DEFM14A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the
Registrant þ
Filed by a Party other than the
Registrant o
Check the appropriate box:
o Preliminary
Proxy Statement
o Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
þ Definitive
Proxy Statement
o Definitive
Additional Materials
o Soliciting
Material Pursuant to §240.14a-12
Merck & Co., Inc.
(Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(1)
and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(set forth the amount on which the filing fee is calculated and
state how it was determined):
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(4)
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Proposed maximum aggregate value of transaction:
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þ
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by
Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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Dear Shareholders:
The boards of directors of Merck & Co., Inc. and
Schering-Plough Corporation have approved a merger agreement
providing for the combination of our two companies.
We expect that this combination will create a strong, global
healthcare leader uniquely positioned for sustainable long-term
growth through:
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scientific innovation, with a combined team of top scientists
focused on discovering, developing and delivering innovative
treatments for patients around the world;
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a stronger, more diversified product portfolio with an expanded
geographic footprint and an industry-leading team of marketing
and sales professionals; and
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a strong financial base, to be further strengthened by synergies
expected to be recognized from the combination, to support
further investments in research and strategic opportunities to
build for the future.
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In addition, the combined company expects to continue
Mercks current practice of paying quarterly dividends of
$0.38 per share.
Merck and Schering-Plough will each hold a special meeting of
shareholders to consider and vote on a proposal to approve the
merger agreement. You will find the notice of meeting, logistics
of the proposed combination and details in the attached
documents. We encourage you to participate in the governance of
your company by voting. Your vote is critical, because we cannot
complete the merger unless the shareholders of both Merck and
Schering-Plough approve the respective proposals related to the
merger.
We enthusiastically support this combination of our companies
and join with our boards in recommending that you vote
FOR the approval of the merger agreement.
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Sincerely,
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Sincerely,
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Richard T. Clark
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Fred Hassan
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Chairman, President and Chief Executive Officer
Merck & Co., Inc.
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Chairman and Chief Executive Officer
Schering-Plough Corporation
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For a discussion of risk factors which you should consider in
evaluating the transaction, see Risk Factors
beginning on page 17 of the attached joint proxy
statement/prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the merger and
other transactions described in the attached joint proxy
statement/prospectus or the securities to be issued pursuant to
the merger under the attached joint proxy statement/prospectus
nor have they determined if the attached joint proxy
statement/prospectus is accurate or adequate. Any representation
to the contrary is a criminal offense.
The attached joint proxy statement/prospectus is dated
June 25, 2009, and
is first being mailed to shareholders on or about June 29,
2009.
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
To be held August 7,
2009
The Special Meeting of Shareholders of Schering-Plough
Corporation will be held at The Conference Center at Harvard
Medical, 77 Avenue Louis Pasteur, Boston, Massachusetts, on
August 7, 2009, at 1:30 p.m. local time. Directions to The
Conference Center at Harvard Medical are available at
http://www.theconfcenter.hms.harvard.edu/directions. The
purposes of the meeting are to vote on the following matters and
to transact such other business that may properly come before
the meeting:
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Consider and act on a proposal to approve the Agreement and Plan
of Merger, dated as of March 8, 2009, by and among
Merck & Co., Inc.,
Schering-Plough
Corporation, SP Merger Subsidiary One, Inc. (formerly Blue,
Inc.), and SP Merger Subsidiary Two, Inc. (formerly Purple,
Inc.), as it may be amended (the merger agreement)
and the issuance of shares of common stock in the merger
contemplated by the merger agreement. The Board recommends a
vote FOR this proposal.
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Approve any adjournment of the Schering-Plough Special Meeting
(including, if necessary, to solicit additional proxies if there
are not sufficient votes to approve the merger agreement and the
issuance of shares of common stock in the merger). The Board
recommends a vote FOR this proposal.
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Only holders of record of common shares at the close of business
on June 22, 2009 will be entitled to vote at the meeting or
any adjournments or postponements thereof.
For the security of everyone attending the meeting, a
shareholder must present both an admission ticket and photo
identification to be admitted to the Special Meeting of
Shareholders. The process for shareholders to obtain an
admission ticket from Schering-Ploughs transfer agent, BNY
Mellon, is described in the attached joint proxy
statement/prospectus on page 45.
Your vote is important. Whether or not you plan to attend the
meeting, please vote in advance by proxy in whichever way is
most convenient in writing, by telephone or by the
Internet.
We appreciate your investment in Schering-Plough. We encourage
you to participate in Schering-Ploughs governance by
voting.
Corporate Secretary and
Vice President Governance
Kenilworth, New Jersey
June 25, 2009
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
August 7, 2009
To the Shareholders:
The shareholders of Merck & Co., Inc. will hold a
special meeting on August 7, 2009 at 8:30 a.m., local
time, at the Bridgewater Marriott located at 700 Commons Way,
Bridgewater, New Jersey. The purposes of the meeting are to:
1. Consider and act on a proposal to approve the Agreement
and Plan of Merger, dated as of March 8, 2009, by and among
Merck & Co., Inc., Schering-Plough Corporation, SP
Merger Subsidiary One, Inc. (formerly Blue, Inc.), and SP Merger
Subsidiary Two, Inc. (formerly Purple, Inc.), as it may be
amended (the merger agreement); and
2. Transact any other business that may properly come
before the meeting.
Only shareholders listed on the companys records at the
close of business on June 22, 2009 are entitled to vote at
the special meeting or at any adjournments or postponements of
the special meeting.
We cannot complete the transactions contemplated by the merger
agreement unless a quorum (comprised of holders of a majority of
the outstanding shares of Merck common stock) is present at the
special meeting in person or by proxy, and a majority of
the votes cast are cast in favor for approval of the merger
agreement.
For more information about the transactions contemplated by the
merger agreement, please review carefully the accompanying joint
proxy statement/prospectus and the merger agreement attached to
it as Annex A.
Your vote is important. Whether or not you plan to attend the
special meeting, please vote in advance by proxy in whichever
way is most convenient by Internet, telephone or
mail.
By Order of the Board of Directors,
Senior Vice President, Secretary and
Assistant General Counsel
Whitehouse Station, New Jersey
June 25, 2009
The board of directors of Schering-Plough Corporation
(Schering-Plough) and Merck & Co., Inc.
(Merck) have approved a merger agreement providing
for the combination of the two companies in a stock and cash
transaction in which Schering-Plough, renamed Merck &
Co., Inc., will continue as the surviving company (referred to
in this joint proxy statement/prospectus as New
Merck) and Merck will become a wholly owned subsidiary of
New Merck.
In the merger, Schering-Plough shareholders will receive $10.50
in cash and 0.5767 of a share of the common stock of the
combined company for each share of Schering-Plough common stock
they hold and Merck shareholders will receive one share of
common stock of the combined company for each share of Merck
common stock they hold. The combined company expects to continue
Mercks current practice of paying quarterly dividends of
$0.38 per share.
A total of approximately 3,099,067,269 shares of the
combined company will be offered to the Merck and
Schering-Plough shareholders in the merger. Immediately after
the merger, the former shareholders of Merck and Schering-Plough
will own approximately 68% and 32%, respectively, of the shares
of the combined company, which we expect will be listed on the
New York Stock Exchange and traded under the symbol
MRK.
For a discussion of risk factors which you should consider in
evaluating the transaction, see Risk Factors
beginning on page 17.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the merger and
other transactions described in this joint proxy
statement/prospectus or the securities to be issued pursuant to
the merger under this joint proxy statement/prospectus nor have
they determined if this joint proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a
criminal offense.
This joint proxy statement/prospectus is dated June 25,
2009, and
is first being mailed to shareholders on or about June 29,
2009.
REFERENCES
TO ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important
business and financial information about Merck and
Schering-Plough from other documents that are not included in or
delivered with this joint proxy statement/prospectus. This
information is available for you to review at the Securities and
Exchange Commissions (SEC) public reference room located
at 100 F Street, N.E., Room 1580, Washington,
DC 20549, and through the SECs website, www.sec.gov.
You can also obtain those documents incorporated by reference in
this joint proxy statement/prospectus by requesting them in
writing or by telephone from the appropriate company at the
following addresses and telephone numbers:
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Merck & Co., Inc.
One Merck Drive
P.O. Box 100
Whitehouse Station, NJ 08889
1-908-423-7845
Attention: Stockholder Services Dept, WS3AB-40
www.merck.com/finance
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Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033
1-908-298-7436
Attention: Investor Relations
www.schering-plough.com/investor-relations/index.aspx
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If you would like to request documents, please do so no later
than July 31, 2009 in order to receive them before the
special meetings.
See Where You Can Find More Information beginning on
page 157 for more information about the documents
referenced in this joint proxy statement/prospectus.
In addition, if you have any questions about the merger, this
joint proxy statement/prospectus, voting your shares, would like
additional copies of this joint proxy statement/prospectus or
need to obtain proxy cards or other information related to the
proxy solicitation, you may contact:
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IF YOU ARE A MERCK SHAREHOLDER:
Laurel Hill Advisory Group, LLC
100 Wall Street,
22nd
Floor
New York, NY 10005
1-888-742-1305
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IF YOU ARE A SCHERING-PLOUGH SHAREHOLDER: Georgeson Shareholder Communications, Inc. 199 Water Street, 26th Floor New York, NY 10038 1-866-288-2190
For strategic and financial issues: Alex Kelly Group Vice President Global Communications and Investor Relations Schering-Plough Corporation 2000 Galloping Hill Road Mail Stop: K-1-4-4275 Kenilworth, NJ 07033 Phone: (908) 298-7436 Fax: (908) 298-7082
For governance and social issues: Susan Ellen Wolf Corporate Secretary and Vice President Corporate Governance Schering-Plough Corporation 2000 Galloping Hill Road Mail Stop: K-1-4-4275 Kenilworth, NJ 07033 Phone: (908) 298-3636 Fax: (908) 298-7303
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TABLE OF
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iv
QUESTIONS
AND ANSWERS ABOUT THE VOTING PROCEDURES FOR THE SPECIAL
MEETINGS
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Q: |
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What is the proposed transaction for which I am being asked
to vote? |
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You are being asked to approve a merger agreement providing for
the combination of Merck and Schering-Plough. In order to
complete the merger, Merck shareholders must vote to approve the
merger agreement and Schering-Plough shareholders must vote to
approve the merger agreement and the issuance of shares of
common stock of New Merck in the merger. Merck and
Schering-Plough will hold separate special shareholders
meetings to obtain these approvals. This joint proxy
statement/prospectus contains important information about the
merger, including the special meetings of the respective
shareholders of Merck and Schering-Plough. You should read it
carefully and in its entirety. The enclosed proxy card or voting
instruction card allows you to vote your shares without
attending your companys special meeting. |
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Your vote is important. We encourage you to vote as soon as
possible. |
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When and where will the special meetings be held? |
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The Merck special meeting is scheduled to be held at
8:30 a.m., local time, on August 7, 2009, at the
Bridgewater Marriott located at 700 Commons Way,
Bridgewater, NJ. The Schering-Plough special meeting is
scheduled to be held at 1:30 p.m., local time, on
August 7, 2009, at The Conference Center at Harvard
Medical, 77 Avenue Louis Pasteur, Boston, MA. |
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Who is entitled to vote at the Merck and Schering-Plough
special meetings? |
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The boards of directors of each of Merck and Schering-Plough has
fixed June 22, 2009 as the record date for its respective
special meeting. If you were a Merck or Schering-Plough
shareholder at the close of business on the record date you are
entitled to vote your Merck or Schering-Plough shares at your
companys special meeting. |
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How many votes do I have? |
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You are entitled to one vote at the Merck special meeting for
each share of Merck common stock that you owned as of the record
date. As of the close of business on the record date, there were
approximately 2,108,780,449 outstanding shares of Merck common
stock. As of that date, less than 1% of the outstanding shares
of Merck common stock were held by the directors and executive
officers of Merck. |
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You are entitled to one vote at the Schering-Plough special
meeting for each share of Schering-Plough common stock that you
owned as of the record date. As of the close of business on the
record date, there were approximately
1,633,437,974 outstanding shares of Schering-Plough common
stock. As of that date, less than 1% of the outstanding shares
of Schering-Plough common stock were held by the directors and
executive officers of Schering-Plough. |
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What constitutes a quorum? |
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Shareholders who hold at least a majority of the outstanding
shares of Merck common stock as of the close of business on the
record date and who are entitled to vote must be present, either
in person or represented by proxy, in order to constitute a
quorum to conduct business at the Merck special meeting. |
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Shareholders who hold at least a majority of the outstanding
shares of Schering-Plough common stock as of the close of
business on the record date and who are entitled to vote must be
present, either in person or represented by proxy, in order to
constitute a quorum to conduct business at the Schering-Plough
special meeting. |
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What vote is required to approve the merger agreement? |
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As long as a quorum is present at the companies respective
special meetings, the affirmative vote of a majority of the
votes cast at the special meeting is required for each of Merck
and Schering-Plough to approve the merger agreement. Moreover,
in the case of Schering-Plough, the rules of the New York Stock
Exchange require that holders of at least a majority of the
outstanding shares of Schering-Plough common |
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stock actually cast votes on the proposal to approve the merger
agreement (whether for or against the proposal). |
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What is the difference between holding shares as a
shareholder of record or in street name? |
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If your shares are registered directly in your name with
Mercks transfer agent, Wells Fargo Bank, N.A., or with
Schering-Ploughs transfer agent, BNY Mellon, as the
case may be, you are considered, with respect to those shares,
the shareholder of record. If you are a shareholder
of record, this joint proxy statement/prospectus and the
enclosed proxy card have been sent directly to you by Merck or
Schering-Plough. |
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If your shares are held in a stock brokerage account or by a
bank or other nominee, you are considered the beneficial owner
of shares held in street name. This joint proxy
statement/prospectus has been forwarded to you by your broker,
bank or nominee who is considered, with respect to those shares,
the shareholder of record. As the beneficial owner of shares
held in street name, you have the right to direct your broker,
bank or nominee how to vote your shares by using the voting
instruction card included with this joint proxy
statement/prospectus or by following their instructions for
voting by telephone or the Internet. |
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Q: |
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How do I vote? |
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In order to ensure that your vote is recorded, please submit
your proxy or voting instructions as instructed below as soon as
possible even if you plan to attend your companys special
meeting in person. |
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Mail. You can vote by mail by completing,
signing, dating and mailing your proxy card or voting
instruction card in the postage-paid envelope included with this
joint proxy statement/prospectus. |
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Vote by Telephone or Internet. If you are a
shareholder of record (that is, if you hold your shares in your
own name), you may vote by telephone (toll-free) or the Internet
by following the instructions on your proxy and voting
instruction card. If your shares are held in the name of a bank,
broker or other holder of record (that is, in street
name), and if the bank or broker offers telephone and
Internet voting, you will receive instructions from them that
you must follow in order for your shares to be voted. If you
vote by telephone or the Internet, you do not need to return
your proxy and voting instruction card. |
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In addition, all shareholders may vote in person at their
companys special meeting. You may also be represented by
another person at the meeting by executing a proper proxy
designating that person. If you are a beneficial owner of shares
held in street name, you must obtain a legal proxy from your
broker, bank or nominee and present it to the inspectors of
election with your ballot when you vote at the meeting. |
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How will my proxy be voted? |
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If you vote by Internet, by telephone or by completing, signing,
dating and mailing your proxy card or voting instruction card,
your shares will be voted in accordance with your instructions.
If you are a shareholder of record and you sign, date, and
return your proxy card but do not indicate how you want to vote
or do not indicate that you wish to abstain, your shares will be
voted in favor of the approval of the merger agreement. |
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Who can attend the Merck and Schering-Plough special
meetings? |
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All Merck shareholders as of the record date may attend the
Merck special meeting but must have an admission ticket. If you
are a shareholder of record, the ticket attached to the proxy
card will admit you and one guest. If you are a beneficial owner
of Merck shares held in street name, you may request a ticket by
writing to the following address: |
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Office of the Secretary, WS 3AB-05
Merck & Co., Inc.
P.O. Box 100
Whitehouse Station, NJ
08889-0100 |
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or by faxing your request to
908-735-1224.
You must provide evidence of your ownership of shares with your
ticket request, which you can obtain from your broker, bank or
nominee. We encourage you or your |
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broker, bank or nominee to fax your ticket request and proof of
ownership in order to avoid any mail delays. |
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All Schering-Plough shareholders as of the record date may
attend the Schering-Plough special meeting with an admission
ticket and a photo identification. To get an admission ticket,
Schering-Plough shareholders must write to
Schering-Ploughs transfer agent, BNY Mellon, using the
following address: |
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BNY Mellon Shareowner Services
480 Washington Boulevard
29th Floor
Jersey City, NJ 07310
Attn: Ann-Marie Webb |
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If you are a record shareholder (your shares are held in your
name), you must list your name exactly as it appears on your
stock ownership records from BNY Mellon. If you hold shares
through a bank, broker or trustee, you must also include a copy
of your latest bank or broker statement showing your ownership. |
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Can I change my vote after I have submitted a proxy or voting
instruction card? |
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Yes. If you are a shareholder of record you can change your vote
at any time before your proxy is voted at your special meeting.
You can do this in one of three ways: |
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you can send a signed notice of revocation to the
Secretary of Merck or the Corporate Secretary of
Schering-Plough, as appropriate;
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you can submit a revised proxy bearing a later date
by Internet, telephone or mail as described above; or
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you can attend your companys special meeting
and vote in person, which will automatically cancel any proxy
previously given, or you may revoke your proxy in person, but
your attendance alone will not revoke any proxy that you have
previously given.
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If you choose either of the first two methods, you must submit
your notice of revocation or your new proxy no later than the
beginning of the applicable special meeting. If you are a
beneficial owner of shares held in street name, you may submit
new voting instructions by contacting your broker, bank or
nominee. You may also vote in person at the special meeting if
you obtain a legal proxy from your broker, bank or nominee and
present it to the inspectors of election with your ballot when
you vote at the meeting. |
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Additional information on changing your vote is located on
page 41 for Merck and on page 45 for Schering-Plough. |
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As a participant in Mercks 401(k) or similar employee
retirement plan(s), how do I vote shares held in my plan
account? |
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If you are a participant in the Merck & Co., Inc.
Employee Savings and Security Plan, Merck & Co., Inc.
Employee Stock Purchase and Savings Plan, Hubbard LLC Employee
Savings Plan, Merck Puerto Rico Employee Savings and Security
Plan, Merck Frosst Canada Inc. Stock Purchase Plan (Merck Frosst
Plan) or Merial 401(k) Savings Plan (Merial Plan), you should
have received separate proxy voting instruction cards from the
plan trustees and you have the right to provide voting
directions to the plan trustee by submitting your voting
instruction card for those shares of Merck common stock that are
held by your plan and allocated to your plan account on the
approval of the merger agreement. |
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If I am a participant in one of the Merck retirement plans
mentioned above, what happens if the plan trustee does not
receive voting instructions from me? |
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If voting instructions are not received from participants in the
Merck Frosst Plan, the plan trustee will vote the shares in
accordance with the recommendation of the Merck board of
directors. |
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If voting instructions are not received from participants in the
Merial Plan, the plan trustee will vote the shares in the same
proportion as it votes shares for which voting instructions are
received from plan participants. |
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If voting instructions are not received from participants in the
plans other than the Merck Frosst Plan and the Merial Plan
mentioned above, trustees for the other plans will not vote
shares for which no voting instructions are received from plan
participants. |
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As a participant in Schering-Ploughs employees
savings plans, how do I vote shares held in my plan account? |
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If you are a current or former Schering-Plough employee with
shares credited to an account under the Schering-Plough
employees savings plan or the Schering-Plough Puerto Rico
employees retirement savings plan, you will receive a
proxy and voting instruction card. |
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If you do not give voting instructions to the plan trustee by
mailing your proxy and voting instruction card or voting by
telephone or the Internet, the trustee will vote shares you hold
in the employees savings plan or in the Puerto Rico
employees retirement savings plan in the same proportion
as shares held in that plan for which voting instructions were
timely received. To allow sufficient time for the trustee to
vote your shares under either plan, your voting instructions
must be received by 5:00 p.m. (Eastern Time) on Tuesday,
August 4, 2009. |
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Should I send in my share certificates now? |
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No. If you hold Schering-Plough share certificates, after
we have completed the transaction, we will send you written
instructions informing you how to exchange your share
certificates. If you hold Merck share certificates, your share
certificates will automatically represent an equal number of
shares in New Merck after completion of the transaction. |
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If I hold outstanding Merck stock options or restricted stock
units, what do I need to do? |
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No action is necessary on your part. Immediately prior to the
closing, each of your outstanding stock options and restricted
stock units will automatically convert, on a one for one basis,
to be a stock option exercisable for, or a restricted stock unit
settled in, common shares of New Merck. This conversion is also
described on page 102. |
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If I hold Schering-Plough stock options or deferred stock
units, what do I need to do? |
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No action is necessary on your part. Immediately prior to the
closing, your outstanding stock options will automatically
convert to options to purchase common shares of New Merck,
pursuant to the conversion formulas described on page 102. |
Outstanding deferred stock units granted prior to 2008 will be
paid out in a single lump cash payment following the closing
based on the higher of (a) the per share price paid for
Schering-Plough stock in connection with the merger and
(b) the highest closing price of Schering-Plough common
shares during the 60 day period immediately prior to and
including the closing. Outstanding deferred stock units granted
in and after 2008 will, immediately prior to the closing,
automatically convert to stock awards in New Merck pursuant to
the conversion formula described on page 102.
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When do you expect the merger to be completed? |
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Schering-Plough and Merck are working to complete the merger in
the fourth quarter of 2009. However, the merger is subject to
various regulatory approvals and other conditions, and it is
possible that factors outside the control of both companies
could result in the merger being completed at a later time, or
not at all. There may be a substantial amount of time between
the respective Schering-Plough and Merck special meetings and
the completion of the merger. Schering-Plough and Merck hope to
complete the merger as soon as reasonably practicable. |
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Who can answer any questions I may have about the special
meeting or the transaction? |
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Merck shareholders may call Laurel Hill Advisory Group, LLC
toll-free at 1-888-742-1305 and banks and brokers may call
collect at 1-917-338-3181 with any questions they may have. |
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For logistical questions, such as how to exchange shares,
Schering-Plough shareholders may call Georgeson Shareholder
Communications, Inc. toll-free at 1-866-288-2190 and banks and
brokers may call 1-212-440-9800 with any questions they may have. |
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For other questions that Schering-Plough shareholders may have,
the officers leading the Schering-Plough Shareholder Engagement
Program remain your contacts: |
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For Strategic and Financial
Issues:
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For Governance and Social
Issues:
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Alex Kelly
Group Vice President
Global Communications and
Investor Relations
Schering-Plough Corporation
2000 Galloping Hill Road
Mail Stop: K-1-4-4275
Kenilworth, NJ 07033
Phone:
(908) 298-7436
Fax:
(908) 298-7082
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Susan Ellen Wolf
Corporate Secretary and Vice President Corporate
Governance
Schering-Plough Corporation
2000 Galloping Hill Road
Mail Stop: K-1-4-4525
Kenilworth, NJ 07033
Phone: (908) 298-3636
Fax: (908) 298-7303
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ix
SUMMARY
This summary highlights selected material information from this
joint proxy statement/prospectus and may not contain all of the
information that is important to you. To understand the merger
agreement fully and for a more complete description of the legal
terms of the merger agreement, you should carefully read this
entire joint proxy statement/prospectus and the other documents
to which we have referred you, including the complete merger
agreement included with this joint proxy statement/prospectus as
Annex A. See Where You Can Find More
Information beginning on page 157.
References to we or our and other first
person references in this joint proxy statement/prospectus refer
to both Schering-Plough and Merck, before completion of the
merger. We refer to the combined company in this joint proxy
statement/prospectus as New Merck, or the
combined company.
Parties
to the Merger Agreement
Merck &
Co., Inc.
Merck is a global research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of
innovative products to improve human and animal health.
Mercks operations are principally managed on a products
basis and are comprised of two reportable segments: the
pharmaceutical segment and the vaccines and infectious diseases
segment. The pharmaceutical segment includes products consisting
of therapeutic and preventive agents, sold by prescription, for
the treatment of human disorders and sold by Merck primarily to
drug wholesalers and retailers, hospitals, government agencies
and managed health care providers such as health maintenance
organizations, pharmacy benefit managers and other institutions.
The vaccines and infectious diseases segment includes human
health vaccine products consisting of preventative pediatric,
adolescent and adult vaccines, primarily administered at
physician offices, and infectious disease products consisting of
therapeutic agents for the treatment of infection sold primarily
to drug wholesalers and retailers, hospitals and government
agencies.
Merck common stock (NYSE: MRK) is listed on the NYSE. The
principal executive offices of Merck are located at One Merck
Drive, Whitehouse Station, NJ 08889, and its telephone number is
(908) 423-1000.
Additional information about Merck and its subsidiaries is
included in the documents incorporated by reference into this
joint proxy statement/prospectus. See Where You Can Find
More Information on page 157.
Schering-Plough
Corporation
Schering-Plough is a global innovation-driven, science-based
health care company with leading prescription pharmaceutical,
animal health and consumer health care products. Schering-Plough
has business operations in more than 140 countries. Through its
own biopharmaceutical research and collaborations with partners,
Schering-Plough
creates therapies that help save and improve lives around the
world. Schering-Plough applies its research and development
platform to prescription pharmaceuticals, animal health and
consumer health care products. The prescription pharmaceuticals
segment discovers, develops, manufactures and markets human
pharmaceutical products. Within the prescription pharmaceuticals
segment, Schering-Plough has a broad range of research projects
and marketed products in six therapeutic areas: cardiovascular,
central nervous system, immunology and infectious disease,
oncology, respiratory and womens health. The animal health
segment discovers, develops, manufactures and markets animal
health products, including vaccines. The consumer health care
segment develops, manufactures and markets
over-the-counter
(OTC), footcare and sun care products.
Schering-Plough common stock (NYSE: SGP) is listed on the NYSE.
The principal executive offices of Schering-Plough are located
at 2000 Galloping Hill Road, Kenilworth, NJ 07033, and its
telephone number is
(908) 298-4000.
Additional information about Schering-Plough and its
subsidiaries is included in the documents incorporated by
reference into this joint proxy statement/prospectus. See
Where You Can Find More Information on page 157.
1
SP
Merger Subsidiary One, Inc.
SP Merger Subsidiary One, Inc., formerly known as Blue, Inc. and
which is sometimes referred to in this joint proxy
statement/prospectus as Merger Sub 1, is a wholly owned
subsidiary of Schering-Plough formed solely for the purpose of
implementing the Schering-Plough merger. It has not carried on
any activities or operations to date, except for those
activities incidental to its formation and undertaken in
connection with the transactions contemplated by the merger
agreement.
The principal executive offices of SP Merger Subsidiary One,
Inc. are located at 2000 Galloping Hill Road, Kenilworth, NJ
07033, and its telephone number is
(908) 298-4000.
SP
Merger Subsidiary Two, Inc.
SP Merger Subsidiary Two, Inc., formerly known as Purple, Inc.
and which is sometimes referred to in this joint proxy
statement/prospectus as Merger Sub 2, is a wholly owned
subsidiary of Schering-Plough formed solely for the purpose of
implementing the Merck merger. It has not carried on any
activities or operations to date, except for those activities
incidental to its formation and undertaken in connection with
the transactions contemplated by the merger agreement.
The principal executive offices of SP Merger Subsidiary Two,
Inc. are located 2000 Galloping Hill Road, Kenilworth, NJ 07033,
and its telephone number is
(908) 298-4000.
The
Transaction
The combination of Merck and Schering-Plough will be implemented
by means of a two-step merger process.
In the first merger, which we refer to as the Schering-Plough
merger, a wholly owned subsidiary of Schering-Plough will merge
into Schering-Plough. Schering-Plough will continue as the
surviving company in this merger, but will change its name to
Merck & Co., Inc. We refer to the
surviving company in this merger as New Merck. In
the Schering-Plough merger, each outstanding share of
Schering-Plough common stock will be converted into the right to
receive $10.50 in cash and 0.5767 of a share of the common stock
of New Merck. After the Schering-Plough merger, each share
of Schering-Ploughs 6% Mandatory Convertible Preferred
Stock (Schering-Plough 6% preferred stock) will remain
outstanding as one share of 6% Mandatory Convertible Preferred
Stock of New Merck (New Merck 6% preferred stock).
In the second merger, which we refer to as the Merck merger, a
second wholly owned subsidiary of Schering-Plough will merge
with Merck. Merck will continue as the surviving company in this
merger, but as a wholly owned subsidiary of New Merck. In this
merger, each outstanding share of Merck common stock will
automatically be converted into one share of the common stock of
New Merck.
We expect that the former shareholders of Merck and
Schering-Plough will own approximately 68% and 32%,
respectively, of the outstanding common stock of New Merck. For
additional information on the structure of the transaction, see
The Merger Agreement beginning on page 101. The
structure of the transaction is depicted below:
2
Merck
Board Recommendation
After careful consideration, the members of Mercks board
of directors unanimously approved the merger agreement. For
factors considered by the Merck board of directors in reaching
its decision to approve the merger agreement, see The
Transaction Mercks Reasons for the Transaction
and Recommendation of Mercks Board of Directors
beginning on page 60. The board of directors of Merck
unanimously recommends that Merck shareholders vote
FOR the approval of the merger agreement.
Schering-Plough
Board Recommendation
After careful consideration, the members of
Schering-Ploughs board of directors unanimously approved
the merger agreement and the issuance of shares of common stock
in the merger. For factors considered by the Schering-Plough
board of directors in reaching its decision to approve the
merger agreement and the issuance of shares, see The
Transaction Schering-Ploughs Reasons for the
Transaction and Recommendation of Schering-Ploughs Board
of Directors beginning on page 70. The board of
directors of Schering-Plough unanimously recommends that
Schering-Plough shareholders vote FOR the approval
of the merger agreement and the issuance of shares of common
stock in the merger.
Merck
Financial Advisors Opinion
At a meeting of the Merck board of directors on March 8,
2009, J.P. Morgan Securities Inc., which is referred to in
this joint proxy statement/prospectus as J.P. Morgan,
rendered its oral opinion, subsequently confirmed in writing, to
the Merck board of directors that, as of such date and based
upon and subject to the factors, limitations and assumptions set
forth in its opinion, the consideration to be received by
holders of shares of Merck common stock in the Merck merger, was
fair from a financial point of view to such holders.
The full text of the written opinion of J.P. Morgan, dated
March 8, 2009, which sets forth, among other things, the
assumptions made, procedures followed, matters considered and
limits on the opinion and review undertaken in connection with
rendering its opinion, is attached as Annex B to this joint
proxy statement/prospectus and is incorporated herein by
reference. J.P. Morgans opinion is addressed to the
Merck board of directors, is directed only to the consideration
in the proposed Merck merger and does not constitute a
recommendation to any shareholder of Merck as to how such
shareholder should vote with respect to the proposed Merck
merger or any other matter. The summary of the opinion of
J.P. Morgan set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of such opinion. For additional information
relating to the opinion of J.P. Morgan, see The
Transaction Opinion of Mercks Financial
Advisor beginning on page 64.
Schering-Plough
Financial Advisors Opinions
Opinion
of Goldman, Sachs & Co.
At a meeting of the Schering-Plough board of directors on
March 8, 2009, Goldman, Sachs & Co., which is
referred to in this joint proxy statement/prospectus as Goldman
Sachs, rendered its oral opinion, subsequently confirmed in
writing, to the Schering-Plough board of directors that, as of
March 8, 2009 and based upon and subject to the factors and
assumptions set forth therein, the $10.50 in cash and
0.5767 shares of New Merck common stock paid as
consideration for each share of common stock of Schering-Plough
to the holders (other than Merck and any of its affiliates) of
such Schering-Plough common stock pursuant to the merger
agreement was fair from a financial point of view to such
holders.
The full text of the written opinion of Goldman Sachs, dated
March 8, 2009, which sets forth assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Annex C to this joint proxy statement/prospectus and is
incorporated herein by reference. Goldman Sachs provided its
opinion for the information and assistance of the
Schering-Plough board of directors in connection with its
consideration of the transaction. The Goldman Sachs opinion is
not a recommendation as to how any holder of Schering-Plough
common stock should vote with respect to the transaction or any
other matter. For additional information relating to the opinion
of Goldman Sachs, see The
4
Transaction Opinions of Schering-Ploughs
Financial Advisors Opinion of Goldman,
Sachs & Co. beginning on page 73.
Opinion
of Morgan Stanley & Co. Incorporated
At a meeting of the Schering-Plough board of directors on
March 8, 2009, Morgan Stanley & Co. Incorporated,
which is referred to in this joint proxy statement/prospectus as
Morgan Stanley, rendered to the Schering-Plough board of
directors its opinion that, as of such date and based upon and
subject to the various assumptions, qualifications and
limitations set forth in its opinion, the merger consideration
to be received by the holders of shares of
Schering-Ploughs common stock pursuant to the merger
agreement was fair from a financial point of view to such
holders.
The full text of the written fairness opinion of Morgan Stanley,
dated March 8, 2009, is attached as Annex D to this
joint proxy statement/prospectus and is incorporated herein by
reference. The opinion sets forth, among other things, the
assumptions made, procedures followed, matters considered and
qualifications and limitations of the reviews undertaken by
Morgan Stanley in rendering its opinion. You should read the
entire opinion carefully and in its entirety. Morgan
Stanleys opinion is directed to the Schering-Plough board
of directors and addresses only the fairness from a financial
point of view of the merger consideration to be received by the
holders of shares of Schering-Ploughs common stock
pursuant to the merger agreement as of the date of the opinion.
It does not address any other aspect of the transaction and does
not constitute a recommendation to the shareholders of
Schering-Plough or Merck as to how to vote or act on any matter
with respect to the transaction. For additional information
relating to the opinion of Morgan Stanley, see The
Transaction Opinions of Schering-Ploughs
Financial Advisors Opinion of Morgan
Stanley & Co. Incorporated beginning on
page 80.
Key Terms
of Merger Agreement
Conditions
to the Completion of the Transaction
As more fully described in this joint proxy statement/prospectus
and in the merger agreement, the completion of the transaction
depends on a number of conditions being satisfied or waived.
