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VALUATION ON Merck’s (MRK) ACQUISITION OF Schering- Plough (SGP) MT5011 – Group 1 Goh Zhi

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering- Plough (SGP)

MT5011 – Group 1

Goh Zhi Qiang Justus Cheah Sin Sheng Lin Qiuyue Wu Hengxin

A0076842X

A0076902A

A0076985H

A0077069U

1

11/20/2010

Group 1 Goh Zhi Qiang Justus Cheah Sin Sheng Lin Qiuyue Wu Hengxin A0076842X A0076902A A0076985H
AGENDA • Introduction • Overview of Merck (MRK) • Overview of Schering-Plough (SGP) • Financial
AGENDA • Introduction • Overview of Merck (MRK) • Overview of Schering-Plough (SGP) • Financial

AGENDA

AGENDA • Introduction • Overview of Merck (MRK) • Overview of Schering-Plough (SGP) • Financial Valuation

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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11/20/2010

(SGP) • Financial Valuation • Synergies Target • Mode of M&A • Conclusion • Q &
Introduction VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) Letter of Intent (March 2009) Closing
Introduction VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) Letter of Intent (March 2009) Closing

Introduction

Introduction VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) Letter of Intent (March 2009) Closing

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP)

Letter of Intent (March 2009)

OF Schering-Plough (SGP) Letter of Intent (March 2009) Closing (Nov 2009) Proposed Acquisition Price for

Closing (Nov 2009)

Proposed Acquisition Price for Schering-Plough (SGP)

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11/20/2010

(SGP) Letter of Intent (March 2009) Closing (Nov 2009) Proposed Acquisition Price for Schering-Plough (SGP) 3
Merck (MRK) by Wu Hengxin VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 4 11/20/2010

Merck (MRK)

by Wu Hengxin

Merck (MRK) by Wu Hengxin VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 4 11/20/2010

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP)

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11/20/2010

Merck (MRK) by Wu Hengxin VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 4 11/20/2010
About Merck • Global Health care company – Medicine – Vaccines – Biologic Therapies –
About Merck • Global Health care company – Medicine – Vaccines – Biologic Therapies –

About Merck

About Merck • Global Health care company – Medicine – Vaccines – Biologic Therapies – Consumer

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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Exchange • 93,000 employees in 53 countries • Market capitalization of 114 Billion USD as at
Organization Structure 6 CEO Animal Health Global Human Health Merck Research Laboratories Consumer Health care
Organization Structure 6 CEO Animal Health Global Human Health Merck Research Laboratories Consumer Health care

Organization Structure

Organization Structure 6 CEO Animal Health Global Human Health Merck Research Laboratories Consumer Health care From

6

CEO
CEO
Organization Structure 6 CEO Animal Health Global Human Health Merck Research Laboratories Consumer Health care From
Animal Health Global Human Health Merck Research Laboratories
Animal Health
Global Human
Health
Merck Research
Laboratories
Consumer Health care
Consumer Health
care

From SGP

Merck Manufacturing
Merck
Manufacturing

11/20/2010

Health Global Human Health Merck Research Laboratories Consumer Health care From SGP Merck Manufacturing 11/20/2010
History 7 11/20/2010
History 7 11/20/2010

History

7 11/20/2010
7
11/20/2010
SWOT Analysis 8 11/20/2010
SWOT Analysis 8 11/20/2010

SWOT Analysis

SWOT Analysis 8 11/20/2010

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SWOT Analysis 8 11/20/2010
Immediate Concerns • Patent Expiry of Top Selling Drugs 9 11/20/2010
Immediate Concerns • Patent Expiry of Top Selling Drugs 9 11/20/2010

Immediate Concerns

Immediate Concerns • Patent Expiry of Top Selling Drugs 9 11/20/2010

Patent Expiry of Top Selling Drugs

Immediate Concerns • Patent Expiry of Top Selling Drugs 9 11/20/2010

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11/20/2010

Immediate Concerns • Patent Expiry of Top Selling Drugs 9 11/20/2010
Competitors 10 11/20/2010 Pfizer Novartis Procter & Gamble GlaxoSmithKline Hoffmann–La Roche Johnson and Johnson
Competitors 10 11/20/2010 Pfizer Novartis Procter & Gamble GlaxoSmithKline Hoffmann–La Roche Johnson and Johnson

