AP News, March 12th, 2007
Schering-Plough Corp. said Monday it will buy the drug unit of Netherlands-based Akzo Nobel NV for $14.4 billion, giving the U.S. pharmaceutical company an array of women's health products while bolstering its animal health business and late-stage pipeline of experimental medicines.
The approximately $4.9 billion in revenue from Organon Biosciences would bulk up Schering-Plough's sales by about half, and analysts applauded the New Jersey's drug maker's effort to diversify and lessen its dependence on its cholesterol franchise. But they also expressed concern about the deal's debt and one key late-stage product, asenapine.
Pfizer Inc. returned the rights to asenapine, a treatment schizophrenia and bipolar disorder, to Organon last year after it had mixed results in clinical trials. On Monday, Standard & Poor's Rating Services placed its rating on Schering-Plough on CreditWatch with negative implications because of the debt the deal will add, while Moody's Investors Service placed its Baa1 long-term debt rating under review for possible downgrade.
Schering-Plough Chief Executive Fred Hassan was upbeat about the deal.
"In a consolidating industry, there are very, very, very few companies left which have strong research ... and a strong pipeline of late projects and new projects that have a long patent life," Hassan said during a conference call.
Akzo's shares soared 19 percent to 55.01 euros ($72.28) in Amsterdam trading. Schering-Plough shares rose 10 cents to close at $23.95 on the New York Stock Exchange.
Schering-Plough said the transaction, which is expected to close by the end of the year, should add about 10 cents per share to earnings in the first full year, after costs and adjustments. It expects to achieve $500 million in synergies from the deal over three years.
Hassan said the deal may result in some job cuts, but he did not specify any numbers. Organon has 19,000 employees, while Schering-Plough has 33,500.
The acquisition will be financed through a mix of cash, debt and equity, Schering-Plough said. New debt is expected to total $6 billion to $8 billion. Moody's Vice President Michael D. Levesque said that means Schering-Plough is planning to at the very least more than double its current long-term debt of about $2.4 billion.
"It is a major credit event to take on," Levesque said.
The deal moves Schering-Plough into two new treatment areas: women's health and the central nervous system. Sales of Organon's contraceptives, which include NuvaRing and Implanon, totaled $669 million euros ($877 million) according to Schering-Plough. Revenue from Organon's pharmaceutical business, which includes an infertility treatment and a muscle relaxant, reached $3.4 billion last year.
"They are good solid products that can be tweaked to add more revenue," said Steve Brozak, president of WBB Securities LLC, an independent broker/dealer specializing in health care.
Organon's animal health unit sales were approximately $1.5 billion last year. Hassan said the unit will complement the company's existing business, creating a leader in the field.
Prudential Securities analyst Tim Anderson said in a research note that even though the deal was accretive, it "lacked pizazz."
Anderson noted the new products don't really complement Schering-Plough's most important franchises such as cholesterol products Vytorin and Zetia, which are sold in a joint venture with Merck & Co. Those drugs have been a key driver of Schering-Plough's recent turnaround.
Bank of America analyst Chris Schott estimated in a report that the cholesterol franchise represents 60 percent to 70 percent of Schering-Plough's earnings, and that the deal represents an opportunity to diversify its profit base.
The deal prompted Bear Stearns analyst John Boris to upgrade his rating on Schering-Plough to a peer perform from underperform. He noted that Organon has five products, including asenapine and treatments for insomnia and infertility, in Phase III trials, the last step before seeking regulatory approval.
While some analysts worried about asenapine's prospects in the wake of Pfizer's decision to jettison the drug, Hassan expressed confidence.
"Our research and development people are impressed with asenapine," Hassan said.
Brozak said asenapine may not turn into a blockbuster and perhaps that is why Pfizer chose not to purse the product.
"It (asenapine) is another arrow in the quiver," Brozak said. "It isn't necessary that every product in the pipeline be a blockbuster."
Akzo Nobel said last year it would either sell or float the operations of Organon by the end of March. It was to have launched an initial public offering of shares Monday, but those plans were abruptly shelved after the Schering-Plough bid.
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AP Business Writer Toby Sterling in Amsterdam, Netherlands, contributed to this report.