These conditions include the receipt of the required approvals
of Schering-Plough shareholders and Merck shareholders, the
absence of an injunction or law issued by a governmental entity
in the United States, the European Union or certain other
jurisdictions enjoining or prohibiting the merger, the
termination or expiration of the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, or HSR Act, the
approval of the merger by the European Commission, and the
termination or expiration of certain other antitrust waiting
periods or receipt of certain approvals from specified
jurisdictions outside the United States, the approval for
listing of the shares of New Merck common stock issuable in the
merger on the New York Stock Exchange, the accuracy of
representations and warranties made by the parties in the merger
agreement (subject to certain materiality and other exceptions),
the performance by the parties of their material obligations
under the merger agreement in all material respects, and the
non-occurrence of a material adverse effect on either
Schering-Plough or Merck since March 8, 2009. In addition,
the obligation of Merck to complete the merger is subject to
additional conditions, including no imposition, in connection
with obtaining regulatory approval of the merger, of
restrictions, required divestitures or other conditions
reasonably likely to result in the one-year loss of net sales
revenues to the combined company in excess of $1 billion
based upon 2008 net sales revenues (excluding any loss of
net sales revenues related to the license, sale, divestiture or
other disposition or holding separate of Schering-Ploughs
animal health segment and Mercks direct or indirect
interest in Merial Ltd.).
Notwithstanding the satisfaction or waiver of all of the
conditions set forth in the merger agreement, if the proceeds of
the financing are not available in full on the date that would
otherwise be the closing date, Merck will not be required to
effect the closing of the merger and, as such, the closing date
will be delayed until the date on which the proceeds of the
financing are available in full. However, either Merck or
Schering-Plough
can terminate the merger agreement if the merger has not been
consummated by a drop-dead date of December 8,
2009, provided that the drop-dead date on which the merger
agreement may be
5
terminated will be extended to March 8, 2010 if, on
December 8, 2009, the closing conditions dealing with
antitrust approvals, laws or injunctions prohibiting the merger
and regulatory divestitures have not been satisfied but all
other conditions to the merger have been satisfied; or the
proceeds of the financing are not available to Merck in full but
all other conditions to the merger have been satisfied or are
then capable of being satisfied.
For additional information relating to the conditions to the
completion of the transaction, see The Merger
Agreement Conditions to the Transaction
beginning on page 114.
Management
of New Merck
Upon completion of the merger, the board of directors of New
Merck will be comprised of the directors of Merck immediately
prior to the merger and three persons who were directors of
Schering-Plough immediately prior to completion of the merger,
as well as those other individuals designated by Merck prior to
the closing. Except as indicated by Merck prior to the closing,
the officers of Merck immediately before the merger will, after
the merger, be officers of New Merck holding the same offices at
New Merck as they hold with Merck immediately before the merger.
For additional information on the management of New Merck, see
The Merger Agreement Directors and Officers of
New Merck beginning on page 101.
No
Solicitation; Withdrawal of Board Recommendation
Merck, Schering-Plough and their respective subsidiaries and
representatives may not, among other things:
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solicit any inquiries or the making of any acquisition proposal;
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engage in discussions or negotiations regarding an acquisition
proposal or furnish to any third party any information in
connection with an acquisition proposal;
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allow its board of directors to change its recommendation in
favor of the merger agreement; or
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enter into any agreement relating to an acquisition proposal.
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Notwithstanding these prohibitions, at any time prior to
obtaining the approval of their respective shareholders for the
merger agreement, the boards of directors of Merck and
Schering-Plough may generally:
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engage in discussions or negotiations with a third party that
has made a superior proposal or an acquisition proposal that the
board determines in good faith could reasonably lead to a
superior proposal and that the board determines in good faith is
credible and reasonably capable of consummating a superior
proposal;
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thereafter, furnish to the third party nonpublic information
pursuant to a confidentiality agreement with terms no less
materially favorable to Merck or Schering-Plough, as the case
may be, than those contained in the confidentiality agreement
between Merck and Schering-Plough, and including a standstill
agreement no more materially favorable to such third party than
any standstill or similar agreement applicable to Merck or
Schering-Plough, as the case may be (provided that any such
standstill or similar provision may allow such third party to
make acquisition proposals to Merck or Schering-Plough, as the
case may be, in connection with the negotiations or discussions
permitted by the merger agreement); and
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in response to a superior proposal or an intervening event,
change its recommendation in favor of the merger agreement.
Moreover, each must present the merger agreement to its
shareholders for their approval or disapproval, even if it is no
longer recommending the transaction. However, the board of
directors of Schering-Plough may, in response to an acquisition
proposal which the board determines in good faith is a superior
proposal, terminate the merger agreement to enter into a
definitive agreement with respect to the superior proposal and,
therefore, need not hold its shareholder meeting to vote on the
merger with Merck.
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For additional information on limitations on solicitation and
withdrawal of board recommendations, see The Merger
Agreement Restrictions on Solicitation of
Third-Party Acquisition Proposals beginning on
page 109.
Termination
of the Merger Agreement
The merger agreement specifies limited circumstances under which
the merger agreement may be terminated by the parties as well as
termination fees to be paid in such event. Either Merck or
Schering-Plough may terminate the merger agreement if the merger
has not been consummated by a drop-dead date of
December 8, 2009, provided that the drop-dead date will be
extended to March 8, 2010, if, on December 8, 2009:
the closing conditions dealing with antitrust approvals, laws or
injunctions prohibiting the merger and regulatory divestitures
have not been satisfied but all other conditions to the merger
have been satisfied; or the proceeds of the financing are not
available to Merck in full but all conditions to the merger have
been satisfied or are then capable of being satisfied.
Either company may also terminate the merger agreement under
other circumstances described in this joint proxy
statement/prospectus and in the merger agreement. For additional
information on Mercks and Schering-Ploughs rights to
terminate the merger agreement, see The Merger Agreement
Termination beginning on page 115.
Termination
Fees; Reimbursement of Expenses
In certain circumstances as described in this joint proxy
statement/prospectus and in the merger agreement,
Schering-Plough or Merck, as the case may be, may be required to
pay to the other company a termination fee of $1.25 billion
and/or
reimburse the other companys out of pocket expenses, up to
a maximum of $250 million (in the case of Mercks
expenses) and $150 million (in the case of
Schering-Ploughs
expenses).
In addition, Merck will pay Schering-Plough a termination fee of
$2.5 billion and reimburse
Schering-Ploughs
expenses up to a maximum of $150 million if either Merck or
Schering-Plough terminates the merger agreement because the
drop-dead date, as it may be extended, has occurred and the
merger has not been consummated because the proceeds of the
financing are not available in full to Merck and all of
Mercks other closing conditions have been fulfilled (other
than those conditions that are to be satisfied at the closing).
For additional information on termination fees and reimbursement
of expenses, see The Merger Agreement
Termination Fees and Expenses beginning on page 116.
Financing
Merck estimates that the total amount of funds necessary to
complete the proposed merger is approximately
$18.4 billion. Merck expects to use available cash and the
proceeds of the credit facilities described below, or, if
available, proceeds from alternative financing sources, to
complete the merger.
On April 20, 2009, Merck obtained the requisite consents
for the amendment of its existing $1.5 billion five-year
revolving credit facility to allow it to remain in place after
consummation of the merger. In addition, Merck anticipates that
Schering-Ploughs existing $2.0 billion revolving
credit facility will remain in place following the consummation
of the merger.
On May 6, 2009, Merck entered into:
|
|
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|
|
a $3 billion
364-day
bridge loan agreement with respect to the bridge loan facility;
|
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|
|
a $3 billion
364-day
asset sale facility agreement with respect to the asset sale
facility; and
|
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|
|
a $1 billion
364-day
incremental loan agreement with respect to the incremental
facility.
|
In lieu of drawing on one or more of these facilities at the
consummation of the merger, we may, depending on market
conditions, issue unsecured notes or bonds or commercial paper
of Merck or
Schering-Plough.
On June 25, 2009, Merck completed a $4.25 billion
public offering of senior unsecured
7
notes. In connection with this offering, the bridge loan
agreement was terminated and the commitment of the lenders under
the 364-day
asset sale facility was reduced by approximately
$375 million.
Under each of the new credit facilities, JPMorgan Chase Bank,
N.A. is the administrative agent, J.P. Morgan is the sole
bookrunner and the sole lead arranger and Banco Santander, S.A.
New York Branch, Bank of America Securities LLC, BNP Paribas
Securities Corp., Citigroup Global Markets Inc., Credit Suisse
(USA) LLC, HSBC Bank USA, National Association, The Royal Bank
of Scotland plc, and UBS Securities LLC are the co-arrangers. In
addition to J.P. Morgan and the eight co-arrangers, twenty
other lenders are party to the asset sale facility and fourteen
other lenders are party to the incremental facility. The maximum
aggregate exposure for any single lender under the new credit
facilities is approximately $301.0 million.
The funding of the new credit facilities and the effectiveness
of the amendment to Mercks existing revolving credit
facility are subject to various conditions precedent, including:
(i) the consummation of the merger; (ii) the absence,
since December 31, 2008, of any material adverse change (as
defined in the new credit facilities) with respect to Merck and
Schering-Plough taken as a whole; (iii) the execution of
definitive documentation with respect to the new credit
facilities and, if applicable, the amendment to Mercks
existing revolving credit facility (which condition has been
satisfied); (iv) certification by the chief financial
officer of Merck that the ratio of total debt to capitalization
of the combined company on a pro forma basis as of the last
fiscal quarter ended at least 45 days before closing does
not exceed 60%; and (v) other customary closing conditions,
each as more fully described in the new credit facilities.
Merck has agreed to use its reasonable best efforts to take, or
to cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate
and obtain the financing on the terms described in the
commitment letter with J.P. Morgan. If all conditions to
the commitment letter or the definitive agreements with respect
to the new credit facilities have been satisfied, Merck will use
its reasonable best efforts to cause the lenders to fund on the
closing date the financing required to consummate the merger
(including by taking enforcement action and seeking specific
performance). Merck has agreed to give Schering-Plough prompt
notice of any material breach by any party to the commitment
letter or the definitive agreements with respect to the new
credit facilities and any condition that is not likely to be
satisfied or termination of the commitment letter or the
definitive agreements with respect to the new credit facilities
(in no event will such notice be given later than one business
day after the occurrence of such event). Merck has also agreed
to keep Schering-Plough informed on a reasonably current basis
of the status of its efforts to arrange the financing.
Schering-Plough has agreed to cooperate with Merck in connection
with obtaining the financing.
For additional information relating to the financing of the
transaction, see The Transaction Financing of
the Transaction beginning on page 96.
Regulatory
Approvals
Merck and Schering-Plough have committed to use their reasonable
best efforts to take whatever actions, subject to certain
limitations, are required to obtain all necessary regulatory
approvals for completion of the merger. These approvals include
approval under, or notices pursuant to, the HSR Act, the Council
Regulation No. 139/2004 of the European Community,
which is referred to in this joint proxy statement/prospectus as
the EC Merger Regulation, and the applicable antitrust
regulatory laws in Canada, China, Mexico and Switzerland. In
using reasonable best efforts to obtain the required regulatory
approvals, Merck may be obligated to sell, divest or dispose of
certain of its assets or businesses (which may include the sale,
divestiture or disposition of assets or businesses of New Merck
at or following the effective time of the merger) or take other
action to avoid the commencement of any action to prohibit any
of the transactions contemplated by the merger agreement, or if
already commenced, to avoid the entry of, or to effect the
dissolution of, any injunction, temporary restraining order or
other order in any action so as to enable the closing of the
merger to occur. However, Merck will not be required to propose,
negotiate, commit to or effect any sale, divestiture or
disposition of assets or business of Merck or its subsidiaries
or Schering-Plough or its subsidiaries or offer to take any
action where the sale, divestiture or disposition, individually
or in the aggregate, would be of assets or a business of Merck
or its subsidiaries or Schering-Plough or its subsidiaries
8
that would result in the one year loss of net sales revenues
(measured by net 2008 sales revenue) in excess of
$1 billion (excluding any loss of net sales revenues
related to the license, sale, divestiture or other disposition
or holding separate of Schering-Ploughs animal health
segment and Mercks direct or indirect interest in Merial
Ltd.).
For additional information relating to regulatory approvals, see
The Transaction Regulatory Approvals
beginning on page 98.
Tax
Consequences to Merck Shareholders
The Merck merger is intended to qualify as a reorganization
within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, which we refer to as the Code,
for U.S. federal income tax purposes, and it is a condition
to Mercks obligation to complete the merger that Merck
receive a written opinion from its counsel to that effect. As a
result of the Merck merger qualifying as a reorganization within
the meaning of Section 368(a) of the Code, a
U.S. holder (as defined in the section titled Certain
Material U.S. Federal Income Tax Consequences) of
shares of Merck common stock generally will not recognize gain
or loss for U.S. federal income tax purposes upon receipt
of shares of New Merck common stock solely in exchange for
shares of Merck common stock in the Merck merger.
All holders of shares of Merck common stock should read
Certain Material U.S. Federal Income Tax
Consequences The Merck Merger beginning on
page 122 for a more complete discussion of the
U.S. federal income tax consequences of the Merck merger.
In addition, all holders of shares of Merck common stock are
urged to consult with their tax advisors regarding the tax
consequences of the Merck merger to them, including the effects
of U.S. federal, state and local,
non-U.S. and
other tax laws.
Tax
Consequences to Schering-Plough Shareholders
For U.S. federal income tax purposes, while not free from
doubt, it is expected that the exchange of shares of
Schering-Plough common stock for shares of New Merck common
stock and cash in the Schering-Plough merger will be treated as
a redemption in which the exchanging holder retained a fraction
of each share of Schering-Plough common stock exchanged
(i.e., that the receipt of a fraction of a share of New
Merck common stock in the Schering-Plough merger is the
equivalent of retaining a fraction of each share of
Schering-Plough common stock exchanged in the Schering-Plough
merger) and exchanged the remaining fraction of such share of
Schering-Plough common stock for cash, and will be subject to
Section 302 of the Code. As a result, the cash that a
U.S. holder receives generally will be treated for
U.S. federal income tax purposes either as consideration
received in respect of a partial sale or exchange of such
U.S. holders shares of Schering-Plough common stock
or as a distribution in respect of such U.S. holders
shares of Schering-Plough common stock. The cash that a
non-U.S. holder
(as defined in the section titled Certain Material
U.S. Federal Income Tax Consequences) of shares of
Schering-Plough common stock receives generally will be subject
to withholding of U.S. federal income tax at a rate of 30%,
subject to reduction or exemption if specific requirements are
met.
All holders of shares of Schering-Plough common stock should
read Certain Material U.S. Federal Income Tax
Consequences The Schering-Plough Merger
beginning on page 123 for a more complete discussion of the
U.S. federal income tax consequences of the Schering-Plough
merger. In addition, all holders of shares of Schering-Plough
common stock are urged to consult with their tax advisors
regarding the tax consequences of the Schering-Plough merger to
them, including the effects of U.S. federal, state and
local,
non-U.S. and
other tax laws.
Listing
of New Merck Common Stock
In connection with the completion of the merger, it is
anticipated that the shares of New Merck will be listed on the
New York Stock Exchange and traded under the symbol
MRK.
For additional information relating to the listing of New Merck
common stock, see The Transaction Listing of
New Merck Common Stock beginning on page 93.
9
Dividends
after the Merger
Following completion of the merger, it is anticipated that New
Merck will continue the dividend policies of Merck, currently a
quarterly cash dividend of $0.38 per share. The payment of
dividends of New Merck will be subject to declaration by its
board of directors and will depend upon on a variety of factors,
including business and financial considerations.
For additional information on dividends after the merger, see
The Transaction Combined Company
Dividend beginning on page 95.
Interests
of Merck Directors and Management in the Transaction
Under the terms of the merger agreement, all of the directors of
Merck immediately before the merger will be directors of New
Merck after the merger, and, unless otherwise indicated by Merck
to Schering-Plough prior to the merger, the officers of Merck
immediately before the merger will, after the merger, be
officers of New Merck holding the same offices at New Merck as
they held with Merck immediately before the merger.
For additional information on interests of Merck directors and
management in the transaction, see The
Transaction Interests of Merck Directors and
Management in the Transaction beginning on page 89.
Interests
of Schering-Plough Directors and Management in the
Transaction
Aside from their interests as Schering-Plough shareholders,
Schering-Ploughs executive officers and directors have
financial interests in the merger. The members of
Schering-Ploughs board of directors were aware of and
considered these interests, among other matters, in evaluating
and negotiating the merger agreement and the merger, and in
recommending to the shareholders that the merger agreement be
approved.
Please see The Transaction Interests of
Schering-Ploughs Directors and Management in the
Transaction beginning on page 90 for additional
information about these financial interests.
No
Dissenters Rights
Under New Jersey law, neither the holders of Merck common stock
nor the holders of Schering-Plough common stock are entitled to
any dissenters rights or rights of appraisal in connection
with the merger or, in the case of Schering-Plough shareholders,
the share issuance.
For additional information on dissenters rights, see
The Transaction No Dissenters Rights of
Appraisal beginning on page 93.
Accounting
Treatment
The transactions contemplated by the merger agreement will be
accounted for under the acquisition method of accounting in
conformity with FASB Statement No. 141(R) Business
Combinations of accounting principles generally accepted
in the U.S. New Merck will account for the transaction by
using Merck historical information and accounting policies and
applying fair value estimates to Schering-Plough as of the date
of the transaction.
For additional information on accounting treatment of the
transaction, see The Transaction Accounting
Treatment beginning on page 95.
ShareGift
USAs Charitable Donation Program
Schering-Plough has made arrangements to enable Schering-Plough
shareholders to donate some or all of the merger consideration
to be received by them upon consummation of the merger to
ShareGift USA.
ShareGift USA is a nonprofit charity recognized as exempt from
tax by the IRS under Section 501(c)(3) of the Code that
will distribute the merger consideration donated by
Schering-Plough shareholders (or the proceeds from the sale of
any donated merger consideration) to a variety of recognized
U.S. charities.
10
ShareGift USA will aggregate all donations from Schering-Plough
shareholders and distribute them to charitable institutions.
If you are a Schering-Plough shareholder and a U.S. taxable
investor, you may be eligible for a tax deduction should you
choose to participate in ShareGift USAs program. Please
consult your tax advisor accordingly.
For additional information on the ShareGift USA charitable
donation program, see ShareGift USAs Charitable
Donation Program beginning on page 120.
11
Selected
Historical Financial Data
Merck and Schering-Plough are providing the following financial
information to aid you in your analysis of the financial aspects
of the transaction. The selected historical consolidated
financial data of Merck and Schering-Plough for the years ending
December 31, 2008, 2007, 2006, 2005 and 2004 have been
derived from Mercks and Schering-Ploughs respective
historical consolidated financial statements. Each
companys historical audited consolidated financial data
for the years ending December 31, 2008, 2007 and 2006 are
incorporated by reference into this joint proxy
statement/prospectus. The following selected historical
consolidated financial data for Merck and Schering-Plough as of
and for the three months ending March 31, 2009 and 2008 has
been derived from Mercks and Schering-Ploughs
unaudited interim consolidated financial statements contained in
their respective Quarterly Reports on
Form 10-Q
for the quarter ending March 31, 2009, which are
incorporated by reference into this joint proxy
statement/prospectus. In the opinion of Mercks and
Schering-Ploughs management, respectively, the unaudited
interim consolidated financial statements of Merck and
Schering-Plough, respectively, have been prepared on the same
basis as their respective audited consolidated financial
statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the
financial position and results of operations at these dates and
for these periods. Results of interim periods are not
necessarily indicative of the results expected for a full year
or for future periods. This information is only a summary, and
you should read it in conjunction with the historical
consolidated financial statements of Merck and Schering-Plough
and the related notes contained in the annual reports and the
other information that each of Merck and Schering-Plough has
previously filed with the Securities and Exchange Commission and
which is incorporated in this joint proxy statement/prospectus
by reference. See Where You Can Find More
Information beginning on page 157.
Selected
Historical Consolidated Financial Data of Merck(1)
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|
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As of and for the
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|
|
|
|
|
|
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|
|
|
|
|
|
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Three Months Ending
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March 31,
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As of and for the Years Ending December 31,
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2009
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|
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2008
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2008(2)
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2007(3)
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2006(4)
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2005(5)
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2004(6)
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(Unaudited)
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(In millions, except per share figures)
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Results for Year:
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Sales
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$
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5,385.2
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$
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5,822.1
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$
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23,850.3
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$
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24,197.7
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$
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22,636.0
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$
|
22,011.9
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|
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$
|
22,972.8
|
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Equity (income) from affiliates
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|
|
(585.8
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)
|
|
|
(652.1
|
)
|
|
|
(2,560.6
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)
|
|
|
(2,976.5
|
)
|
|
|
(2,294.4
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)
|
|
|
(1,717.1
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)
|
|
|
(1,008.2
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)
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Net income attributable to Merck & Co., Inc.
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1,425.0
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|
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3,302.6
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7,808.4
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3,275.4
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|
4,433.8
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4,631.3
|
|
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|
5,830.1
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Basic earnings per common share attributable to
Merck & Co., Inc. common shareholders
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$
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0.67
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|
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$
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1.52
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|
|
$
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3.65
|
|
|
$
|
1.51
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|
|
$
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2.03
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|
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$
|
2.10
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|
|
$
|
2.63
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|
Diluted earnings per common share attributable to
Merck & Co., Inc. common shareholders
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$
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0.67
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$
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1.52
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|
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$
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3.63
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|
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$
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1.49
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|
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$
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2.02
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|
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$
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2.10
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|
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$
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2.62
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Cash dividends paid per common share
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$
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0.38
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$
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0.38
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$
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1.52
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$
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1.52
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|
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$
|
1.52
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$
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1.52
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|
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$
|
1.49
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Year-End Position:
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Total assets
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46,543.1
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47,041.1
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47,195.7
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48,350.7
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44,569.8
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44,845.8
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42,572.8
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Long-term debt
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|
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3,939.1
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3,965.0
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3,943.3
|
|
|
|
3,915.8
|
|
|
|
5,551.0
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|
|
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5,125.6
|
|
|
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4,691.5
|
|
|
|
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(1) |
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Mercks financial statements have been restated to reflect
the retrospective application of Financial Accounting Standards
Board (FASB) Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
and FASB Staff Position EITF
03-6-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities, which Merck
adopted on January 1, 2009. |
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(2) |
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Amounts for 2008 include a gain on distribution from AstraZeneca
LP, a gain related to the sale of Mercks remaining
worldwide rights to Aggrastat, the favorable impact of
certain tax items, the impact of |
12
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restructuring actions, additional legal defense costs and an
expense for a contribution to the Merck Company Foundation. |
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(3) |
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Amounts for 2007 include the impact of Mercks U.S.
Vioxx Settlement Agreement charge, restructuring actions,
a civil governmental investigations charge, an insurance
arbitration settlement gain, acquired research expense resulting
from an acquisition, additional Vioxx legal defense
costs, gains on sales of assets and product divestitures, as
well as a net gain on the settlements of certain patent disputes. |
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(4) |
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Amounts for 2006 include the impact of restructuring actions,
acquired research expenses resulting from acquisitions,
additional Vioxx legal defense costs and the adoption of
a new accounting standard requiring the expensing of stock
options. |
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(5) |
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Amounts for 2005 include the impact of the net tax charge
primarily associated with the American Jobs Creation Act
repatriation, restructuring actions and additional Vioxx
legal defense costs. |
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(6) |
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Amounts for 2004 include the impact of the withdrawal of
Vioxx, Vioxx legal defense costs and restructuring
actions. |
13
Selected
Historical Consolidated Financial Data of
Schering-Plough
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As of and for the
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Three Months Ending
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March 31,
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As of and for the Years Ending December 31,
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2009
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2008
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2008(1)
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2007(1)
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2006
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2005
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2004
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(In millions, except per share figures)
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Operating Results
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Net sales
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$
|
4,393
|
|
|
$
|
4,657
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|
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$
|
18,502
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|
|
$
|
12,690
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|
|
$
|
10,594
|
|
|
$
|
9,508
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|
|
$
|
8,272
|
|
Equity (income)
|
|
|
(400
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)
|
|
|
(517
|
)
|
|
|
(1,870
|
)
|
|
|
(2,049
|
)
|
|
|
(1,459
|
)
|
|
|
(873
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)
|
|
|
(347
|
)
|
Net income/(loss)(2)
|
|
|
805
|
|
|
|
314
|
|
|
|
1,903
|
|
|
|
(1,473
|
)
|
|
|
1,143
|
|
|
|
269
|
|
|
|
(947
|
)
|
Basic earnings/(loss) per common share(2)
|
|
|
0.47
|
|
|
|
0.17
|
|
|
|
1.08
|
|
|
|
(1.04
|
)
|
|
|
0.71
|
|
|
|
0.12
|
|
|
|
(0.67
|
)
|
Diluted earnings/(loss) per common share(2)
|
|
|
0.46
|
|
|
|
0.17
|
|
|
|
1.07
|
|
|
|
(1.04
|
)
|
|
|
0.71
|
|
|
|
0.12
|
|
|
|
(0.67
|
)
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets(3)
|
|
|
27,718
|
|
|
|
30,120
|
|
|
|
28,117
|
|
|
|
29,156
|
|
|
|
16,071
|
|
|
|
15,469
|
|
|
|
15,911
|
|
Long-term debt(3)
|
|
|
7,685
|
|
|
|
9,349
|
|
|
|
7,931
|
|
|
|
9,019
|
|
|
|
2,414
|
|
|
|
2,399
|
|
|
|
2,392
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
|
|
0.065
|
|
|
|
0.065
|
|
|
|
0.26
|
|
|
|
0.25
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.22
|
|
Cash dividends paid on preferred shares
|
|
|
38
|
|
|
|
38
|
|
|
|
150
|
|
|
|
99
|
|
|
|
86
|
|
|
|
86
|
|
|
|
30
|
|
|
|
|
(1) |
|
Operating results and other financial information reflect the
operations of the Organon BioSciences (OBS) business
subsequent to Schering-Ploughs acquisition of OBS on
November 19, 2007, including the impacts of purchase
accounting in accordance with SFAS No. 141,
Business Combinations. |
|
(2) |
|
2008, 2007, 2006, 2005, and 2004 include special and
acquisition-related charges and manufacturing streamlining costs
of $329 million, $84 million, $248 million,
$294 million, and $153 million, respectively. See
Note 3, Special and Acquisition-Related Charges and
Manufacturing Streamlining in the audited financial
statements of Schering-Plough included in its Annual Report on
Form 10-K
for the year ended December 31, 2008 for additional
information on these charges that were incurred in 2008, 2007
and 2006. The special charges incurred in 2005 of
$294 million included litigation charges of
$250 million, employee termination costs of
$28 million and asset impairment and other charges of
$16 million. The special charges incurred in 2004 included
$119 million of employee termination costs and
$34 million for asset impairment and related charges. |
|
(3) |
|
The increase in total assets and long-term debt in 2007, as
compared to 2006, primarily reflects the purchase of OBS (total
assets) and the financing of the OBS acquisition (long-term
debt). |
14
Comparative
Per Share Market Price and Dividend Information
Shares of Merck common stock and Schering-Plough common stock
are listed on the NYSE. The following table presents the last
reported closing sale price per share of Merck common stock and
Schering-Plough
common stock, as reported on the NYSE Composite Transaction
reporting system on March 6, 2009, the last full trading
day prior to the public announcement of the merger agreement,
and on June 5, 2009, the last trading day for which this
information could be calculated prior to the filing of this
joint proxy statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implied Value of
|
|
|
|
|
|
|
|
|
|
Merger Consideration
|
|
|
|
|
|
|
|
|
|
per Share of
|
|
|
|
Merck
|
|
|
Schering-Plough
|
|
|
Schering-Plough
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock(1)
|
|
|
March 6, 2009
|
|
$
|
22.74
|
|
|
$
|
17.63
|
|
|
$
|
23.61
|
|
June 5, 2009
|
|
|
26.07
|
|
|
|
23.80
|
|
|
|
25.53
|
|
|
|
|
(1) |
|
The equivalent implied per share data for Schering-Plough common
stock has been determined by multiplying the closing market
price of a share of Merck common stock on each of the dates by
the exchange ratio of 0.5767 per share and adding the per share
cash consideration of $10.50 being paid to Schering-Plough
shareholders. Schering-Plough shareholders will not receive the
merger consideration until the merger is completed, which may be
a substantial period of time after the Schering-Plough
shareholder meeting. There can be no assurance as to the trading
prices of the Merck common stock at the time of the closing of
the merger. Moreover, because of the need to obtain regulatory
approvals, the closing of the merger may not occur, if at all,
until months after the vote of shareholders on the transaction. |
Merck currently pays quarterly dividends of $0.38 per share of
Merck common stock. Schering-Plough currently pays quarterly
dividends of $0.065 per share of Schering-Plough common stock.
New Merck expects to continue Mercks dividend practice
according to which it would pay quarterly dividends of $0.38 per
share of New Merck common stock out of funds legally available
for the payment of dividends. As is the case with Merck, the
payment of dividends by New Merck following completion of the
merger will be subject to approval and declaration by its board
of directors.
Selected
Unaudited Pro Forma Condensed Combined Financial
Information
The following selected unaudited pro forma condensed combined
financial information has been derived from the unaudited pro
forma condensed combined financial information presented in this
joint proxy statement/prospectus beginning on page 130.
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
|
|
|
Three Months Ending
|
|
|
For the Year Ending
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
(In millions, except per share figures)
|
|
|
Pro Forma Statement of Income Data
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
10,685.6
|
|
|
$
|
46,749.6
|
|
Equity income from affiliates
|
|
$
|
(294.9
|
)
|
|
$
|
(1,024.3
|
)
|
Net income available to common shareholders
|
|
$
|
1,506.0
|
|
|
$
|
6,565.1
|
|
Basic earnings per common share
|
|
$
|
0.48
|
|
|
$
|
2.09
|
|
Earnings per common share assuming dilution
|
|
$
|
0.48
|
|
|
$
|
2.09
|
|
Cash dividends per common share
|
|
$
|
0.38
|
|
|
$
|
1.52
|
|
Pro Forma Balance Sheet Data
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116,725.0
|
|
|
|
|
|
Long-term debt
|
|
$
|
16,878.1
|
|
|
|
|
|
15
Comparative
Per Share Data
The following table presents, for the three months ended
March 31, 2009 and the year ended December 31, 2008,
selected historical per share data of Merck and Schering-Plough
as well as similar information, reflecting the combination of
Merck and Schering-Plough into New Merck, as if the transaction
had been effective for the period presented, which we refer to
as pro forma combined information. The hypothetical
Schering-Plough equivalent per share data presented below is
calculated by multiplying the pro forma combined amounts for New
Merck by the exchange ratio of 0.5767 of a share of New Merck
for each share of Schering-Plough.
Each share of Schering-Plough common stock will also be entitled
to receive $10.50 in cash consideration. The hypothetical
Schering-Plough equivalent per share data does not take into
account the cash portion of the merger consideration.
The pro forma combined information is provided for informational
purposes only and is not necessarily an indication of the
results that would have been achieved had the transaction been
completed as of the dates indicated or that may be achieved in
the future. The December 31, 2008 selected comparative per
share information of Merck and Schering-Plough set forth below
was derived from audited financial statements. The
March 31, 2009 selected comparative share information of
Merck and Schering-Plough set forth below was derived from
unaudited interim financial statements. In the opinion of
Mercks and Schering-Ploughs management,
respectively, the unaudited interim financial statements have
been prepared on the same basis as their respective audited
financial statements. You should read the information in this
section along with Mercks and Schering-Ploughs
historical consolidated financial statements and accompanying
notes for the period referred to above included in the documents
described under Where You Can Find More Information
beginning on page 157. You should also read the unaudited
pro forma condensed combined financial information and
accompanying discussion and notes included in this joint proxy
statement/prospectus beginning on page 130.
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
Merck historical
|
|
$
|
0.67
|
|
|
$
|
3.65
|
|
Schering-Plough historical
|
|
$
|
0.47
|
|
|
$
|
1.08
|
|
Pro forma combined
|
|
$
|
0.48
|
|
|
$
|
2.09
|
|
Schering-Plough equivalent
|
|
$
|
0.28
|
|
|
$
|
1.21
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
Merck historical
|
|
$
|
0.67
|
|
|
$
|
3.63
|
|
Schering-Plough historical
|
|
$
|
0.46
|
|
|
$
|
1.07
|
|
Pro forma combined
|
|
$
|
0.48
|
|
|
$
|
2.09
|
|
Schering-Plough equivalent
|
|
$
|
0.28
|
|
|
$
|
1.21
|
|
Dividends Per Share
|
|
|
|
|
|
|
|
|
Merck historical
|
|
$
|
0.38
|
|
|
$
|
1.52
|
|
Schering-Plough historical
|
|
$
|
0.065
|
|
|
$
|
0.26
|
|
Pro forma combined
|
|
$
|
0.38
|
|
|
$
|
1.52
|
|
Schering-Plough equivalent
|
|
$
|
0.22
|
|
|
$
|
0.88
|
|
Book Value Per Share at Period End
|
|
|
|
|
|
|
|
|
Merck historical
|
|
$
|
10.43
|
|
|
|
|
|
Schering-Plough historical
|
|
$
|
6.30
|
|
|
|
|
|
Pro forma combined
|
|
$
|
17.93
|
|
|
|
|
|
Schering-Plough equivalent
|
|
$
|
10.34
|
|
|
|
|
|
16
RISK
FACTORS
Risks
Relating to the Transaction
In addition to the other information included and incorporated
by reference in this joint proxy
statement/prospectus,
Merck and Schering-Plough shareholders should carefully consider
the matters described below to determine whether to approve the
merger agreement.
Because
the market price of Merck common shares will fluctuate,
Schering-Plough shareholders cannot be certain of the value of
the merger consideration that they will receive in the
transaction.