Competitors

Competitors 10 11/20/2010 Pfizer Novartis Procter & Gamble GlaxoSmithKline Hoffmann–La Roche Johnson and Johnson

10

11/20/2010

Pfizer Novartis Procter & Gamble GlaxoSmithKline Hoffmann–La 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

Net Income USD Million

0 5,000 10,000 15,000 20,000 25,000 19,337 11,053 10,340 10,135 7,318 7,202 6,450 6,063 5,033
0
5,000
10,000
15,000
20,000
25,000
19,337
11,053
10,340
10,135
7,318
7,202
6,450
6,063
5,033
4,434
4,197
2,950
2,870
2,663
Source: Top 50 Pharmaceutical Companies Charts & Lists, Med
Ad News, September 2007
2,163
2,113
1,717
1,585
1,397
1,057
Top 50 Pharmaceutical Companies Charts & Lists, Med Ad News, September 2007 2,163 2,113 1,717 1,585
Schering-Plough (SGP) by Lin Qiuyue VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 11 11/20/2010
Schering-Plough (SGP) by Lin Qiuyue VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 11 11/20/2010

Schering-Plough (SGP)

by Lin Qiuyue

Schering-Plough (SGP) by Lin Qiuyue VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 11 11/20/2010

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP)

11

11/20/2010

Schering-Plough Overview 12 • Global Pharmaceutical Company • R&D and manufacturing of human pharmaceutical,
Schering-Plough Overview 12 • Global Pharmaceutical Company • R&D and manufacturing of human pharmaceutical,

Schering-Plough

Overview

Schering-Plough Overview 12 • Global Pharmaceutical Company • R&D and manufacturing of human pharmaceutical,

12

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

Presence in 140 countries with subsidiaries in more than 55 countries • 51,000 employees • Listed
Presence in 140 countries with subsidiaries in more than 55 countries • 51,000 employees • Listed

11/20/2010

Presence in 140 countries with subsidiaries in more than 55 countries • 51,000 employees • Listed
Schering-Plough Overview • Revenue: $18.5B (‘08), $12.7B (‘07) and $10.6B (‘06) • Schering-Plough 2008-13 sales
Schering-Plough Overview • Revenue: $18.5B (‘08), $12.7B (‘07) and $10.6B (‘06) • Schering-Plough 2008-13 sales

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)

and $10.6B (‘06) • Schering-Plough 2008-13 sales CAGR of 4.5% (fastest growth rate for pharmaceuticals) 13

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and $10.6B (‘06) • Schering-Plough 2008-13 sales CAGR of 4.5% (fastest growth rate for pharmaceuticals) 13
and $10.6B (‘06) • Schering-Plough 2008-13 sales CAGR of 4.5% (fastest growth rate for pharmaceuticals) 13
Motivations-Geogaphical Expansion Merck's Total Revenue (2008): USD $23,850 mil Schering-Plough's Total Revenue
Motivations-Geogaphical Expansion Merck's Total Revenue (2008): USD $23,850 mil Schering-Plough's Total Revenue

Motivations-Geogaphical

Expansion

Motivations-Geogaphical Expansion Merck's Total Revenue (2008): USD $23,850 mil Schering-Plough's Total Revenue
Merck's Total Revenue (2008): USD $23,850 mil
Merck's
Total Revenue (2008):
USD $23,850 mil
Schering-Plough's Total Revenue (2008): USD $18,502 mil
Schering-Plough's
Total Revenue (2008):
USD $18,502 mil

14

Merck's Total Revenue (%) 2008

Others, 12% Japan, 8%

14 Merck's Total Revenue (%) 2008 Others, 12% Japan, 8% Europe, Middle East and Africa, 24%
14 Merck's Total Revenue (%) 2008 Others, 12% Japan, 8% Europe, Middle East and Africa, 24%

Europe, Middle East and Africa,

24%

US, 56%

12% Japan, 8% Europe, Middle East and Africa, 24% US, 56% 11/20/2010 SGP's Total revenue (%)

11/20/2010

SGP's Total revenue (%) 2008 Latin America 11% Asia Pacific 11% Europe and Canada 48%
SGP's Total revenue (%) 2008
Latin America
11%
Asia Pacific
11%
Europe and Canada
48%
US
30%
America 11% Asia Pacific 11% Europe and Canada 48% US 30% Source: GlobalData and company's financial

