Merck’s Geographic Footprint Grows A Size (Or Two) With Schering Buy

Merck’s international sales will more than double to $25 billion with the acquisition of Schering-Plough.

With the acquisition of Schering-Plough, Merck will more than double its international sales to $25 billion, broadening its geographic footprint particularly in Europe, Canada and Latin America.

Diversification is one of the key benefits of the $41.1 billion merger, announced March 9 (¹ (Also see "Merck/Schering: The Next Wave Of Consolidation" - Pink Sheet, 9 Mar, 2009.)). In addition to a strong international presence, Schering-Plough brings Merck significant animal health and consumer health businesses.

Schering generates more than 70 percent of its sales outside the U.S. - $12.94 billion of the company's $18.5 billion in sales in 2008. That percentage is significantly greater than ratios demonstrated by Schering's U.S. pharma rivals.

Merck, in comparison, generated about 44 percent - $10.5 billion - of its 2008 sales from international markets. About 58 percent of Pfizer's revenues last year, or $27.9 billion, came from ex-U.S. operations. Bristol-Myers Squibb derived about 42 percent of sales ex-U.S. About 46 percent of Eli Lilly's net sales come from outside the U.S.

Following the acquisition, Merck expects the U.S. to account for 47 percent of sales for the combined unit, down from 56 percent at Merck alone. Its greatest geographic expansion will come in Europe and Canada, which will account for 35 percent of sales after the acquisition versus 26 percent for Merck alone. Latin America will also grow to 7 percent of sales in the combined unit, versus 4 percent. Japan and Asia Pacific will decrease, however, from 8 percent and 6 percent, respectively, to 6 percent and 5 percent.

As pricing pressures, generic competition, health care policy issues and even the economy weigh on pharmaceutical growth in the U.S., international markets, especially high-growth emerging markets, represent opportunities for pharma companies to make up shortfalls. Pharmaceutical markets in China, Brazil, India, South Korea, Mexico, Turkey and Russia - the so-called "pharmerging" markets - are expected to grow a combined 14 percent to 15 percent in 2009, according to IMS Health, whereas the U.S. market is expected to inch up by 1 percent to 2 percent.

"Merck has been working to build our presence overseas ... This transaction will dramatically accelerate those efforts," CEO Richard Clark said during a same-day conference call announcing the acquisition. Last year, Merck set a goal of achieving a top-five market share in targeted emerging markets, and during its annual investor update in December, announced it is on track to reach its goal of $2 billion in emerging market sales by 2010.

The addition of Schering will more than assist Merck's effort to achieve that goal. Schering generates more than $2 billion of its annual revenue from high-growth emerging markets, according to Merck. During a 2008 third quarter release, Schering CEO Fred Hassan noted that new markets like Brazil, China and Russia contributed about 12 percent to the company's overall net sales, more than double the percentage contributed from those markets in 2005. Put another way: Merck derived less than 5 percent of its revenues from the seven pharmerging markets for the 12 months ended June 2008, while Schering generated 8 percent to 9 percent of its revenues from those countries, according to IMS.

Schering enhanced its global operations through the acquisition of Organon Biosciences from the Dutch chemical company Akzo Nobel in 2007, a deal that also gave it several late-stage pipeline assets and a presence in women's health (² (Also see "Schering-Plough Makes Its Move, Snapping Up Organon For $14.4 Billion" - Pink Sheet, 12 Mar, 2007.)). In 2006, prior to the acquisition, Schering's international sales accounted for 60 percent of the business. Ex-U.S. sales grew to 64 percent in 2007, which included just over one month of Organon sales.

The bulk of Schering's international sales comes from mature markets in Europe and Canada. Those regions accounted for $8.9 billion (48 percent) of Schering's 2008 sales. Asia Pacific represented $2.06 billion (11 percent) and Latin America accounted for $1.99 billion (11 percent). Schering has business operations in 140 countries.

- Jessica Merrill ([email protected])