Merck KGaA declares $17B Sigma purchase 'quantum leap' as drug biz struggles

Merck KGaA CEO Karl-Ludwig Kley

Speculation has been brewing all year about the prospect of Germany's Merck KGaA turning to M&A to bolster its unproductive drug pipeline, and today the company confirmed it has struck a deal, agreeing to buy Sigma-Aldrich ($SIAL) for $17 billion. St. Louis-based Sigma develops and distributes chemicals and laboratory equipment to the life sciences industry and will enhance Merck KGaA's position in the lab equipment space, adding to the company's 2010 acquisition of Millipore for $6 billion.

Karl-Ludwig Kley, chairman of Merck KGaA's executive board, said in a statement announcing the deal that it marks a "milestone" in the company's ongoing efforts to make sustainable growth platforms out of its three businesses: life science, biopharmaceuticals, and chemicals. The company expects the life science division's contribution to overall earnings will more than double with this deal, which it says will be immediately accretive to earnings.

The marriage of Merck KGaA and Sigma will increase Merck Millipore's reach in North America and Asia. Merck expects to realize €260 million (about $340 million) in cost savings per year within three years of the deal closing, according to the statement.

For the life science unit, Kley said in the statement, the deal would be a "quantum leap" that will "secure stable growth and profitability in an industry that is driven by trends such as the globalization of research and manufacturing." He added that the combination would allow the company to "invest even more in innovation going forward."

There's little doubt this deal will help deflect the concerns swirling around Merck's drug unit, which hasn't delivered a major new drug since 2003, Bloomberg points out. Merck KGaA acquired Swiss biotech company Serono in 2007 but has struggled to establish a strong presence in the drug business nonetheless.

Earlier this month, Merck KGaA finally pulled the plug on Stimuvax, its cancer vaccine that failed in late-stage development despite the company's controversial attempt to revive the research program. The decision came three years after the company's experimental oral drug for multiple sclerosis, cladribine, had to be dumped because of the FDA's safety concerns. The company has long been struggling to come up with a successor to Rebif, its MS drug that is facing a tough rival: Biogen Idec's ($BIIB) Tecfidera.

Just last week, Merck KGaA announced plans to invest €380 million ($494 million) in developing new biosimilars, while scouting for a development partner for its PD-L1 immuno-oncology program. The company said it plans to initiate as many as five Phase III programs between 2015 and 2016. Separately, on Sept. 5, Merck KGaA signed a development deal with S-TARget to work on new allergy remedies.

Merck KGaA derived 39% of its revenues from chemicals last year, according to Bloomberg. But the decision to make a big acquisition of something that's on the sidelines of drug development does put it at odds with some of its competitors, which are angling instead to grab pieces of the rapidly growing worldwide market for new pharmaceuticals. Last week, Merck's German neighbor Bayer said it would spin off its plastics unit within 18 months, leaving Bayer with just its HealthCare and CropScience businesses. A deal might generate as much as €10 billion ($12.9 billion), a sum it can use to build its life sciences businesses. Some think a prime target could be animal health leader Zoetis ($ZTS), which would allow Bayer to bolster that part of its business.

- here's Merck KGaA's press release (PDF)
- read the Bloomberg story
- get more from the New York Times (sub. req.)

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