Source: GlobalData and company's financial reports

America 11% Asia Pacific 11% Europe and Canada 48% US 30% Source: GlobalData and company's financial
Motivations-Schering-Plough’s Wide Product Portfolio • Animal Health, Cardiovascular Disease, Central Nervous
Motivations-Schering-Plough’s Wide Product Portfolio • Animal Health, Cardiovascular Disease, Central Nervous

Motivations-Schering-Plough’s Wide Product Portfolio

Motivations-Schering-Plough’s Wide Product Portfolio • Animal Health, Cardiovascular Disease, Central Nervous

• Animal Health, Cardiovascular Disease, Central Nervous System-Anesthesia, Consumer Health Care, Immunology, Oncology, Respiratory and Women's Health.

15

More than 50 brands in 55 countries outside the US.

Consumer health products

S c h er ng- i Pl oug h' s B us ness i S
S
c
h
er ng-
i
Pl
oug
h'
s
B
us ness
i
S
ec ors
t
77%
80%
70%
60%
50%
40%
30%
16%
20%
7%
10%
0%
Prescription
Animal Health
Consumer
Health

such as Coppertone Suncare lotions and antifungal creams.

11/20/2010

0% Prescription Animal Health Consumer Health such as Coppertone Suncare lotions and antifungal creams. 11/20/2010
Motivations-Patent Expiry • Schering-Plough’s biggest-selling drugs have longer patent protection • Merck’s $4
Motivations-Patent Expiry • Schering-Plough’s biggest-selling drugs have longer patent protection • Merck’s $4

Motivations-Patent Expiry

Motivations-Patent Expiry • Schering-Plough’s biggest-selling drugs have longer patent protection • Merck’s $4

Schering-Plough’s biggest-selling drugs have longer patent protection

Merck’s $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

What it treats

Patent Expiry

 

Singulair

Asthma

2012

Cozaar/Hyzaar

Hypertension

2010

Maxalt

Migraine Headaches

2012

Merck

Januvia

Diabetes

2022

Merck/

     

Schering-Plough

Zetia/Vytorin

Cholestrol

2011

 

Remicade

Inflammatory diseases

2018

Nasonex

Allergies

2014

Temodar

Brain Tumors

2012

Nuvaring

Women's health

2018

Schering-Plough

Banamine

Livestock health

2023

Source: Drugs Expiration Table (2009 Medco Health Solutions)

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Banamine Livestock health 2023 Source: Drugs Expiration Table (2009 Medco Health Solutions) 16 11/20/2010
Motivations- Schering-Plough’s R & D • 19.07% of total revenue goes to R & D
Motivations- Schering-Plough’s R & D • 19.07% of total revenue goes to R & D

Motivations-

Schering-Plough’s R & D

• 19.07% of total revenue goes to R & D (€3529mil in 2008) • 6
• 19.07% of total revenue goes to R & D (€3529mil in 2008)
• 6 R & D projects have received fast track designation from FDA
D projects have received fast track designation from FDA • SGP’s acquisition of Organon (in 2007)-

SGP’s 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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(total 12 in late-stage development) • Blood thinner (TRA) to seek regulatory approval in 2010 or
Financial Valuation by Cheah Sin Sheng VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 18
Financial Valuation by Cheah Sin Sheng VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 18

Financial Valuation

by Cheah Sin Sheng

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP)

18

11/20/2010

Market Value of Schering-Plough • Three approaches used to measure the market value of SGP
Market Value of Schering-Plough • Three approaches used to measure the market value of SGP

Market Value of Schering-Plough

Market Value of Schering-Plough • Three approaches used to measure the market value of SGP –

Three approaches used to measure the market value of SGP

Asset-based Valuation Using Net Asset Value

Market-based Valuation by Comparing Similar Industry as SGP

Income-based Valuation Using DCF Method

Asset Value – Market-based Valuation by Comparing Similar Industry as SGP – Income-based Valuation Using DCF
Asset-based Valuation • SGP’s 2008 finance statement, – Total asset value is $28,117M – Short
Asset-based Valuation • SGP’s 2008 finance statement, – Total asset value is $28,117M – Short

