharmaceuticals business and creates a leading position in the world of biologic medicines, which helps to ensure its future through the 21st century,î he commented, adding that the deal would raise his company's R&D budget for prescription drugs from Ä442m in 2005 to Ä1bn this year with 28 compounds in development.

To fund the acquisition, Merck plans to raise as much as Ä2.5bn in new shares and to issue a bond and a syndicated loan after initially paying through existing cash and a bridge financing.

Merck shares dropped by over 5 per cent on the news, reflecting investors' concerns that it had paid over the odds for Serono.

However, Richard Purkiss, pharma analyst at UBS Warburg told PMLive that he didn't think Merck had overpaid.

ìI think the acquisition of Serono certainly achieves a lot of the goals that Merck originally set out when it attempted to buy Schering,î he said. ìThe two firms are reasonably similar and the merger makes sense strategically. There's an overriding rationale on the part of Merck to improve the quality of the business in the longer term and consequently Serono will get them some of the way there.î

The new subsidiary, which will be called Merck-Serono Biopharmaceuticals, will have its headquarters in Geneva, while the US arm will be based in Boston. Rumours in Switzerland suggest that Bertarelli was keen on the Merck offer as it would maintain the Serono name in Geneva and safeguard more local jobs.

It was feared that if a much larger pharma firm had bought Serono, it might have been forced to strip down assets and close plants in Switzerland.

Merck is the oldest drug company in the world; it separated from Merck & Co of the US at the end of the First World War. The Serono deal will give the Darmstadt-based firm, whose main products include cardiovascular drug, Concor, and cancer drug, Erbitux, a greater presence in the US thanks to Serono's partnership with Pfizer to market multiple sclerosis drug Rebif.

30th September 2008

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