In the Schering-Plough merger, each outstanding share of
Schering-Plough common stock will be converted into the right to
receive 0.5767 of a share of New Merck common stock and $10.50
in cash. The 0.5767 exchange ratio is fixed and will not be
adjusted for changes in the market price of either Merck common
stock or Schering-Plough common stock. The market value of the
New Merck common stock that Schering-Plough shareholders will be
entitled to receive in the Schering-Plough merger will depend on
the market value of Merck common stock immediately before that
merger is completed and could vary significantly from the market
value on the date of the announcement of the merger agreement,
the date that this joint proxy statement/prospectus was mailed
to shareholders of Merck and Schering-Plough or the date of
Mercks and Schering-Ploughs special meetings of
their shareholders. The merger agreement does not provide for
any price-based termination right. For example, Mercks
closing common stock price on March 6, 2009, the last
trading day prior to the execution of the merger agreement, was
$22.74 and, therefore, if the transaction had closed on that
date, the value of the merger consideration that Schering-Plough
shareholders would have received for each share of common stock,
including the $10.50 in cash consideration, would have been
$23.61. On June 5, 2009, Mercks closing common stock
price was $26.07, and, therefore, if the transactions had closed
on that date, the value of the merger consideration that
Schering-Plough shareholders would have received for each share
of common stock, including the $10.50 in cash consideration,
would have been $25.53. Moreover, the market value of the New
Merck common stock will likely fluctuate after the completion of
the merger. See Comparative Per Share Market Price and
Dividend Information beginning on page 15.
Fluctuations in the share price of Merck, or New Merck following
the merger, could result from changes in the business,
operations or prospects of Merck or Schering-Plough prior to the
merger or New Merck following the merger, regulatory
considerations, general market and economic conditions and other
factors both within and beyond the control of Merck or
Schering-Plough. The merger may be completed a considerable
period after the date of the Merck and Schering-Plough special
meetings of their shareholders. As such, at the time of the
special meetings, Merck and Schering-Plough shareholders will
not know the value of the merger consideration that
Schering-Plough shareholders will receive in the Schering-Plough
merger for each share of Schering-Plough common stock.
Mercks
inability to obtain the financing necessary to complete the
transaction could delay or prevent the completion of the
merger.
Under the terms of the merger agreement, even if the conditions
to closing are satisfied, if the proceeds of the financing
necessary to complete the transaction are not available in full,
the closing may be delayed until the date, if any, on which the
proceeds of the financing are available in full. Moreover, the
merger agreement may be terminated if the required financing is
not available to Merck by the drop-dead date under the merger
agreement, which may be extended to as late as March 8,
2010. In addition, Merck is required to pay Schering-Plough a
termination fee of $2.5 billion and reimburse
Schering-Ploughs expenses up to a maximum of
$150 million if the merger agreement is terminated because
the merger has not occurred by the drop-dead date by reason of
the fact that the proceeds of the financing are not available to
Merck and all of Mercks other closing conditions have been
fulfilled.
On May 6, 2009, Merck entered into (i) a
$3.0 billion
364-day
bridge loan agreement with respect to the bridge loan facility,
(ii) a $3.0 billion
364-day
asset sale facility agreement with respect to the asset sale
17
facility and (iii) a $1.0 billion
364-day
incremental loan agreement with respect to the incremental
facility. Under each of the new credit facilities, JPMorgan
Chase Bank, N.A. is the administrative agent, J.P. Morgan
is the sole bookrunner and the sole lead arranger and Banco
Santander, S.A. New York Branch, Bank of America Securities LLC,
BNP Paribas Securities Corp., Citigroup Global Markets Inc.,
Credit Suisse (USA) LLC, HSBC Bank USA, National Association,
The Royal Bank of Scotland plc, and UBS Securities LLC are the
co-arrangers. In addition to J.P. Morgan and the eight
co-arrangers, twenty other lenders are party to the bridge loan
facility and the asset sale facility and fourteen other lenders
are party to the incremental facility. The maximum aggregate
exposure for any single lender under the new credit facilities
is $875.0 million. On April 20, 2009, Merck amended
its existing $1.5 billion five-year revolving credit
facility to allow it to remain in place after the merger. In
addition, Schering-Ploughs existing $2.0 billion
revolving credit facility will remain in place following
consummation of the merger. Although Merck entered into credit
agreements with respect to the new credit facilities and amended
its existing $1.5 billion five-year revolving credit
facility, the funding under the new credit facilities and the
effectiveness of the amendment to the existing $1.5 billion
five-year revolving credit facility are subject to various
customary conditions, including the absence of any material
adverse change with respect to New Merck, satisfaction of a pro
forma maximum debt to capitalization ratio, and other closing
conditions. Under the terms of the credit agreements for the new
credit facilities, neither J.P. Morgan nor the co-arrangers
is responsible for the failure of any other member of the
syndicate to provide its committed portion of the financing.
Although Merck expects to obtain in a timely manner the
financing necessary to complete the pending merger, if Merck is
unable to timely obtain the financing because one of the
conditions to the financing fails to be satisfied or one or more
of the members of the syndicate defaults on its obligations to
provide its committed portion of the financing (and the
commitments of any defaulting syndicate member cannot be
replaced on a timely basis), the closing of the merger could be
significantly delayed or may not occur at all.
Legal
proceedings in connection with the merger, the outcomes of which
are uncertain, could delay or prevent the completion of the
merger.
Since the announcement of the transaction, several putative
class action lawsuits have been filed on behalf of shareholders
of Schering-Plough (alleging, among other things, that the
merger consideration is too low) and Merck (alleging, among
other things, that the consideration is too high). The
complaints seek, among other things, class action status, an
order preliminarily and permanently enjoining the proposed
transaction, rescission of the transaction if it is consummated,
damages, and attorneys fees and expenses. Such legal
proceedings could delay or prevent the transaction from becoming
effective within the agreed upon timeframe.
The
transaction is subject to the receipt of certain required
clearances or approvals from governmental entities that could
delay the completion of the merger or impose conditions that
could have a material adverse effect on the combined
company.
Completion of the merger is conditioned upon the receipt of
certain governmental clearances or approvals, including, without
limitation, the expiration or termination of the applicable
waiting period under the HSR Act, the issuance by the European
Commission of a decision under the EC Merger Regulation
declaring the merger compatible with the common market, and the
clearance or approval of the merger by the antitrust regulators
in Canada, China, Mexico and Switzerland. Although Merck and
Schering-Plough have agreed in the merger agreement to use
reasonable best efforts to obtain the requisite governmental
approvals, there can be no assurance that these clearances and
approvals will be obtained. In addition, the governmental
entities from which these clearances and approvals are required
may impose conditions on the completion of the merger or require
changes to the terms of the merger. Under the terms of the
merger agreement, in using reasonable best efforts to obtain
required regulatory approvals, we may be obligated to make
divestitures of assets of Merck or Schering-Plough so long as
such divestitures, individually or in the aggregate, would not
result in the one-year loss of net sales revenues (measured by
net 2008 sales revenue) in excess of $1 billion (excluding
any loss of net sales revenues related to the license, sale,
divestiture or other disposition or holding separate of
Schering-Ploughs animal health segment and Mercks
direct or indirect interest in Merial Ltd.). If Merck or
Schering-Plough
become subject to any material conditions in order to obtain any
clearances or
18
approvals required to complete the merger, the business and
results of operations of the combined company may be adversely
affected.
Any
delay in completing the merger beyond the fourth quarter of
2009 may reduce or eliminate the benefits
expected.
In addition to receipt of financing and required antitrust
clearances and approvals, the merger is subject to a number of
other conditions beyond the parties control that may
prevent, delay or otherwise materially adversely affect the
completion of the transaction. Merck and Schering-Plough cannot
predict with certainty whether and when these other conditions
will be satisfied. Any delay in completing the merger beyond the
fourth quarter of 2009 could cause the combined company not to
realize, or delay the realization of, some or all of the cost
savings and other benefits we expect to achieve from the
transaction.
The
combined company may fail to realize the anticipated cost
savings, revenue enhancements and other benefits expected from
the merger, which could adversely affect the value of New Merck
common stock after the merger.
The success of the merger will depend, in part, on New
Mercks ability to successfully combine the businesses of
Merck and Schering-Plough and realize the anticipated benefits
and cost savings from the combination of the two companies. If
the combined company is not able to achieve these objectives
within the anticipated time frame, or at all, the anticipated
benefits and cost savings of the merger may not be realized
fully or at all or may take longer to realize than expected and
the value of New Mercks common stock may be adversely
affected.
Merck and Schering-Plough have operated and, until the
completion of the merger, will continue to operate,
independently. It is possible that the integration process could
result in the loss of key employees, result in the disruption of
each companys ongoing businesses or identify
inconsistencies in standards, controls, procedures and policies
that adversely affect our ability to maintain relationships with
customers, suppliers, distributors, creditors, lessors, clinical
trial investigators or managers or to achieve the anticipated
benefits of the merger.
Specifically, issues that must be addressed in integrating the
operations of Merck and Schering-Plough in order to realize the
anticipated benefits of the merger include, among other things:
|
|
|
|
|
integrating the research and development, manufacturing,
distribution, marketing and promotion activities and information
technology systems of Merck and Schering-Plough;
|
|
|
|
conforming standards, controls, procedures and accounting and
other policies, business cultures and compensation structures
between the companies;
|
|
|
|
consolidating corporate and administrative infrastructures;
|
|
|
|
consolidating sales and marketing operations;
|
|
|
|
retaining existing customers and attracting new customers;
|
|
|
|
identifying and eliminating redundant and underperforming
operations and assets;
|
|
|
|
coordinating geographically dispersed organizations;
|
|
|
|
managing tax costs or inefficiencies associated with integrating
the operations of the combined company; and
|
|
|
|
making any necessary modifications to operating control
standards to comply with the Sarbanes-Oxley Act of 2002 and the
rules and regulations promulgated thereunder.
|
Integration efforts between the two companies will also divert
management attention and resources. An inability to realize the
full extent of, or any of, the anticipated benefits of the
merger, as well as any delays encountered in the integration
process, could have an adverse effect on New Mercks
business and results of operations, which may affect the value
of the shares of the New Merck common stock.
19
In addition, the actual integration may result in additional and
unforeseen expenses, and the anticipated benefits of the
integration plan may not be realized. Actual cost and sales
synergies, if achieved at all, may be lower than we expect and
may take longer to achieve than anticipated. If the combined
company is not able to adequately address these challenges, it
may be unable to successfully integrate the operations of Merck
and Schering-Plough, or to realize the anticipated benefits of
the integration of the two companies.
Delays encountered in the integration process could have a
material adverse effect on the revenues, expenses, operating
results and financial condition of New Merck. Although Merck and
Schering-Plough
expect significant benefits, such as increased cost savings, to
result from the merger, there can be no assurance that New Merck
will realize any of these anticipated benefits.
Merck,
Schering-Plough and the combined company will incur significant
transaction and merger-related transition costs in connection
with the merger.
Merck and Schering-Plough expect that they and the combined
company will incur significant costs in connection with
consummating the merger and integrating the operations of the
two companies, with a significant portion of such costs being
incurred through the first year after completion of the merger.
Merck continues to assess the magnitude of these costs, and
additional unanticipated costs may be incurred in the
integration of the businesses of Merck and Schering-Plough.
Although Merck and Schering-Plough believe that the elimination
of duplicative costs, as well as the realization of other
efficiencies related to the integration of the businesses, will
offset incremental transaction and merger-related costs over
time, no assurance can be given that this net benefit will be
achieved in the near term, or at all.
An
arbitration proceeding commenced by Centocor against
Schering-Plough may result in the combined companys loss
of the rights to market
Remicade
and golimumab.
A subsidiary of Schering-Plough is a party to a Distribution
Agreement with Centocor, a wholly owned subsidiary of
Johnson & Johnson, under which the Schering-Plough
subsidiary has rights to distribute and commercialize the
rheumatoid arthritis treatment Remicade and golimumab, a
next-generation treatment, in certain territories.
Under Section 8.2(c) of the Distribution Agreement,
If either party is acquired by a third party or otherwise
comes under Control (as defined in Section 1.4 [of the
Distribution Agreement]) of a third party, it will promptly
notify the other party not subject to such change of control.
The party not subject to such change of control will have the
right, however not later than thirty (30) days from such
notification, to notify in writing the party subject to the
change of Control of the termination of the Agreement taking
effect immediately. As used herein Change of Control
shall mean (i) any merger, reorganization, consolidation or
combination in which a party to this Agreement is not the
surviving corporation; or (ii) any person
(within the meaning of Section 13(d) and
Section 14(d)(2) of the Securities Exchange Act of 1934),
excluding a partys Affiliates, is or becomes the
beneficial owner, directly or indirectly, of securities of the
party representing more than fifty percent (50%) of either
(A) the then-outstanding shares of common stock of the
party or (B) the combined voting power of the partys
then-outstanding voting securities; or (iii) if individuals
who as of the Effective Date [April 3, 1998] constitute the
Board of Directors of the party (the Incumbent
Board) cease for any reason to constitute at least a
majority of the Board of Directors of the party; provided,
however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by
the partys shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual
or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board; or (iv) approval
by the shareholders of a party of a complete liquidation or the
complete dissolution of such party.
Section 1.4 of the Distribution Agreement defines
Control to mean the ability of any entity (the
Controlling entity), directly or indirectly, through
ownership of securities, by agreement or by any other
20
method, to direct the manner in which more than fifty percent
(50%) of the outstanding voting rights of any other entity (the
Controlled entity), whether or not represented by
securities, shall be cast, or the right to receive over fifty
percent (50%) of the profits or earnings of, or to otherwise
control the management decisions of, such other entity (also a
Controlled entity).
On May 27, 2009, Centocor delivered to Schering-Plough a
notice initiating an arbitration proceeding to resolve whether,
as a result of the proposed merger between Schering-Plough and
Merck, Centocor is permitted to terminate the Distribution
Agreement and related agreements. As part of the arbitration
process, Centocor will likely take the position that it has the
right to terminate the Distribution Agreement on the grounds
that, in the proposed merger between Schering-Plough and Merck,
Schering-Plough and the Schering-Plough subsidiary party to the
Distribution Agreement are (i) being acquired by a
third party or otherwise come[ing] under Control (as
defined in Section 1.4) of a third party
and/or
(ii) undergoing a Change of Control (as defined
in Section 8.2(c)).
Schering-Plough is vigorously contesting, and the combined
company will vigorously contest, Centocors attempt to
terminate the Distribution Agreement as a result of the proposed
merger. However, if the arbitrator were to conclude that
Centocor is permitted to terminate the Distribution Agreement as
a result of the transaction and Centocor in fact terminates the
Distribution Agreement following the merger, the combined
company would not be able to distribute Remicade, which
generated sales for Schering-Plough of approximately
$2.1 billion in 2008, and would not have the right to
commercialize and distribute golimumab in the future. In
addition, due to the uncertainty surrounding the outcome of the
arbitration, the parties may choose to settle the dispute under
mutually agreeable terms but any agreement reached with Centocor
to resolve the dispute under the Distribution Agreement may
result in the terms of the Distribution Agreement being modified
in a manner that may reduce the benefits of the Distribution
Agreement to the combined company.
Merck
and Schering-Plough will be subject to business uncertainties
and contractual restrictions while the merger is pending, which
could adversely affect Mercks and Schering-Ploughs
respective businesses.
Uncertainty about the effect of the merger on customers,
suppliers and others that do business with Merck and
Schering-Plough may have an adverse effect on Merck and
Schering-Plough and, consequently, on the combined company.
Although Merck and Schering-Plough intend to take steps to
reduce any adverse effects, these uncertainties could cause
customers, suppliers and others that do business with Merck or
Schering-Plough
to terminate or change existing business relationships with
Merck, Schering-Plough and, after the completion of the merger,
the combined company. In addition, the merger agreement
restricts Schering-Plough and, to a lesser extent, Merck,
without the other partys consent, from making certain
acquisitions and taking other specified actions until completion
of the merger or the merger agreement is terminated. These
restrictions may prevent Merck or Schering-Plough from pursuing
otherwise attractive business opportunities and making other
changes to their businesses that may arise before the merger is
completed or the merger agreement is terminated.
Merck,
Schering-Plough and, subsequently, the combined company must
continue to retain, motivate and recruit executives and other
key employees, which may be difficult in light of uncertainty
regarding the merger, and failure to do so could negatively
affect the combined company.
For the merger to be successful, during the period before the
merger is completed, both Merck and Schering-Plough must
continue to retain, motivate and recruit executives and other
key employees. Moreover, the combined company must be successful
at retaining and motivating key employees following the
completion of the merger. Experienced employees in the
pharmaceutical industry are in high demand and competition for
their talents can be intense. Employees of both Merck and
Schering-Plough may experience uncertainty about their future
role with the combined company until, or even after, strategies
with regard to the combined company are announced or executed.
These potential distractions of the merger may adversely affect
the ability of Merck, Schering-Plough or, following completion
of the merger, the combined company, to retain, motivate and
recruit executives and other key employees and keep them focused
on applicable strategies and goals. A failure by Merck,
Schering-Plough or, following the completion of the merger, the
combined company, to attract, retain and motivate executives and
other key employees during the period prior to or after
21
the completion of the merger could have a negative impact on the
business of Merck, Schering-Plough or the combined company.
Because
directors and executive officers of Schering-Plough have
interests in seeing the merger completed that are different than
those of Schering-Ploughs other shareholders, directors of
Schering-Plough
have potential conflicts of interest in recommending that
Schering-Plough shareholders vote to approve the merger
agreement.
Schering-Ploughs directors have arrangements or other
interests that provide them with interests in the merger that
are different than those of Schering-Ploughs other
shareholders. For example, the merger agreement provides that
three directors of Schering-Plough will become directors of New
Merck after the merger. While other Schering-Plough directors
will not become directors of New Merck after the merger, New
Merck will indemnify and maintain liability insurance for each
of the Schering-Plough directors services as directors of
Schering-Plough before the merger. In addition, the executive
officers of Schering-Plough have employment, indemnification,
equity award, incentive and bonus, pension and severance
arrangements. These and other material interests of the
directors and executive officers of
Schering-Plough
in the merger that are different than those of the other
Schering-Plough shareholders are described under The
Transaction Interests of Schering-Ploughs
Directors and Management in the Transaction beginning on
page 90.
Failure
to complete the merger could negatively impact the stock price
and the future business and financial results of Merck and
Schering-Plough.
If the merger is not completed, the ongoing businesses of Merck
and Schering-Plough may be adversely affected and, without
realizing any of the benefits of having completed the merger,
Merck and Schering-Plough will be subject to a number of risks,
including the following:
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Schering-Plough may be required to pay Merck a termination fee
of up to $1.25 billion if the merger agreement is
terminated under certain circumstances (plus, in certain
circumstances, Schering-Plough also would be obligated to
reimburse Merck up to $250 million of Mercks actual
expenses incurred in connection with the merger), or Merck may
be required to pay Schering-Plough a termination fee of
$1.25 billion if the merger agreement is terminated under
certain other circumstances (and, in certain circumstances,
Merck also would be obligated to reimburse Schering-Plough up to
$150 million of Schering-Ploughs actual expenses
incurred in connection with the merger), all as described in the
merger agreement and summarized in this joint proxy
statement/prospectus;
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Merck will be required to pay Schering-Plough a termination fee
of $2.5 billion and reimburse Schering-Ploughs
expenses up to a maximum of $150 million if either Merck or
Schering-Plough terminates the merger agreement because the
drop-dead date, as it may be extended, has occurred and the
merger has not been consummated because the proceeds of the
financing are not available in full;
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Merck and Schering-Plough will be required to pay certain costs
relating to the merger, whether or not the merger is
completed; and
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matters relating to the merger (including integration planning)
may require substantial commitments of time and resources by
Merck and Schering-Plough management, which could otherwise have
been devoted to other opportunities that may have been
beneficial to Merck and Schering-Plough as independent
companies, as the case may be.
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Merck and Schering-Plough also could be subject to litigation
related to any failure to complete the merger or related to any
enforcement proceeding commenced against Merck or
Schering-Plough to perform their respective obligations under
the merger agreement. If the merger is not completed, these
risks may materialize and may adversely affect Mercks and
Schering-Ploughs business, financial results and stock
price.
22
Risks
Related to New Merck After Completion of the
Transaction
The
indebtedness of New Merck following the completion of the merger
will be substantially greater than Mercks indebtedness on
a stand-alone basis and greater than the combined indebtedness
of Merck and Schering-Plough existing prior to the transaction.
This increased level of indebtedness could adversely affect New
Merck, including by reducing funds available for other business
purposes.
The indebtedness of Merck and Schering-Plough as of
March 31, 2009 was approximately $6.7 billion and
$7.9 billion, respectively. New Mercks pro forma
indebtedness as of March 31, 2009, after giving effect to
the merger, would be approximately $23.4 billion. As a
result of the substantial increase in debt and the cost of that
debt, the amount of cash required to service New Mercks
increased indebtedness levels and thus the demands on New
Mercks cash resources may be significantly greater than
the percentages of cash flows required to service the
indebtedness of Merck or Schering-Plough individually prior to
the transaction. The increased levels of indebtedness could
reduce funds available for New Mercks investment in
research and development as well as capital expenditures and
other activities, and may create competitive disadvantages for
New Merck relative to other companies with lower debt levels.
New
Merck will face intense competition from lower-cost generic
products.
In general, both Merck and Schering-Plough face increasing
competition from lower-cost generic products and New Merck will
face the same challenge after the merger. The patent rights that
protect Mercks and Schering-Ploughs products are of
varying strengths and durations. In addition, in some countries,
patent protection is significantly weaker than in the United
States or the European Union. In the United States, political
pressure to reduce spending on prescription drugs has led to
legislation that encourages the use of generic products. Generic
challenges to our products could arise at any time, and we may
not be able to prevent the emergence of generic competition for
our products.
Loss of patent protection for a product typically is followed
promptly by generic substitutes, reducing sales of that product.
Availability of generic substitutes for the combined
companys drugs may adversely affect its results of
operations and cash flow. In addition, proposals emerge from
time to time in the United States and other countries for
legislation to further encourage the early and rapid approval of
generic drugs. Any such proposal that is enacted into law could
increase the substantial negative impact on Mercks,
Schering-Ploughs, and, after the completion of the merger,
New Mercks sales, business, cash flow, results of
operations, financial position and prospects resulting from the
availability of generic substitutes for products.
New
Merck will face intense competition from new
products.
New Mercks products will face intense competition from
competitors products. This competition may increase as new
products enter the market. Competitors products may be
safer or more effective or more effectively marketed and sold
than New Mercks products. Alternatively, in the case of
generic competition, they may be equally safe and effective
products that are sold at a substantially lower price than New
Mercks products. As a result, if New Merck fails to
maintain its competitive position, this could have a material
adverse effect on New Mercks business, cash flows, results
of operations, financial position and prospects.
Key
Merck and Schering-Plough products generate a significant amount
of Mercks and Schering-Ploughs profits and cash
flows, and subsequent to the merger, will generate a significant
amount of New Mercks profits and cash flows, and any
events that adversely affect the markets for these products
could have a material and negative impact on results of
operations and cash flows.
Mercks and Schering-Ploughs ability to generate
profits and operating cash flow depends largely upon the
continued profitability of Mercks key products including,
without limitation, Singulair, Cozaar/Hyzaar,
Januvia and Gardasil and Schering-Ploughs
and Mercks cholesterol franchise, consisting of
Vytorin and Zetia, and other
Schering-Plough
key products including, without limitation, Remicade,
Temodar, Nasonex, and PegIntron. As a
result of Mercks and Schering-Ploughs dependence on
key products, any event that adversely affects any of these
products or the markets for any of these products could have a
significant impact on results of operations and cash flows of
both companies and of the combined company after the
23
merger. These events could include loss of patent protection,
increased costs associated with manufacturing, generic or OTC
availability of Mercks and Schering-Ploughs product
or a competitive product, the discovery of previously unknown
side effects, increased competition from the introduction of
new, more effective treatments and discontinuation or removal
from the market of the product for any reason.
Merck
and Schering-Plough are involved in arrangements with third
parties that may restrict Mercks and
Schering-Ploughs, and subsequently New Mercks,
ability to sell, market, promote and develop products in certain
markets.
Merck and Schering-Plough are each party to numerous
co-promotion, development, licensing and other agreements and
arrangements with third parties, some of which may contain
provisions limiting Mercks or Schering-Ploughs
ability to sell, market, promote
and/or
develop products in specified markets. Following the completion
of the transaction, products previously marketed by either Merck
or Schering-Plough may fall under the parameters of these
restrictions by virtue of the combination of the two companies.
If it is determined that any of New Mercks products are
subject to these restrictions, New Merck may be required to
divest, license or otherwise cease marketing these products in
various geographic territories, potentially worldwide, and may
or may not be entitled to retain passive revenue in connection
with actions taken to comply with any such restriction. In the
event any product captured by these restrictions as a result of
the transaction contributes significantly to sales, the
divesture of rights to market the product could have an adverse
effect on New Mercks business, cash flows, results of
operations, financial position and prospects.
Merck
faces significant litigation related to
Vioxx
and, if the merger is consummated, New Merck will face that
litigation.
On September 30, 2004, Merck voluntarily withdrew
Vioxx, its arthritis and acute pain medication, from the
market worldwide. As of March 31, 2009, approximately
10,625 product liability lawsuits, involving approximately
25,675 plaintiff groups, alleging personal injuries resulting
from the use of Vioxx, have been filed against Merck in
state and federal courts in the United States. Merck is also a
defendant in approximately 242 putative class actions related to
the use of Vioxx. (All of these suits are referred to as
the Vioxx Product Liability Lawsuits.) On
November 9, 2007, Merck announced that it had entered into
an agreement (the Settlement Agreement) with the law firms that
comprise the executive committee of the Plaintiffs
Steering Committee of the federal multidistrict Vioxx
litigation as well as representatives of plaintiffs
counsel in the Texas, New Jersey and California state
coordinated proceedings, to resolve state and federal myocardial
infarction (MI) and ischemic stroke (IS) claims filed as of
that date in the United States. The Settlement Agreement, which
also applies to tolled claims, was signed by the parties after
several meetings with three of the four judges overseeing the
coordination of more than 95% of the current claims in the
Vioxx product liability litigation. The Settlement
Agreement applies only to U.S. legal residents and those
who allege that their MI or IS occurred in the United States.
As of October 30, 2008, the deadline for enrollment in the
Settlement Program, more than 48,100 of the approximately 48,325
individuals who were eligible for the Settlement Program and
whose claims were not (1) dismissed, (2) expected to
be dismissed in the near future, or (3) tolled claims that
appear to have been abandoned had submitted some or all of the
materials required for enrollment in the Settlement Program.
This represents approximately 99.8% of the eligible MI and IS
claims previously registered with the Settlement Program. Under
the terms of the Settlement Agreement, Merck could exercise a
right to walk away from the Settlement Agreement if the
thresholds and other requirements were not met. Merck waived
that right as of August 4, 2008. The waiver of that right
triggered Mercks obligation to pay a fixed total of
$4.85 billion. Payments will be made in installments into
the settlement funds. The first payment of $500 million was
made in August 2008 and an additional payment of
$250 million was made in October 2008. Payments of
$12 million and $3 million were made in February and
March 2009, respectively, into the IS Settlement Fund. In
addition, in April 2009, payments of $110 million and
$12 million were made into the MI and IS Settlement Funds,
respectively. Interim payments to IS claimants began on
February 27, 2009. Additional payments will be made on a
periodic basis going forward, when and as needed to fund
payments of claims and administrative expenses. During 2009,
Merck anticipates that it will make total payments of
$3.4 billion
24
into the Vioxx settlement funds pursuant to the
Settlement Agreement. However, if the pending merger with
Schering-Plough is completed in 2009, as expected, Merck expects
it will also pay the remaining approximately $700 million
into the IS Settlement Fund.
Of the plaintiff groups described above, most are currently in
the Vioxx Settlement Program. As of March 31, 2009,
approximately 70 plaintiff groups who were otherwise eligible
for the Settlement Program have not participated and their
claims remained pending against Merck. In addition, the claims
of 400 plaintiff groups who are not eligible for the program
remained pending against Merck. A number of these 400 plaintiff
groups are subject to motions to dismiss for failure to comply
with court-ordered deadlines.
Claims of certain individual third-party payors remain pending
in the New Jersey court, and counsel purporting to represent a
large number of third-party payors has threatened to file
numerous additional such actions. Discovery is currently ongoing
in these cases, and a status conference with the court took
place in January 2009 to discuss scheduling issues, including
the selection of early trial pool cases.
There are also pending in various U.S. courts putative
class actions purportedly brought on behalf of individual
purchasers or users of Vioxx and claiming either
reimbursement of alleged economic loss or an entitlement to
medical monitoring. The majority of these cases are at early
procedural stages. On June 12, 2008, a Missouri state court
certified a class of Missouri plaintiffs seeking reimbursement
for
out-of-pocket
costs relating to Vioxx. The plaintiffs do not allege any
personal injuries from taking Vioxx. The Missouri Court
of Appeals affirmed the trial courts certification of a
class on May 12, 2009. Merck is preparing a combined motion
for rehearing and application to transfer the case to the
Missouri Supreme Court. In New Jersey, the trial court dismissed
the complaint in the case of Sinclair, a purported statewide
medical monitoring class. The Appellate Division reversed the
dismissal, and the issue was appealed to the New Jersey Supreme
Court. That court heard argument on October 22, 2007. On
June 4, 2008, the New Jersey Supreme Court reversed the
Appellate Division and dismissed this action. Plaintiffs also
have filed a class action in California state court seeking
certification of a class of California third-party payors and
end-users. The court denied the motion for class certification
on April 30, 2009.
In addition to the Vioxx Product Liability Lawsuits,
various putative class actions and individual lawsuits have been
brought against Merck and several current and former officers
and directors of Merck alleging that Merck made false and
misleading statements regarding Vioxx in violation of the
federal and state securities laws (all of these suits are
referred to as the Vioxx Securities Lawsuits). On
April 12, 2007, Judge Chesler granted defendants
motion to dismiss the complaint with prejudice. Plaintiffs
appealed Judge Cheslers decision to the United States
Court of Appeals for the Third Circuit. On September 9,
2008, the Third Circuit issued an opinion reversing Judge
Cheslers order and remanding the case to the District
Court. On September 23, 2008, Merck filed a petition
seeking rehearing en banc, which was denied. The case was
remanded to the District Court in October 2008, and plaintiffs
have filed their Consolidated and Fifth Amended
Class Action Complaint. Merck filed a petition for a writ
of certiorari with the United States Supreme Court on
January 15, 2009. On March 23, 2009, plaintiffs filed
a response to Mercks petition and, on April 7, 2009,
Merck filed a reply brief. Merck expects to file a motion to
dismiss the Fifth Amended Class Action Complaint. In
addition, various putative class actions have been brought
against Merck and several current and former employees,
officers, and directors of Merck alleging violations of ERISA.
(All of these suits are referred to as the Vioxx ERISA
Lawsuits.) In addition, shareholder derivative suits that were
previously filed and dismissed are now on appeal and several
shareholders have filed demands with Merck asserting claims
against Merck Board members and Merck officers. (All of these
suits and demands are referred to as the Vioxx Derivative
Lawsuits and, together with the Vioxx Securities Lawsuits
and the Vioxx ERISA Lawsuits, the Vioxx
Shareholder Lawsuits.) Merck has also been named as a defendant
in actions in various countries outside the United States. (All
of these suits are referred to as the Vioxx Foreign
Lawsuits.) Merck has also been sued by ten states, five counties
and New York City with respect to the marketing of Vioxx.
Merck anticipates that additional lawsuits relating to
Vioxx may be filed against it
and/or
certain of its current and former officers and directors in the
future.
The SEC is conducting a formal investigation of Merck concerning
Vioxx. Merck has received subpoenas from the
U.S. Department of Justice requesting information related
to Mercks research, marketing and selling
25
activities with respect to Vioxx in a federal health care
investigation under criminal statutes. This investigation
includes subpoenas for witnesses to appear before a grand jury.
In March 2009, Merck received a letter from the
U.S. Attorneys Office for the District of
Massachusetts identifying it as a target of the grand jury
investigation regarding Vioxx. There are also ongoing
investigations by local authorities in certain cities in Europe
in order to determine whether any criminal charges should be
brought concerning Vioxx. Merck is cooperating with
authorities in all of these investigations. (All of these
investigations are referred to as the Vioxx
Investigations.) Merck cannot predict the outcome of any of
these investigations; however, they could result in potential
civil and/or
criminal liability.
Juries have now decided in favor of Merck twelve times and in
plaintiffs favor five times. One Merck verdict was set
aside by the court and has not been retried. Another Merck
verdict was set aside and retried, leading to one of the five
plaintiffs verdicts. There have been two unresolved
mistrials. With respect to the five plaintiffs verdicts,
Merck filed an appeal or sought judicial review in each of those
cases. In one of those five, an intermediate appellate court
overturned the trial verdict and directed that judgment be
entered for Merck, and in another, an intermediate appellate
court overturned the trial verdict, entering judgment for Merck
on one claim and ordering a new trial on the remaining claims.
The outcomes of these Vioxx Product Liability trials
should not be interpreted to indicate any trend or what outcome
may be likely in future Vioxx trials.
A trial in a representative action in Australia commenced on
March 30, 2009, in the Federal Court of Australia. The
named plaintiff, who alleges he suffered a MI, seeks to
represent others in Australia who ingested Vioxx and
suffered a MI, thrombotic stroke, unstable angina, transient
ischemic attack or peripheral vascular disease. On
November 24, 2008, Merck filed a motion for an order that
the proceeding no longer continue as a representative
proceeding. During a hearing on December 5, 2008, the court
dismissed that motion and, on January 9, 2009, issued its
reasons for that decision. On February 17, 2009,
Mercks motion for leave to appeal that decision was denied
and the parties were directed to prepare proposed lists of
issues to be tried. On March 11, 2009, the full Federal
Court allowed Mercks appeal of that part of the trial
judges order that had declined to specify the matters to
be tried and directed further proceedings on remand on that
issue. On March 30, 2009, the trial judge entered an order
directing that, in advance of all other issues in the
proceeding, the issues to be determined during the trial are
those issues of fact and law in the named plaintiffs
individual case, and those issues of fact and law that the trial
judge finds, after hearing the evidence, are common to the
claims of the group members that the named plaintiff has alleged
that he represents.
