The Side-Effects of a Giant Merger

Last Updated Aug 16, 2010 6:24 PM EDT

A stock analyst at Morningstar and editor of Morningstar's
Healthcare Observer, Damien Conover has been covering the healthcare industry
for nine years. Based in Chicago, he specializes in large-cap pharmaceutical
companies. Here, Conover explains the fallout from Schering's $14 billion purchase of Organon in 2007.

Did buying Organon make sense?

Definitely. It gave Schering access to an expanded pipeline, and it further expanded their international reach, particularly in Eastern Europe. It also created room for cost cutting, because the two companies had some duplication. For example, they could combine sales efforts in Western Europe — just add another drug to the sales person's bag. And having one R&D center instead of two made it easier to move some products through the pipeline.

Did it work?

Yes, it worked well. It increased the pipeline and made Schering much more attractive to Merck. Schering had been rebounding from a weak pipeline and the devastating patent expiration of Claritin. It never fully rebounded from that. Organon helped them establish a more diversified portfolio and allowed them to weather the controversy over whether the cholesterol drugs Vytorian and Zetia were more effective than generic equivalents.

Did Schering pay too much?

It's too early to say; a few things need to play out to see if they over paid. For example, Sugammadex, an anesthesiology product. Because it's in a new area, I'm not sure the market fully appreciated the upside. The FDA has delayed approval, but I think it will get to the market; if it does well, that is the kind of thing that makes Organon worth the price.

Then there's Saphris, the schizophrenia drug that Pfizer originally had a relationship with when it was a compound known as asenapine. Pfizer decided to terminate the partnership, essentially writing it off. If you look at the Pfizer portfolio, it already had a schizophrenia drug. But Saphris probably came out with a better profile than Pfizer had anticipated. In this therapeutic class, the more you push on efficacy, the more side effects there are, particularly weight gain. Saphris seems to have a good profile in this regard. It's entering a pretty crowded market, but it's one with high failure rates. Saphris, which recently won FDA approval, could be a very important drug to Merck, and if it succeeds that would justify the price Schering paid for Organon.

How will CEO Fred Hassan be remembered?

He will be judged on the acquisition of Organon and the sale to Merck. I think he probably could have gotten a higher price from Merck, but I don't think he left a lot of money on the table.

At Schering, Hassan revived a company that, if not quite on the brink, was on the brink of the brink; it was in nearly total disrepair. It came back as one of the best growth companies in the pharmaceutical industry. He brought in the right people, chose the right strategic paths, and was skilled in allocating capital to the right elements in the pipeline. I'd say he was in the top tier of pharmaceutical management.

How important is the Vytorin controversy?

The question is whether Vytorin, a drug that Schering developed and the FDA approved, is any more effective than the generic equivalent, Zocor. Schering did a trial among a very niche group of patients with extremely high levels of cholesterol. There were a lot of problems with the study, which dates back to before Hassan. People question why Schering did it this way, because it ended up with a questionable result in an obscure patient population.

Vytorin naturally became harder to market after the media took hold of this idea that Zocor was just as good, and a third as expensive. We won't know for sure about Vytorin's therapeutic effects until we get the new study, which is due in the next two years.

If the study finds no significant benefit, it will be detrimental to Merck, which sees Vytorin as an important drug franchise. I have a hard time seeing that it will come out like that. All the preliminary data we've seen seems to suggest that Vytorin helps you in the right direction. If that's not the case, though, sales will evaporate pretty quickly.

Did the purchase of Organon make it more difficult for Schering to stay independent?

Organon really increased the value of Schering, but Merck might have bought it regardless; the acquisition didn't emerge out of the weakness of Schering, but out of the weakness of Merck. It solved a lot of Merck's problems.

Buying Organon put Schering in a really strong position; without that piece, it would have been less interesting to Merck. The pipeline would not have been as robust, and there would not have been as many ways to cut costs.

-As told to Cait Murphy

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