Asset-based Valuation

Asset-based Valuation • SGP’s 2008 finance statement, – Total asset value is $28,117M – Short term

SGP’s 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

SGP Net Asset Value (NAV)

NAV = $28,117 - $5,193 - $304 - $12,395 = $10,225M

– Long term liabilities: $12,395M • SGP Net Asset Value (NAV) NAV = $28,117 - $5,193
Market-based Valuation • PFIZER (PFE) agrees to pay $68 Billion for rival drug maker WYETH
Market-based Valuation • PFIZER (PFE) agrees to pay $68 Billion for rival drug maker WYETH

Market-based Valuation

Market-based Valuation • PFIZER (PFE) agrees to pay $68 Billion for rival drug maker WYETH (WYE)

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

Might NOT reflect a similar market conditions

MRK – $44.4 Billion WYE – $51.7 Billion vs. SGP – $32.6 Billion • Might NOT
Income-based Valuation ß = 0.86 SGP beta 4.28 US Treasury Yield Curve Rates (30 years)
Income-based Valuation ß = 0.86 SGP beta 4.28 US Treasury Yield Curve Rates (30 years)

Income-based Valuation

Income-based Valuation ß = 0.86 SGP beta 4.28 US Treasury Yield Curve Rates (30 years) 8.80

ß

=

0.86 SGP beta 4.28 US Treasury Yield Curve Rates (30 years) 8.80 S&P 500 CAGR past 22 years market return

rf

=

rm =

Re =

rf + ß (rm - rf)

 

Rd = rf x (1 - Tax %)

Pharmaceutical Industry

WACC

Pfizer (PFE)

6.80

Johnson & Johnson (JNJ)

7.30

GlaxoSmithKline (GSK)

8.00

Bristol Myers Squibb (BMY)

7.20

Abbott Labs (ABT)

7.20

Source: http://www.wikiwealth.com

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

37.45%

62.55%

15.56%

3.00%

7.70%

k Long-term growth rate (CAGR) 12.00% 4.50%
k
Long-term growth rate (CAGR)
12.00%
4.50%
SGP WACC = We x Re + Wd x Rd 37.45% 62.55% 15.56% 3.00% 7.70% k
Assumptions • SGP historical data (2006, 2007 & 2008) were extracted from the financial report
Assumptions • SGP historical data (2006, 2007 & 2008) were extracted from the financial report

Assumptions

Assumptions • SGP historical data (2006, 2007 & 2008) were extracted from the financial report to

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.

• Terminal value at 2028 is calculated consideration typical drug patent 20 years expiration with no
SGP Historical Year 2006 2007 2008 (in millions) Revenue Interest Expense Income Tax Expense Net
SGP Historical Year 2006 2007 2008 (in millions) Revenue Interest Expense Income Tax Expense Net

SGP Historical

SGP Historical Year 2006 2007 2008 (in millions) Revenue Interest Expense Income Tax Expense Net Income

Year

2006

2007

2008

(in millions)

Revenue Interest Expense Income Tax Expense Net Income

$10,594.00

$12,690.00

$18,502.00

$

172.00

$

245.00

$

536.00

$

362.00

$

258.00

$

146.00

$ 1,143.00

$ (1,473.00)

$ 1,903.00

Net Income

$ 1,143.00

$ (1,473.00)

$ 1,903.00

+Interest Expense

$

172.00

$

245.00

$

536.00

+Income Tax Expense +Depreciation and Amortization

$

362.00

$

258.00

$

146.00

$

568.00

$

861.00

$ 2,175.00

EBITDA

$ 2,245.00

$

(109.00)

$ 4,760.00

EBITDA Less: Interest paid Less: Tax paid Add: Changes in net working capital Less: Capital expenditures

$ 2,245.00

$

(109.00)

$ 4,760.00

$

(172.00)

$

(245.00)

$

(536.00)

$

(362.00)

$

(258.00)

$

(146.00)

$

1,188.00

$ (1,458.00)

$

975.00

$

(458.00)

$

(618.00)

$

(747.00)

Free cash flow

$ 2,441.00

$ (2,688.00)

$ 4,306.00

Ratio Calculation Study Sales growth Interest expense ratio Tax expense ratio Depreciation and amortization exp. ratio

 