Merck currently anticipates that one U.S. Vioxx
Product Liability Lawsuit will be tried in 2009. Except with
respect to the product liability trial being held in Australia,
Merck cannot predict the timing of any other trials related to
the Vioxx Litigation. Merck believes that it has
meritorious defenses to the Vioxx Product Liability
Lawsuits, Vioxx Shareholder Lawsuits and Vioxx
Foreign Lawsuits (collectively, the Vioxx Lawsuits)
and will vigorously defend against them. Mercks insurance
coverage with respect to the Vioxx Lawsuits will not be
adequate to cover its defense costs and any losses.
During the first quarter of 2009, Merck spent approximately
$54 million in the aggregate in legal defense costs
worldwide related to (1) the Vioxx Product Liability
Lawsuits, (2) the Vioxx Shareholder Lawsuits,
(3) the Vioxx Foreign Lawsuits, and (4) the
Vioxx Investigations (collectively, the Vioxx
Litigation). In addition, in the first quarter of 2009,
Merck paid an additional $15 million into the settlement
funds in connection with the Settlement Program. Consequently,
as of March 31, 2009, the aggregate amount of Mercks
total reserve for the Vioxx Litigation (the Vioxx
Reserve) was approximately $4.310 billion. The amount of
the Vioxx Reserve allocated to defense costs is based on
certain assumptions, and is the best estimate of the minimum
amount that Merck believes will be incurred in connection with
the remaining aspects of the Vioxx Litigation; however,
events such as additional trials in the Vioxx Litigation
and other events that could arise in the course of the Vioxx
Litigation could affect the ultimate amount of defense costs
to be incurred by Merck and, if the merger is consummated, New
Merck.
Merck is not currently able to estimate any additional amount of
damages that it may be required to pay in connection with the
Vioxx Lawsuits or Vioxx Investigations. These
proceedings are still expected to continue for years and Merck
has very little information as to the course the proceedings
will take. In view of the
26
inherent difficulty of predicting the outcome of litigation,
particularly where there are many claimants and the claimants
seek unspecified damages, Merck is unable to predict the outcome
of these matters, and at this time cannot reasonably estimate
the possible loss or range of loss with respect to the Vioxx
Lawsuits not included in the Settlement Program. Merck has
not established any reserves for any potential liability
relating to the Vioxx Lawsuits not included in the
Settlement Program or the Vioxx Investigations.
A series of unfavorable outcomes in the Vioxx Lawsuits or
the Vioxx Investigations, resulting in the payment of
substantial damages or fines or resulting in criminal penalties,
in excess of the Vioxx Reserve, could have a material
adverse effect on Mercks and, if the merger is completed,
New Mercks business, cash flows, results of operations,
financial position and prospects.
Merck
faces and, if the merger is completed prior to resolution of the
litigation, New Merck will face, patent litigation related to
Singulair.
In February 2007, Merck received a notice from Teva
Pharmaceuticals, Inc. (Teva), a generic company, indicating that
it had filed an Abbreviated New Drug Application (ANDA) for
montelukast and that it is challenging the U.S. patent that
is listed for Singulair. On April 2, 2007, Merck
filed a patent infringement action against Teva. The lawsuit
automatically stays United States Food and Drug Administration
(FDA) approval of Tevas ANDA until August 2009 or until an
adverse court decision, if any, whichever may occur earlier. A
trial in this matter was held in February 2009. Merck is
awaiting the courts decision which Merck expects to
receive before the stay expires in August 2009. Patent
litigation and other challenges to Mercks Singulair
patents are costly and unpredictable and may deprive Merck
and, if the merger is completed, New Merck, of market
exclusivity. If Singulair loses patent protection, sales
of Singulair are likely to decline significantly as a
result of generic versions of it becoming available. An
unfavorable outcome in the Singulair litigation, could
have a material adverse effect on Mercks and, if the
merger is completed, New Mercks business, cash flows,
results of operations, financial position and prospects.
Government
investigations involving Merck or Schering-Plough, or New Merck
after completion of the merger, could lead to the commencement
of civil and/or criminal proceedings involving the imposition of
substantial fines, penalties and injunctive or administrative
remedies, including exclusion from government reimbursement
programs, which could give rise to other investigations or
litigation by government entities or private
parties.
We cannot predict whether future or pending investigations to
which Merck or Schering-Plough, or New Merck after
completion of the merger, may become subject would lead to a
judgment or settlement involving a significant monetary award or
restrictions on its operations.
The pricing, sales and marketing programs and arrangements and
related business practices of Merck, Schering-Plough and other
participants in the health care industry are under increasing
scrutiny from federal and state regulatory, investigative,
prosecutorial and administrative entities. These entities
include the Department of Justice and its
U.S. Attorneys Offices, the Office of Inspector
General of the Department of Health and Human Services, the FDA,
the Federal Trade Commission and various state Attorneys General
offices. Many of the health care laws under which certain of
these governmental entities operate, including the federal and
state anti-kickback statutes and statutory and common law false
claims laws, have been construed broadly by the courts and
permit the government entities to exercise significant
discretion. In the event that any of those governmental entities
believes that wrongdoing has occurred, one or more of them could
institute civil or criminal proceedings which, if resolved
unfavorably, could subject Merck or Schering-Plough, or New
Merck after completion of the merger, to substantial fines,
penalties and injunctive or administrative remedies, including
exclusion from government reimbursement programs. In addition,
an adverse outcome to a government investigation could prompt
other government entities to commence investigations of Merck or
Schering-Plough, or New Merck after completion of the merger, or
cause those entities or private parties to bring civil claims
against it. We also cannot predict whether any investigations
will affect marketing practices or sales. Any such result could
have a material adverse impact on Mercks or
Schering-Ploughs, or New Mercks after completion of
the merger, results of operations, cash flows, financial
condition or business.
27
Regardless of the merits or outcomes of any investigation,
government investigations are costly, divert managements
attention from our business and may result in substantial damage
to our reputation. For additional information about these
investigations, see the respective reports of Schering-Plough
and Merck described under Where You Can Find More
Information beginning on page 157.
There
are other legal matters in which adverse outcomes could
negatively affect New Mercks results of operations, cash
flows, financial condition or business.
Unfavorable outcomes in other pending litigation matters, or in
future litigation, including litigation concerning product
pricing, securities law violations, product liability claims,
ERISA matters, patent and intellectual property disputes, and
antitrust matters could preclude the commercialization of
products, negatively affect the profitability of existing
products and subject New Merck to substantial fines, penalties
and injunctive or administrative remedies, including exclusion
from government reimbursement programs. Any such result could
materially and adversely affect New Mercks results of
operations, cash flows, financial condition or business.
Further, aggressive plaintiffs counsel often file litigation on
a wide variety of allegations whenever there is media attention
or negative discussion about the efficacy or safety of a product
and whenever the stock price is volatile; even when the
allegations are groundless, we may need to expend considerable
funds and other resources to respond to such litigation. For
further information on material legal matters facing
Schering-Plough
and Merck, see the reports described under Where You Can
Find More Information beginning on page 157.
New
Merck and third parties acting on New Mercks behalf will
be subject to governmental regulations, and the failure to
comply with, as well as the costs of compliance with, these
regulations may adversely affect New Mercks results of
operations, cash flow and financial position.
New Mercks manufacturing and research practices and those
of third parties acting on New Mercks behalf must meet
stringent regulatory standards and are subject to regular
inspections. The cost of regulatory compliance, including that
associated with compliance failures, could materially affect New
Mercks results of operations, cash flow and financial
position. Failure to comply with regulations, which include
pharmacovigilance reporting requirements and standards relating
to clinical, laboratory and manufacturing practices, could
result in suspension or termination of clinical studies, delays
or failure in obtaining the approval of drugs, seizure or
recalls of drugs, suspension or revocation of the authority
necessary for the production and sale of drugs, withdrawal of
approval, fines and other civil or criminal sanctions.
New Merck will also be subject to other regulations, including
environmental, health and safety, and labor regulations.
Certain
of Schering-Ploughs and Mercks major products are
going to lose patent protection in the near future and, when
that occurs, we expect a significant decline in sales of those
products.
Each of Schering-Plough and Merck depends upon patents to
provide it with exclusive marketing rights for its products for
some period of time. As patents for several of its products have
recently expired, or are about to expire, in the United States
and in other countries, Schering-Plough and Merck and, if the
merger is consummated, New Merck will each face strong
competition from lower-priced generic drugs. Loss of patent
protection for a product typically leads to a rapid loss of
sales for that product, as lower-priced generic versions of that
drug become available. In the case of products that contribute
significantly to sales, the loss of patent protection could have
a material adverse effect on each of Schering-Ploughs and
Mercks and, if the merger is consummated, New Mercks
business, cash flows, results of operations, financial position
and prospects.
28
Both
Merck and Schering-Plough are dependent on our patent rights,
and if our patent rights are invalidated or circumvented, our
business, and the business of New Merck if the merger is
completed, would be adversely affected.
Patent protection will be of material importance in our
marketing of human health products in the United States and
in most major foreign markets. Patents covering products that
have been or will be introduced normally provide a period of
market exclusivity, which is important for the successful
marketing and sale of our products. We seek patents covering
each of our products in each of the markets where we intend to
sell the products and where meaningful patent protection is
available.
Even if we succeed in obtaining patents covering our products,
third parties or government authorities may challenge or seek to
invalidate or circumvent our patents and patent applications. It
will be important for our business to defend successfully the
patent rights that provide market exclusivity for our products.
We are often involved in patent disputes relating to challenges
to our patents or infringement and similar claims against us. We
aggressively defend our important patents both within and
outside the United States, including by filing claims of
infringement against other parties, however, there can be no
guarantee that our efforts will be successful. In particular,
manufacturers of generic pharmaceutical products from time to
time file ANDAs with the FDA seeking to market generic forms of
our products prior to the expiration of relevant patents owned
by us. We normally respond by vigorously defending our patent,
including by filing lawsuits alleging patent infringement.
Patent litigation and other potential challenges to our patent
portfolio will be costly and unpredictable. An adverse
determination by a court may deprive us of market exclusivity
for our patented products or, in some cases, third-party patents
may prevent us from marketing and selling products in a
particular geographic area and may lead to significant financial
damages for past and ongoing infringement. Due to the
uncertainty surrounding patent litigation, parties may settle
patent disputes by obtaining a license under mutually agreeable
terms in order to decrease risk of an interruption in
manufacturing
and/or
marketing of their products.
Additionally, certain foreign governments have indicated that
compulsory licenses to patents may be granted in the case of
national emergencies, which could diminish or eliminate sales
and profits from those regions and negatively affect our results
of operations. Further, recent court decisions relating to other
companies U.S. patents, potential
U.S. legislation relating to patent reform, as well as
regulatory initiatives may result in further erosion of
intellectual property protection.
If one or more important products lose patent protection in
profitable markets, sales of our products will likely decline
significantly as a result of generic versions of those products
becoming available. Our results of operations may be adversely
affected by the lost sales unless and until we successfully
launch commercially successful proprietary replacement products.
New
Mercks research and development efforts may not succeed in
developing commercially successful products and New Merck may
not be able to acquire commercially successful products in other
ways, and consequently, New Merck may not be able to replace
sales of successful products that have lost patent
protection.
Like other major pharmaceutical companies, in order to remain
competitive, New Merck must be able to launch new products each
year. Declines in sales of products after the loss of marketing
exclusivity mean that New Mercks future success is
dependent on New Mercks pipeline of new products,
including new products that New Merck develops through joint
ventures and products that it is able to obtain through license
or acquisition. To accomplish this, New Merck will commit
substantial effort, funds and other resources to research and
development, both through New Mercks own dedicated
resources, and through various collaborations with third
parties. To support its research and development efforts New
Merck must make ongoing, substantial expenditures, without any
assurance that the efforts it is funding will result in a
commercially successful product. New Merck must also commit
substantial efforts, funds and other resources to recruiting and
retaining high-quality scientists and other personnel with
pharmaceutical research and development expertise.
29
There is a high rate of failure inherent in the research to
develop new drugs to treat diseases. As a result, there is a
high risk that funds invested by Merck or Schering-Plough or New
Merck following the merger in research programs will not
generate financial returns. This risk profile is compounded by
the fact that this research has a long investment cycle. To
bring a pharmaceutical compound from the discovery phase to
market may take a decade or more and failure can occur at any
point in the process, including later in the process after
significant funds have been invested.
Each phase of testing is highly regulated, and during each phase
there is a substantial risk that New Merck will encounter
serious obstacles or will not achieve its goals, and accordingly
New Merck may abandon a product in which it has invested
substantial amounts of time and money. Some of the risks
encountered in the research and development process include the
following: pre-clinical testing of a new compound may yield
disappointing results; clinical trials of a new drug may not be
successful; a new drug may not be effective or may have harmful
side effects; a new drug may not be approved by the FDA for its
intended use; it may not be possible to obtain a patent for a
new drug; manufacturing costs or other factors may make
marketing a new product economically unfeasible; proprietary
rights of others may preclude our commercialization of a new
product; or sales of a new product may be disappointing.
In that connection, on June 5, 2009, Merck announced that
the preliminary results for its pivotal Phase III study of
rolofylline, an investigational medicine for the treatment of
acute heart failure, indicated that rolofylline did not meet the
primary or secondary endpoints of the study. The primary
hypothesis of the study, called PROTECT, was that rolofylline
would improve symptoms of acute heart failure compared to
placebo. The secondary endpoints were that rolofylline would
reduce the risk of death or cardiovascular or renal
re-hospitalization within 60 days of treatment, and would
reduce the risk of persistent kidney impairment.
Merck and
Schering-Plough
cannot state with certainty when or whether any of
Schering-Ploughs or Mercks products now under
development will be approved or launched; whether New Merck will
develop, license or otherwise acquire compounds, product
candidates or products; or whether any products, once launched,
will be commercially successful. New Merck must be able to
maintain a continuous flow of successful new products and
successful new indications or brand extensions for existing
products sufficient both to cover substantial research and
development costs and to replace sales that are lost as
profitable products lose patent protection or are displaced by
competing products or therapies. Failure to do so in the short
term or long term could have a material adverse effect on New
Mercks business, cash flows, results of operations,
financial position and prospects.
Issues
concerning Vytorin and the ENHANCE and SEAS clinical trials
could have a material adverse effect on sales of Vytorin and
Zetia in the U.S., which in turn could have a material adverse
effect on New Mercks financial condition.
Schering-Plough and Merck sell Vytorin and Zetia
through our joint venture company, referred to in this joint
proxy statement/prospectus as the Merck/Schering-Plough
cholesterol partnership. Upon consummation of the merger, the
Merck/Schering-Plough cholesterol partnership would be wholly
owned by New Merck. On January 14, 2008, the
Merck/Schering-Plough cholesterol partnership announced the
primary endpoint and other results of the ENHANCE trial. ENHANCE
was a surrogate endpoint trial conducted in 720 patients
with Heterozygous Familial Hypercholesterolemia, a rare
condition that affects approximately 0.2% of the population. The
primary endpoint was the mean change in the intima-media
thickness measured at three sites in the carotid arteries (the
right and left common carotid, internal carotid and carotid
bulb) between patients treated with ezetimibe/simvastatin 10/80
mg versus patients treated with simvastatin 80 mg alone
over a two year period. There was no statistically significant
difference between treatment groups on the primary endpoint.
There was also no statistically significant difference between
the treatment groups for each of the components of the primary
endpoint, including the common carotid artery.
As previously disclosed, we have received several letters
addressed to both Merck and Schering-Plough from the House
Committee on Energy and Commerce, its Subcommittee on Oversight
and Investigations (O&I), and the Ranking Minority Member
of the Senate Finance Committee, collectively seeking a
combination of witness interviews, documents and information on
a variety of issues related to the ENHANCE clinical
30
trial, the sale and promotion of Vytorin, as well as
sales of stock by corporate officers. In addition, since August
2008, we have received three additional letters from O&I,
including one dated February 19, 2009, seeking certain
information and documents related to the SEAS clinical trial,
which is described in more detail below. Merck and
Schering-Plough
have each received subpoenas from the New York and New Jersey
State Attorneys General Offices and a letter from the
Connecticut Attorney General seeking similar information and
documents. In addition, Merck has received six Civil
Investigative Demands (CIDs) from a multistate group of 34 State
Attorneys General who are jointly investigating whether the
companies violated state consumer protection laws when marketing
Vytorin. Finally, in September 2008, Merck received a
letter from the Civil Division of the DOJ informing it that the
DOJ is investigating whether the companies conduct
relating to the promotion of Vytorin caused false claims
to be submitted to federal health care programs. We are
cooperating with these investigations and working together to
respond to the inquiries. In addition, Merck has become aware
of, or been served with, approximately 145 civil class action
lawsuits alleging common law and state consumer fraud claims in
connection with the Merck/Schering-Plough cholesterol
partnerships sale and promotion of Vytorin and
Zetia. Certain of those lawsuits allege personal injuries
and/or seek
medical monitoring.
Also, as previously disclosed, on April 3, 2008, a Merck
shareholder filed a putative class action lawsuit in federal
court in the Eastern District of Pennsylvania alleging that
Merck and its Chairman, President and Chief Executive Officer,
Richard T. Clark, violated the federal securities laws. This
suit has since been withdrawn and re-filed in the District of
New Jersey and has been consolidated with another federal
securities lawsuit under the caption In re Merck &
Co., Inc. Vytorin Securities Litigation. An amended
consolidated complaint was filed on October 6, 2008 and
names as defendants Merck; Merck/Schering-Plough
Pharmaceuticals, LLC; and certain of Mercks officers and
directors. Specifically, the complaint alleges that Merck
delayed releasing unfavorable results of a clinical study
regarding the efficacy of Vytorin and that Merck made
false and misleading statements about expected earnings, knowing
that once the results of the Vytorin study were released,
sales of Vytorin would decline and Mercks earnings
would suffer. On April 22, 2008, a member of a Merck ERISA
plan filed a putative class action lawsuit against Merck and
certain of its officers and directors alleging they breached
their fiduciary duties under ERISA. Since that time, there have
been other similar ERISA lawsuits filed against Merck in the
District of New Jersey, and all of those lawsuits have been
consolidated under the caption In re Merck & Co., Inc.
Vytorin ERISA Litigation. An amended consolidated
complaint was filed on February 5, 2009, and names as
defendants Merck and various members of Mercks board of
directors and members of committees of Mercks board of
directors.
In addition, Schering-Plough continues to respond to existing
and new litigation, including several putative shareholder
securities class action lawsuits (where several officers are
also named defendants) alleging false and misleading statements
and omissions by Schering-Plough and its representatives related
to the timing of disclosures concerning the ENHANCE results; a
putative shareholder securities class action lawsuit (where
several officers and directors are also named), alleging
material misstatements and omissions related to the ENHANCE
results in the offering documents in connection with
Schering-Ploughs 2007 securities offerings; several
putative class action suits alleging that Schering-Plough and
certain officers and directors breached their fiduciary duties
under ERISA; a shareholder derivative action alleging that the
board of directors breached its fiduciary obligations relating
to the timing of the release of the ENHANCE results; and a
letter on behalf of a single shareholder requesting that the
board of directors investigate the allegations in the litigation
described above and, if warranted, bring any appropriate legal
action on behalf of Schering-Plough.
In January 2009, the FDA announced that it had completed its
review of the final clinical study report of ENHANCE. The FDA
stated that the results from ENHANCE did not change its position
that an elevated LDL cholesterol is a risk factor for
cardiovascular disease and that lowering LDL cholesterol reduces
the risk for cardiovascular disease. The FDA also stated that,
based on current available data, patients should not stop taking
Vytorin or other cholesterol lowering medications and
should talk to their doctor if they have any questions about
Vytorin, Zetia, or the ENHANCE trial.
In July 2008, efficacy and safety results from the SEAS study
were announced. SEAS was designed to evaluate whether intensive
lipid lowering with Vytorin would reduce the need for
aortic valve replacement and the risk of cardiovascular
morbidity and mortality versus placebo in patients with
asymptomatic mild to
31
moderate aortic stenosis who had no indication for statin
therapy. Vytorin failed to meet its primary endpoint for
the reduction of major cardiovascular events. There also was no
significant difference in the key secondary endpoint of aortic
valve events; however, there was a reduction in the group of
patients taking Vytorin compared to placebo in the key
secondary endpoint of ischemic cardiovascular events. In the
study, patients in the group who took Vytorin had a
higher incidence of cancer than the group who took placebo.
There was also a statistically nonsignificant increase in deaths
from cancer in patients in the group who took Vytorin
versus those who took placebo. Cancer and cancer deaths were
distributed across all major organ systems.
In August 2008, the FDA announced that it was investigating the
results from the SEAS trial. In this announcement, the FDA also
cited interim data from two large ongoing cardiovascular trials
of Vytorin the Study of Heart and Renal
Protection (referred to as SHARP) and the IMPROVE-IT clinical
trials in which there was no increased risk of
cancer with the combination of simvastatin plus ezetimibe. The
SHARP trial is expected to be completed in 2010. The IMPROVE-IT
trial is scheduled for completion around 2012. The FDA
determined that, as of that time, these findings in the SEAS
trial plus the interim data from ongoing trials should not
prompt patients to stop taking Vytorin or any other
cholesterol lowering drug.
In 2008, following the announcements of the ENHANCE and SEAS
clinical trial results, sales of Vytorin and Zetia
declined in the U.S. These issues concerning the
ENHANCE and SEAS clinical trials have had an adverse effect on
the Merck/Schering-Plough cholesterol partnerships sales
of Vytorin and Zetia and could continue to have an
adverse effect on the sales of the combined company. If sales of
such products are materially adversely affected, Mercks,
Schering-Ploughs and, consequently, the combined
companys businesses, cash flows, results of operations,
financial positions and prospects could also be materially
adversely affected. In addition, unfavorable outcomes resulting
from the government investigations or the litigation concerning
the sale and promotion of these products could have a material
adverse effect on Mercks, Schering-Ploughs and,
consequently, the combined companys businesses, cash
flows, results of operations, financial positions and prospects.
Schering-Ploughs,
Mercks and, if the merger is completed, New Mercks
products, including products in development, cannot be marketed
unless regulatory approval is obtained and
maintained.
Our business activities, including research, preclinical
testing, clinical trials and manufacturing and marketing of
products, are and will continue to be subject to extensive
regulation by numerous federal, state and local governmental
authorities in the United States, including the FDA, and by
foreign regulatory authorities. In the United States, the FDA is
of particular importance, as it administers requirements
covering the testing, approval, safety, effectiveness,
manufacturing, labeling and marketing of prescription
pharmaceuticals. In many cases, FDA requirements have increased
the amount of time and money necessary to develop new products
and bring them to market in the United States. Regulation
outside the United States also is primarily focused on drug
safety and effectiveness and, in many cases, cost reduction. The
FDA and foreign regulatory authorities have substantial
discretion to require additional testing, to delay or withhold
registration and marketing approval and to mandate product
withdrawals.
Even if Merck, Schering-Plough and, if the merger is completed,
New Merck, are successful in developing new products, they will
not be able to market any of those new products unless and until
they have obtained all required regulatory approvals in each
jurisdiction where they propose to market the new products. Once
obtained, Merck,
Schering-Plough
and, if the merger is completed, New Merck must maintain
approval as long as they plan to market their new products in
each jurisdiction where approval is required. Mercks,
Schering-Ploughs
and, if the merger is completed, New Mercks failure to
obtain approval, significant delays in the approval process, or
their failure to maintain approval in any jurisdiction will
prevent Merck,
Schering-Plough
and, if the merger is completed, New Merck from selling the new
products in that jurisdiction until approval is obtained, if
ever. Merck, Schering-Plough and, if the merger is completed,
New Merck will not be able to realize revenues for those new
products in any jurisdiction where they have not obtained such
required approvals.
32
Developments
following regulatory approval may adversely affect sales of
Mercks, Schering-Ploughs and, if the merger is
completed, New Mercks products.
Even after a product reaches market, certain developments
following regulatory approval, including results in
post-marketing Phase IV trials, may decrease demand for our
products, including the following: re-review of products that
are already marketed; new scientific information and evolution
of scientific theories; recall or loss of marketing approval of
products that are already marketed; changing government
standards or public expectations regarding safety, efficacy or
labeling changes; and greater scrutiny in advertising and
promotion.
In the past several years, clinical trials and post-marketing
surveillance of certain marketed drugs of competitors within the
industry have raised safety concerns that have led to recalls,
withdrawals or adverse labeling of marketed products. Clinical
trials and post-marketing surveillance of certain marketed drugs
also have raised concerns among some prescribers and patients
relating to the safety or efficacy of pharmaceutical products in
general that have negatively affected the sales of such
products. In addition, increased scrutiny of the outcomes of
clinical trials have led to increased volatility in market
reaction. Further, these matters often attract litigation and,
even where the basis for the litigation is groundless,
considerable resources may be needed to respond.
In addition, following the wake of product withdrawals of other
companies and other significant safety issues, health
authorities such as the FDA, the European Medicines Agency
(EMEA) and the Pharmaceuticals and Medical Device Agency (PMDA)
have increased their focus on safety when assessing the
benefit/risk balance of drugs. Some health authorities appear to
have become more cautious when making decisions about
approvability of new products or indications and are
re-reviewing select products that are already marketed, adding
further to the uncertainties in the regulatory processes. There
is also greater regulatory scrutiny, especially in the U.S., on
advertising and promotion and, in particular,
direct-to-consumer
advertising.
In that connection, on June 12, 2009, the FDA announced
that it had completed its review of neuropsychiatric events
possibly related to drugs that act through the leukotriene
pathway, including Singulair. As part of its review, the
FDA reviewed post-marketing reports and also requested that
manufacturers submit all available clinical trial data for these
products. The FDA has requested that manufacturers include a
precaution related to neuropsychiatric events (agitation,
aggression, anxiousness, dream abnormalities and hallucinations,
depression, insomnia, irritability, restlessness, suicidal
thinking and behavior (including suicide), and tremor) in the
drug prescribing information.
If previously unknown side effects are discovered or if there is
an increase in negative publicity regarding known side effects
of any of our products, it could significantly reduce demand for
the product or require Merck, Schering-Plough or New Merck
following the merger to take actions that could negatively
affect sales, including removing the product from the market,
restricting its distribution or applying for labeling changes.
Further, in the current environment in which all pharmaceutical
companies operate, Merck, Schering-Plough and New Merck
following the merger are at risk for product liability claims
for their products.
We
face pricing pressure with respect to our
products.
Our products will be subject to increasing price pressures and
other restrictions worldwide, including in the United States. In
the United States, these include (1) practices of managed
care groups and institutional and governmental purchasers and
(2) U.S. federal laws and regulations related to
Medicare and Medicaid, including the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (2003 Act). The 2003
Act included a prescription drug benefit for individuals, which
first went into effect on January 1, 2006, and has resulted
in an increased use of generic products. In addition, the
increased purchasing power of entities that negotiate on behalf
of Medicare beneficiaries could result in further pricing
pressures on our, and consequently New Mercks, products.
Outside the United States, numerous major markets have pervasive
government involvement in funding healthcare, and in that
regard, fix the pricing and reimbursement of pharmaceutical and
vaccine products. Consequently, in those markets, we, and
consequently New Merck, will be subject to government
decision-making and budgetary actions with respect to our
products.
33
In addition, a number of intermediaries are involved between
drug manufacturers, such as Merck and Schering-Plough, and
patients who use the drugs. These intermediaries impact the
patients ability, and their prescribers ability, to
choose and pay for a particular drug, which may adversely affect
sales of a particular drug. These intermediaries include health
care providers, such as hospitals and clinics; payors and their
representatives, such as employers, insurers, managed care
organizations and governments; and others in the supply chain,
such as pharmacists and wholesalers. Examples include: payors
that require a patient to first fail on one or more generic, or
less expensive branded drugs, before reimbursing for a more
effective, branded product that is more expensive; payors that
are increasing patient co-payment amounts; hospitals that stock
and administer only a generic product to in-patients; managed
care organizations that may penalize doctors who prescribe
outside approved formularies, which may not include branded
products when a generic is available; and pharmacists who
receive larger revenues when they dispense a generic drug over a
branded drug. Further, the intermediaries are not required to
routinely provide transparent data to patients comparing the
effectiveness of generic and branded products or to disclose
their own economic benefits that are tied to steering patients
toward, or requiring patients to use, generic products rather
than branded products.
We expect pricing pressures to increase in the future.
Merck
is experiencing difficulties and delays in the manufacturing of
certain of its products.
As previously disclosed, Merck has experienced difficulties in
manufacturing certain of its vaccines and other products. Merck
is working on these issues, but there can be no assurance of
when or if these issues will be resolved.
Merck, and consequently New Merck, may experience difficulties
and delays inherent in manufacturing its products, such as
(1) its failure, or the failure of vendors or suppliers to
comply with Current Good Manufacturing Practices and other
applicable regulations and quality assurance guidelines that
could lead to manufacturing shutdowns, product shortages and
delays in product manufacturing; (2) construction delays
related to the construction of new facilities or the expansion
of existing facilities, including those intended to support
future demand for its products; and (3) other manufacturing
or distribution problems including changes in manufacturing
production sites and limits to manufacturing capacity due to
regulatory requirements, changes in types of products produced,
or physical limitations that could impact continuous supply.
Manufacturing difficulties can result in product shortages,
leading to lost sales.
Pharmaceutical
products can develop unexpected safety or efficacy
concerns.
Unexpected safety or efficacy concerns can arise with respect to
marketed products, whether or not scientifically justified,
leading to product recalls, withdrawals, or declining sales, as
well as product liability, consumer fraud
and/or other
claims.
Biologics
carry unique risks and uncertainties, which could have a
negative impact on future results of operations.
Schering-Plough has significant biologics operations, including
animal health vaccines, and the biologics business will
represent a significant part of the operations of New Merck
after the merger. The successful development, testing,
manufacturing and commercialization of biologics, particularly
human and animal health vaccines, is a long, expensive and
uncertain process. There are unique risks and uncertainties with
biologics, including:
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There may be limited access to and supply of normal and diseased
tissue samples, cell lines, pathogens, bacteria, viral strains
and other biological materials. In addition, government
regulations in multiple jurisdictions such as the U.S. and
European states within the EU, could result in restricted access
to, or transport or use of, such materials. If Schering-Plough,
or New Merck after the merger, loses access to sufficient
sources of such materials, or if tighter restrictions are
imposed on the use of such materials, we may not be able to
conduct research activities as planned and may incur additional
development costs.
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The development, manufacturing and marketing of biologics are
subject to regulation by the FDA, the EMEA and other regulatory
bodies. These regulations are often more complex and extensive
than the regulations applicable to other pharmaceutical
products. For example, in the U.S., a Biologics License
Application, including both preclinical and clinical trial data
and extensive data regarding manufacturing procedures, is
required for human vaccine candidates and FDA approval for the
release of each manufactured lot.
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Manufacturing biologics, especially in large quantities, is
often complex and may require the use of innovative technologies
to handle living micro-organisms. Each lot of an approved
biologic must undergo thorough testing for identity, strength,
quality, purity and potency. Manufacturing biologics requires
facilities specifically designed for and validated for this
purpose, and sophisticated quality assurance and quality control
procedures are necessary. Slight deviations anywhere in the
manufacturing process, including filling, labeling, packaging,
storage and shipping and quality control and testing, may result
in lot failures, product recalls or spoilage. When changes are
made to the manufacturing process, we may be required to provide
pre-clinical and clinical data showing the comparable identity,
strength, quality, purity or potency of the products before and
after such changes.
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Biologics are frequently costly to manufacture because
production ingredients are derived from living animal or plant
material, and most biologics cannot be made synthetically. In
particular, keeping up with the demand for vaccines may be
difficult due to the complexity of producing vaccines.
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The use of biologically derived ingredients can lead to
allegations of harm, including infections or allergic reactions,
or closure of product facilities due to possible contamination.
Any of these events could result in substantial costs.
Product
liability insurance for products may be limited, cost
prohibitive or unavailable.
As a result of a number of factors, product liability insurance
has become less available while the cost has increased
significantly. Merck has evaluated its risks and has determined
that the cost of obtaining product liability insurance outweighs
the likely benefits of the coverage that is available and, as
such, has no insurance for certain product liabilities effective
August 1, 2004, including liability for products first sold
after that date. Schering-Plough maintains insurance coverage
with such deductibles and self-insurance to reflect market
conditions (including cost and availability) existing at the
time it is written, and the relationship of insurance coverage
to self-insurance varies accordingly. With respect to product
liability insurance, Schering-Plough self-insures substantially
all of its risk, as the availability of commercial insurance has
become more restrictive. Merck, Schering-Plough, and if the
merger is completed, New Merck, will continually assess the most
efficient means to address their insurance needs; however, there
can be no guarantee that insurance coverage will be obtained or
if obtained, will be sufficient to fully cover product
liabilities that may arise.
Changes
in laws and regulations could adversely affect our business and
the business of New Merck.
All aspects of our respective businesses, and consequently the
business of New Merck, including research and development,
manufacturing, marketing, pricing, sales, litigation and
intellectual property rights are, or in the case of New Merck,
will be, subject to extensive legislation and regulation.
Changes in applicable federal and state laws and agency
regulations, as well as the laws and regulations of foreign
jurisdictions, could have a material adverse effect on our
respective businesses, and consequently the business of New
Merck.
The
recent financial crisis and current uncertainty in global
economic conditions could negatively affect our operating
results and consequently the operating results of New
Merck.
Merck, Schering-Plough and New Merck following the merger have
exposure to many different industries and counterparties,
including commercial banks, investment banks, suppliers and
customers (which include wholesalers, managed care organizations
and governments) that may be unstable or may become unstable in
the current economic environment. Any such instability may
impact these parties ability to fulfill contractual
obligations to Merck, Schering-Plough or New Merck, following
the merger, or they might limit or place burdensome conditions
upon future transactions with New Merck. Customers may also
reduce spending during
35
times of economic uncertainty. Also, it is possible that
suppliers may be negatively impacted. In such events, there
could be a resulting material and adverse impact on operations
and results of operations.
Further, the current conditions have resulted in severe downward
pressure on the stock and credit markets, which could further
reduce the return available on invested corporate cash, reduce
the return on investments held by the pension plans and thereby
potentially increase funding obligations, all of which if severe
and sustained could have material and adverse impacts on New
Mercks results of operations, financial position and cash
flows.
