Académique Documents
Professionnel Documents
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MT5011 Group 1
Goh Zhi Qiang Justus Cheah Sin Sheng Lin Qiuyue Wu Hengxin
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AGENDA
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Introduction Overview of Merck (MRK) Overview of Schering-Plough (SGP) Financial Valuation Synergies Target Mode of M&A Conclusion Q&A
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Introduction
VALUATION ON Mercks (MRK) ACQUISITION OF Schering-Plough (SGP)
Letter of Intent (March 2009) Closing (Nov 2009)
Merck (MRK)
by Wu Hengxin
About Merck
Global Health care company
Medicine Vaccines Biologic Therapies Consumer Animal
Incorporated in 1891 Listed in New York Stock Exchange 93,000 employees in 53 countries Market capitalization of 114 Billion USD as at Sep 2010
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Organization Structure
CEO
Animal Health
Merck Manufacturing
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History
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SWOT Analysis
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Immediate Concerns
Patent Expiry of Top Selling Drugs
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Competitors
Net Income USD Million
0 Pfizer Novartis Procter & Gamble GlaxoSmithKline HoffmannLa Roche Johnson and Johnson Bayer AstraZeneca Sanofi-Aventis Merck & Co. Wyeth Amgen Takeda Pharmaceutical Co. Eli Lilly and Company Boehringer Ingelheim Genentech Abbott Laboratories Bristol-Myers Squibb Baxter International Schering-Plough 7,318 7,202 6,450 6,063 5,033 4,434 4,197 2,950 2,870 2,663 2,163 2,113 1,717 1,585 1,397 1,057 11,053 10,340 10,135 5,000 10,000 15,000 20,000 19,337 25,000
Source: Top 50 Pharmaceutical Companies Charts & Lists, Med Ad News, September 2007
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Schering-Plough (SGP)
by Lin Qiuyue
Schering-Plough Overview
Global Pharmaceutical Company R&D and manufacturing of human pharmaceutical, animal health and consumer healthcare Presence in 140 countries with subsidiaries in more than 55 countries 51,000 employees Listed on NYSE
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Schering-Plough Overview
Revenue: $18.5B (08), $12.7B (07) and $10.6B (06) Schering-Plough 2008-13 sales CAGR of 4.5% (fastest growth rate for pharmaceuticals)
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Motivations-Geogaphical Expansion
Merck's Total Revenue (2008): USD $23,850 mil Schering-Plough's Total Revenue (2008): USD $18,502 mil
US, 56%
US 30%
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16% 7%
Animal Health
Consumer Health
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Motivations-Patent Expiry
Schering-Ploughs biggest-selling drugs have longer patent protection Mercks $4 billion-a-year asthma drug Singulair will face generic competition by 2012. By then, Schering-Plough has said it plans to file for approval of seven drugs, each with more than $1 billion in peak annual sales.
Top drugs for both companies Company Drug Name Singulair Cozaar/Hyzaar Maxalt Merck Januvia Merck/ Schering-Plough What it treats Asthma Hypertension Migraine Headaches Diabetes Patent Expiry 2012 2010 2012 2022
Zetia/Vytorin
Schering-Plough
Source: Drugs Expiration Table (2009 Medco Health Solutions) 16 11/20/2010
Cholestrol Inflammatory diseases Allergies Brain Tumors Women's health Livestock health
MotivationsSchering-Ploughs R & D
19.07% of total revenue goes to R & D (3529mil in 2008) 6 R & D projects have received fast track designation from FDA SGPs acquisition of Organon (in 2007)a biotechnology company which has 18 drugs in phase 3 clinical trials Late-stage R&D pipeline, from 2004 to 2008: three new entities in Phase III and four more in pre-registration (total 12 in late-stage development) Blood thinner (TRA) to seek regulatory approval in 2010 or 2011.
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Financial Valuation
by Cheah Sin Sheng
Asset-based Valuation
SGPs 2008 finance statement,
Total asset value is $28,117M Short term liabilities: $5,193M Net pension & other post-retirement periodic benefits: $304M Long term liabilities: $12,395M
Market-based Valuation
PFIZER (PFE) agrees to pay $68 Billion for rival drug maker WYETH (WYE) on Jan 2009 roughly 29% premium over WYE Stock Price Market Capitalization as of 2008
PFE $113.75 Billion vs. MRK $44.4 Billion WYE $51.7 Billion vs. SGP $32.6 Billion
Income-based Valuation
= rf = rm = 0.86 SGP beta 4.28 US Treasury Yield Curve Rates (30 years) 8.80 S&P 500 CAGR past 22 years market return Assumption/Calculation: Weight of Equity, We Weight of Debt, Wd Cost of Equity, Re Cost of Debt, Rd SGP WACC = We x Re + Wd x Rd k Long-term growth rate (CAGR) WACC 6.80 7.30 8.00 7.20 7.20 37.45% 62.55% 15.56% 3.00% 7.70% 12.00% 4.50%
Pharmaceutical Industry Pfizer (PFE) Johnson & Johnson (JNJ) GlaxoSmithKline (GSK) Bristol Myers Squibb (BMY) Abbott Labs (ABT)
Source: http://www.wikiwealth.com
Assumptions
SGP historical data (2006, 2007 & 2008) were extracted from the financial report to project the forecast in this report. Interest paid, Interest expense, Tax expense, Depreciation and Amortization are projected at the rate of the assumption made to the growth rate for next 5 years. Changes in the net working capital and Capital expenditure is assumed to grow at the same growth rate of the assumption made to the growth rate for next 5 years. Terminal value at 2028 is calculated consideration typical drug patent 20 years expiration with no growth after 2013.
