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Cash-rich Merck won't go on M&A bender

by Jonathan Marino  |  Published January 8, 2013 at 10:39 AM
Merck & Co. may be sitting on as good a cash pile as it has in several years, but that doesn't mean that the pharmaceutical giant is planning another Schering-Plough Corp.-sized buyout anytime soon.

"I don't see us looking for another large combination," said Merck CEO Kenneth Frazier, speaking at the JPMorgan Healthcare Conference in San Francisco on Monday, Jan. 7, in reference to the Whitehouse Station, N.J.-based company's $41.1 billion buyout of Schering-Plough in 2009.

Indeed, Merck hasn't been nearly as active on the M&A front as many of its rivals. Since acquiring Schering-Plough, the company has only made two relatively large buyouts: a $500 million play for diabetes drugmaker SmartCells Inc. in 2010 and a $430 million move for Inspire Pharmaceuticals Inc., a developer of ophthalmic treatments, in 2011. Low-key M&A isn't necessarily unusual for Merck: it has long been known for its in-house research and development rather than a propensity to join the acquisition parade.

But the pressure has risen for Merck over the past few years. Blockbuster asthma treatment Singular lost patent protection in 2012, and Merck has been cutting costs over the past few years to offset the revenue hit.

Frazier noted Monday that Merck is now sitting on roughly $10 billion worth of cash on its balance sheet. The company's bountiful liquidity has led to speculation that Merck may once again dip its toes in large-scale M&A, but Frazier told attendees that it's more likely to stay disciplined, looking at early-stage assets that build on the pharma giant's specialty or leadership positions in areas such as diabetes, hepatitis C or cancer.

He also said that Merck would continue to do deals only on terms that make sense. The company, for example, agreed in April to pay as much as $1 billion for the rights to an investigational cancer compound named vintafolide, which is being developed by Endocyte Inc.

"The sweet spot [for Merck] is really in the early-stage work," he said. "[Merck's blockbuster diabetes drug] Januvia had its origins in an early-stage deal. From our perspective, we will continue to look across all stages of R&D but also recognize that things in late-stage [development] ... are harder to acquire in a way that creates value."

Even so, Frazier does believe that current market trends, such as increased scrutiny of the price of drugs, may make for more buyouts in the pharmaceutical space.

"The kind of pressure we see around pricing and around R&D productivity are likely to put some players in the market in the position where they feel continued consolidation is a positive thing in the short term," Frazier said.

Tags: cancer | diabetes | early-stage | Endocyte Inc. | hepatitis C | Inspire Pharmaceuticals Inc. | Januvia | JPMorgan Healthcare Conference | Kenneth Frazier | Merck & Co. | R&D | Schering-Plough Corp. | Singular | SmartCells Inc. | vintafolide

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Jonathan Marino

Senior Editor: Private Equity

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