The current financial crisis and uncertainty in global economic
conditions have resulted in substantial volatility in the credit
markets and a low level of liquidity in many financial markets.
These conditions may result in a further slowdown to the global
economy that could affect our business and consequently the
business of New Merck by reducing the prices that drug
wholesalers and retailers, hospitals, government agencies and
managed health care providers may be able or willing to pay for
our or New Mercks products or by reducing the demand for
our products, which could in turn negatively impact our or New
Mercks sales and revenue generation and could result in a
material adverse effect on our or New Mercks business,
cash flows, results of operations, financial position and
prospects.
Although none of Schering-Plough, Merck or New Merck after the
merger currently has plans to access the equity or debt markets
to meet capital or liquidity needs, constriction and volatility
in these markets may restrict future flexibility to do so if
unforeseen capital or liquidity needs were to arise.
Merck,
Schering-Plough and, subsequently, the combined company may be
subject to changes in tax laws, including those outlined by
President Obama in his Fiscal Year 2010 Revenue
Proposal.
In May 2009, President Obamas administration proposed
significant changes to the U.S. international tax laws,
including changes that would limit U.S. tax deductions for
expenses related to un-repatriated foreign-source income and
modify the U.S. foreign tax credit and
check-the-box
rules. We cannot determine whether these proposals will be
enacted into law or what, if any, changes may be made to such
proposals prior to their being enacted into law. If these or
other changes to the U.S. international tax laws are
enacted they could have a significant impact on the financial
results of Merck, Schering-Plough and, subsequently, the
combined company.
As a
result of the merger, New Merck will have significant global
operations, which expose it to additional risks, and any adverse
event could have a material negative impact on New Mercks
results of operations.
The extent of New Mercks operations outside the
U.S. will be significant due to the fact that the majority
of Schering-Ploughs operations are outside the
U.S. Risks inherent in conducting a global business include:
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changes in medical reimbursement policies and programs and
pricing restrictions in key markets;
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multiple regulatory requirements that could restrict New
Mercks ability to manufacture and sell its products in key
markets;
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trade protection measures and import or export licensing
requirements;
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diminished protection of intellectual property in some
countries; and
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possible nationalization and expropriation.
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In addition, there may be changes to New Mercks business
and political position if there is instability, disruption or
destruction in a significant geographic region, regardless of
cause, including war, terrorism, riot, civil insurrection or
social unrest; and natural or man-made disasters, including
famine, flood, fire, earthquake, storm or disease.
36
Reliance
on third party relationships and outsourcing arrangements could
adversely affect our, and consequently New Mercks,
business.
We depend on third parties, including suppliers, alliances with
other pharmaceutical and biotechnology companies and third party
service providers, for key aspects of our businesses including
development, manufacture and commercialization of our products
and support for our information technology systems. Failure of
these third parties to meet their contractual, regulatory and
other obligations to us or the development of factors that
materially disrupt our relationships with these third parties,
could have a material adverse effect on our, and consequently
New Mercks, business.
We are
and, after the merger is completed, New Merck will be,
increasingly dependent on sophisticated information technology
and infrastructure.
We are, and New Merck will be, increasingly dependent on
sophisticated information technology and infrastructure. Any
significant breakdown, intrusion, interruption or corruption of
these systems or data breaches could have a material adverse
effect on our, and consequently New Mercks, business. As
previously disclosed, Merck has been proceeding with a
multi-year implementation of an enterprise-wide resource
planning system, which includes modification to the design,
operation and documentation of Mercks internal controls
over financial reporting. The planned completion and
implementation of the enterprise-wide resource planning systems
may be complicated
and/or
delayed by the integration of Schering-Ploughs operations
under these systems. Any material problems in the implementation
could have a material adverse effect on our, and consequently
New Mercks, business.
Risks
Relating to Merck and Schering-Plough and the combined company
after the merger.
Merck and Schering-Plough are, and will continue to be, and the
combined company after consummation of the merger will be,
subject to the risks described in (i) Part I,
Item 1A in Mercks Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
February 27, 2009, (ii) Part II, Item IA in
Mercks Quarterly Report on
Form 10-Q
for the three months ended March 31, 2009 filed with the
SEC on May 4, 2009, (iii) Part I, Item 1A in
Schering-Ploughs Annual Report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
February 27, 2009 and (iv) Part II, Item IA
in Schering-Ploughs Quarterly Report for the three months
ended March 31, 2009 filed with the SEC on May 1,
2009, in each case as filed with the SEC and incorporated by
reference into this joint proxy statement/prospectus. See
Where You Can Find More Information beginning on
page 157 for the location of information incorporated by
reference into this joint proxy statement/prospectus.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents that are
incorporated into this joint proxy statement/prospectus by
reference may contain or incorporate by reference statements
that do not directly or exclusively relate to historical facts.
Such statements are forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. You can typically identify forward-looking
statements by the use of forward-looking words, such as
may, will, could,
project, believe,
anticipate, expect,
estimate, continue,
potential, plan, forecast
and other similar words. These include, but are not limited to,
statements relating to the synergies and the benefits that we
expect to achieve in the transaction discussed herein, including
future financial and operating results, the combined
companys plans, objectives, expectations and intentions
and other statements that are not historical facts. Those
statements represent our intentions, plans, expectations,
assumptions and beliefs about future events and are subject to
risks, uncertainties and other factors. Many of those factors
are outside the control of Merck and Schering-Plough and could
cause actual results to differ materially from the results
expressed or implied by those forward-looking statements. In
addition to the risk factors described under Risk
Factors, those factors include:
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those identified and disclosed in public filings with the SEC
made by Merck and Schering-Plough;
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obtaining shareholder approvals required for the Merck merger,
the Schering-Plough merger and the issuance of shares of New
Merck common stock in connection with the merger;
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satisfying the conditions to the closing of the merger;
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successfully integrating the Merck and Schering-Plough
businesses, avoiding problems which may result in the combined
company not operating as effectively and efficiently as expected;
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the possibility that the estimated synergies are not realized,
or will not be realized within the expected timeframe;
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unexpected costs or unexpected liabilities, or the effects of
purchase accounting varying from the companies
expectations;
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the risk that funds invested in research will not generate
financial returns because the development of novel drugs
requires significant expenditure with a low probability of
success;
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the actual resulting credit ratings of the companies or their
respective subsidiaries;
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the effects on the businesses of the companies resulting from
uncertainty surrounding the merger;
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adverse outcomes of pending or threatened litigation or
government investigations;
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the effects on the companies of future regulatory or legislative
actions;
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conduct and changing circumstances related to third-party
relationships on which Merck and
Schering-Plough
rely for their key products;
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the extremely volatile and unpredictable current stock market
and credit market conditions;
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market risks from fluctuations in currency exchange rates and
interest rates;
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variations between the stated assumptions on which
forward-looking statements are based and Mercks and
Schering-Ploughs actual experience; and
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other economic, business,
and/or
competitive factors.
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The areas of risk and uncertainty described above should be
considered in connection with any written or oral
forward-looking statements that may be made after the date of
this joint proxy statement/prospectus by Merck or
Schering-Plough or anyone acting for any or all of them. Except
for their ongoing obligations to disclose material information
under the U.S. federal securities laws, neither Merck nor
Schering-Plough undertakes any obligation to release publicly
any revisions to any forward-looking statements, to report
events or circumstances after the date of this joint proxy
statement/prospectus or to report the occurrence of
unanticipated events.
THE MERCK
SPECIAL MEETING
This section contains information about the special meeting of
Merck shareholders (the Merck special meeting) that
has been called to consider and approve the merger agreement.
This joint proxy statement/prospectus is being furnished to the
shareholders of Merck in connection with the solicitation of
proxies by Mercks board of directors for use at the Merck
special meeting. Merck is first mailing this joint proxy
statement/prospectus and accompanying proxy card to its
shareholders on or about June 29, 2009.
Date,
Time and Place of the Special Meeting
The shareholders of Merck will hold a special meeting on
August 7, 2009 at 8:30 a.m., local time, at the
Bridgewater Marriott located at 700 Commons Way,
Bridgewater, New Jersey, unless the special meeting is adjourned
or postponed.
38
Purpose
of the Special Meeting
At the special meeting, Merck shareholders will be asked to:
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consider and act on a proposal to approve the merger
agreement; and
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transact any other business that may properly come before the
special meeting or any reconvened meeting following an
adjournment or postponement of the special meeting.
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Record
Date; Outstanding Shares Entitled to Vote
Only shareholders listed on Mercks records at the close of
business on June 22, 2009, the record date for the Merck
special meeting, are entitled to vote at the special meeting or
any adjournments or postponements of the Merck special meeting.
As of the record date, there were 2,108,780,449 shares of
Merck common stock, par value $0.01 per share, outstanding and
entitled to vote at the Merck special meeting.
Ownership
of Shares
If your shares are registered directly in your name with
Mercks transfer agent, Wells Fargo Bank, N.A., you are
considered, with respect to those shares, the shareholder
of record. This joint proxy statement/prospectus and the
enclosed proxy card have been sent directly to you by Merck.
If your shares are held in a stock brokerage account or by a
bank or other nominee, you are considered the beneficial owner
of shares held in street name. This joint proxy
statement/prospectus has been forwarded to you by your broker,
bank or nominee who is considered, with respect to those shares,
the shareholder of record. As the beneficial owner of shares
held in street name, you have the right to direct your broker,
bank or nominee how to vote your shares by using the voting
instruction card included in the mailing or by following their
instructions for voting by telephone or the Internet.
Quorum
In order to transact business at the Merck special meeting, a
quorum of Merck shareholders must be present. A quorum will
exist if holders of a majority of the outstanding shares of
Merck common stock are present in person, or represented by
proxy, at the special meeting. Accordingly, the presence at the
Merck special meeting, either in person or by proxy, of holders
of at least 1,054,390,225 shares of Merck common stock will
be required to establish a quorum. If a quorum is not present,
the Merck special meeting may be adjourned to a later date.
Holders of shares of Merck common stock present in person at the
Merck special meeting but not voting, and shares of Merck common
stock for which Merck has received proxies indicating that their
holders have abstained, will be counted as present at the Merck
special meeting for purposes of determining whether a quorum is
established.
A New York Stock Exchange member broker who holds shares in
street name for a customer has the authority to vote on certain
items if the broker does not receive instructions from the
customer. Under the rules that govern brokers who have record
ownership of shares that are held in street name for their
clients, the beneficial owners of the shares, brokers have
discretion to vote these shares on routine matters but not on
non-routine matters. The approval of the merger agreement is not
considered a routine matter. Accordingly, brokers will not have
discretionary voting authority to vote shares of Merck common
stock at the Merck special meeting. A broker
non-vote occurs when brokers do not have discretionary
voting authority and have not received instructions from the
beneficial owners of the shares. A broker will not be permitted
to vote on the approval of the merger agreement without
instruction from the beneficial owner of the shares of Merck
common stock held by that broker. Accordingly, shares of Merck
common stock beneficially owned that have been designated on
proxy cards by the broker, bank or nominee as not voted (broker
non-vote) will not be counted as votes cast for or against the
proposal to approve the merger agreement. These broker non-votes
will, however, be counted for purposes of determining whether a
quorum exists at the Merck special meeting.
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Vote
Required
Provided a quorum of shareholders is present in person or by
proxy at the Merck special meeting, in order to approve the
merger agreement, a majority of the votes cast at the special
meeting must be cast in favor of the proposal to approve the
merger agreement. Abstentions and broker non-votes will have no
impact on the outcome of the voting.
Recommendation
of Mercks Board of Directors
Mercks board of directors unanimously determined that the
merger agreement is advisable, fair and in the best interests of
Merck and its shareholders and unanimously approved the merger
agreement. The Merck board of directors unanimously recommends
that Merck shareholders vote FOR the proposal to
approve the merger agreement. See The
Transaction Mercks Reasons for the Transaction
and Recommendation of Mercks Board of Directors
beginning at page 60.
Merck shareholders should carefully read this joint proxy
statement/prospectus in its entirety for more detailed
information concerning the merger agreement and the proposed
transaction. In addition, Merck shareholders are directed to the
merger agreement, which is attached as Annex A to this
joint proxy
statement/prospectus.
Voting by
Mercks Directors and Executive Officers
As of the record date, Mercks directors and executive
officers and certain of their affiliates beneficially owned
530,492 shares of Merck common stock entitled to vote at
the Merck special meeting. This represents less than 1% of the
total votes entitled to be cast at the Merck special meeting.
Each Merck director and executive officer and certain of their
affiliates has indicated his or her present intention to vote,
or cause to be voted, the shares of Merck common stock owned by
him or her for the approval of the merger agreement. As of the
record date, Schering-Plough beneficially owned
101,867 shares of Merck common stock entitled to vote at
the Merck special meeting. This represents less than 1% of the
total votes entitled to be cast at the Merck special meeting.
How to
Vote
There are several ways for Merck shareholders to vote:
Mail. You can vote by mail by completing,
signing, dating and mailing your proxy card or voting
instruction card in the postage-paid envelope included with this
joint proxy statement/prospectus.
Telephone. If you are a shareholder of record
of Merck, you can vote by telephone by calling the toll-free
number
800-690-6903
on a touch-tone phone. You will then be prompted to enter the
control number printed on your proxy card and to follow
subsequent instructions. Telephone voting is available
24 hours a day. If you vote by telephone, do not return
your proxy card. The availability of telephone voting for
beneficial owners will depend on the voting process of your
broker, bank or nominee. Therefore, Merck recommends that you
follow the voting instructions in the materials you receive.
Internet. If you are a shareholder of record
of Merck, you can vote over the Internet by accessing the
website at www.proxyvote.com and following the instructions on
your proxy card and the website. Internet voting is available
24 hours a day. If you vote over the Internet, do not
return your proxy card. The availability of Internet voting for
beneficial owners will depend on the voting process of your
broker, bank or nominee. Therefore, Merck recommends that you
follow the voting instructions in the materials you receive.
In Person. In addition, all Merck shareholders
as of the record date may attend the Merck special meeting and
vote in person. You may also be represented by another person at
the meeting by executing a proper proxy designating that person.
If you are a beneficial owner of shares held in street name, you
must obtain a legal proxy from your broker, bank or nominee and
present it to the inspectors of election with your ballot when
you vote at the meeting.
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Attending
the Special Meeting
All Merck shareholders as of the close of business on the record
date may attend the Merck special meeting but must have an
admission ticket. If you are a shareholder of record, the ticket
attached to the proxy card will admit you and one guest. If you
are a beneficial owner of Merck shares, you may request a ticket
by writing to the Office of the Secretary, WS 3AB-05,
Merck & Co., Inc., P.O. Box 100, Whitehouse
Station, New Jersey
08889-0100
or by faxing your request to
908-735-1224.
You must provide evidence of your ownership of shares with your
ticket request, which you can obtain from your broker, bank or
nominee. Merck encourages you or your broker to fax your ticket
request and proof of ownership in order to avoid any mail delays.
Voting of
Proxies
If you vote by Internet, by telephone or by completing, signing,
dating and mailing your proxy card or voting instruction card,
your shares will be voted in accordance with your instructions.
If you are a shareholder of record and you sign, date and return
your proxy card but do not indicate how you want to vote or do
not indicate that you wish to abstain, your shares will be voted
FOR the approval of the merger agreement.
Revoking
Your Proxy
If you are a shareholder of record, you may revoke your proxy at
any time before it is voted at the special meeting by:
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sending a signed notice of revocation to the Secretary of Merck;
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submitting a revised proxy bearing a later date by mail,
Internet or telephone; or
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attending the special meeting and voting in person, which will
automatically cancel any proxy previously given, or revoking
your proxy in person. Your attendance alone will not revoke any
proxy that you have previously given.
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If you choose either of the first two methods, you must submit
your notice of revocation or your new proxy no later than the
beginning of the special meeting. If you are a beneficial owner
of shares of Merck common stock, you may submit new voting
instructions by contacting your broker, bank or nominee. You may
also vote in person at the special meeting if you obtain a legal
proxy from your broker, bank or nominee and present it to the
inspectors of election with your ballot when you vote at the
special meeting.
Merck
401(k) Plan Participants
If you are a participant in the Merck & Co., Inc.
Employee Savings and Security Plan, Merck & Co., Inc.
Employee Stock Purchase and Savings Plan, Hubbard LLC Employee
Savings Plan, Merck Puerto Rico Employee Savings and Security
Plan, Merck Frosst Canada Inc. Stock Purchase Plan (Merck Frosst
Plan) or Merial 401(k) Savings Plan (Merial Plan), you will
receive separate proxy voting instruction cards from the plan
trustees and you have the right to provide voting directions to
the plan trustee by submitting your voting instruction card for
those shares of Merck common stock that are held by your plan
and allocated to your plan account.
If voting instructions are not received from participants in the
Merck Frosst Plan, the plan trustee will vote the shares in
accordance with the recommendations of the Merck board of
directors.
If voting instructions are not received from participants in the
Merial Plan, the plan trustee will vote the shares in the same
proportion as it votes shares for which voting instructions are
received from plan participants.
If voting instructions are not received from participants in the
plans other than the Merck Frosst Plan and the Merial Plan
mentioned above, trustees for the other plans will not vote
shares for which voting instructions have not been received from
plan participants.
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Shareholders
Sharing an Address
Consistent with notices sent to record shareholders sharing a
single address, Merck is sending only one copy of this joint
proxy statement/prospectus to that address unless Merck received
contrary instructions from any shareholder at that address. This
householding practice reduces Mercks printing
and postage costs. Shareholders may request to discontinue
householding, or may request a separate copy of this joint proxy
statement/prospectus by one of the following methods:
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record shareholders wishing to discontinue or begin
householding, or any record shareholder residing at a household
address wanting to request delivery of a copy of this joint
proxy statement/prospectus should contact Merck Stockholder
Services, WS3AB-40, P.O. Box 100, Whitehouse Station,
NJ 08889-0100
or by calling our toll-free number 1-877-602-7615; and
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shareholders owning their shares through a bank, broker or other
holder of record who wish to either discontinue or begin
householding should contact their record holder.
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Proxy
Solicitations
Merck is soliciting proxies for the special meeting from Merck
shareholders. Merck will bear the entire cost of soliciting
proxies from Merck shareholders, except that Merck and
Schering-Plough will share equally the expenses incurred in
connection with the printing and mailing of this joint proxy
statement/prospectus. In addition to this mailing, Mercks
directors, officers and employees (who will not receive any
additional compensation for such services) may solicit proxies
by telephone or in-person meeting.
Merck has also engaged the services of Laurel Hill Advisory
Group, LLC to assist in the distribution of this joint proxy
statement/prospectus and the solicitation of proxies, for a fee
of $23,000 plus reasonable
out-of-pocket
expenses.
Merck will reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable
out-of-pocket
expenses for forwarding proxy and solicitation materials to the
beneficial owners of Merck common stock.
Other
Business
Mercks board of directors is not aware of any other
business to be acted upon at the special meeting.
THE
SCHERING-PLOUGH SPECIAL MEETING
This section contains information about the special meeting of
Schering-Plough shareholders (the Schering-Plough special
meeting) that has been called to consider and approve the
merger agreement and the issuance of shares of common stock in
the merger.
This joint proxy statement/prospectus is being furnished to the
shareholders of Schering-Plough in connection with the
solicitation of proxies by Schering-Ploughs board of
directors for use at the special meeting. Schering-Plough is
first mailing this joint proxy statement/prospectus and
accompanying proxy card to its shareholders on or about
June 29, 2009.
Date,
Time and Place of the Special Meeting
A special meeting of the shareholders of Schering-Plough will be
held at The Conference Center at Harvard Medical, 77 Avenue
Louis Pasteur, Boston, MA on Friday, August 7, 2009 at
1:30 p.m., local time, unless the special meeting is
adjourned or postponed. Directions to The Conference Center at
Harvard Medical are available at
http://www.theconfcenter.hms.harvard.edu/directions.
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Purpose
of the Special Meeting
At the special meeting, Schering-Plough shareholders will be
asked to:
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consider and act on a proposal to approve the merger agreement
and the issuance of shares of common stock in the merger
contemplated by the merger agreement;
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approve the adjournment of the Schering-Plough Special Meeting
(including, if necessary, to solicit additional proxies if there
are not sufficient votes to approve the merger agreement and the
issuance of shares of common stock in the merger); and
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transact any other business that may properly come before the
special meeting or any reconvened meeting following an
adjournment or postponement of the special meeting.
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Record
Date; Outstanding Shares Entitled to Vote
Only holders of record of shares of Schering-Plough common stock
at the close of business on June 22, 2009, the record date
for the special meeting, will be entitled to vote shares held at
that date at the Schering-Plough special meeting or any
adjournments or postponements thereof. Each outstanding share of
Schering-Plough common stock entitles its holder to cast one
vote.
As of the record date, there were 1,633,437,974 shares of
Schering-Plough common stock par value $.50 per share,
outstanding and entitled to vote at the Schering-Plough special
meeting.
Ownership
of Shares
If your shares are registered directly in your name with
Schering-Ploughs transfer agent, BNY Mellon, you are
considered, with respect to those shares, the shareholder
of record. This joint proxy statement/prospectus and the
enclosed proxy card have been sent directly to you by
Schering-Plough.
If your shares are held in a stock brokerage account or by a
bank or other nominee, you are considered the beneficial owner
of shares held in street name. This joint proxy
statement/prospectus has been forwarded to you by your broker,
bank or nominee who is considered, with respect to those shares,
the shareholder of record. As the beneficial owner of shares
held in street name, you have the right to direct your broker,
bank or nominee how to vote your shares by using the voting
instruction card included in the mailing or by following their
instructions for voting by telephone or the Internet.
Quorum
In order to transact business at the special meeting, a quorum
of Schering-Plough shareholders must be present. A quorum will
exist if holders of a majority of shares of Schering-Plough
common stock outstanding on the record date are present in
person, or represented by proxy, at the meeting. Accordingly,
the presence at the meeting, either in person or by proxy, of
holders of at least 816,718,988 shares of Schering-Plough
common stock will be required to establish a quorum.
Holders of shares of Schering-Plough common stock present in
person at the meeting but not voting, and shares of
Schering-Plough common stock for which Schering-Plough has
received proxies indicating that their holders have abstained,
will be counted as present at the meeting for purposes of
determining whether a quorum is established.
A New York Stock Exchange member broker who holds shares in
street name for a customer has the authority to vote on certain
items if the broker does not receive instructions from the
customer. Under the rules that govern brokers who have record
ownership of shares that are held in street name for their
clients, the beneficial owners of the shares, brokers have
discretion to vote these shares on routine matters but not on
non-routine matters. The approval of the merger agreement and
the issuance of shares of common stock in the merger, are not
considered routine matters. Accordingly, brokers will not have
discretionary voting authority to vote your shares at the
Schering-Plough special meeting. A broker non-vote
occurs when brokers do not have discretionary voting authority
and have not received instructions from the beneficial owners of
the shares. A broker will not be permitted to vote on the
approval of the merger agreement without instruction from the
43
beneficial owner of the shares of Schering-Plough common stock
held by that broker. Accordingly, shares of Schering-Plough
common stock beneficially owned that have been designated on
proxy cards by the broker, bank or nominee as not voted (broker
non-vote) will not be counted as votes cast for or against the
proposal to approve the merger agreement and the issuance of
shares of common stock in the merger. These broker non-votes
will, however, be counted for purposes of determining whether a
quorum exists at the special meeting.
Vote
Required
Provided a quorum of shareholders is present in person or by
proxy at the special meeting, in order to approve the merger
agreement and the issuance of shares of common stock in the
merger contemplated by the merger agreement, (1) holders of
a majority of the outstanding shares of Schering-Plough common
stock must vote at the special meeting with respect to the
proposal to approve the merger agreement and the issuance of
shares of common stock in the merger contemplated by the merger
agreement and (2) a majority of the votes cast at the
special meeting must be cast in favor of the proposal to approve
the merger agreement and the issuance of shares of common stock
in the merger contemplated by the merger agreement.
Abstentions and broker non-votes may impact whether the issuance
of the shares of common stock necessary to complete the merger
is properly approved for purposes of NYSE rules applicable to
Schering-Plough
which require that at least a majority of the Schering-Plough
shares entitled to vote on the proposal to approve the merger
agreement are actually cast for or against the proposal.
However, any shares not voted as a result of an abstention or a
broker non-vote will not be counted as voting for or against a
particular matter. Accordingly, except as relates to the
approval of shares for issuance, abstentions and broker
non-votes will have no effect on the outcome of a vote.
Regardless of whether or not a quorum of shareholders is present
in person or by proxy at the special meeting, in order to
approve any proposal to adjourn the meeting to solicit
additional proxies, holders of a majority of the shares of
Schering-Plough common stock who are present at the special
meeting must vote in favor of the proposal to adjourn the
meeting.
Recommendation
of Schering-Ploughs Board of Directors
Schering-Ploughs board of directors unanimously determined
that the merger agreement and the issuance of shares of common
stock in the merger are fair to and in the best interests of
Schering-Plough and its shareholders and unanimously approved
the merger agreement and the transactions contemplated thereby.
The Schering-Plough board of directors unanimously recommends
that Schering-Plough shareholders vote FOR the
proposal to approve the merger agreement and the issuance of
shares of common stock in the merger contemplated by the merger
agreement. See The Transaction
Schering-Ploughs Reasons for the Transaction and
Recommendation of Schering-Ploughs Board of
Directors beginning at page 70.
Schering-Plough shareholders should carefully read this joint
proxy statement/prospectus in its entirety for more detailed
information concerning the merger agreement and the proposed
transactions. In addition, Schering-Plough shareholders are
directed to the merger agreement, which is attached as
Annex A to this joint proxy statement/prospectus.
Voting by
Schering-Ploughs Directors and Executive
Officers
As of the record date, Schering-Ploughs directors and
executive officers and certain of their affiliates beneficially
owned 13,786,303 shares of Schering-Plough common stock
entitled to vote at the Schering-Plough special meeting. This
represents less than 1% of the total votes entitled to be cast
at the Schering-Plough special meeting. Each Schering-Plough
director and executive officer and certain of their affiliates
has indicated his or her present intention to vote, or cause to
be voted, the shares of Schering-Plough common stock owned by
him or her for the approval of the merger agreement and the
issuance of shares of common stock in the merger contemplated by
the merger agreement. As of the record date, Merck did not
beneficially own any shares of Schering-Plough common stock.
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How to
Vote
There are several ways for Schering-Plough shareholders to vote:
Mail. You can vote by mail by completing,
signing, dating and mailing your proxy card or voting
instruction card in the postage-paid envelope included with this
joint proxy statement/prospectus.
Vote by Telephone or Internet. If you are a
shareholder of record (that is, if you hold your shares in your
own name), you may vote by telephone (toll free) or the Internet
by following the instructions on your proxy and voting
instruction card. If your shares are held in the name of a bank,
broker or other holder of record (that is, in street
name), and if the bank or broker offers telephone and
Internet voting, you will receive instructions from them that
you must follow in order for your shares to be voted. If you
vote by telephone or the Internet, you do not need to return
your proxy and voting instruction card.
In Person. You may vote in person at the
Schering-Plough special meeting. You may also be represented by
another person at the meeting by executing a proper proxy
designating that person. If you are a beneficial owner of shares
held in street name, you must obtain a legal proxy from your
broker, bank or nominee and present it to the inspectors of
election with your ballot when you vote at the meeting. Even if
you plan to attend the meeting, Schering-Plough recommends that
you vote in advance of the meeting. You may vote in advance of
the meeting by any of the methods above.
Attending
the Special Meeting
All Schering-Plough shareholders as of the record date may
attend the Schering-Plough special meeting with an admission
ticket and a photo identification. To get an admission ticket,
Schering-Plough shareholders must write to
Schering-Ploughs transfer agent, BNY Mellon, using the
following address:
BNY Mellon Shareowner Services
480 Washington Boulevard
29th Floor
Jersey City, NJ 07310
Attn: Ann-Marie Webb
If you are a record shareholder (your shares are held in your
name), you must list your name exactly as it appears on your
stock ownership records from BNY Mellon. If you hold shares
through a bank, broker or trustee, you must also include a copy
of your latest bank or broker statement showing your ownership.
Voting of
Proxies
If you vote by Internet, by telephone or by completing, signing,
dating and mailing your proxy card or voting instruction card,
your shares will be voted in accordance with your instructions.
If you are a shareholder of record and you sign, date and return
your proxy card but do not indicate how you want to vote or do
not indicate that you wish to abstain, your shares will be voted
FOR the approval of the merger agreement and the
issuance of shares of common stock in the merger contemplated by
the merger agreement.
Revoking
Your Proxy
If you are a shareholder of record, you may revoke your proxy at
any time before it is voted at the special meeting by:
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sending a signed notice of revocation to the Corporate Secretary
of Schering-Plough;
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submitting a revised proxy bearing a later date by mail,
Internet or telephone; or
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attending the special meeting and voting in person, which will
automatically cancel any proxy previously given, or giving
written notice of revocation to the Corporate Secretary before
the proxy is voted at the special meeting. Your attendance alone
will not revoke any proxy that you have previously given.
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If you choose either of the first two methods, you must submit
your notice of revocation or your new proxy no later than the
beginning of the special meeting. If you are a beneficial owner
of shares of Schering-Plough common stock, you may submit new
voting instructions by contacting your broker, bank or nominee.
You may also vote in person at the special meeting if you obtain
a legal proxy from your broker, bank or nominee and present it
to the inspectors of election with your ballot when you vote at
the special meeting.
Schering-Plough
Employee Savings Plan Participants
If you are a current or former Schering-Plough employee with
shares of Schering-Plough common stock credited to an account
under the Schering-Plough Employees Savings Plan or the
Schering-Plough Puerto Rico Employees Retirement Savings
Plan, you will receive a proxy and voting instruction card.
If you do not give voting instructions to the plan trustee by
mailing your proxy and voting instruction card or voting by
Internet or telephone, the plan trustee will vote shares you
hold in the Employees Savings Plan or in the Puerto Rico
Employees Savings Plan in the same proportion as shares
held in that plan for which voting instructions were timely
received. To allow sufficient time for the plan trustee to vote
your shares under either plan, your voting instructions must be
received by 5:00 p.m. (Eastern Time) on Tuesday,
August 4, 2009.
Shareholders
Sharing an Address
Consistent with notices sent to record shareholders sharing a
single address, Schering-Plough is sending only one copy of this
joint proxy statement/prospectus to that address unless
Schering-Plough received contrary instructions from any
shareholder at that address. This householding
practice reduces Schering-Ploughs printing and postage
costs. Shareholders may request to discontinue householding, or
may request a separate copy of this joint proxy
statement/prospectus by one of the following methods:
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record shareholders wishing to discontinue or begin
householding, or any record shareholder residing at a household
address wanting to request delivery of a copy of this joint
proxy statement/prospectus should contact Schering-Ploughs
transfer agent, BNY Mellon, at
877-429-1240
(U.S.),
201-680-6685
(outside of the U.S.) or www.bnymellon.com/shareowner/isd or may
write to them at Schering-Plough Corporation,
c/o BNY
Mellon Shareowner Services, P.O. Box 358015,
Pittsburgh,
Pennsylvania 15252-8015; and
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shareholders owning their shares through a bank, broker or other
holder of record who wish to either discontinue or begin
householding should contact their record holder. Any shareholder
in the household may request prompt delivery of a copy of this
joint proxy statement/prospectus by contacting
Schering-Plough
at
908-298-3636
or may write to Schering-Plough at Office of the Corporate
Secretary, Schering-Plough Corporation, 2000 Galloping Hill
Road, Mail Stop: K-1-4-4525, Kenilworth, New Jersey 07033.
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Proxy
Solicitations
Schering-Plough has retained Georgeson Shareholder
Communications, Inc. to solicit proxies for the special meeting
from Schering-Plough shareholders for a fee of $30,000 plus
reasonable
out-of-pocket
expenses. Schering-Plough will bear the entire cost of
soliciting proxies from Schering-Plough shareholders, except
that Merck and Schering-Plough will share equally the expenses
incurred in connection with the printing and mailing of this
joint proxy statement/prospectus. In addition to this mailing,
Schering-Ploughs directors, officers and employees (who
will not receive any additional compensation for such services)
may solicit proxies. Solicitation of proxies will be undertaken
through the mail, in person, by telephone, the Internet, and
videoconference.
Schering-Plough will reimburse brokerage houses and other
custodians, nominees and fiduciaries for their reasonable
out-of-pocket
expenses for forwarding proxy and solicitation materials to the
beneficial owners of Schering-Plough common stock.
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Other
Business
Schering-Ploughs board of directors is not aware of any
other business to be acted upon at the special meeting.
THE
PARTIES TO THE MERGER AGREEMENT
Merck &
Co., Inc.
One Merck Drive
Whitehouse Station, NJ 08889
Telephone:
(908) 423-1000
Merck, a New Jersey corporation, is a global research-driven
pharmaceutical company that discovers, develops, manufactures
and markets a broad range of innovative products to improve
human and animal health. Merck products are sold in over 140
countries, in the Americas, Europe, Asia-Pacific, Middle East
and Africa. Merck operates manufacturing facilities at sites in
25 countries. Merck has production facilities for human health
products at seven locations in the United States and Puerto Rico
and, through subsidiaries, owns or has an interest in
manufacturing plants or other properties in Australia, Canada,
Japan, Singapore, South Africa, and other countries in
Western Europe, Central and South America and Asia.
Mercks operations are principally managed on a products
basis and are comprised of two reportable segments: the
pharmaceutical segment and the vaccines and infectious diseases
segment. The pharmaceutical segment includes products consisting
of therapeutic and preventive agents, sold by prescription, for
the treatment of human disorders and sold by Merck primarily to
drug wholesalers and retailers, hospitals, government agencies
and managed healthcare providers such as health maintenance
organizations, pharmacy benefit managers and other institutions.
In 2008, Merck recorded $19.4 billion of revenues in its
pharmaceutical segment. The vaccines and infectious diseases
segment includes human health vaccine products consisting of
preventative pediatric, adolescent and adult vaccines, primarily
administered at physician offices, and infectious disease
products consisting of therapeutic agents for the treatment of
infection sold primarily to drug wholesalers and retailers,
hospitals and government agencies. In 2008, Merck recorded
$4.2 billion of revenues in its vaccines and infectious
diseases segment.