SGP Historical
Year (in millions) Revenue Interest Expense Income Tax Expense Net Income Net Income +Interest Expense +Income Tax Expense +Depreciation and Amortization EBITDA EBITDA Less: Interest paid Less: Tax paid Add: Changes in net working capital Less: Capital expenditures Free cash flow Ratio Calculation Study Sales growth Interest expense ratio Tax expense ratio Depreciation and amortization exp. ratio Net income ratio 11.42% 1.62% 3.42% 5.36% 10.79% 19.78% 1.93% 2.03% 6.78% -11.61% 45.80% 2.90% 0.79% 11.76% 10.29% $10,594.00 $ $ 172.00 362.00 $12,690.00 $ $ 245.00 258.00 $18,502.00 $ $ 536.00 146.00 2006 2007 2008
$ (1,473.00) $ (1,473.00) $ $ $ $ $ $ $ $ 245.00 258.00 861.00 (109.00) (109.00) (245.00) (258.00) (618.00)
$ 1,188.00
$ (1,458.00)
$ 2,441.00
$ (2,688.00)
$ 4,306.00
$ 2,272.88 $ 4,974.20 $ 4,974.20 $ (560.12) $ (152.57) $ 1,018.88 $ (607.67) $ 4,672.72 $ 0.89 $ 4,672.72 $ 4,172.07
$ 2,710.45 $ 5,931.83 $ 5,931.83 $ (667.95) $ (181.94) $ 1,215.03 $ (724.65) $ 5,572.30 $39,660.05 $ 0.57 $ 5,572.30 $ 3,161.87 $ 0.57 $39,660.05 $22,504.18
$40,751.64
12.00% 4.50%
PV of Enterprise Value ($/per share) WACC 11.0% 12.0% 13.0% # 0f shares (million)
SGP Growth Rate 3.5% 4.5% 5.5% 25.45 26.65 27.90 23.82 24.92 26.08 22.35 23.37 24.44 1,635
Synergy Target
Synergy target of $3.5 billion in recurring savings per year from its operations by 2012 Process Streamlining
1. Headcount reductions (15,000/100,000 15%) 2. Duplicate facilities to be closed or divested 3. Initiate procurement savings
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Reverse Merger
Merck's acquisition of its rival, Schering-Plough is being structured as Reverse Merger
Sale of Business
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Reverse Merger
Sale of Business
Subsidiary
Schering-Plough would technically be the surviving corporation, but it would take on the Merck's name.
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Conclusion
Presented the reasoning and motivation for Merck acquisition target Schering-Plough Proposed an acquisition value of $40.75 Billion for Schering-Plough based on DCF and its associated assumptions Explain why the M&A deal between Merck and Schering-Plough is being structured as a Reverse Merger
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Back-up Slides
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Market-based Valuation
Pfizer would pay $50.19 a share for WYE ~ 29% premium
WYE Closing Stock Price ~ $38.90 (1/23/09) Using 29% premium over SGP, the acquisition value of SGP could be $21.97 (12/31/08 closing $17.03) SGP might value at ~ $35.92 Billion
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-2001 11.89% -2002 22.10% -2003 -2004 -2005 -2006 -2007 28.69% 10.88% 4.91% 15.79% 5.49%
10.92%
Source: http://en.wikipedia.org/wiki/S%26P_500
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Cost of Restructuring
Merger restructuring program: $1.4 billion Merger related costs: $544 million Other restructuring programs: $521 million Restructuring costs, primarily employee separations: $1.6 billion Total overall costs associated with restructuring programs included in materials and production, research and development, and restructuring costs: $2.0 billion
The first phase of the Merger Restructuring Program is expected to be completed by the end of 2012 with total pretax costs estimated at $2.6 billion to $3.3 billion.
Synergy target of $3.5 billion in in recurring savings per year from its operations by 2012
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Required Divestures
Merck must sell its interest in Merial Limited, an animal health joint venture with Sanofi-Aventis. As Merial and ScheringPlough together account for about 75 percent of U.S. sales of such vaccines, causing monopoly in poultry vaccines Schering Plough must sell its assets related to drugs that treat nausea and vomiting in humans. As Schering-Plough nausea drug, Rolapitant will competed with Mercks drug, Emend.
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Merger Mechanics
The Merck/Schering transaction features the two stages with the creation of two subsidiaries, namely MS1 and MS2 by SGP Stage 1 MS1 will merge with and into Schering.
In the merger, each share of Schering common stock shall be converted into the right to receive, (a) 0.5767 of a share of the surviving corporation (Schering), and (b) $10.50 in cash;
Stage 2
In that merger, each share of Merck common stock shall be converted into one share of the stock of the surviving corporation (Schering).
The merger agreement provides that "it is intended that the [Merck] merger shall qualify as a reorganization." In fact, the deal is conditioned on the receipt of an opinion that the Merck merger qualifies as such a reorganization.
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