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Germany-based pharmaceutical giant Merck KGaA. (DE:MRK) announced this morning that it will be acquiring U.S.-based life sciences company Sigma -lrdrich NASDAQ:SIAL) for $17 billion, or $140 per share. Sigma-Aldrich had closed at $102.37 on Friday, 19 September, but pre-trading this morning on the heels of the announcement drove the shares to open at $137.28, an increase 0f 35%, just 2% less that the proposed acquisition price. Merck share price has remained steady until noon, when it climbed to 76.14, up 9.3% from its close of 69.60 on the Frankfurt exchange on Friday.
Who is Sigma-Aldrich?
Sigma-Aldrich Corporation is a life science and high technology company that develops, manufactures, purchases and distributes the range of high quality chemicals, biochemicals and equipment available throughout the world. The company describes itself as “a leading Life Science and High Technology company whose biochemical, organic chemical products, kits and services are used in scientific research, including genomic and proteomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical, diagnostics and high technology manufacturing.”
Financially speaking, SIAL has a market cap of $16.3 billion with 119 million shares outstanding. It operates with a gross margin of 50.3% on annual sales of $2.74 billion, returning an EPS of $4.10 per share on revenues of $22.91 per share.
Unless you are well versed in highly technical life science terminology it remains somewhat difficult to determine exactly what the ten-year old Sigma-Aldrich actually does, because all that it says about itself is in broad descriptive terms, such as “We manufacture roughly 70,000 of the 230,000 chemical and biological products we offer.” Merck obviously knows what those products are.
Why is this a good deal for Merck?
Aside from the obvious pharmaceutical synergies, I noted with interest the following comment from Sigma-Aldrich President and CEO, Rakesh Sachdev in an interview on Bloomberg TV this morning. “I can safely say that there’s no drug today in the world, not a single drug, that, at some point, didn’t use Sigma-Aldrich to develop and discover that drug.” In that same braodcast, Merck KGaA Executive Chairmand, Karl-Ludwig Kley emphasis that, “This is not an interest rate or a tax deal. This is a business deal with compelling, strategic logic and a business logic behind it.”
That strategic, business logic may be best understood when we see Mr. Sachdev’s comments through the prism of Merck’s apparent inability to develop an adequate pipeline of new drugs and treatments to fill its pipeline. This, then, becomes a classic pharma M&A. But, perhaps more importantly, when this deal closes, Merck will own a life science company through which, allegedly, every new drug in the world might reasonably be expected to pass.
This merger, to be completed in 2015 probably has more synergies than we may either imagine or even want to know. Merck has developed a core weakness and Sigma-Aldrich seems to have the core strengths to fill the gap.
Merck & Company (NASDAQ:MRK) shares traded steady today withing the $60.00 range.