Merck common stock (NYSE: MRK) is listed on the NYSE.
Additional information about Merck and its subsidiaries is
included in the documents incorporated by reference into this
joint proxy statement/prospectus. See Where You Can Find
More Information on page 157.
Schering-Plough
Corporation
2000 Galloping Hill Road
Mailstop K-1-4525
Kenilworth, NJ 07033
Telephone:
(908) 298-4000
Schering-Plough, a New Jersey corporation, is an
innovation-driven, science-centered global health care company.
Currently, Schering-Plough has business operations in more than
140 countries. Through its own biopharmaceutical research and
collaborations with partners, Schering-Plough creates therapies
that help save and improve lives around the world.
Schering-Plough applies its research and development platform to
prescription pharmaceuticals, animal health, and consumer health
care products. The prescription pharmaceuticals segment
discovers, develops, manufactures and markets human
pharmaceutical products. Within the prescription pharmaceuticals
segment, Schering-Plough has a broad range of research projects
and marketed products in six therapeutic areas: cardiovascular,
central nervous system, immunology and infectious disease,
oncology, respiratory and womens health. The animal health
segment discovers, develops, manufactures and
47
markets animal health products, including vaccines. The consumer
health care segment develops, manufactures and markets
over-the-counter
(OTC), footcare and sun care products.
Schering-Plough common stock (NYSE: SGP) is listed on the NYSE.
Additional information about Schering-Plough and its
subsidiaries is included in the documents incorporated by
reference into this joint proxy statement/prospectus. See
Where You Can Find More Information on page 157.
SP Merger
Subsidiary One, Inc.
2000 Galloping Hill Road
Mailstop K-1-4525
Kenilworth, NJ 07033
Telephone:
(908) 298-4000
SP Merger Subsidiary One, Inc., formerly known as Blue, Inc. and
which is sometimes referred to in this joint proxy
statement/prospectus as Merger Sub 1, is a wholly owned
subsidiary of Schering-Plough formed solely for the purpose of
executing the Schering-Plough merger. Merger Sub 1 has not
carried on any activities or operations to date, except for
those activities incidental to its formation and undertaken in
connection with the transactions contemplated by the merger
agreement. By operation of the Schering-Plough merger, Merger
Sub 1 will be merged into Schering-Plough, Merger Sub 1s
separate existence will cease, and Schering-Plough will be the
surviving corporation upon completion of the Schering-Plough
merger.
SP Merger
Subsidiary Two, Inc.
2000 Galloping Hill Road
Mailstop K-1-4525
Kenilworth, NJ 07033
Telephone:
(908) 298-4000
SP Merger Subsidiary Two, Inc., formerly known as Purple, Inc.
and which is sometimes referred to in this joint proxy
statement/prospectus as Merger Sub 2, is a wholly owned
subsidiary of Schering-Plough formed solely for the purpose of
executing the Merck merger. Merger Sub 2 has not carried on any
activities or operations to date, except for those activities
incidental to its formation and undertaken in connection with
the transactions contemplated by the merger agreement. By
operation of the Merck merger, Merger Sub 2 will be merged into
Merck, Merger Sub 2s separate existence will cease and
Merck will continue as a direct wholly owned subsidiary of the
corporation that survives the Schering-Plough merger.
THE
TRANSACTION
The following is a description of certain material aspects of
the transaction. While we believe that the following description
covers the material terms of the transaction, the description
may not contain all of the information that may be important to
you. The discussion of the transaction in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the merger agreement. The merger agreement is attached to
this joint proxy statement/prospectus as Annex A for
purposes of providing you with information regarding its terms,
and is incorporated by reference into this document. It is not
intended to provide any other factual information about either
Merck or Schering-Plough. We encourage you to read carefully
this entire joint proxy statement/prospectus, including the
merger agreement, for a more complete understanding of the
transaction.
General
Description of the Transaction
On March 8, 2009, the boards of directors of Merck and
Schering-Plough approved the merger agreement, which provides
for the combination of Merck and Schering-Plough through two
successive mergers. In the Schering-Plough merger, SP Merger
Subsidiary One, Inc., a newly formed and wholly owned subsidiary
of Schering-Plough will be merged with and into Schering-Plough,
after which SP Merger Subsidiary One, Inc.
48
will cease to exist and Schering-Plough will be the surviving
corporation, be renamed Merck & Co., Inc., referred to
as New Merck in this joint proxy
statement/prospectus, and remain the publicly listed ultimate
parent of the combined company. In the Merck merger, SP Merger
Subsidiary Two, Inc., a newly formed and wholly owned subsidiary
of Schering-Plough will be merged with and into Merck, after
which SP Merger Subsidiary Two, Inc. will cease to exist and
Merck will continue as the surviving corporation in that merger
and will become a wholly owned subsidiary of New Merck.
Upon completion of the Schering-Plough merger, each share of
Schering-Plough common stock will be converted into the right to
receive $10.50 in cash, without interest, and 0.5767 of a share
of New Merck common stock (other than shares of Schering-Plough
common stock held by a wholly owned subsidiary of
Schering-Plough that will be converted solely into common stock
of New Merck as contemplated by the merger agreement). Upon
completion of the Merck merger, each share of Merck common stock
will automatically be converted into one share of New Merck
common stock. Schering-Plough shareholders will not receive any
fractional shares of New Merck common stock in the
Schering-Plough merger. Instead, a cash payment will be made to
such shareholders as described more fully in the section of this
joint proxy statement/prospectus entitled The Merger
Agreement Merger Consideration beginning on
page 102.
Based upon the closing price of Merck common stock on the NYSE
on March 6, 2009, the last trading day before the
announcement of the signing of the merger agreement, the
aggregate consideration payable to the Schering-Plough
shareholders in the Schering-Plough merger had a value of
approximately $41.1 billion. We expect that, immediately
after the merger, the former shareholders of Merck and
Schering-Plough will own approximately 68% and 32%,
respectively, of New Mercks outstanding common stock.
At the Merck special meeting of shareholders, the holders of
Merck common stock will be asked to vote upon a proposal to
approve the merger agreement and thereby approve the Merck
merger.
At the Schering-Plough special meeting of shareholders, holders
of Schering-Plough common stock will be asked to vote upon a
proposal to approve the merger agreement and thereby approve the
Schering-Plough merger and the issuance of shares of common
stock required to complete the Merck merger.
Background
of the Transaction
Over several months beginning in June 2008, in light of the
economic and regulatory landscape and trends in the
pharmaceutical industry, Merck senior management engaged in an
extensive review of strategic alternatives for its business,
including mergers and strategic combinations with numerous
companies of different sizes and having a variety of business
models. These strategic alternatives were reviewed by
Mercks board of directors at regularly scheduled board
meetings held in July, September, October and November of 2008.
In early December 2008, Mr. Bruce Kuhlik, Executive Vice
President and General Counsel of Merck, contacted
Mr. Thomas J. Sabatino, Jr., Executive Vice President
and General Counsel of Schering-Plough, and stated that
Mr. Richard Clark, Chairman, President and Chief Executive
Officer of Merck, wished to meet with Mr. Fred Hassan,
Chairman and Chief Executive Officer of Schering-Plough, to
discuss strategic options relating to the two companies. After
Mr. Kuhlik and Mr. Sabatino agreed upon a limited
waiver of a pre-existing standstill to allow the discussion, on
December 5, Mr. Clark and Mr. Kuhlik met with
Mr. Hassan and Mr. Sabatino. In that meeting,
Mr. Clark and Mr. Hassan discussed the changing
economic and regulatory environment and Mr. Clark generally
outlined Mercks views of strategies and opportunities to
address the evolving environment and industry trends.
Mr. Clark indicated that Mercks management and board
believed that a business combination merited serious
consideration for Merck, that Schering-Plough appeared to be an
excellent fit and that a compelling combination between the two
companies could be constructed. Mr. Hassan thanked
Mr. Clark and noted that Schering-Plough was not for sale,
and that, based on recent thorough consideration of strategic
direction, both senior management and the board were confident
in the prospects of Schering-Plough as a standalone company.
Mr. Hassan agreed, however, to discuss
Mr. Clarks statements with the Schering-Plough board.
49
Following that meeting, Schering-Plough retained the law firm of
Wachtell, Lipton, Rosen & Katz to provide legal
counsel in connection with the discussion. In anticipation of a
proposal from Merck, Schering-Plough requested that Wachtell
Lipton review the applicable charter, bylaws, and other material
documents that might be implicated by a transaction.
Schering-Plough also retained Goldman, Sachs & Co. as
its financial advisor and requested that it analyze the
financial prospects of the company, and the broader industry
dynamics, in preparation for a potential proposal from Merck for
a business combination of the two companies.
On December 10, 2008, the Schering-Plough board held a
special meeting, with representatives of Goldman Sachs and
Wachtell Lipton in attendance. At the meeting, the board
discussed the companys financial position and operational
strategy and discussed the current economic and regulatory
environment, as well as the overall industry landscape and
trends in the industry. The Schering-Plough board discussed the
prospects for Schering-Plough in light of these overall trends,
and considered the circumstances under which a business
combination with Merck, or other third parties, might be in the
best interests of Schering-Ploughs shareholders. The board
reiterated its conclusion from its annual comprehensive
consideration of strategic direction: the prospects of
Schering-Plough on a standalone basis were promising, even in
light of the current environment, and Schering-Plough had the
strength to build long-term shareholder value without a major
strategic combination. The Schering-Plough board also discussed
whether other companies in addition to Merck might contemplate a
proposal for a business combination with Schering-Plough.
Wachtell Lipton reviewed with the Schering-Plough board the
fiduciary duties of directors in the context of considering a
potential proposal for a business combination with Merck. In the
December 10, 2008 meeting, the Schering-Plough board also
discussed with its legal advisors their views as to the
potential impacts of a business combination with Merck on the
companys key collaborations. The board indicated that it
was comfortable with Mr. Hassan continuing to learn what
Merck might propose in terms of a strategic combination.
On December 11, 2008, Mr. Kuhlik and Mr. Sabatino
spoke by telephone about the reaction of the Schering-Plough
board to a possible combination of the companies. Following that
discussion, Merck retained J.P. Morgan as its financial
advisor to assist it in its preparation of a potential proposal
for a combination with Schering-Plough. Merck also consulted the
law firm Fried, Frank, Harris, Shriver & Jacobson LLP,
its legal counsel retained in connection with Mercks
consideration of a potential combination with Schering-Plough.
On December 15, 2008, Mr. Hassan and Mr. Clark
spoke by telephone. Mr. Hassan emphasized again that
Schering-Plough was not seeking a strategic transaction, and
that Schering-Plough was confident in its prospects on a
standalone basis. The two chief executive officers discussed
general industry trends as well as the possibility of further
industry consolidation, in addition to each of the
companies prospects and the possibility of and potential
benefits from a business combination between the two companies,
but did not discuss the specific terms of any potential
combination.
Later that evening at a regularly scheduled board-only dinner,
Mr. Clark updated the members of the Merck board regarding
his earlier call with Mr. Hassan and the board generally
discussed, among other things, the potential combination with
Schering-Plough.
On December 16, 2008 at a regularly scheduled meeting of
the Merck board, Mr. Clark and members of Mercks
senior management discussed with the board possible next steps
in connection with the potential combination with
Schering-Plough. After the meeting, Mr. Kuhlik contacted
Mr. Sabatino to express a desire for Mercks outside
legal counsel to meet with Schering-Ploughs outside legal
counsel to discuss a potential transaction. Mr. Sabatino
responded that, prior to taking any steps toward a potential
transaction,
Schering-Plough
would need to be comfortable that Merck could present a
compelling proposal for a business combination, emphasizing
again that Schering-Plough was confident in its prospects on a
standalone basis and that the company was not seeking a
combination transaction. Mr. Kuhlik said that
Mr. Clark would be in contact with Mr. Hassan.
On December 19, 2008, Mr. Clark contacted
Mr. Hassan. Mr. Clark reiterated that Mercks
board supported exploring a potential transaction with
Schering-Plough and discussed with Mr. Hassan the
possibility of a meeting between the financial advisors for the
two companies to attempt to assess the appropriate valuation of
Schering-Plough and the potential benefits of a business
combination and to discuss other financial aspects of a
potential transaction. Mr. Hassan reiterated that any such step
would occur only after,
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and if, it was clear that Merck could present a compelling
proposal for a combination with Schering-Plough that would be in
the best interests of Schering-Ploughs shareholders.
Mr. Clark responded that, although he believed that a
meeting between financial advisors would be helpful, Merck was
in the process of evaluating a combination with Schering-Plough
and could soon be in a position to present a preliminary
proposal based on publicly available information, if necessary.
Mr. Clark and Mr. Hassan discussed an appropriate time
for their next meeting, and determined to meet the following
week. Mr. Hassan contacted Mr. Clark soon after to
propose that the two meet instead on January 5, 2009, to
enable Mercks financial advisors ample time to complete
their financial analysis. Mr. Clark agreed.
On December 23, 2008, the Merck board held a special
meeting via teleconference at which Mr. Clark updated the
board on his conversation with Mr. Hassan. At the meeting,
members of Mercks senior management, representatives of
J.P. Morgan and representatives of Fried Frank discussed
with the board various considerations in connection with a
potential combination with Schering-Plough. In addition,
representatives of Fried Frank reviewed the fiduciary duties of
the board in the context of a potential business combination
with Schering-Plough. At this meeting, the board authorized
Mr. Clark to make a preliminary non-binding proposal for a
business combination with Schering-Plough.
On January 5, 2009, Mr. Clark and Mr. Hassan met.
Mr. Clark indicated that, based only on publicly available
information, Merck would be prepared to propose a combination
transaction in which Schering-Ploughs shareholders would
receive cash and stock having a total value in the range of
$21.50 to $22.50 per share of Schering-Plough stock, which he
noted was an approximate 30 percent premium to a recent
trading range and compared well with the premiums associated
with other similar transactions. Mr. Clark indicated that,
in Mercks contemplated transaction, Schering-Ploughs
shareholders would receive merger consideration comprised of
approximately
40-50 percent
cash, with the remainder in common stock of the combined
company. Mr. Clark stated that he believed that
Mercks due diligence on Schering-Plough would require
approximately two weeks and that Schering-Plough would have the
opportunity to conduct due diligence on Merck during that time.
Mr. Hassan responded that the range was below the value
that Schering-Plough ascribed to the company, based on
preliminary analysis by Goldman Sachs. In response,
Mr. Clark suggested that the companies financial
advisors meet to understand more fully the details and the
underlying assumptions of Mercks proposal and
Schering-Ploughs own views of valuation and potential
benefits in a combination of the companies.
On January 7, 2009, representatives of Goldman Sachs and
J.P. Morgan met to discuss Mercks valuation of
Schering-Plough. J.P. Morgan clarified details of the
proposal and described the methodology and assumptions
underlying the $21.50-$22.50 valuation, including, among other
things, the estimates of the potential synergies and other
benefits that might be available in a combination of Merck and
Schering-Plough based on synergy levels achieved in precedent
mergers in the pharmaceutical industry. Goldman Sachs noted that
Mercks estimate of potential synergies was low based on
publicly available information. In the meeting, J.P. Morgan
noted that Merck might have a basis to increase its views of
valuation and potential synergies if Merck were provided with
additional information relating to Schering-Ploughs early
stage pipeline and key collaborations.
On January 9, 2009, the Schering-Plough board held a
telephonic update, with representatives of Goldman Sachs and
Wachtell Lipton participating. The board discussed the initial
value indication from Merck with its senior management and
financial advisors, and concluded that the indication was
insufficient and not a basis to proceed with the diligence
process that Mr. Clark had proposed. After consultation
with senior management and Schering-Ploughs financial and
legal advisors, the board directed Mr. Hassan to inform
Merck that the board was not prepared to proceed with full due
diligence based on the indicated valuation, but that
Mr. Hassan could authorize a further meeting between key
officers regarding valuation and potential synergies, including
the chief financial officer of Schering-Plough, Mr. Robert
Bertolini, and the chief financial officer of Merck,
Mr. Peter Kellogg, along with the companies financial
advisors, as had been suggested by Mr. Clark. The board
also authorized a meeting, if Mr. Hassan deemed it
appropriate, to provide Merck with additional information,
including information about the early stage pipeline, as had
been requested by Mr. Clark. After the
Schering-Plough
board meeting, Mr. Sabatino contacted Mr. Kuhlik to
inform him that the board had determined that it would not
proceed with full due diligence at the indicated valuation. He
informed Mr. Kuhlik
51
that the board had authorized Mr. Bertolini to meet with
Mr. Kellogg, along with the companies financial
advisors, to assist Merck in better understanding the potential
synergies between the two companies, at the same time making
clear that such a meeting would be a discussion aimed at testing
the assumptions underlying the initial value indication, and was
not for the purpose of providing due diligence to Merck.
Also during the January 9, 2009 Schering-Plough board update,
Schering-Ploughs financial advisors noted that another
company (Company X) potentially had the financial
and operational capacity to complete a strategic transaction
with Schering-Plough and that, other than Merck, Company X was,
in their view, the entity most likely to be interested in and
capable of completing a strategic transaction with
Schering-Plough. The board determined that it would be
appropriate to better understand Company Xs interest
before making a determination as to Schering-Ploughs
response to the approach by Merck. Accordingly, the board asked
Mr. Hassan to contact Company X to understand the interest
of Company X and to assess any such interest in light of the
approach by Merck.
After the January 9, 2009 Schering-Plough board update,
Mr. Hassan contacted the chief executive officer of Company
X, informing him that Schering-Plough had been approached by an
unnamed company about a potential business combination with
Schering-Plough. The two chief executive officers agreed to meet.
On January 12, 2009, Mr. Hassan and the chief
executive officer of Company X met. Mr. Hassan noted to the
chief executive officer of Company X that he had been approached
by another company regarding a possible business combination.
The chief executive officer of Company X expressed potential
interest in the possibility of a business combination and the
chief executive officers agreed to authorize a meeting between
senior members of Schering-Plough and Company X management to
discuss the potential benefits of such a transaction. In
preparation for such a meeting, they agreed on the need for a
confidentiality agreement.
The following day, January 13, 2009, Mr. Sabatino sent
a proposed confidentiality agreement to the general counsel of
Company X.
On January 15, 2009, Merck and Schering-Plough entered into
a confidentiality agreement. That same day, Mr. Kellogg met
with Mr. Bertolini, and other financial executives from
both companies, along with each of the companies financial
advisors. The Schering-Plough representatives discussed their
view of potential synergies to be realized in a combination of
Merck and Schering-Plough.
On January 16, 2009, during a special meeting of
Mercks board via teleconference at which members of senior
management and representatives of J.P. Morgan were present,
Mr. Clark updated the board on the status of discussions
and activities involving the potential combination with
Schering-Plough. At that meeting, after consultation with senior
management and Mercks financial advisors, the board
authorized Mr. Clark to deliver a revised proposal for a
business combination. Also that day, Mercks financial
advisors informed
Schering-Ploughs
financial advisors that they would consider the information
obtained in the meeting the prior day and return with feedback.
Also on January 16, 2009, Mr. Sabatino continued
negotiating the confidentiality agreement with the general
counsel of Company X.
On January 19, 2009, representatives of J.P. Morgan
contacted Goldman Sachs and requested a meeting for
January 21, 2009, to learn more information about
Schering-Ploughs early pipeline. J.P. Morgan proposed
that the meeting be followed by a meeting between Mr. Clark
and Mr. Hassan the following day. After discussion amongst
Schering-Plough senior management and the companys
financial and legal advisors, Mr. Sabatino contacted
Mr. Kuhlik and agreed to arrange the meeting.
On January 21, 2009, Company X and Schering-Plough
finalized and executed the confidentiality agreement to enable
Company X to obtain information about Schering-Plough and
discuss a possible business combination.
Also on January 21, 2009, members of senior management of
Schering-Plough met with members of senior management of Company
X, including Mr. Hassan and the chief executive officer of
Company X. At the meeting, Schering-Plough discussed information
from publicly available sources regarding various aspects of its
business, including information about Schering-Ploughs
early stage pipeline. The information included a synthesis of
information previously provided to industry analysts at various
company events. At the conclusion
52
of the meeting, the chief executive officer of Company X
inquired as to the required timing for any proposal that Company
X might present. Mr. Hassan responded that, in light of the
motivated overture from the other company, Company X should act
expeditiously.
Later in the day on January 21, 2009, members of
Schering-Ploughs research and development team met with
their counterparts at Merck, along with representatives of
Goldman Sachs and J.P. Morgan, to discuss the early stage
pipeline of Schering-Plough. Following the meeting,
Mr. Kuhlik contacted Mr. Sabatino to notify him that
Mr. Clark would be contacting Mr. Hassan the following
day to provide Mr. Hassan a clearer picture of Mercks
views of a potential business combination in light of the
information obtained during the previous weeks meetings of
the companies representatives.
On January 23, 2009, Mr. Clark and Mr. Hassan
met. Mr. Clark informed Mr. Hassan that the meetings
over the prior week had been very helpful, both in terms of
developing a better understanding of
Schering-Plough
and also to assist in Merck refining its views of valuation of
the company and its assessment of the potential benefits of a
business combination. Noting that there appeared to be a good
fit between the two companies, Mr. Clark informed
Mr. Hassan that Mercks revised value indication was
$24 per share of Schering-Plough common stock, an indication
that was based on the additional information obtained during the
meeting between J.P. Morgan and Goldman Sachs regarding
valuation and underlying assumptions, but that did not
necessarily fully reflect evaluation and analysis of the
information obtained during the meeting regarding
Schering-Ploughs early pipeline held on January 21.
Mr. Clark noted that
50-60 percent
of the proposed merger consideration would be comprised of
common stock of the combined company, resulting in ownership by
Schering-Plough shareholders of approximately
25-30 percent
of the combined company. Mr. Clark also noted that if
Schering-Plough provided the due diligence that Merck had
requested, Merck might have a basis for increasing its view of
the value of Schering-Plough.
Mr. Hassan responded that the revised value indication
remained below the zone that would be of interest, but said that
he would discuss the revised proposal with the Schering-Plough
board. Mr. Clark indicated that Merck had a regularly
scheduled board meeting on February 23, 2009, and said that
he would be interested in having a clear understanding with
Mr. Hassan as to the potential value of Schering-Plough in
a combination with Merck before that time. Mr. Clark also
requested a meeting between the two companies legal
advisors to discuss the implications of a transaction for
Schering-Ploughs key collaborations.
Also that day, the assigned research and development lead at
Company X contacted Dr. Thomas Koestler, head of research
and development at Schering-Plough, and the two individuals
agreed to hold a
follow-up
meeting on the afternoon of Sunday, January 25, 2009. The
chief executive officer of Company X indicated to
Mr. Hassan that after that meeting had occurred, Company X
would be able to provide a response to
Schering-Plough.
On January 25, 2009, Dr. Koestler along with
Ms. Carrie Cox, Executive Vice President and President,
Global Pharmaceutical Business at Schering-Plough, met with
senior members of Company Xs research and commercial teams
for a technical discussion focusing on Schering-Ploughs
early stage pipeline and the companies commercial
prospects.
On January 27, 2009, Schering-Plough engaged Morgan
Stanley & Co. Incorporated as an additional financial
advisor to assist in evaluating a potential transaction in view
of Morgan Stanleys deep historical knowledge of
Schering-Plough
and their expertise in pharmaceutical industry transactions.
On January 28, 2009, the Schering-Plough board held a
telephonic update on recent developments with respect to
discussions with Merck and with Company X. Representatives of
both Goldman Sachs and Morgan Stanley, along with
representatives of Wachtell Lipton, were present.
Schering-Plough management expressed the view that Mercks
proposal did not fully value Schering-Plough and the benefits
that would be derived from a business combination with
Schering-Plough. The Schering-Plough board considered
Mercks request for full due diligence and its suggestion
that such diligence could result in a higher value indication.
After further discussion, however, the board determined not to
approve full due diligence until Merck returned with a value
indication that more appropriately reflected
Schering-Ploughs view of the value of the company and of
the benefits to be derived from a business combination.
53
Mr. Hassan conveyed this information to Mr. Clark in a
January 29, 2009 telephone call.
On January 30, 2009, during a special meeting of the Merck
board via teleconference at which members of Mercks senior
management and representatives of J.P. Morgan participated,
Mr. Clark and senior management updated the board on the
progress made since January 16, 2009 in connection with the
potential business combination with Schering-Plough.
After further internal discussions, and in an effort to assist
Merck in understanding the basis for
Schering-Ploughs
belief that Mercks valuation of Schering-Plough should be
increased, Schering-Plough determined to provide Merck with
limited due diligence information based on publicly available
information. The companies scheduled a meeting for
February 3, 2009. Two days prior to the meeting,
representatives of J.P. Morgan contacted Goldman Sachs to
understand what information was expected to be presented during
the meeting and inquired as to whether outside counsel could
have a meeting soon afterwards.
On February 3, 2009, members of senior management of
Schering-Plough met with members of senior management of Merck
to discuss various aspects of Schering-Ploughs and
Mercks businesses, including discussions regarding the
basis for Schering-Ploughs view that Mercks
valuation of Schering-Plough needed to be increased and
Mercks belief that its common stock was currently
undervalued.
On February 4, 2009, attorneys from Wachtell Lipton and
Schering-Plough met with representatives of Merck to discuss
Schering-Ploughs collaboration agreements.
On February 5, 2009, Mr. Hassan received a call from
the chief executive officer at Company X. The chief executive
officer of Company X noted that his team had been working
diligently on assessing the possibility for a business
combination but had determined not to proceed with a proposal at
that time.
Also that day, Mr. Clark called Mr. Hassan and
indicated that he understood the early stage pipeline and legal
meetings had been very productive and that Merck was likely
willing to increase its proposed merger consideration for
Schering-Plough, but would first like an indication from
Schering-Plough as to what valuation they would believe to be
appropriate. Mr. Hassan declined to respond with
specificity. Instead, after a lengthy discussion,
Mr. Hassan and Mr. Clark agreed that the chief
financial officers from the companies meet again to attempt to
bridge the differences in their respective views of the value of
Schering-Plough, and also to gain a better understanding of
Mercks business and financial prospects.
On February 7, 2009, representatives of J.P. Morgan
contacted Goldman Sachs. The two financial advisors discussed
next steps, and confirmed the planned meeting between the two
chief financial officers. J.P. Morgan requested that
Mr. Bertolini describe Schering-Ploughs financial and
business prospects at the meeting.
On the afternoon of February 9, 2009, the Schering-Plough
board held a telephonic update, which included participation by
senior management of Schering-Plough. At the meeting,
Mr. Hassan updated the board on recent developments,
including his discussion with the chief executive officer of
Company X and Company Xs determination that it was not in
a position at that time to make a proposal for a business
combination. Mr. Hassan also updated the board on recent
discussions with Merck, and noted that
Schering-Ploughs
chief financial officer was scheduled to meet with his
counterpart from Merck that week to obtain a better
understanding of Mercks business and financial prospects
and also to discuss Schering-Ploughs business and
financial prospects. After an interactive discussion with
management, the board met in a board-only discussion. The board
concluded that they were comfortable with the proposed meeting
between chief financial officers, as well as additional due
diligence as deemed appropriate by Mr. Hassan.
Also on February 9, 2009, during a special meeting via
teleconference at which representatives of Fried Frank were
present, Mr. Clark, together with members of senior
management, updated the Merck board on the progress made since
January 30, 2009 in connection with the potential business
combination with Schering-Plough.
On February 11, 2009, Mr. Kellogg and other Merck
executives met with Mr. Bertolini, Ms. Cox and other
members of Schering-Plough management, along with
J.P. Morgan, Goldman Sachs and Morgan Stanley. The
discussion included each of the companies describing its
commercial, business, and financial prospects to the other
company. The representatives of Merck indicated that the mix of
cash and stock consideration to be received by the
Schering-Plough shareholders in the proposed business
combination was designed to enable
54
the combined company to maintain the flexibility required to
complete additional licensing arrangements and that
Schering-Plough shareholders would benefit as shareholders of
the combined entity. The Merck representatives noted that
Mr. Clark and Mr. Hassan would both be in attendance
at an industry meeting in Washington, D.C. the following
Thursday, February 19, 2009, and Merck proposed a meeting
at that time.
On February 13, 2009, attorneys from Wachtell Lipton and
Schering-Plough met with attorneys from Fried Frank at the
offices of Wachtell Lipton to discuss legal issues relating to
the potential business combination. Also that day,
Mr. Kuhlik contacted Mr. Sabatino to discuss
expectations for the meeting between Mr. Clark and
Mr. Hassan proposed for February 19, 2009, when the
two men would be attending the industry meeting in
Washington, D.C. Mr. Kuhlik indicated that
Mercks goal was to reach an understanding as to the
aggregate merger consideration that day, subject to due
diligence and to the negotiation of definitive documentation
acceptable to both parties, and recognizing that both parties
would need to discuss any proposal with their respective boards.
On February 16, 2009, representatives of J.P. Morgan
called Goldman Sachs to discuss a
follow-up
meeting that had been scheduled for February 18, 2009
between the chief financial officers, which the companies
respective financial advisors would also be attending. Goldman
Sachs requested that J.P. Morgan discuss their pro forma
estimates as well as their plans for financing the potential
transaction. J.P. Morgan noted on that call that, should
the companies decide to pursue a transaction, the target
announcement date was envisioned to be the week of March 9,
2009.
On February 17, 2009, during a special meeting via
teleconference at which representatives of J.P. Morgan were
present, Mr. Clark, together with members of senior
management, updated the Merck board on the progress made since
February 9, 2009 in connection with the potential business
combination with Schering-Plough. Later that day, Mr. Clark
telephoned Mr. Hassan to confirm plans for the chief
financial officers to meet.
On February 18, 2009, at a meeting of the chief financial
officers and the financial advisors, representatives of
J.P. Morgan described the anticipated financing in some
detail, and discussed methodologies and alternatives for setting
an exchange ratio for the stock portion of the consideration.
On February 19, 2009, Mr. Clark and Mr. Hassan
met after the industry meeting in Washington D.C. At the
meeting, Mr. Clark delivered a revised business combination
proposal to Mr. Hassan in which
Schering-Plough
shareholders would receive merger consideration in the amount of
$10.50 in cash and an amount of combined company common stock
that, based on the share price of Merck common stock at the
time, resulted in a nominal price in the mid to high $25 range
in aggregate consideration per share of Schering-Plough common
stock. The proposed stock component was to be based on the
average share price of Merck common stock for the 30 days
ending on the day before announcement. Based on the closing
price per share of Schering-Plough common stock of $18.62 on
February 18, 2009, the revised proposal reflected a premium
over Schering-Ploughs stock price on that date in the
range of 37% to 39%. Mr. Hassan thanked Mr. Clark for
his proposal, but responded with the request for merger
consideration for the Schering-Plough shareholders with a
greater nominal price. If Merck could agree to merger
consideration with an acceptable higher value, Mr. Hassan
said that he would recommend a combination between the two
companies to his board, although he emphasized that the
transaction would need to be structured so that there was a high
degree of certainty of closing and that the financing commitment
would have to be solid. Mr. Clark indicated that Merck
would consider whether it could agree to merger consideration
with a nominal price of $26.25 per share of
Schering-Plough.
Assuming the board would authorize the increased consideration,
Mr. Clark and Mr. Hassan agreed to commence due
diligence and contract negotiations. Mr. Hassan noted that
the Schering-Plough board would be meeting on February 27,
2009, and that of course any authorization to proceed would be
subject to their approval at each stage.
Mr. Clark called Mr. Hassan later that afternoon to
confirm that Merck was willing to proceed with a transaction in
which Schering-Plough shareholders would receive merger
consideration with a nominal price of $26.25 subject to due
diligence.
That same day, representatives of J.P. Morgan contacted
Goldman Sachs and Morgan Stanley to confirm that the Merck
proposal was for merger consideration of $10.50 in cash and an
amount of combined company
55
common stock with a nominal price of $15.75, determined by
dividing $15.75 by the trailing 30 day volume weighted
average price of Merck common stock ending on the day prior to
announcement.
Also, later that day, Mr. Kuhlik contacted
Mr. Sabatino to discuss the process for completing due
diligence expeditiously and the process for negotiating the
merger agreement.
On February 21, 2009, Merck sent a due diligence request
list to Schering-Plough requesting items to review prior to
reaching a definitive agreement.
On February 22, 2009, the Schering-Plough board held a
telephonic update with the Schering-Plough management team,
which included participation of its outside legal advisor and
its outside financial advisors. Following a discussion with the
outside financial advisors and outside legal advisor, the
Schering-Plough board convened in executive session to discuss
Mercks recent proposal. After discussion, the
Schering-Plough board authorized Mr. Hassan to proceed to
negotiate toward a definitive agreement. The board asked that a
special session on the proposed transaction be included in the
schedule for the Friday, February 27, 2009 board meeting.
Mr. Hassan contacted Mr. Clark after the meeting to
inform him of the boards determinations.
In the days that followed, the companies began the due diligence
process, with meetings occurring directly between management
members by telephone as well as a series of meetings in person
at the offices of Wachtell Lipton. Schering-Plough opened an
electronic data room to facilitate the due diligence process and
began populating the data room in response to requests for
information from Merck. Similarly, Merck opened an electronic
data room to provide materials for Schering-Plough to conduct
due diligence with respect to Merck.
On February 23, 2009, at a regularly scheduled board-only
dinner, Mr. Clark updated the members of the Merck board
regarding the status of the discussions and activities of
management and Mercks advisors with their Schering-Plough
counterparts since the February 17 telephonic meeting and the
board generally discussed the potential combination with
Schering-Plough.
In the early morning of February 24, 2009, Fried Frank sent
to Wachtell Lipton an initial draft of the proposed merger
agreement for their review. Due diligence meetings continued
throughout the week, both by telephone and at the offices of
Wachtell Lipton.
Also on February 24, 2009, the Merck board held a regularly
scheduled board meeting at which representatives of Fried Frank
and J.P. Morgan were in attendance. Members of senior
management and representatives of Mercks financial and
legal advisors discussed with the board the potential Merck and
Schering-Plough business combination. After the meeting,
Mr. Clark called Mr. Hassan to confirm Mercks
continuing interest in the proposed combination.
