Schering-Plough Builds New Empire with Organon Acquisition

Schering-Plough and Akzo Nobel today announced that the U.S. drug firm will purchase the Dutch chemicals/healthcare group's pharmaceutical business in an 11-billion-euro (US$14.4-billion) deal. Schering-Plough will assume full control of Organon BioSciences by year-end in an all-cash deal, and is the largest of the carefully administered, strategic deals which have characterised Fred Hassan’s turnaround tenure at the top of Schering-Plough (including the deals with Germany's Bayer and U.S.-based Centocor). It will be financed through cash, debt and equity.

The deal immediately pushes Schering-Plough up from 17^th to 14^th in terms of revenues size of the global pharmaceutical industry, nestling alongside Germany's Boehringer Ingelheim and U.S.-based Abbott. Perhaps more importantly, it solidifies the company's critical mass and holds up its margins, which remain very poor compared with its peers. Schering-Plough will get its hands on Organon's contraceptives franchise, which includes fast-growing drugs such as NuvaRing. The overall business here grew 18% to 699 million euro last year, and is supplemented by growth in other areas such as anaesthetics (where Schering-Plough also has some interests).

There is, however, very little therapeutic overlap between the two companies. Organon is very much confined to its core areas in neuroscience and hormonal products, based on steroidal chemistry, whereas Schering-Plough has little traditional expertise. As such, there is not much room for synergy-related cost savings, although Schering-Plough has noted that it expects annual synergies of US$500 million after three years from closing, though has provided no insight into how this will be achieved as yet (a conference call will be held later today).

Again, in the pipeline there is little overlap, though the two companies meet at Organon's sole cardiovascular compound, Org-42675, which has stood out like a sore thumb in the company's Phase II candidates (we expected it to be out-licensed). Schering-Plough has its own anti-thrombotic nearing Phase III trials, and has been highlighted as a core development compound. Schering-Plough has not had much in terms of near-term development highlights, but Organon immediately fills this out somewhat (though none look like outstanding catalysts). Organon's troubled asenapine is due to be filed imminently, as is its selective relaxant binding agent sugammadex. Elsewhere, Organon's most promising compound is Org-50081 (esmirtazapine).

Outlook and Implications

We suspect that the all-cash element here was the primary attraction for Akzo Nobel, and is testament to Hassan's much-heralded (but hitherto little-used) "war chest", accumulated over several years of Schering-Plough's turnaround policy. Global Insight has not been impressed by Organon's recent research credentials, but Schering-Plough will now add an entirely new centre for global gynecology and fertility (in the Netherlands) to its global network of R&D. Certainly, Organon's late-stage pipeline relieves some of the short-term pressure on Schering-Plough, who's pipeline is mainly concentrated on Phase II candidates. While the company's portfolio is among the strongest-growing in the industry, Schering-Plough's pipeline only has its antibiotic garenoxacin as a near-term prospect, but it will likely be out-licensed as it stands. Elsewhere, its pipeline is largely confined to golimumab, line extensions to its oncology franchise, as well as the thrombin receptor antagonist. In general, the market is reacting well to the acquisition, which has come at an opportune time and price for Schering-Plough.