11.42%

19.78%

45.80%

1.62%

1.93%

2.90%

3.42%

2.03%

0.79%

5.36%

6.78%

11.76%

Net income ratio

10.79%

-11.61%

10.29%

2.90% 3.42% 2.03% 0.79% 5.36% 6.78% 11.76% Net income ratio 10.79% -11.61% 10.29%
SGP Projected Data Year 2009 2010 2011 2012 2013 (in millions) Forecast Forecast Forecast Forecast
SGP Projected Data Year 2009 2010 2011 2012 2013 (in millions) Forecast Forecast Forecast Forecast

SGP Projected Data

Year 2009 2010 2011 2012 2013 (in millions) Forecast Forecast Forecast Forecast Forecast 1 2
Year
2009
2010
2011
2012
2013
(in millions)
Forecast
Forecast
Forecast
Forecast
Forecast
1
2
3
4
5
Net Income
$ 1,988.64
$2,078.12
$2,171.64
$2,269.36
$ 2,371.48
+Interest Expense
$
560.12
$
585.33
$
611.67
$
639.19
$
667.95
+Income Tax Expense
$
152.57
$
159.44
$
166.61
$
174.11
$
181.94
+Depreciation and Amortization
$
2,272.88
$2,375.15
$2,482.04
$2,593.73
$ 2,710.45
EBITDA
$ 4,974.20
$5,198.04
$5,431.95
$5,676.39
$ 5,931.83
EBITDA
Less: Interest paid
Less: Tax paid
$ 4,974.20
$5,198.04
$5,431.95
$5,676.39
$ 5,931.83
$
(560.12)
$ (585.33)
$ (611.67)
$ (639.19)
$
(667.95)
$
(152.57)
$ (159.44)
$ (166.61)
$ (174.11)
$
(181.94)
Add: Changes in net working capital
Less: Capital expenditures
$
1,018.88
$1,064.72
$1,112.64
$1,162.71
$ 1,215.03
$
(607.67)
$ (635.01)
$ (663.59)
$ (693.45)
$
(724.65)
Free Cash Flow
$ 4,672.72
$4,882.99
$5,102.73
$5,332.35
$ 5,572.30
Terminal Value @ 2028
$39,660.05
Discount factor
$
0.89
$
0.80
$
0.71
$
0.64
$
0.57
$
0.57
Total Cash Flow
$ 4,672.72
$4,882.99
$5,102.73
$5,332.35
$ 5,572.30
$39,660.05
Discounted Cash Flow
$ 4,172.07
$3,892.69
$3,632.02
$3,388.80
$ 3,161.87
$22,504.18
Valuation of target/Enterprise value
$40,751.64

Assumption Made

k Long-term growth rate (CARG)

12.00%

4.50%

Valuation of target/Enterprise value $40,751.64 Assumption Made k Long-term growth rate (CARG) 12.00% 4.50%
DCF –Sensitivity Analysis PV of Enterprise Value ($ Million) SGP Growth Rate WACC 3.5% 4.5%
DCF –Sensitivity Analysis PV of Enterprise Value ($ Million) SGP Growth Rate WACC 3.5% 4.5%

DCF –Sensitivity Analysis

DCF –Sensitivity Analysis PV of Enterprise Value ($ Million) SGP Growth Rate WACC 3.5% 4.5% 5.5%

PV of Enterprise Value ($ Million)

SGP Growth Rate

WACC

3.5%

4.5%

5.5%

6.5%

7.5%

11.0%

41,618

43,573

45,613

47,740

49,959
49,959
     

12.0%

38,947

40,752
40,752

42,633

44,596

46,641

13.0%

36,546

38,215

39,955

41,770

43,660

PV of Enterprise Value ($/per share)

SGP Growth Rate

 

WACC

 

3.5%

4.5%

5.5%

6.5%

7.5%

11.0%

 

25.45

26.65

27.90

29.20

30.56
30.56

12.0%

 

23.82

24.92
24.92

26.08

27.28

28.53

13.0%

 

22.35

23.37

24.44

25.55

26.70

# 0f shares (million)

 
1,635
1,635
 
28.53 13.0%   22.35 23.37 24.44 25.55 26.70 # 0f shares (million)   1,635  
Synergy Target & Reverse Merger by Justus Goh VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough

Synergy Target & Reverse Merger

by Justus Goh

VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP)

27

11/20/2010

Target & Reverse Merger by Justus Goh VALUATION ON Merck’s (MRK) ACQUISITION OF Schering-Plough (SGP) 27
Synergy Target Synergy target of $3.5 billion in recurring savings per year from its operations
Synergy Target Synergy target of $3.5 billion in recurring savings per year from its operations

Synergy Target

Synergy Target Synergy target of $3.5 billion in recurring savings per year from its operations by

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

28

11/20/2010

(15,000/100,000 15%) 2. Duplicate facilities to be closed or divested 3. Initiate procurement savings 28 11/20/2010
Reverse Merger Merck's “acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29
Reverse Merger Merck's “acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29

Reverse Merger

Reverse Merger Merck's “acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29

Merck's “acquisition” of its rival, Schering-Plough is being structured as Reverse Merger

29

“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business

11/20/2010

“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business

Sale of Business

“acquisition” of its rival, Schering-Plough is being structured as Reverse Merger 29 11/20/2010 Sale of Business
Reverse Merger Sale of Business Subsidiary Schering-Plough would technically be the surviving corporation, but it
Reverse Merger Sale of Business Subsidiary Schering-Plough would technically be the surviving corporation, but it

Reverse Merger

Reverse Merger Sale of Business Subsidiary Schering-Plough would technically be the surviving corporation, but it would

Sale of Business

Reverse Merger Sale of Business Subsidiary Schering-Plough would technically be the surviving corporation, but it would
Reverse Merger Sale of Business Subsidiary Schering-Plough would technically be the surviving corporation, but it would

Subsidiary

Schering-Plough would technically be the surviving corporation, but it would take on the Merck's name.

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Schering-Plough would technically be the surviving corporation, but it would take on the Merck's name. 30
Why Reverse Merger To avoid triggering a loss of rights in an agreement between Schering-Plough
Why Reverse Merger To avoid triggering a loss of rights in an agreement between Schering-Plough

Why Reverse Merger

Why Reverse Merger To avoid triggering a loss of rights in an agreement between Schering-Plough and

To avoid triggering a loss of rights in an agreement between Schering-Plough and Johnson & Johnson; -Blockbuster arthritis treatment, Remicade -Follow-up drug in late-stage development, Golimumab

Currently, SGP owns the drug’s international rights and J&J owns the domestic (USA) rights.

Remicade generated $2.1 billion in revenue 11.35% of SGP sales.

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owns the domestic (USA) rights. Remicade generated $2.1 billion in revenue 11.35% of SGP sales. 31
Conclusion • Presented the reasoning and motivation for Merck acquisition target Schering-Plough • Proposed an
Conclusion • Presented the reasoning and motivation for Merck acquisition target Schering-Plough • Proposed an

Conclusion

Conclusion • Presented the reasoning and motivation for Merck acquisition target Schering-Plough • Proposed an

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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• Explain why the M&A deal between Merck and Schering-Plough is being structured as a Reverse
Thank you Q & A 33 11/20/2010

Thank you Q & A

Thank you Q & A 33 11/20/2010
Thank you Q & A 33 11/20/2010

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Thank you Q & A 33 11/20/2010
Back-up Slides 34 11/20/2010

Back-up Slides

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Back-up Slides 34 11/20/2010
Actual Acquisition Price 35 Merck to Buy Schering-Plough for US $41.1 Billion • March 10,
Actual Acquisition Price 35 Merck to Buy Schering-Plough for US $41.1 Billion • March 10,

Actual Acquisition Price

Actual Acquisition Price 35 Merck to Buy Schering-Plough for US $41.1 Billion • March 10, 2009

35

Merck to Buy Schering-Plough for US $41.1 Billion

March 10, 2009

The deal values SGP at $23.61 a share, a premium of 34 percent over its closing price Friday. (3/6/09 - $17.63)

For each share of SGP, shareholders will receive 0.5767 shares in the new company plus $10.50 in cash.