In a regular board-only dinner on February 26, 2009,
Mr. Hassan updated the Schering-Plough board on the status
of the proposed transaction and the board expressed to
Mr. Hassan its expectations regarding the information it
expected to receive from its outside legal and financial
advisors the following day.
The following day, February 27, 2009, the Schering-Plough
board reconvened, along with its legal and financial advisors.
Goldman Sachs and Morgan Stanley presented a financial analysis
of the proposed transaction, and also reviewed each of the large
multinational pharmaceutical companies and assessed their
ability and willingness to complete a strategic transaction with
Schering-Plough, and advised that Merck and Company X were the
companies most likely to be interested in, and capable of
completing, a business combination with Schering-Plough.
Wachtell Lipton discussed the fiduciary duties of the directors
and the current state of negotiations with respect to the merger
agreement, describing in further detail the most significant
issues raised in the initial draft of the merger agreement.
Later that day, Mr. Hassan called Mr. Clark to update
him on the Schering-Plough board deliberations.
During that week, representatives of Wachtell Lipton contacted
Fried Frank to provide responses to the draft merger agreement.
Among other things, Wachtell Lipton noted to Fried Frank that
deal certainty was critical to Schering-Plough and that the need
for a right to avoid closing based on financing seemed
unnecessary given the strong cash flows of the two companies,
the cash on hand, as well as the relatively small financing
requirement
56
to close the transaction. Relatedly, Wachtell Lipton noted that
from Schering-Ploughs perspective the extent of required
regulatory efforts required by the draft merger agreement needed
to be enhanced. Wachtell Lipton also noted that the draft merger
agreement did not contain a right of Schering-Plough to
terminate the agreement in the event the Schering-Plough board
changed its recommendation in response to a superior alternative
proposal. Finally, Wachtell Lipton, without making any request,
noted that the agreement was silent with respect to
representation of current Schering-Plough directors on the board
of the post-merger company.
Throughout the next days, negotiations with respect to the
merger agreement continued, including with respect to
transaction certainty, the representations and warranties to be
given by the companies, and the restrictions on
Schering-Ploughs business between signing and closing, as
did due diligence discussions by telephone and in meetings at
Wachtell Lipton.
On March 1, 2009, Wachtell Lipton sent Fried Frank a
revised draft of the merger agreement.
On March 3, 2009, representatives of Fried Frank and
Wachtell Lipton held a conference call to discuss key
outstanding issues. The attorneys noted that the parties were
not far apart on many of the provisions in the merger agreement,
but that key unresolved issues remained, most prominent of which
was the financing provision. Fried Frank stated that the
provision enabling Merck not to close the transaction in the
event that financing was unavailable was fundamental to Merck,
and that Merck would not in any event agree to bear the risk of
a failure by banks to deliver the financing. Fried Frank noted
that, while there was no flexibility on this provision, there
would be room to negotiate with respect to the size the
financing termination fee. Wachtell Lipton noted that the
proposed financing termination fee of $1 billion was low
relative to precedent transactions. Wachtell Lipton and Fried
Frank also discussed the size of the general termination fee,
with Wachtell Lipton noting that the proposed fee was high
relative to precedent transactions. Fried Frank agreed to permit
Schering-Plough to terminate the merger agreement to accept a
superior alternative proposal, but reiterated that the size of
the termination fee was still open.
On March 4, 2009, during a special meeting via
teleconference at which representatives of J.P. Morgan were
present, Mr. Clark and members of Mercks senior
management updated the Merck board on the progress made since
February 24, 2009 in connection with the potential business
combination with Schering-Plough. The update included progress
and key findings from the due diligence process, status of the
definitive merger agreement, bank financing and rating agency
reviews among other things. Later that day, Fried Frank sent to
Wachtell Lipton a revised draft of the merger agreement.
On March 6, 2009, the Schering-Plough board held a
board-only telephonic update to discuss the transaction in light
of the then-declining market conditions. The Schering-Plough
board discussed the fact that the price of Merck stock had
fallen by 19% over the prior two weeks. As a result of the fall
in Mercks stock price and the method by which the stock
component of the consideration was agreed to be calculated, the
spot implied value of the merger consideration would
be lower than it was at the time of Mr. Clarks and
Mr. Hassans meeting on February 19, 2009.
However, given Mercks decline in stock price and the
consequent decline in the 30 day volume weighted average
price, the exchange ratio had risen since February 19,
2009, and Schering-Ploughs shareholders would be receiving
a greater number of shares in the combined company. The
Schering-Plough board determined that it would reconvene in two
days time and further review and discuss the situation. After
the meeting, Mr. Hassan, after consulting with his
financial advisors, called Mr. Clark to ask whether
adjustment would be possible in light of the changes in stock
prices. Mr. Hassan also noted to Mr. Clark that the
current draft of the merger agreement contemplated no board
representation for any of the current Schering-Plough directors,
despite the fact that Schering-Plough shareholders would hold
over 30 percent of the stock of the continuing company.
Mr. Clark said he would discuss Mr. Hassans
concerns with Mercks board, although he pointed out that
Schering-Plough shareholders would be receiving a greater
percentage of the shares of the combined company as a result of
the decline in the Merck share price during the period since the
two men had reached an understanding on the merger consideration
to be received by the Schering-Plough shareholders. Later on
that evening, Mr. Clark called Mr. Hassan to inform
him that he had discussed the possibility of an adjustment to
the proposed merger consideration with members of his board, and
such possibility had been rejected.
57
Earlier that day, Fried Frank sent to Wachtell Lipton a draft of
the commitment letter being negotiated between Merck, JPMorgan
Chase Bank, N.A. and J.P. Morgan Securities Inc. for the
financing.
Later that evening, Wachtell Lipton sent Fried Frank a revised
draft of the merger agreement, noting that the revised draft did
not contain comments on the financing provisions, which would
need to be discussed separately.
On March 7, 2009, during a special meeting of the Merck
board via teleconference at which representatives of
J.P. Morgan, Fried Frank and Mercks New Jersey
counsel, Day Pitney LLP, were present, updates and a review of
various matters relevant to the proposed business combination
with Schering-Plough were provided, including a review of the
communications plans with respect to the transaction. The board
heard from members of senior management with respect to key
issues identified during the due diligence process.
J.P. Morgan reviewed its financial analyses of the proposed
combination with Schering-Plough and recent transactions in the
pharmaceutical industry, and reviewed and discussed the
financial terms of the proposed transaction with
Schering-Plough. Mr. Kuhlik and Fried Frank provided a
summary of the key terms of the proposed merger agreement,
including the termination fees payable by Merck in the event the
merger agreement were terminated because the financing for the
proposed transaction was not available to Merck for closing, the
status of financing arrangements and a review of regulatory
approvals required in connection with the proposed combination.
In addition, Fried Frank, assisted by Day Pitney, described the
fiduciary duties of the board and the legal standards applicable
to the boards consideration of the proposed combination
with Schering-Plough. The board then discussed their duties with
Fried Frank and Day Pitney. Following this discussion, the
independent members of Mercks board met separately and
discussed the potential combination with Schering-Plough.
Also on March 7, 2009, while discussions with respect to
other aspects of the merger agreement continued throughout the
day, including with respect to the obligations of
Schering-Plough in the period between the signing of the merger
agreement and the closing of the transaction, the legal and
financial advisors to Schering-Plough discussed with Merck and
its financial and legal advisors the possibility of alternatives
to the financing provision, such as a provision permitting
Schering-Plough to mandate a cure in the event of a failure to
obtain financing and subsequent inability to close the
transaction. Merck rejected these alternatives, again
emphasizing that the financing provision was fundamental to the
transaction, and that Merck would not accept the risk of a
financing failure.
On March 8, 2009, the Schering-Plough board convened,
meeting first in a board-only session. The board discussed the
implied value of the merger consideration to be received by
Schering-Plough (calculated on both a current basis and a
30-day
volume weighted average basis), the transaction premium, the
financing contingency and the companys standalone
prospects. Following this discussion, Schering-Ploughs
financial advisors and legal counsel joined the meeting, along
with members of senior management of Schering-Plough. Wachtell
Lipton provided a summary of the proposed merger agreement.
Goldman Sachs and Morgan Stanley reviewed their financial
analyses of the potential transaction and the potential
standalone value of the company. Wachtell Lipton, assisted by
Schering-Ploughs New Jersey counsel, McCarter &
English, described the legal standards applicable to the duties
of directors in considering the potential transaction, after
which the board discussed their duties with Wachtell Lipton and
McCarter English. The board then heard from members of
management with respect to key issues that had surfaced during
the due diligence process. Next there was an interactive
discussion of the strategic fit of the two companies, and the
significant strategic advantages of a combination with Merck.
After further discussion, Mr. Sabatino reviewed the
material terms of the merger agreement, as well as the terms of
the related debt financing commitment by JPMorgan Chase Bank,
N.A. and J.P. Morgan Securities Inc. to Merck. Goldman
Sachs and Morgan Stanley then reviewed and discussed the
financial terms of the proposed transaction.
The exchange ratio of 0.5767 was calculated based on the agreed
stock consideration of $15.75 divided by the trailing
30-day
volume weighted average price of Merck common stock, which was
$27.3109 as of Friday, March 6, 2009. As of that date, the
spot implied value of the aggregate per share merger
consideration was $23.61, representing a premium of
approximately 34% to the closing price of Schering-Plough common
stock on
58
March 6, 2009, and a premium of approximately 44% based on
the volume weighted average price of
Schering-Plough
common stock over the 30 trading days prior to the announcement.
Goldman Sachs and Morgan Stanley also discussed the benefits of
the transaction to shareholders, including the increase in
anticipated pro-forma earnings going forward and the greater
dividend rate offered on Merck common stock (as compared to the
current Schering-Plough dividend rate). Merck had indicated that
it would announce, as part of the press release relating to the
transaction, that its board was committed to maintaining the
dividend of the combined company at the current level of the
Merck dividend following the closing of the transaction.
Goldman Sachs and Morgan Stanley then compared the proposed
transaction to other recent transactions and discussed their
respective analyses as to the fairness, from a financial point
of view, to the holders of Schering-Plough common stock (other
than Merck and its affiliates), of the cash and stock
consideration to be delivered pursuant to the proposed merger
agreement.
Goldman Sachs delivered to the Schering-Plough board an oral
opinion that the merger consideration was fair, from a financial
point of view, to the holders of Schering-Plough common stock
(other than Merck and its affiliates) and indicated that,
subject to review of definitive documentation, it expected that
it would be able to confirm such oral opinion in writing. Morgan
Stanley also delivered to the Schering-Plough board an oral
opinion that the merger consideration was fair, from a financial
point of view, to the holders of Schering-Plough common stock
and indicated that, subject to review of definitive
documentation, it expected that it would be able to confirm such
oral opinion in writing. Goldman Sachss and Morgan
Stanleys opinions are more fully described below under the
caption Opinions of Schering-Ploughs
Financial Advisors and the full text of the written
opinions of Goldman Sachs and Morgan Stanley, which set forth
the assumptions made, procedures followed, matters considered
and limitations on the review undertaken in connection with such
opinions, are attached as Annex C and D hereto,
respectively.
Wachtell Lipton and McCarter English discussed with the board
various legal matters relevant to the consideration of the
merger agreement by the Schering-Plough board.
The financial and legal advisors and senior management were then
excused, and the board discussed the proposed transaction, as
well as the current strategic environment and
Schering-Ploughs prospects as a standalone company.
Following the discussion, the legal advisors and certain members
of senior management rejoined the meeting. After further
consideration by the board, and assuming satisfactory resolution
of the financing provisions, including the size of the financing
termination fee and director representation on the combined
company, the board unanimously resolved that the merger
agreement and the transactions contemplated by the merger
agreement, including the issuance of shares of combined company
stock in the transaction, were advisable, fair to and in the
best interests of Schering-Plough shareholders. The board then
unanimously voted to approve the merger agreement and the
transactions contemplated by the merger agreement, and
recommended that Schering-Plough shareholders approve the merger
agreement. The
Schering-Plough
board authorized the appropriate officers of Schering-Plough to
finalize, execute and deliver the merger agreement and related
documentation.
After further discussion among the advisors for Merck and
Schering-Plough, Merck and Schering-Plough agreed to an increase
in the financing termination fee to $2.5 billion and that
the general termination fee would be reduced to
$1.25 billion.
After the Schering-Plough board meeting, Mr. Hassan and
Mr. Sabatino met with Mr. Clark and Mr. Kuhlik to
discuss a small number of outstanding issues. At this meeting,
Mr. Clark and Mr. Hassan agreed that the board of the
combined company would include three members of the current
board of Schering-Plough.
Following that meeting, also on March 8, 2009, the Merck
board held a special meeting via teleconference, at which
representatives of Fried Frank and J.P. Morgan were
present. Mr. Clark and members of senior management updated
the Merck board on the status of the negotiations.
Representatives of Fried Frank reviewed key provisions of the
merger agreement, updating the presentation made to the board at
the meeting held on March 7. Representatives of
J.P. Morgan reviewed key aspects of the financial analyses
of the proposed combination, updating the presentation made to
the board on March 7, and delivered to the Merck
59
board an oral opinion, subsequently confirmed in writing, that,
based upon and subject to the factors and assumptions stated in
that opinion, as of such date, the consideration to be received
by the holders of shares of Merck common stock in the
transaction was fair, from a financial point of view, to the
holders of Merck common stock. After further consideration by
the board, and assuming satisfactory resolution of the few
remaining issues in the negotiations, the board unanimously
resolved that the merger agreement and the transactions
contemplated by the merger agreement, were fair to and in the
best interest of Merck and Mercks shareholders,
unanimously approved the merger agreement and the transactions
contemplated by the merger agreement, and recommended that Merck
shareholders approve the merger agreement. The Merck board
authorized the appropriate officers of Merck to finalize,
execute and deliver the merger agreement and related
documentation.
Schering-Plough and Merck and their legal advisors continued to
negotiate the final terms of the merger agreement, subsequently
reaching an acceptable agreement on the open issues and
finalized the merger agreement, the terms of which are more
fully described in the section entitled The Merger
Agreement beginning on page 101. After Merck received
the executed commitment letter from JPMorgan Chase Bank, N.A.
and J.P. Morgan Securities Inc., Merck and Schering-Plough,
along with several subsidiaries of
Schering-Plough,
executed the merger agreement. The merger was announced on the
morning of March 9, 2009.
Mercks
Reasons for the Transaction and Recommendation of Mercks
Board of Directors
At its meeting on March 8, 2009, following detailed
presentations by Mercks management, its legal counsel and
financial advisor, the members of Mercks board of
directors unanimously approved the merger agreement with
Schering-Plough, unanimously determined that the merger and the
transactions contemplated thereby were advisable, fair to and in
the best interests of Merck and the holders of Merck common
stock, and unanimously recommended that the shareholders of
Merck vote FOR the proposal to approve the merger
agreement.
In evaluating the proposed transaction, Mercks board of
directors consulted with management, as well as Mercks
internal and outside legal counsel and outside financial
advisor, and, in reaching its determination to approve and
recommend the merger agreement, the board of directors
considered various material factors, which are discussed below.
The following discussion of the information and factors
considered by Mercks board of directors is not intended to
be exhaustive. In view of the wide variety of factors considered
in connection with the transactions contemplated by the merger
agreement, Mercks board of directors did not consider it
practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific material factors it
considered in reaching its decision. In addition, individual
members of Mercks board of directors may have given
different weight to different factors. Mercks board of
directors considered this information and these factors as a
whole and overall considered the relevant information and
factors to be favorable to, and in support of, its
determinations and recommendations.
Strategic
Benefits of the Transaction
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Expanded Pipeline to Deliver Innovative Medicines for
Patients. Mercks board of directors
considered that the combination is expected to:
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increase Mercks pipeline of early, mid and late stage
product candidates, including a doubling from 9 to 18 of the
number of potential medicines Merck has in Phase III
development;
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create a combined company having a product pipeline with greater
depth and breadth and many promising drug candidates; with
greater resources, the combined company is expected to have
greater financial flexibility to invest in these development
opportunities, as well as external opportunities; and
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accelerate the expansion into therapeutic areas that Merck has
focused on in recent years with the addition of
Schering-Ploughs established presence and expertise in
oncology, neuroscience and novel biologics.
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Complementary Product Portfolios Focused on Key
Therapeutic Areas. The Merck board of
directors considered that the combination with Schering-Plough
is expected to broaden Mercks commercial portfolio with
leading franchises in key therapeutic areas, including
cardiovascular, respiratory, oncology, neuroscience, infectious
diseases, immunology and womens health. In particular, the
Merck board of directors considered that:
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Schering-Ploughs products are expected to have long
periods of marketing exclusivity;
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as a result of its expanded product offerings, the combined
company is expected to benefit from additional revenue growth
opportunities;
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the combined company is expected to have expanded opportunities
for life-cycle management through the introduction of potential
new combinations and formulations of existing products of the
two companies;
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the combined company will be well positioned to expand its
presence and product offerings; and
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the combined company is expected to realize potential benefits
from Schering-Ploughs strong portfolio of womens
health products, its animal health business and portfolio of
consumer health brands, including Claritin, Coppertone
and Dr. Scholls.
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Strong Commercial
Organization. Mercks board of directors
considered that both companies have teams of talented and
experienced employees with strong customer relationships. In
particular, the board considered that:
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both Merck and Schering-Plough have made progress in
implementing new customer-centric selling models; this is
expected to help ensure a smooth and efficient integration of
the companies commercial operations; and
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the combined companys broadened product portfolio is
expected to help its sales force be more effective.
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Expanded Global Presence and Geographically Diverse
Revenue Base. Mercks board of directors
considered the global reach of the combined company, including
that:
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in 2008, Schering-Plough generated approximately 70% of its
revenue outside the United States, including more than
$2 billion in revenue from newer markets; the combination
is expected to accelerate Mercks international growth
efforts, especially in key, high-growth emerging markets;
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the combined company is expected to have an industry-leading
global team of marketing and sales professionals; and
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the combined company will have a more geographically diverse
revenue base with more than 50% of its revenues expected to be
generated outside the United States.
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Increased Manufacturing
Capabilities. Mercks board of directors
considered the increased manufacturing capabilities that the
combined company is expected to have, including that:
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the combination with Schering-Plough will increase Mercks
manufacturing capabilities, particularly in the important growth
areas related to biologics and sterile medicines; and
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the application of Mercks manufacturing and sourcing
strategies across a larger manufacturing base can be expected to
create opportunities for synergies and cost savings across the
organization.
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Financial
Benefits of the Transaction
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Strong Financial Profile. Mercks
board of directors considered the expected financial profile of
the combined company. In particular, Mercks board of
directors noted that:
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the combined companys broad product offerings could be
expected to generate strong cash flow;
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the combined revenues of the two companies in 2008 totaled
approximately $47 billion (consisting of
Schering-Ploughs 2008 reported revenue of
$18.502 billion, Mercks 2008 reported revenue of
$23.85 billion, and the Merck/Schering-Plough cholesterol
partnerships 2008 reported revenue of $4.561 billion);
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the combined company would have had approximately
$8 billion in cash and cash equivalents as of
December 31, 2008, after giving effect to the cash payable
as merger consideration to the Schering-Plough shareholders and
to satisfy transaction expenses; and
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it is expected that Merck would maintain its existing credit
rating following completion of the transaction.
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Maintenance of Mercks
Dividend. Mercks board of directors
considered the ability of the combined entity to pay dividends
to its shareholders, and confirmed that it expects the combined
company to maintain Mercks existing annual dividend of
$1.52 per share.
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Substantial Cost Savings. Mercks
board of directors considered the potential for cost savings and
synergies from the transaction, including that:
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the companies shared therapeutic category focus provides
opportunities for consolidation in both sales and marketing and
research and development;
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in addition to the ongoing cost reduction initiatives at both
companies, up to $3.5 billion in annual cost savings are
expected to be realized from the transaction after 2011;
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to the extent realized, the savings would allow for greater
flexibility for continued investment in strategic opportunities,
promising pipeline candidates and licensing
opportunities; and
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there is a probability of meaningful value creation for
shareholders of both companies as a result of these savings.
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Accretive to
Non-GAAP Earnings. Mercks board of
directors considered that the transaction is anticipated to be
modestly accretive to Mercks non-GAAP earnings per share
or EPS, in the first full year following completion of the
merger and significantly accretive in the following years. For
this purpose, non-GAAP EPS means EPS in accordance with
GAAP, excluding purchase-accounting adjustments, restructuring
costs, acquisition-related costs and certain other significant
items.
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Other
Considerations
In the course of reaching its decision to approve the merger
agreement, the Merck board of directors considered the following
additional factors as generally supporting its decision:
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the current and future landscape of the pharmaceutical industry,
and in light of the regulatory, financial and competitive
challenges facing industry participants, the likelihood that the
combined company would be better positioned to overcome these
challenges if the expected strategic and financial benefits of
the transaction were fully realized;
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the recommendation of Mercks management in support of the
transaction;
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the opinion of J.P. Morgan, dated March 8, 2009, that,
based upon and subject to the factors and assumptions stated in
that opinion, as of such date, the consideration to be paid to
the Merck shareholders in the Merck merger is fair, from a
financial point of view, to such shareholders;
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the terms of the proposed financing for the transaction and the
fact that Merck would not be required to complete the
transaction in the event the full proceeds of the financing were
not available to it, even though a $2.5 billion fee would
be payable in these circumstances;
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the views of Mercks management and its financial advisors
as to the likelihood that Merck will be able to obtain the
necessary financing and that the full proceeds of the financing
will be available to Merck;
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the expectation that the Merck merger will qualify as a
reorganization for U.S. federal income tax purposes and
that, as a result, the exchange by Merck shareholders of Merck
common stock for New Merck common stock in the Merck merger
generally will be tax-free to the Merck shareholders;
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the expected percentage ownership interests and voting power of
the Merck shareholders following completion of the merger, and
the fact that the stock portion of the merger consideration is a
fixed ratio and will not be affected by changes in the market
price of Mercks stock;
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the required regulatory consents and the views of Mercks
advisors that the merger will be approved by the requisite
authorities without the imposition of conditions sufficiently
material to preclude the merger, and that the transaction would
otherwise be completed in accordance with the terms of the
merger agreement;
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the fact that Mercks directors and senior management prior
to closing will be members of the board of directors and
management of the combined company following completion of the
merger, and the enhanced value of the combined company that may
be realized through continuity of management and implementation
of Mercks long-range strategic plans;
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the fact that, following completion of the merger, New Merck
will be entitled to all of the benefits related to
Vytorin and Zetia, the drugs marketed by the
Merck/Schering-Plough cholesterol partnership;
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the scope and results of Mercks due diligence
investigation, which included reviews of organizational,
operational, financial, commercial, regulatory, legal, employee
and other matters related to
Schering-Ploughs
business and potential financial, operational and other impacts
of the merger on Merck;
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after reviewing the merger agreement with its legal advisors,
that the terms of the merger agreement offered Merck reasonable
assurances as to the likelihood of consummation of the
transaction; and
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that the structure of the transaction would permit
Schering-Ploughs revolving credit line of up to
$2 billion to remain outstanding following completion of
the merger.
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Mercks board of directors also considered the potential
risks of the merger, including the following:
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Certain risks inherent in Schering-Ploughs business and
operations, including, in particular:
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FDA approval prospects for its product candidates, the
investment required to develop experimental compounds and the
timing of such development efforts;
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the various contingent liabilities, including pending legal
proceedings, to which Schering-Plough is subject;
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the results of operations and prospects of
Schering-Ploughs global animal health business, the
possibility that divestiture of all or a portion of
Schering-Ploughs animal health business or Mercks
interests in Merial Ltd. may be required in order to obtain
regulatory approvals for the merger, and the possibility of New
Merck selling all or a portion of the animal health business to
Merial Ltd.;
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to the extent of issues raised concerning the efficacy of
Vytorin and Zetia in connection with certain
clinical trials, the fact that New Merck will be subject to all
of the risk associated with these drugs; and
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the possibility that Centocor, a wholly owned subsidiary of
Johnson & Johnson may, through the required
arbitration process, seek to terminate Schering-Ploughs
distribution agreement with respect to Remicade and
golimumab, prior to, or following completion of, the merger; and
the possibility that Centocor could be successful in convincing
an arbitrator that Centocor will have the right to effect such
termination and the adverse impact that any termination could
have.
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Certain provisions of the merger agreement, including in
particular:
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the obligation of Merck to pay a $2.5 billion fee if the
drop-dead date occurs, the conditions to Mercks
obligations to close have been satisfied and the merger
agreement is terminated because the full proceeds of the
financing are not available to Merck;
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restrictions on Mercks operations until completion of the
transactions, and the extent of those restrictions as negotiated
between the parties;
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Schering-Ploughs right to terminate to enter into a
transaction representing a superior proposal;
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restrictions on Mercks ability to consider alternative
transactions except in limited circumstances;
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the amount of and circumstances in which Merck may be required
to pay termination fees to Schering-Plough and reimburse
Schering-Plough for its expenses;
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the requirement that Merck hold a shareholder vote on the merger
agreement, even though the board of directors may have withdrawn
its recommendation;
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the challenges inherent in the combination of two business
enterprises of the size and scope of Merck and Schering-Plough,
including the possibility the anticipated cost savings and
synergies and other benefits sought to be obtained from the
merger might not be achieved in the time frame contemplated or
at all;
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the possibility of disruption to business and operational
relationships and employee morale as a result of the pending
transaction and in the event the merger is not completed;
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the risks associated with the timing of, the possibility that
adverse conditions are imposed in connection with, and the
possibility of not obtaining, necessary regulatory approvals
required for the transaction;
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the potential length of the regulatory approval process and the
period of time Merck may be subject to the merger agreement;
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in light of the turbulence in the credit markets, the
possibility that the financing for the transaction may not be
available and that Merck may be required to pay
$2.5 billion under those circumstances;
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the failure of Merck or Schering-Plough shareholders to approve
the merger agreement;
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the risks described under Risk Factors located
beginning on page 17; and
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the risks of not satisfying the closing conditions in the merger
agreement.
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Mercks board of directors believed that, overall, the
potential benefits of the transactions to Merck and Mercks
shareholders outweighed the risks, many of which are mentioned
above. Mercks board of directors realized that there can
be no assurance about future results, including results
considered or expected as described in the factors listed above.
Opinion
of Mercks Financial Advisor
At a meeting of the Merck board of directors on March 8,
2009, J.P. Morgan rendered its oral opinion, subsequently
confirmed in writing, to the Merck board of directors that, as
of such date and based upon and subject to the factors,
limitations and assumptions set forth in its opinion, the
consideration to be received by holders of shares of Merck
common stock in the Merck merger, was fair, from a financial
point of view, to such holders.
The full text of the written opinion of J.P. Morgan,
dated March 8, 2009, which sets forth, among other things,
the assumptions made, procedures followed, matters considered
and limits on the opinion and review undertaken in connection
with rendering its opinion, is included as Annex B to this
joint proxy statement/prospectus and is incorporated herein by
reference. Holders of Merck common stock are urged to read the
opinion carefully in its entirety.
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J.P. Morgans opinion is addressed to the Merck board of
directors, is directed only to the consideration in the proposed
Merck merger and does not constitute a recommendation to any
shareholder of Merck as to how such shareholder should vote with
respect to the proposed Merck merger or any other matter. The
summary of the opinion of J.P. Morgan set forth in this
joint proxy statement/prospectus is qualified in its entirety by
reference to the full text of such opinion.
J.P. Morgans opinion was authorized for issuance by
the fairness opinion committee of J.P. Morgan.
In arriving at its opinion, J.P. Morgan, among other things:
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reviewed a draft dated March 8, 2009 of the merger
agreement;
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reviewed certain publicly available business and financial
information concerning Merck and
Schering-Plough
and the industries in which they operate;
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compared the proposed financial terms of the transaction with
the publicly available financial terms of certain transactions
involving companies J.P. Morgan deemed relevant and the
consideration received for such companies;
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compared the financial and operating performance of Merck and
Schering-Plough with publicly available information concerning
certain other companies J.P. Morgan deemed relevant and
reviewed the current and historical market prices of Merck
common stock and Schering-Plough common stock and certain
publicly traded securities of such other companies;
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reviewed certain internal financial analyses and forecasts
prepared by (i) the management of
Schering-Plough
relating to its businesses and (ii) the management of Merck
relating to the respective businesses of Merck and
Schering-Plough, as well as the estimated amount and timing of
the cost savings and related expenses and synergies expected to
result from the proposed merger, which J.P. Morgan refers
to as the synergies; and
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performed such other financial studies and analyses and
considered such other information as J.P. Morgan deemed
appropriate for the purposes of its opinion.
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J.P. Morgan also held discussions with certain members of the
management of Merck and Schering-Plough with respect to certain
aspects of the proposed transaction, the past and current
business operations of Merck and Schering-Plough, the financial
condition and future prospects and operations of Merck and
Schering-Plough, the effects of the proposed transaction on the
financial condition and future prospects of Merck and
Schering-Plough, and certain other matters J.P. Morgan
believed necessary or appropriate to its inquiry.
In giving its opinion, J.P. Morgan relied upon and assumed
the accuracy and completeness of all information that was
publicly available or was furnished to or discussed with
J.P. Morgan by Merck and Schering-Plough or otherwise
reviewed by or for J.P. Morgan, and J.P. Morgan did
not independently verify (nor did J.P. Morgan assume
responsibility or liability for independently verifying) any
such information or its accuracy or completeness.
J.P. Morgan did not conduct and was not provided with any
valuation or appraisal of any assets or liabilities, nor did
J.P. Morgan evaluate the solvency of Merck or
Schering-Plough under any state or federal laws relating to
bankruptcy, insolvency or similar matters. In relying on
financial analyses and forecasts prepared and provided to it by
Merck or derived therefrom, including the synergies,
J.P. Morgan assumed that they were reasonably prepared
based on assumptions reflecting the best currently available
estimates and judgments by management as to the expected future
results of operations and financial condition of Merck and
Schering-Plough. J.P. Morgan expressed no view as to such
analyses or forecasts (including the synergies), the financial
analyses and forecasts prepared by the management of
Schering-Plough or the assumptions on which they were based.
J.P. Morgan also assumed that the proposed Merck merger
will qualify as a tax-free reorganization for U.S. federal
income tax purposes, that the Merck merger and other
transactions contemplated by the merger agreement would be
consummated as described in the merger agreement, and that the
definitive merger agreement would not differ in any material
respects from the draft thereof furnished to J.P. Morgan.
J.P. Morgan also assumed that the representations and
warranties made by Merck and Schering-Plough in the merger
agreement and the related agreements were and will be true and
correct in all respects material to J.P. Morgans
analysis. J.P. Morgan is not a legal, regulatory or tax
expert and relied on the
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assessments made by advisors to Merck with respect to such
issues. J.P. Morgan further assumed that all material
governmental, regulatory or other consents and approvals
necessary for the consummation of the proposed merger would be
obtained without any adverse effect on Merck or Schering-Plough,
or on the contemplated benefits of the proposed merger, in each
case material to J.P. Morgans analysis, and any
divestitures required to be made by Merck or Schering-Plough in
connection with receiving such consents or approval will not be
on terms which would have a material adverse effect on the
results of J.P. Morgans analysis.
J.P. Morgans opinion was necessarily based on economic,
market and other conditions as in effect on, and the information
made available to J.P. Morgan as of, the date of its
opinion. The opinion also indicates that subsequent developments
may affect J.P. Morgans opinion and that
J.P. Morgan does not have any obligation to update, revise,
or reaffirm its opinion. J.P. Morgans opinion is
limited to the fairness, from a financial point of view, to the
holders of Merck common stock of the consideration to be
received by such holders in the proposed transaction and
J.P. Morgan expressed no opinion as to the fairness of the
proposed Merck merger to, or any consideration received by, the
holders of any other class of securities, creditors or other
constituencies of Merck or as to the underlying decision by
Merck to engage in the proposed transaction. Furthermore,
J.P. Morgan expressed no opinion with respect to the amount
or nature of any compensation to any officers, directors, or
employees of any party to the proposed transaction, or any class
of such persons relative to the consideration to be received by
the holders of Merck common stock in the proposed Merck merger
or with respect to the fairness of any such compensation.
J.P. Morgan expressed no opinion as to the price at which
Merck or Schering-Plough common stock would trade at any future
time.
J.P. Morgans opinion notes that it was not authorized to
and did not solicit any expressions of interest from any other
parties with respect to any other merger, sale or other business
combination involving any part of Merck.
The terms of the merger agreement, including the consideration
payable to Merck shareholders in the proposed Merck merger, were
determined through negotiation between Merck and
Schering-Plough, and the decision to enter into the merger
agreement was solely that of the Merck and Schering-Plough
boards of directors. J.P. Morgans opinion and
financial analyses were only one of the many factors considered
by Merck in its evaluation of the proposed transaction and
should not be viewed as determinative of the views of the Merck
board of directors or management with respect to the proposed
merger or the merger consideration.
In accordance with customary investment banking practice,
J.P. Morgan employed generally accepted valuation methods
in reaching its opinion. The following is a summary of the
material financial analyses used by J.P. Morgan in
connection with providing its opinion and does not purport to be
a complete description of the analyses or data presented by
J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan believes that
the summary set forth below and its analyses must be considered
as a whole and that selecting portions thereof, or focusing on
information in tabular format, without considering all of its
analyses and the narrative description of the analyses, could
create an incomplete view of the processes underlying its
analyses and opinion. The order of analyses described does not
represent the relative importance or weight given to those
analyses by J.P. Morgan. In arriving at its fairness
determination, J.P. Morgan considered the results of all
the analyses and did not attribute any particular weight to any
factor or analysis considered by it; rather, J.P. Morgan
arrived at its opinion based on the results of all the analyses
undertaken by it and assessed as a whole.
J.P. Morgans analyses are not necessarily indicative
of actual values or actual future results that might be
achieved, which values may be higher or lower than those
indicated. Moreover, J.P. Morgans analyses are not
and do not purport to be appraisals or otherwise reflective of
the prices at which businesses actually could be bought or sold.
Except as otherwise noted, the following quantitative
information, to the extent that it is based on market data, is
based on market data as it existed on or before March 6,
2009 and is not necessarily indicative of current market
conditions.
66
Standalone
Valuation of Schering-Plough
Historical common stock performance: J.P.
