Updated from 2:53 p.m. EDT
( SGP) has agreed to pay about $14.4 billion for
, a subsidiary of the Dutch chemical and drug conglomerate
, in a transaction that expands its research pipeline and diversifies its product portfolio.
"It is the right deal at the right time," Schering-Plough Chairman and CEO Fred Hassan said Monday. The purchase of Organon, which had about $5 billion in sales last year, could add 10 cents a share to Schering-Plough's earnings one year after the deal closes, excluding costs related to the purchase.
The acquisition should be completed by the end of the year. Schering-Plough produced $10.6 billion in revenue last year.
"Organon BioSciences will be an excellent fit with Schering-Plough -- strategically, scientifically and financially, "said Hassan, as he spoke to analysts from the Netherlands during a conference call. "It builds on our growing strength in primary care, giving us immediate access to central nervous system and women's health care products."
Additionally, Organon offers Schering-Plough five products in late-stage clinical testing and "a number of promising projects" in midstage clinical trials, Hassan said. Late-stage clinical trials include treatments for schizophrenia, infertility and insomnia.
Although it will require multiple regulatory approvals, the deal doesn't need the endorsement of shareholders at either company.
Schering-Plough will pay for Organon with cash, new debt, common stock and convertible securities. "We will be able to maintain our strong balance sheet," Robert Bertolini, the chief financial officer, told analysts.
Although the announcement initially sent Schering-Plough's shares rising, the stock slipped into negative territory as several analysts gave the deal "yes, but" reviews. Yes, Schering-Plough will add new products and improve its late-stage clinical trial line-up, but the acquisition, as one analyst put it, "lacks pizzazz."
The stock climbed as high as $24.22, but by the afternoon, it was trading at $23.69, down 16 cents for the day.
Both Standard & Poor's and Moody's Investors Service placed Schering-Plough under review, saying it may be taking on too much debt to warrant its current credit ratings.
"Despite strategic benefits of the transaction, the size of the Organon acquisition falls considerably outside Moody's earlier expectations for Schering-Plough," said Michael Levesque, Moody's senior vice president.
Buying Organon "will add a significant amount of debt, and Schering-Plough's financial profile will be inconsistent with the current ratings," said S&P. However, S&P added that the company "has a demonstrated history of conservative financial policies and actions."
Given that behavior, S&P credit analyst Arthur Wong said the company's credit rating "has the potential to remain at the investment-grade level."
Prudential Equity Group's Tim Anderson told clients, in a research note, that he would have preferred a deal that bolstered the cholesterol-drug franchise. The company has a joint venture with
to sell Schering-Plough's Zetia as well as Vytorin, which combines Zetia and Merck's Zocor. Anderson has a neutral rating on Schering-Plough.
Several other analysts say the deal will help Schering-Plough reduce its reliance on the cholesterol drugs, even though they didn't rave about the agreement or the cost.
Schering-Plough is paying a "pretty steep price," says the independent financial research firm Morningstar. In a research note, analyst Heather Brilliant says "we're not overly enthusiastic" about Organon's experimental drugs because most focus on smaller-revenue markets.
However, due to the weakness of Schering-Plough's collection of compounds in late-stage clinical testing, "even drugs that address smaller potential markets should give the firm better revenue prospects," says Brilliant.
For Hassan, the purchase is his most dramatic move since he assumed leadership of the company four years ago. He has been slowly trying to rebuild Schering-Plough, but this acquisition is his biggest leap forward.
Meanwhile, Akzo Nobel had been promising investors that it would spin off its Organon subsidiary so that it could concentrate on chemicals.
"We have found a good home for Organon BioSciences," said Hans Wijers, CEO of Akzo Nobel. "While an independent future also offered potentially exciting possibilities, the partnership with Schering-Plough ... will give more scope to develop the unique capabilities of Organon BioSciences."
Shares of Akzo Nobel jumped $9.59, or 15.8%, to $70.40.
Organon's drugs produced about $3.4 billion in sales last year. Major products include Follistim/Puregon for infertility; Esmeron/Zemuron, a muscle relaxant; and the contraceptives NuvaRing and Implanon.
Its animal health business have revenue of about $1.5 billion last year, while Schering-Plough's animal health business had $910 million. The combination would push Schering-Plough ahead of U.S. leader
, which had $2.3 billion in animal health sales last year.
The experimental Organon drug provoking the most questions from analysts is asenapine for schizophrenia. Organon said in October that it might delay seeking approval from the Food and Drug Administration because trial results had been "mixed." Organon had planned to seek FDA approval in early 2007.
Pfizer pulled out of a marketing deal with the Dutch company, saying its decision reflected "a commercial analysis of the compound as a part of
our overall portfolio." Organon said it would continue testing the drug.
Deutsche Bank Securities analyst Barbara Ryan says in a research note that asenapine missed its primary goal in two of four late-stage clinical trials. Ryan has a hold rating. Her firm seeks to do business with companies mentioned in research reports.
Schering-Plough officials didn't offer a timetable for seeking approval from the FDA or the European Union. "Our R&D people were impressed with asenapine," Hassan said.