By Neetha Mahadevan And Joseph Walker
FRANKFURT--German pharmaceutical company Merck KGaA is paying
$17 billion to acquire Sigma-Aldrich Corp., a U.S. supplier of
laboratory testing materials, as Merck looks to reduce its reliance
on finding blockbuster drugs.
Merck will acquire all of Sigma-Aldrich for $140 a share in
cash, a 37% premium to Sigma's closing share price on Friday, which
industry experts note is a high price for Sigma.
St. Louis-based Sigma-Aldrich is one of the largest makers of
chemicals and biological materials used in scientific laboratories.
Sigma-Aldrich had sales of $2.7 billion last year, and about half
of its revenue comes from academic labs, drug companies and
industrial manufacturers conducting research and development.
The merger would be the latest instance of consolidation among
makers of laboratory testing materials. Last year, Thermo Fisher
Scientific Inc. agreed to pay $13.6 billion to acquire Life
Technologies Corp., a primary competitor of Sigma-Aldrich's.
Analysts said the combination of Merck and Sigma-Aldrich would
enable the new company to better compete for business from
pharmaceutical companies, which have sought to cut costs by
limiting the number of suppliers they use.
"By merging, we are securing for us stable growth and
profitability in our life science business and benefiting from
trends like increasing globalization of research and pharmaceutical
production," Merck Chief Executive Karl-Ludwig Kley said.
If the deal closes as planned, it will leave Merck with more
predictable earnings, and the company will be less reliant on its
largest division, pharmaceutical business Merck Serono. That is a
relief, since sales at Merck Serono are dominated by just two
prescription drugs: Rebif for multiple sclerosis and cancer
treatment Erbitux. Rebif is facing stiff competition from cheaper,
generic drugs, and saw sales slide 2.8% in the second quarter.
Analysts fret that Erbitux could also face generic competition from
2018.
The deal also takes the pressure off the Merck Serono business
to deliver on new pipeline drugs, a decision analysts at Citigroup
noted was positive given the company's "long standing poor track
record in pharmaceutical R&D." Merck has focused on rebuilding
its pipeline in recent years, but the bulk of its experimental
drugs are still early stage, meaning revenues are many years away,
if the drugs make it through clinical trials at all.
"Sigma helps fill in a lot of the missing pieces" for Merck,
said Ross Muken, a life sciences industry analyst with ISI Group
LLC in New York. Many of Merck's products are used to manufacture
pharmaceuticals, whereas Sigma-Aldrich's products are commonly used
in the earlier stages of drug discovery and development. The
combined company would be able to offer customers products that
span the drug development life-cycle, from discovery to production,
Mr. Muken said.
Pharmaceutical companies have been increasingly shedding noncore
activities to strengthen core businesses, leading to shopping trips
on both sides of the Atlantic. However, Merck's decision to become
more diversified flies in the face of these recent deals.
"The U.S. has many attractive targets and the prices that are
being paid are rather high, but German companies wouldn't mind
paying that if the target fits their strategy," Ernst & Young's
sector leader for life sciences and chemicals transactions, Stefan
Rösch-Rötschje, said. He cited the timing of Bayer AG's acquisition
of Merck & Co.'s consumer-product business for $14.2 billion
earlier this year.
Bayer later went on to shed its noncore plastics business to
focus on life science. Merck KGaA isn't affiliated with Merck &
Co. of the U.S.
Sigma-Aldrich executives also stand to personally benefit from
the transaction, regulatory filings show. Chief Executive Rakesh
Sachdev is eligible for a payment of $17.52 million in accelerated
stock options, severance pay and retirement benefits, if his
employment is terminated following a change in control at the
company. The company's other top four executives, including Chief
Financial Officer Jan A. Bertsch, stand to receive a combined $17.5
million upon a change-in-control, filings show.
Jenny Gore, a spokeswoman for Sigma-Aldrich, declined to comment
on executives' severance packages. The company declined to make
executives available for interviews.
Merck expects annual synergies of about 260 million euros ($334
million), it said should be fully achieved within three years after
closing. It also expects integration costs of about 400 million
euros spread over 2015 to 2018.
The acquisition has been unanimously approved by Sigma-Aldrich's
board of directors and will be presented to the company's
shareholders for approval at a special meeting.
Michael Calia and Hester Plumridge contributed to this
article.
Write to Neetha Mahadevan at neetha.mahadevan@wsj.com
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