Merck, Schering-Plough shareholders approve the merger

Merck & Co., Inc. (MRK) announced today that its shareholders voted by an overwhelming 99 percent to approve a proposed $41 billion merger with Schering-Plough Corp. (SGP). Schering-Plough's shareholders, whose meeting started much later, were also quick to approve the deal with the same overwhelming support. Merck shares jumped over 3 percent in afternoon trading, as did Schering-Plough's.

Under the terms of the agreement, Schering-Plough shareholders will receive 0.5767 of a share of new Merck common stock and $10.50 in cash for each share of Schering-Plough. For Merck shareholders, existing Merck share certificates will automatically represent an equal number of shares in the post-merger Merck.

Barring any unforeseen regulatory problems, the company expects the transaction to close in the fourth quarter of 2009, as originally planned. Merck tried to clear the way by selling it stake in the Merial animal-health venture to Sanofi-Aventis (SNY).

After the merger, the new company will become the world's second largest pharmaceutical company, right behind Pfizer Inc. (PFE), which is acquiring Wyeth (WYE).

Merck and Schering-Plough are already partners on the blockbuster cholesterol drugs Vytorin and Zetia. On Wednesday, they announced that they have entered into agreements to resolve, for a total fixed amount of $41.5 million, civil class action litigation in which some plaintiffs claimed that use of the drugs caused personal injury. With this, the two cleared one more house keeping item off their list, without admitting any misconduct or liability.

The new powerhouse will include the cholesterol venture, Merck's asthma treatment Singulair, its cervical cancer vaccine Gardasil, as well as Schering-Plough's nasal spray Nasonex and consumer health products. Then there is the addition of Schering-Plough's lucrative biotech unit, which sells the blockbuster arthritis drug Remicade. Of course, the new pipeline will include Schering's richer late-stage compounds, which should create long-term opportunities. The new company will be a dominant player in vaccines, cholesterol, respiratory and women's drugs.

That's before any operational synergies are taken into account, including reducing overhead, cost cutting -- including 15,000 job cuts -- and R&D collaboration.

Of course, the road could still be strewn with problems. For one, Johnson & Johnson (JNJ) has initiated arbitration proceedings as a result of the proposed merger. The arbitration relates to Schering-Plough's rights to Remicade and Simponi in the U.S.; J&J wants them all. This is no small matter, as the mega-blockbuster Remicade brings in more than $2 billion a year in sales. Attempting to avert that, the deal is structured as a reverse merger; technically, Schering-Plough will be the surviving company operating under Merck's name.

The question now is whether the combined company could withstand the deteriorating earnings that both companies have experienced, mostly due to a plunge in sales of Vytorin and Zetia after data from two clinical trials questioned the effectiveness of the medicines. Could cost cuts and Schering's pipeline give them the earnings and long-term growth potential they seek, especially in light of the increasing competition from generics? That remains to be seen.

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