presentation mrk's acquisition of sgp-submitted

8/6/2019 Presentation MRK's Acquisition of SGP-Submitted

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VALUATION ON Mercks (MRK)ACQUISITION OF Schering-

Plough (SGP)

MT5011 Group 1

Goh Zhi Qiang Justus A0076842X

Cheah Sin Sheng A0076902A

Lin Qiuyue A0076985H

Wu Hengxin A0077069U

11/20/20101


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AGENDA

Introduction

Overview of Merck (MRK)

Overview of Schering-Plough (SGP)

Financial Valuation Synergies Target

Mode of M&A Conclusion

Q & A

11/20/20102


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Introduction

VALUATION ON Mercks (MRK)

ACQUISITION OF Schering-Plough (SGP)

11/20/20103

(March 2009) (Nov 2009)

Proposed Acquisition Price

for Schering-Plough (SGP)


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Merck MRK



11/20/20104

by Wu Hengxin


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About Merck Global Health care company

MedicineVaccines

Biologic Therapies

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

11/20/20105


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Organization Structure

CEO

11/20/20106

Global Human

Health

Animal Health Consumer Health

care

Merck ResearchLaboratories

MerckManufacturing

From SGP


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History

11/20/20107


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SWOT Analysis

11/20/20108


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Immediate Concerns

Patent Expiry of Top Selling Drugs

11/20/20109


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Competitors

19,337

11,053

10,340

10,135

7,318

0 5,000 10,000 15,000 20,000 25,000

Pfizer

Novartis

Procter & Gamble

GlaxoSmithKline

HoffmannLa Roche

Net Income USD Million

11/20/201010

7,202

6,450

6,063

5,033

4,434

4,197

2,950

2,870

2,6632,163

2,113

1,717

1,585

1,397

1,057

Jo nson an Jo nson

BayerAstraZeneca

Sanofi-Aventis

Merck & Co.

Wyeth

Amgen

Takeda Pharmaceutical Co.

Eli Lilly and CompanyBoehringer Ingelheim

Genentech

Abbott Laboratories

Bristol-Myers Squibb

Baxter International

Schering-Plough

Source: Top 50 Pharmaceutical Companies Charts & Lists, Med

Ad News, September 2007


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Schering-Plough (SGP)

11/20/201011

by Lin Qiuyue




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Schering-Plough

Overview

Global Pharmaceutical Company R&D and manufacturing of human pharmaceutical,

animal health and consumer healthcare

11/20/201012

Presence in 140 countries with subsidiaries in morethan 55 countries

51,000 employees

Listed on NYSE


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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)

11/20/201013


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Motivations-Geogaphical

ExpansionSchering-Plough's

Total Revenue (2008):USD $18,502 mil

Merck'sTotal Revenue (2008):

USD $23,850 mil

SGP's Total revenue (%) 2008

Latin America

Merck's Total Revenue (%) 2008

11/20/201014

Source: GlobalData andcompany's financial reports

Europe and Canada

48%

US

30%

Asia Pacific11%

11%

US, 56%Europe, Middle

East and Africa,

24%

Japan, 8%Others, 12%


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Motivations-Schering-Ploughs

Wide Product Portfolio Animal Health, Cardiovascular Disease, Central Nervous

System-Anesthesia, Consumer Health Care, Immunology,

Oncology, Respiratory and Women's Health.

More than 50 brands in 55 countries outside the US.

Consumer health products- '

11/20/201015

such as Coppertone Suncare

lotions and antifungal

creams.

PrescriptionAnimal Health

Consumer

Health

77%

16%

7%

0%

10%20%

30%

40%

50%

60%

70%

80%


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Motivations-Patent Expiry Schering-Ploughs biggest-selling drugs have longer patent protection

Mercks $4 billion-a-year asthma drug Singulair will face generic competitionby 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

Com an Dru Name What it treats Patent Ex ir

11/20/201016

Singulair Asthma 2012Cozaar/Hyzaar Hypertension 2010

Maxalt Migraine Headaches 2012

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

Banamine Livestock health 2023

Merck

Schering-Plough

Source: Drugs Expiration Table(2009 Medco Health Solutions)


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Motivations-

Schering-Ploughs R & D

19.07% of total revenue goes to R & D (3529mil in 2008)

6 R & D projects have received fast track designation from FDA

SGPs acquisition of Organon (in 2007)-

11/20/201017

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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Financial Valuation

11/20/201018

by Cheah Sin Sheng




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Market Value of Schering-Plough

Three approaches used to measure the

market value of SGPAsset-based Valuation Using Net Asset Value

-Industry as SGP

Income-based Valuation Using DCF Method


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Asset-based Valuation SGPs 2008 finance statement,

Total asset value is $28,117M

Short term liabilities: $5,193M

-

benefits: $304M

Long term liabilities: $12,395M

SGP Net Asset Value (NAV)NAV = $28,117 - $5,193 - $304 - $12,395 = $10,225M


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Market-based Valuation PFIZER (PFE) agrees to pay $68 Billion for rival

drug maker WYETH (WYE) on Jan 2009roughly 29% premium over WYE Stock Price

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


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Income-based Valuation

Assumption/Calculation:

Weight of Equity, We 37.45%

Weight of Debt, Wd 62.55%

Cost of Equity, Re 15.56%

Cost of Debt, Rd 3.00%

SGP WACC = We x Re + Wd x Rd 7.70%

= 0.86SGP beta

rf = 4.28US Treasury Yield Curve Rates (30 years)rm = 8.80S&P 500 CAGR past 22 years market return

Re = rf + (rm - rf)

k 12.00%Long-term growth rate (CAGR) 4.50%

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) 7.20Abbott Labs (ABT) 7.20

Source: http://www.wikiwealth.com


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Assumptions 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

.