• For each share of SGP, shareholders will receive 0.5767 shares in the new company plus

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Market-based Valuation • Pfizer would pay $50.19 a share for WYE ~ 29% premium –
Market-based Valuation • Pfizer would pay $50.19 a share for WYE ~ 29% premium –

Market-based Valuation

Market-based Valuation • Pfizer would pay $50.19 a share for WYE ~ 29% premium – WYE

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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acquisition value of SGP could be $21.97 (12/31/08 closing $17.03) – SGP might value at ~
Total S&P 500 annual returns     $1.00              
Total S&P 500 annual returns     $1.00              

Total S&P 500 annual returns

Total S&P 500 annual returns     $1.00                
   

$1.00

                 

Year

Annual

Investment

5 Year

10 Year

15 Year

Year

Annual

$1.00 Investment

5 Year

10 Year

15 Year

Annualized

Annualized

Annualized

Annualized

Annualized

Annualized

Return

Gives

Return

Return

Return

Return

Gives

Return

Return

Return

1988

17%

$1.17

-

-

 

-1999

21.04%

$8.18

28.56%

18.21%

-

1989

31.69%

$1.54

-

-

 

-2000

−9.10%

$7.44

18.33%

17.46%

-

1990

−3.10%

$1.49

-

-

 

-2001

−11.89%

$6.55

10.70%

12.94%

-

1991

30.47%

$1.94

-

-

 

-2002

−22.10%

$5.10

−0.59%

9.34%

11.47%

1992

7.62%

$2.09

15.89%

-

 

-2003

28.69%

$6.57

−0.57%

11.07%

12.19%

1993

10.08%

$2.30

14.55%

-

 

-2004

10.88%

$7.28

−2.30%

12.07%

10.91%

1994

1.32%

$2.33

8.70%

-

 

-2005

4.91%

$7.64

0.54%

9.07%

11.51%

1995

37.58%

$3.21

16.59%

-

 

-2006

15.79%

$8.85

6.19%

8.42%

10.65%

1996

22.96%

$3.94

15.22%

-

 

-2007

5.49%

$9.33

12.83%

5.91%

10.48%

1997

33.36%

$5.26

20.27%

18.05%

 

-2008

−37.00%

$5.88

−2.19%

−1.38%

6.46%

1998

28.58%

$6.76

24.06%

19.21%

 

-2009

26.46%

$7.26

−0.06%

−1.19%

7.87%

High

37.58%

 

28.56%

19.21%

12.12%

 

Low

−37.00%

 

−2.25%

−1.51%

6.46%

CAGR

8.80%

       

Medi

         

an

10.88%

10.92%

Source: http://en.wikipedia.org/wiki/S%26P_500

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          an 10.88% 10.92% Source: http://en.wikipedia.org/wiki/S%26P_500 37 11/20/2010
Cost of Restructuring • Merger restructuring program: $1.4 billion • Merger related costs: $544 million
Cost of Restructuring • Merger restructuring program: $1.4 billion • Merger related costs: $544 million

Cost of Restructuring

Cost of Restructuring • Merger restructuring program: $1.4 billion • Merger related costs: $544 million •

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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$3.3 billion. Synergy target of $3.5 bil lion in in recurring savings per year from its
Required Divestures • Merck must sell its interest in Merial Limited, an animal health joint
Required Divestures • Merck must sell its interest in Merial Limited, an animal health joint

Required Divestures

Required Divestures • Merck must sell its interest in Merial Limited, an animal health joint venture

Merck must sell its interest in Merial Limited, an animal health

joint venture with Sanofi-Aventis. As Merial and Schering- Plough together account for about 75 percent of U.S. sales of such vaccines, causing monopoly in poultry vaccines

39

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 Merck’s drug, Emend.

11/20/2010

and vomiting in humans. As Schering-Plough nausea drug, Rolapitant will competed with Merck’s drug, Emend. 11/20/2010
Merger Mechanics • The Merck/Schering transaction features the two stages with the creation of two
Merger Mechanics • The Merck/Schering transaction features the two stages with the creation of two

Merger Mechanics

Merger Mechanics • The Merck/Schering transaction features the two stages with the creation of two subsidiaries,

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 MS2 will merge with and into Merck.

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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deal is conditioned on the receipt of an opinion that the Merck merger qualifies as such
Merck Financial Data 41 11/20/2010
Merck Financial Data 41 11/20/2010

Merck Financial Data

Merck Financial Data 41 11/20/2010

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Merck Financial Data 41 11/20/2010