Changes in the net working capital and Capital expenditure isassumed 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 drugpatent 20 years expiration with no growth after 2013.


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SGP HistoricalYear 2006 2007 2008

(in millions)

Revenue $10,594.00 $12,690.00 $18,502.00Interest Expense $ 172.00 $ 245.00 $ 536.00

Income Tax Expense $ 362.00 $ 258.00 $ 146.00

Net Income $ 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 $ 362.00 $ 258.00 $ 146.00

+Depreciation and Amortization $ 568.00 $ 861.00 $ 2,175.00EBITDA $ 2,245.00 $ (109.00) $ 4,760.00

EBITDA $ 2,245.00 $ (109.00) $ 4,760.00

Less: Interest paid $ (172.00) $ (245.00) $ (536.00)

Less: Tax paid $ (362.00) $ (258.00) $ (146.00)

Add: Changes in net working capital $ 1,188.00 $ (1,458.00) $ 975.00

Less: Capital expenditures $ (458.00) $ (618.00) $ (747.00)

Free cash flow $ 2,441.00 $ (2,688.00) $ 4,306.00

Ratio Calculation Study

Sales growth 11.42% 19.78% 45.80%

Interest expense ratio 1.62% 1.93% 2.90%

Tax expense ratio 3.42% 2.03% 0.79%

Depreciation and amortization exp. ratio 5.36% 6.78% 11.76%

Net income ratio 10.79% -11.61% 10.29%


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SGP Projected DataYear 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 $ 4,974.20 $5,198.04 $5,431.95 $5,676.39 $ 5,931.83

Less: Interest paid $ (560.12) $ (585.33) $ (611.67) $ (639.19) $ (667.95)Less: Tax paid $ (152.57) $ (159.44) $ (166.61) $ (174.11) $ (181.94)

Add: Changes in net working capital $ 1,018.88 $1,064.72 $1,112.64 $1,162.71 $ 1,215.03

Less: Capital expenditures $ (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 12.00%

Long-term growth rate (CARG) 4.50%


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DCF Sensitivity AnalysisPV 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 49,95912.0% 38,947 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

12.0% 23.82 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


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Synergy Target &Reverse Merger

11/20/201027

by Justus Goh




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Synergy TargetSynergy target of$3.5 billion in recurring

savings per year from its operations by 2012

rocess tream n ng1. Headcount reductions (15,000/100,000 15%)2. Duplicate facilities to be closed or divested

3. Initiate procurement savings

11/20/201028


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Reverse MergerMerck's acquisition of its rival, Schering-Plough is

being structured as Reverse Merger

11/20/201029

Sale ofBusiness


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Reverse MergerSale of Business

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

11/20/201030

Subsidiary


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Why Reverse MergerTo 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 drugs international rights and J&J

owns the domestic (USA) rights.

Remicade generated $2.1 billion in revenue

11.35% of SGP sales.

11/20/201031


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Conclusion Presented the reasoning and motivation for Merck

acquisition target Schering-Plough

Pro osed an ac uisition value of 40.75 Billion for

Schering-Plough based on DCF and its associatedassumptions

Explain why the M&A deal between Merck andSchering-Plough is being structured as a Reverse

Merger

11/20/201032


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Thank you

Q & A

11/20/201033


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Back-u Slides

11/20/201034


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Actual Acquisition Price

March 10, 2009

Merck to Buy Schering-Plough for

US $41.1 Billion

The deal values SGP at $23.61 a share, apremium of 34 percent over its closing price

Friday. (3/6/09 - $17.63)

For each share of SGP, shareholders willreceive 0.5767 shares in the new company

plus $10.50 in cash.11/20/201035


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Market-based Valuation Pfizer would pay $50.19 a share for WYE ~

29% premiumWYE Closing Stock Price ~ $38.90 (1/23/09)

,

value of SGP could be $21.97 (12/31/08 closing$17.03)

SGP might value at ~ $35.92 Billion

11/20/201036


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Total S&P 500 annual returns

Year

Annual$1.00

Investment

5 Year 10 Year 15 Year

Year

Annual $1.00 Investment 5 Year 10 Year 15 Year

Return GivesAnnualized

Return

Annualized

Return

Annualized

ReturnReturn Gives

Annualized

Return

Annualized

Return

Annualized

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% -

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

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

an10.88% 10.92%


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Cost of Restructuring 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 inmaterials and production, research and development, and restructuring

costs: $2.0 billion

The first phase of the Merger Restructuring Program is expected to becompleted 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

11/20/201038


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Required Divestures Merckmust 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

Schering Plough must sell its assets related to drugs that treatnausea and vomiting in humans. As Schering-Plough nausea

drug, Rolapitant will competed with Mercks drug, Emend.

11/20/201039


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Merger Mechanics The Merck/Schering transaction features the two stages with the creation

of two subsidiaries, namely MS1 and MS2 by SGP

Stage 1MS1 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 2MS2 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 conditionedon the receipt of an opinion that the Merck merger qualifies as such a

reorganization.

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Merck Financial Data

11/20/201041

presentation mrk's acquisition of sgp-submitted

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