Morgan reviewed the publicly available historical trading price
performance of Schering-Plough common stock over the 52-week
period from March 6, 2008 to March 6, 2009 relative to
the amount to be received by holders of such stock in the
proposed transaction. During that period, Schering-Plough common
stock achieved a closing price high of $22.32 per share and a
closing price low of $12.76 per share relative to the implied
value of the cash and stock consideration (based on the closing
price for Merck common stock on March 6, 2009 of $22.74 per
share) to be received by the Schering-Plough shareholders of
$23.61 per share.
Selected public market multiples: J.P. Morgan
performed a selected public market multiples financial analysis
on Schering-Ploughs constituent businesses to analyze the
entire company on a
segment-by-segment
basis using certain trading multiples and Wall Street equity
research, in each case as selected by J.P. Morgan based on
its judgment. J.P. Morgan analyzed Schering-Ploughs
pharmaceutical, consumer and animal health businesses.
J.P. Morgan reviewed publicly available information for the
following public companies and calculated the multiples set
forth below:
|
|
|
Segment/Company
|
|
Metric/Multiple
|
|
Consumer
|
|
2009E P/E
|
Procter & Gamble
|
|
10.9x
|
Colgate Palmolive
|
|
13.0x
|
Reckitt-Benckiser
|
|
13.4x
|
Kimberly Clark
|
|
10.6x
|
Henkel
|
|
9.2x
|
Clorox
|
|
12.1x
|
Church & Dwight
|
|
14.4x
|
Energizer
|
|
6.8x
|
Alberto Culver
|
|
15.1x
|
Animal Health
|
|
2009E Firm Value/ EBITDA
|
Virbac S.A.
|
|
9.1x
|
Vetoquinol
|
|
5.0x
|
Pharmaceutical
|
|
2009E P/E
|
Johnson & Johnson
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|
10.7x
|
Abbott
|
|
12.7x
|
Pfizer
|
|
7.0x
|
Wyeth
|
|
10.4x
|
Eli Lilly
|
|
6.9x
|
Bristol-Myers Squibb
|
|
9.7x
|
Roche
|
|
12.1x
|
GlaxoSmithKline
|
|
8.1
|
Novartis
|
|
8.1x
|
Sanofi-Aventis
|
|
6.3x
|
AstraZeneca
|
|
5.6x
|
Based on the constituent multiples described above, J.P. Morgan
calculated implied values for each of
Schering-Ploughs
business segments by applying P/E multiples ranging from 8.0x to
10.0x to the 2009 estimated earnings for Schering-Ploughs
pharmaceutical business, P/E multiples ranging from 11.0x to
13.0x to the 2009 estimated earnings for Schering-Ploughs
consumer business and firm value/EBITDA multiples ranging from
8.0x to 10.0x to the 2009 estimated EBITDA for
Schering-Ploughs animal health business. Based on the
foregoing, J.P. Morgan calculated an implied per share
equity range for Schering-Plough of $15.30 to $19.00.
67
Selected precedent transaction analysis: J.P.
Morgan performed a selected precedent transaction analysis,
which compares the per share merger consideration to be received
in the proposed transaction by holders of Schering-Plough common
stock to an implied range of per share values for
Schering-Plough common stock derived from an analysis of
selected precedent transactions deemed by J.P. Morgan to be
reasonably similar to the proposed transaction. Using publicly
available information, J.P. Morgan examined selected
transactions within the pharmaceutical industry that
J.P. Morgan, based on its experience with mergers and
acquisitions analysis, deemed relevant to arriving at its
opinion. J.P. Morgan noted that none of the selected
precedent transactions is either identical or directly
comparable to the proposed transaction and that any analysis of
selected precedent transactions necessarily involves complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the
acquisition values of the companies concerned. J.P. Morgan
determined the firm value for each of the target companies in
these precedent transactions based on the aggregate value of the
consideration to be paid to the target companys
shareholders at the time of announcement, plus debt less cash,
and the earnings before interest, taxes and depreciation, or
EBITDA, based on data for the latest 12 months
that were publicly available prior to announcement of the
applicable precedent transaction. J.P. Morgan also
calculated Schering-Ploughs firm value based on the
implied value of the cash and stock consideration (based on the
closing price for Merck common stock on March 6, 2009 of
$22.74 per share) to be received by the Schering-Plough
shareholders in the proposed transaction and
Schering-Ploughs EBITDA for the 12 months ended
December 31, 2008, plus debt minus cash. In each case,
J.P. Morgan then divided the firm value by the latest
12 month EBITDA, and performed the same calculation after
taking into account the synergies. Specifically,
J.P. Morgan reviewed the following transactions and
calculated the multiples set forth below:
|
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|
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|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
|
|
|
|
Firm
|
|
Value/LTM
|
|
|
|
|
|
|
Value/LTM
|
|
EBITDA &
|
Announcement
|
|
Acquiror
|
|
Target
|
|
EBITDA
|
|
Synergies
|
|
01/26/2009
|
|
Pfizer
|
|
Wyeth
|
|
8.3x
|
|
5.5x
|
01/26/2004
|
|
Sanofi-Synthelabo
|
|
Aventis
|
|
10.2x
|
|
7.9x
|
07/15/2002
|
|
Pfizer
|
|
Pharmacia
|
|
19.0x
|
|
10.6x
|
02/02/2000
|
|
Pfizer
|
|
Warner-Lambert
|
|
31.8x
|
|
20.3x
|
Based on various judgments concerning the relative comparability
of each of the selected transactions to the proposed
transaction, J.P. Morgan did not rely solely on the
quantitative results of the selected transaction analysis in
developing a reference range or otherwise applying its analysis.
J.P. Morgan observed that, if the multiples for the three
most recent transactions referred to above were applied to
Schering-Plough, the resulting range of implied equity values
for Schering-Plough common stock would be $21.40 to $50.45.
J.P. Morgan noted that the implied value of the proposed
cash and stock consideration to be received by holders of
Schering-Plough common stock of $23.61 was within this range.
J.P. Morgan also compared the dollar premium (based on
(i) trading prices 1 day and 1 month prior to
announcement and (ii) the 1 month average trading
price prior to announcement) in each of the above noted
transactions to the announced synergies for such transaction and
observed multiples of 3.9x to 12.9x. J.P. Morgan noted that
the range of multiples of the dollar premium to be received by
Schering-Plough shareholders relative to announced synergies in
the transaction was 1.8x to 3.0x.
Discounted cash flow analysis: J.P. Morgan
calculated ranges of implied equity value per share for
Schering-Plough common stock by performing a discounted cash
flow, or DCF, analysis. The discounted cash flow
analysis assumed a valuation date of October 1, 2009.
J.P. Morgan performed its DCF analysis of Schering-Plough based
primarily on two sets of assumptions: (1) a set of
assumptions provided by Merck management relating to
Schering-Ploughs business, referred to as
Mercks Schering-Plough base case; and
(2) a set of assumptions provided by Merck which reflect
Mercks Schering-Plough base case plus the synergies,
referred to as Mercks Schering-Plough base case with
synergies. For references purposes, J.P. Morgan also
considered: (1) a set of assumptions provided by
Schering-Plough relating to Schering-Ploughs business,
referred to as the Schering-Plough management case;
and (2) a set of assumptions based on publicly available
Wall Street research relating to
Schering-Ploughs
business, referred to as the Schering-Plough street
case.
68
A discounted cash flow analysis is a traditional method of
evaluating an asset by estimating the future cash flows of an
asset and taking into consideration the time value of money with
respect to those future cash flows by calculating the
present value of the estimated future cash flows of
the asset. Present value refers to the current value
of one or more future cash payments, or cash flows,
from an asset and is obtained by discounting those future cash
flows or amounts by a discount rate that takes into account
macro-economic assumptions, estimates of risk, the opportunity
cost of capital, expected returns and other appropriate factors.
Another financial term utilized below is terminal
value, which refers to the value of all future cash flows
from an asset at a particular point in time.
In arriving at the estimated equity values per share of
Schering-Plough common stock using the DCF analysis,
J.P. Morgan calculated terminal values for each of
Schering-Ploughs business segments as of December 31,
2018 by applying a terminal value growth rate of 2.0% (except
for Schering-Ploughs Remicade/golimumab and
Vytorin/Zetia businesses), added synergies and applied a
range of discount rates of 7% to 10%, depending on the business.
Based on the assumptions set forth above, this analysis implied
for Schering-Plough common stock ranges of $19.15 to $21.80,
$38.45 to $45.05, $25.20 to $27.80 and $20.65 to $23.25 per
share for Mercks
Schering-Plough
base case, Mercks Schering-Plough base case with
synergies, the Schering-Plough management case and the
Schering-Plough street case, respectively. The range of discount
rates used by J.P. Morgan in its analysis was estimated
using traditional investment banking methodology, including the
analysis of selected publicly traded companies engaged in
businesses that J.P. Morgan deemed relevant to
Schering-Ploughs businesses. These publicly traded
companies were analyzed to determine the appropriate beta (an
estimate of systematic risk) and target debt/total capital ratio
to use in calculating the ranges of discount rates described
above.
Standalone
Valuation of Merck
Historical common stock performance: J.P.
Morgan reviewed the historical trading price performance of
Merck common stock over the 52-week period from March 6,
2008 to March 6, 2009. During that period, Merck common
stock achieved a closing price high of $44.78 and a closing
price low of $22.14.
Selected public market multiples: J.P. Morgan
undertook a selected public market multiples analysis similar to
that described above under Standalone Valuation of
Schering-Plough Selected public market
multiples. J.P. Morgan analyzed Mercks
pharmaceutical business and animal health business based on the
selected public market multiples described above.
J.P. Morgan also analyzed Mercks Singulair
product using a DCF analysis. These analyses resulted in an
implied per share equity range for Merck of $21.68 to $25.86.
Discounted cash flow analysis: Using a DCF
methodology similar to that described above under
Standalone Valuation of Schering-Plough
Discounted cash flow analysis, J.P. Morgan calculated
terminal values for each of Mercks business segments as of
December 31, 2018 by applying a terminal value growth rate
of 2% (except for the Merck/Schering-Plough cholesterol
partnership, for which J.P. Morgan assumed no terminal
value) and applied a range of discount rates of 8% to 10%,
depending on the business. In performing this analysis,
J.P. Morgan used the following sets of assumptions:
(1) a set of assumptions provided by Merck relating to
Mercks business, referred to as the Merck management
case; and (2) a set of assumptions based on publicly
available Wall Street research relating to Mercks
business, referred to as the Merck street case.
Based on these assumptions, this analysis implied for Merck
common stock ranges of $42.00 to $46.75 to $38.95 to $43.15 per
share for the Merck management case and Merck street case,
respectively.
Pro
Forma Combined Business Valuation
Value creation analysis: J.P. Morgan also
performed an illustrative value creation analysis with respect
to Merck using a DCF analysis, an analysis of public trading
values and a selected public multiples analysis. In performing
the DCF analysis, J.P. Morgan compared (1) the Merck
management case with respect to Mercks business to the
Schering-Plough management case with respect to
Schering-Ploughs business and (2) the Merck
management case with respect to Mercks business to
Mercks Schering-Plough base case with respect to
Schering-Ploughs business, yielding an implied equity
value increase to Merck shareholders of $14.1 billion and
$6.8 billion, respectively. J.P. Morgan also performed
this DCF analysis using the same cases but excluding the
financial effects of Remicade and golimumab and yielded
an implied equity value increase to Merck shareholders
69
of $9.4 billion and $3.0 billion, respectively.
J.P. Morgan also analyzed the current market
capitalizations of Merck and Schering-Plough and observed an
implied equity value increase to Merck shareholders of
$6.7 billion. Lastly, J.P. Morgan analyzed each of
Merck and Schering-Ploughs constituent businesses to
analyze each respective company on a
segment-by-segment
basis using certain trading multiples and Wall Street equity
research, as described above under Standalone Valuation of
Schering-Plough Selected public market
multiples. This analysis yielded an implied equity value
increase to Merck shareholders of $5.7 billion.
Miscellaneous
As a part of its investment banking business, J.P. Morgan
and its affiliates are continually engaged in the valuation of
businesses and their securities in connection with mergers and
acquisitions, investments for passive and control purposes,
negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for
estate, corporate and other purposes.
J.P. Morgan was selected by Merck as its exclusive financial
advisor based on J.P. Morgans qualifications,
reputation and experience in the valuation of businesses and
securities in connection with mergers and acquisitions and its
familiarity with Merck. Merck has agreed to pay J.P. Morgan
$45 million for its services as financial advisor,
$5 million of which was paid after public announcement of
the proposed transaction and the remainder of which will become
payable only if the Merck merger is consummated. In addition,
Merck has agreed to reimburse J.P. Morgan for its expenses
incurred in connection with its services, including the fees and
disbursements of counsel, and will indemnify J.P. Morgan
for certain liabilities.
During the two years preceding the date of its opinion,
J.P. Morgan and its affiliates have had commercial or
investment banking relationships with each of Merck and
Schering-Plough, for which it and such affiliates have received
customary compensation. Such services during such period have
included acting as a financial advisor to Merck in making an
investment in FoxHollow Technologies in March 2007 and serving
as joint bookrunner for Mercks $1.5 billion revolving
credit facility in April 2007, joint bookrunner for an offering
by Schering-Plough of senior unsecured notes and
Euro-denominated senior unsecured notes in September 2007 and as
co-manager and joint bookrunner for offerings of mandatory
convertible preferred stock and common stock of Schering-Plough
in August 2007. In addition, J.P. Morgans commercial
banking affiliates are lenders under outstanding credit
facilities of each of Merck and Schering-Plough, for which such
affiliates receive customary compensation or other financial
benefits. J.P. Morgan also expects that it and its
commercial bank affiliates will act as sole lead arranger and
sole bookrunner of, and agent bank and a lender under, new
credit facilities of Merck, Schering-Plough or their respective
affiliates to finance a portion of the cash consideration to be
paid to holders of Schering-Plough common stock in the
transaction and as a lead underwriter, lead placement agent or
lead initial purchaser of subsequent capital markets offerings
of debt securities to refinance such credit facilities. It is
anticipated that the $1.5 billion Merck Credit Facility,
referred to herein as the Merck Credit Facility,
will be amended or replaced in connection with the transaction
and that such amendment or replacement will result in the
payment of customary compensation to J.P. Morgans
affiliate and in certain of the terms under the Merck Credit
Facility being amended to be more favorable to the lenders
thereunder. J.P. Morgan also expects that it and its
affiliates will perform various investment banking and financial
services for Merck and Schering-Plough and their affiliates in
the future, and expects to receive customary fees for such
services. In the ordinary course of J.P. Morgans
businesses, it and its affiliates may actively trade the debt
and equity securities of Merck or Schering-Plough for
J.P. Morgans own account or for the accounts of
customers and, accordingly, may at any time hold long or short
positions in such securities.
Schering-Ploughs
Reasons for the Transaction and Recommendation of
Schering-Ploughs Board of Directors
At its meeting on March 8, 2009, following detailed
presentations by Schering-Ploughs management, its legal
counsel and financial advisors, the members of
Schering-Ploughs board of directors unanimously determined
that the merger and the transactions contemplated by the merger
agreement were fair to and in the best interests of
Schering-Plough and its shareholders, unanimously approved the
merger agreement and the transactions contemplated by the merger
agreement, and unanimously recommended that the shareholders of
70
Schering-Plough vote FOR the proposal to approve
the merger agreement and the transactions contemplated by the
merger agreement.
In evaluating the merger agreement and the transactions
contemplated by the merger agreement, including the issuance of
Schering-Plough stock in connection with the merger, the
Schering-Plough board of directors consulted with
Schering-Ploughs management and its legal and financial
advisors. In reaching its decision, the Schering-Plough board of
directors considered a number of factors, including the
following factors which the Schering-Plough board viewed as
generally supporting its decision to approve and enter into the
merger agreement and the transactions contemplated by the merger
agreement.
Strategic
Considerations
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|
Increased Scale and Scope. The
Schering-Plough board of directors considered the current and
prospective competitive climate in the industry in which
Schering-Plough and Merck operate, which includes challenging
conditions that are likely to persist, and the relatively better
position that the combined company would have in facing such
challenges, as a result of:
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|
the advantages presented by the larger scale and greater scope
of the combined company in meeting the challenges facing the
pharmaceutical industry in light of changes in regulatory,
financial and economic conditions affecting the industry, as
well as the possibility of future industry consolidation;
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|
the greater financial flexibility of the combined company to
invest in promising drug candidates and to invest in internal
and external research and development opportunities; and
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|
the significantly greater scope of the combined companys
operations and product offerings, including the broadening of
the portfolio of blockbuster products and expansion of the
global footprint for both companies, resulting in a more diverse
mix of business.
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|
|
|
Complementary Products and Customer
Bases. The Schering-Plough board of directors
considered the complementary nature of the respective products
and customer bases of Schering-Plough and Merck and the
opportunity created by the transaction to enhance the
capabilities of both companies to more effectively and
efficiently serve customers.
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|
Significant Cost Savings. The
Schering-Plough board of directors considered the opportunity
for the combined company to achieve significant annual cost
savings and revenue opportunities, including:
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savings and revenue opportunities from operational efficiencies,
including with respect to a consolidation of the
Merck/Schering-Plough cholesterol partnership; and
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savings and revenue opportunities from consolidating other
operations, procurement savings, and sharing support
infrastructure and best practices.
|
Other
Factors Considered by the Schering-Plough Board
In addition to considering the strategic factors described
above, the Schering-Plough board considered the following
additional factors, all of which it viewed as supporting its
decision to approve the transaction:
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its knowledge of Schering-Ploughs business, operations,
financial condition, earnings and prospects and of Mercks
business, operations, financial condition, earnings and
prospects, taking into account the results of
Schering-Ploughs due diligence review of Merck;
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the adequacy of the merger consideration and the other value
provided to Schering-Plough shareholders including:
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the spot implied per share price of the merger
consideration on various measurement dates and the premium to
the price of Schering-Plough common stock as of various dates
represented by such implied prices;
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the stock component of the merger consideration, which would
give Schering-Plough shareholders an equity interest in the
combined entity providing the Schering-Plough shareholders an
opportunity to
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71
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benefit from the future performance of the combined Merck and
Schering-Plough businesses and synergies resulting from the
merger;
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the cash component of the merger consideration, which would
allow Schering-Plough shareholders to diversify a portion of
their current exposure to the evolving U.S. pharmaceutical
industry;
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the Merck dividend rate, which Merck has stated it will maintain
at the combined company and which is three times the current
Schering-Plough dividend; and
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the current market price of Schering-Ploughs common stock,
as well as the historical, present and anticipated future
earnings of Schering-Plough and the anticipated future earnings
of the combined companies;
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the analyses and presentations of Goldman Sachs, including the
opinion of Goldman Sachs, dated March 8, 2009, to the
Schering-Plough board of directors to the effect that, as of
that date, and based upon the factors and subject to the
assumptions set forth in such opinion, the merger consideration
is fair, from a financial point of view, to Schering-Plough
shareholders (other than Merck and its affiliates), as more
fully described below under the caption
Opinions of Schering-Ploughs Financial
Advisors Opinion of Goldman, Sachs &
Co.;
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the analyses and presentations of Morgan Stanley, including the
opinion of Morgan Stanley, dated March 8, 2009, to the
Schering-Plough board of directors to the effect that, as of
that date, and based upon the factors and subject to the
assumptions set forth in such opinion, the merger consideration
is fair, from a financial point of view, to Schering-Plough
shareholders, as more fully described below under the caption
Opinions of Schering-Ploughs Financial
Advisors Opinion of Morgan Stanley & Co.
Incorporated;
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the efforts made to negotiate a merger agreement favorable to
Schering-Plough and its shareholders and the financial and other
terms and conditions of the merger agreement, including the fact
that
Schering-Plough
is permitted to terminate the merger agreement in order to
approve an alternative transaction proposed by a third party
that is a Superior Proposal as defined in the merger
agreement, upon the payment of a $1.25 billion termination
fee, and its belief that such termination fee was reasonable in
the context of
break-up
fees that were payable in other transactions and should not
preclude another party from making a competing proposal;
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the extent of the commitments to obtain required antitrust
regulatory approvals that Merck has made under the merger
agreement;
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the fact that Merck has firmly committed financing from a
reputable financing source for the merger, the efforts that
Merck is required to make under the merger agreement to obtain
the proceeds of the financing on the terms and conditions
described in the financing commitment letters, and the resulting
likelihood that Merck will have the financing available to
complete the merger despite the difficulties in the financial
markets, including if such difficulties increase in the coming
months;
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the knowledge that another company with a potentially strong
strategic fit, and similar capability to effect a transaction
such as the one proposed by Merck, and which
Schering-Ploughs financial advisors advised may be the
only other logical potential bidder for the company, declined to
make an offer for a business combination or other
arrangement; and
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the opportunity to combine two strong teams with compatible
corporate cultures and a strong and successful existing
relationship in connection with the Merck/Schering-Plough
cholesterol partnership and the inclusion of three
Schering-Plough directors on the board of directors of the
combined company.
|
The Schering-Plough board of directors weighed these advantages
and opportunities against a number of other factors identified
in its deliberations weighing negatively against the
transaction, including:
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the challenges inherent in the combination of two businesses of
the size and scope of Schering-Plough and Merck and the size of
the companies relative to each other, including the risk that
integration costs
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72
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may be greater than anticipated and the possible diversion of
management attention for an extended period of time;
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the risk that changes in the regulatory or competitive landscape
may adversely affect the business benefits anticipated to result
from the transaction;
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the risk of not capturing all the anticipated cost savings and
operational synergies between Schering-Plough and Merck and the
risk that other anticipated benefits might not be realized;
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the risk that regulatory agencies may not approve the
transaction or may impose terms and conditions on their
approvals that adversely affect the financial results of the
combined company, including divestitures of key businesses (see
the section entitled Regulatory
Approvals beginning on page 98);
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the challenges in the financial markets and the risk that the
required financing will not be available to Merck;
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the various contingent liabilities, including pending legal
proceedings with respect to Singulair and Vioxx,
to which Merck is subject;
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the possibility that Centocor, a wholly owned subsidiary of
Johnson & Johnson, would challenge the right of the
combined company to maintain its rights under
Schering-Ploughs distribution agreement with Centocor with
respect to Remicade and golimumab;
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the potential impact of the merger announcement and the
consummation of the transaction on employees, however the board
recognized the overall benefits of the greater scale and size of
the combined entity, given the challenges in the pharmaceutical
industry, and in light of changes in the regulatory and
financial conditions and broader economic changes affecting the
industry; and
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the risks of the type and nature described under Risk
Factors beginning on page 17 and the matters
described under Cautionary Statement Regarding
Forward-Looking Statements beginning on page 37.
|
Schering-Ploughs board of directors concluded that the
anticipated benefits of the merger would outweigh the preceding
considerations.
In addition, the Schering-Plough board of directors was aware of
and considered the interests that Schering-Ploughs
directors and executive officers may have with respect to the
merger that differ from, or are in addition to, their interests
as shareholders of Schering-Plough generally, as described in
Interests of Schering-Ploughs Directors
and Management in the Transaction beginning on
page 90.
The reasons set forth above are not intended to be exhaustive,
but include material facts considered by the board of directors
in approving the merger agreement. In view of the wide variety
of factors considered in connection with its evaluation of the
merger and the complexity of these matters, the Schering-Plough
board of directors did not find it useful and did not attempt to
quantify or assign any relative or specific weights to the
various factors that it considered in reaching its determination
to approve the merger and the merger agreement and to make its
recommendations to Schering-Plough shareholders. In addition,
individual members of the Schering-Plough board of directors may
have given differing weights to different factors. The
Schering-Plough
board of directors conducted an overall review of the factors
described above, including thorough discussions with
Schering-Ploughs management and outside legal and
financial advisors.
Opinions
of Schering-Ploughs Financial Advisors
Opinion of Goldman, Sachs & Co. At a meeting of
the Schering-Plough board of directors on March 8, 2009,
Goldman Sachs rendered its oral opinion, subsequently confirmed
in writing, to the Schering-Plough board of directors that, as
of March 8, 2009 and based upon and subject to the factors
and assumptions set forth therein, the $10.50 in cash and
0.5767 shares of New Merck common stock to be paid as
consideration for each share of common stock of Schering-Plough
to the holders (other than Merck and any of its affiliates) of
such Schering-Plough common stock pursuant to the merger
agreement was fair from a financial point of view to such
holders.
73
The full text of the written opinion of Goldman Sachs, dated
March 8, 2009, which sets forth assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Annex C to this joint proxy statement/prospectus and is
incorporated by reference herein. Goldman Sachs provided its
opinion for the information and assistance of the
Schering-Plough board of directors in connection with its
consideration of the transaction. The Goldman Sachs opinion is
not a recommendation as to how any holder of Schering-Plough
common stock should vote with respect to the transaction or any
other matter.
In connection with rendering the opinion described above and
performing its related financial analyses, Goldman Sachs
reviewed, among other things:
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the merger agreement;
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annual reports to shareholders and Annual Reports on
Form 10-K
of Schering-Plough and Merck;
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certain interim reports to shareholders and Quarterly Reports on
Form 10-Q
of Schering-Plough and Merck;
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certain other communications from Schering-Plough and Merck to
their respective shareholders;
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certain publicly available research analyst reports for
Schering-Plough and Merck; and
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certain internal financial analyses and forecasts for
Schering-Plough prepared by its management and for Merck by its
management, in each case, as approved for Goldman Sachss
use by Schering-Plough, including certain cost savings and
operating synergies projected by the managements of
Schering-Plough and Merck to result from the transaction.
|
Goldman Sachs also held discussions with members of the senior
management of Schering-Plough and Merck regarding their
assessment of the strategic rationale for, and the potential
benefits of, the transaction and the past and current business
operations, financial condition and future prospects of their
respective companies. In addition, Goldman Sachs reviewed the
reported price and trading activity for the shares of
Schering-Plough common stock and Merck common stock, compared
certain financial and stock market information for
Schering-Plough and Merck with similar information for certain
other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business
combinations in the healthcare industry specifically and in
other industries generally and performed such other studies and
analyses, and considered such other factors, as it considered
appropriate.
For purposes of rendering the opinion described above, Goldman
Sachs relied upon and assumed, without assuming any
responsibility for independent verification, the accuracy and
completeness of all of the financial, legal, regulatory, tax,
accounting and other information provided to, discussed with or
reviewed by it. Goldman Sachs assumed, with the consent of the
Schering-Plough board of directors, that the internal financial
analyses and forecasts prepared by the management of
Schering-Plough, and the synergies estimated by Merck, were
reasonably prepared on a basis reflecting the best
then-currently available estimates and judgments of the
management of Schering-Plough. In addition, Goldman Sachs did
not make an independent evaluation or appraisal of the assets
and liabilities (including any contingent, derivative or
off-balance-sheet assets and liabilities) of Schering-Plough,
Merck or any of their respective subsidiaries and it has not
been furnished with any such evaluation or appraisal. Goldman
Sachs also has assumed that all governmental, regulatory or
other consents and approvals necessary for the consummation of
the transaction will be obtained without any adverse effect on
Schering-Plough, Merck or the combined company or on the
expected benefits of the transaction in any way meaningful to
its analysis.
Goldman Sachss opinion does not address any legal,
regulatory, tax or accounting matters, the underlying business
decision of Schering-Plough to engage in the transaction, the
relative merits of the transaction as compared to any strategic
alternatives that may be available to Schering-Plough. Goldman
Sachss opinion addresses only the fairness from a
financial point of view of, as of the date of the opinion, the
$10.50 in cash and 0.5767 shares of New Merck common stock
to be paid as consideration for each share of common stock of
Schering-Plough to the holders (other than Merck and any of its
affiliates) of such Schering-Plough common stock pursuant to the
merger agreement. Goldman Sachss opinion does not express
any view on, and does not
74
address, any other term or aspect of the merger agreement or the
transaction, including, without limitation, the fairness of the
transaction to, or any consideration received in connection
therewith by, the holders of any other class of securities,
creditors or other constituencies of Schering-Plough or Merck;
the fairness of the amount or nature of any compensation to be
paid or payable to any of the officers, directors or employees
of Schering-Plough or Merck, or class of such persons in
connection with the transaction, whether relative to the $10.50
in cash and 0.5767 shares of New Merck common stock to be
paid as consideration for each share of common stock of
Schering-Plough to the holders (other than Merck and any of its
affiliates) of such Schering-Plough common stock pursuant to the
merger agreement or otherwise. Goldman Sachs did not express any
opinion as to the prices at which shares of Schering-Plough,
Merck or the combined company will trade at any time. Goldman
Sachss opinion was necessarily based on economic,
monetary, market and other conditions as in effect on, and the
information made available to it as of, the date of the opinion
and Goldman Sachs assumed no responsibility for updating,
revising or reaffirming its opinion based on circumstances,
developments or events occurring after the date of its opinion.
Goldman Sachss opinion was approved by a fairness
committee of Goldman Sachs.
The following is a summary of the material financial analyses
delivered by Goldman Sachs to the Schering-Plough board of
directors in connection with rendering the opinion described
above. The following summary, however, does not purport to be a
complete description of the financial analyses performed by
Goldman Sachs. The order of analyses described does not
represent the relative importance or weight given to those
analyses by Goldman Sachs. Some of the summaries of the
financial analyses include information presented in tabular
format. The tables must be read together with the full text of
each summary and are alone not a complete description of Goldman
Sachss financial analyses. Except as otherwise noted, the
following quantitative information, to the extent that it is
based on market data, is based on market data as it existed on
or before March 8, 2009 and is not necessarily indicative
of current market conditions.
Historical Stock Trading Analysis. Goldman
Sachs reviewed the historical trading prices for shares of
Schering-Plough and Merck common stock for the five-year period
ended March 6, 2009. In addition, Goldman Sachs analyzed
the consideration to be received by holders of Schering-Plough
common stock pursuant to the merger agreement in relation to the
market prices of Schering-Plough and Merck common stock as of
March 6, 2009, the average market prices for the month
ending March 6, 2009, the average market prices for the
three, six and twelve months ending March 6, 2009 and the
average market prices for the two-, three- and five-year periods
ending March 6, 2009.
This analysis indicated that the implied consideration per share
of Schering-Plough common stock to be paid to Schering-Plough
shareholders pursuant to the merger agreement represented:
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a premium of 33.9% based on the March 6, 2009 market price
of $17.63 per share of Schering-Plough common stock and $22.74
per share of Merck common stock;
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a premium of 43.8% based on the latest one months average
market price of $18.08 per share of Schering-Plough common stock
and $26.87 per share of Merck common stock;
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a premium of 64.3% based on the latest twelve months
average market price of $18.06 per share of Schering-Plough
common stock and $33.25 per share of Merck common stock;
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a premium of 50.4% based on the latest two years average
market price of $23.24 per share of Schering-Plough common stock
and $42.42 per share of Merck common stock.
|
Selected Companies Analysis. Goldman Sachs
reviewed and compared certain financial information and public
market multiples for Schering-Plough and Merck to corresponding
financial information and public market multiples for the
following publicly traded companies in the large cap
pharmaceutical industry:
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U.S.: Abbott Laboratories, Bristol-Myers Squibb Company, Eli
Lilly and Company, Johnson & Johnson, Pfizer Inc.
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U.K.: AstraZeneca PLC, GlaxoSmithKline plc
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Continental Europe: Bayer AG, Merck KgaA, Novartis AG, Novo
Nordisk A/S, Roche Holdings Ltd.
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75
Although none of the selected companies is directly comparable
to Schering-Plough or Merck, the companies included were chosen
because they are publicly traded companies with operations that
for purposes of analysis may be considered similar to certain
operations of Schering-Plough or Merck.
Goldman Sachs also calculated and compared the selected
companies estimated
price-to-earnings
multiples for calendar year 2009 to the corresponding multiples
for Schering-Plough and Merck using certain publicly available
financial information and the Institutional Brokers
Estimate System, or IBES. The following table summarizes the
results of this analysis:
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Price/Earnings Multiples
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2009E
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Novo Nordisk A/S
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15.4x
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Abbott Laboratories
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12.7x
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Roche Holdings Ltd.
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11.2x
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Johnson & Johnson
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10.7x
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Schering-Plough
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10.4x
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Merck KGaA
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9.6x
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Bristol-Myers Squibb Company
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9.5x
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Bayer AG
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9.2x
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GlaxoSmithKline plc
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8.8x
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Novartis AG
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8.5x
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Merck
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7.0x
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Eli Lilly and Company
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6.7x
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Sanofi-Aventis
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6.6x
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Pfizer Inc.
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6.5x
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AstraZeneca PLC
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5.7x
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Illustrative Discounted Cash Flow
Analysis. Goldman Sachs performed an illustrative
discounted cash flow analysis on Schering-Plough using
Schering-Plough management forecasts through 2013 and estimates
for the Merck/Schering-Plough cholesterol partnership based on
year-over-year
growth rates for 2013 to 2020. Goldman Sachs calculated the
illustrative standalone discounted cash flow value per share of
Schering-Plough common stock, consisting of the illustrative
discounted cash flow value of the Merck/Schering-Plough
cholesterol partnership and the illustrative discounted cash
flow value of Schering-Plough excluding the
Merck/Schering-Plough cholesterol partnership. Goldman Sachs
calculated the illustrative discounted cash flow value for the
Merck/Schering-Plough cholesterol partnership through 2020,
assuming no terminal value and taking into account the potential
2017 patent expiry, using a discount rate ranging from 8.0% to
9.0% and a compound annual growth rate (excluding additional
sales, general and administrative expenses) between 2012 and
2016 ranging from 1.6% to 11.6%. Goldman Sachs calculated the
indicative standalone discounted cash flow value of
Schering-Plough excluding the Merck/Schering-Plough cholesterol
partnership using a discount rate ranging from 8.0% to 9.0% and
a perpetuity growth rate ranging from 0.0% to 2.0%. The
following table presents the results of this analysis:
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Illustrative Discounted Cash Flow
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Value (per Share) of Schering-Plough
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(Including
Merck/Schering-Plough
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Cholesterol Partnership)
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Discount Rate
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Perpetuity Growth Rate
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8.0%
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8.5%
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9.0%
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0.0%
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$
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20.93
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$
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19.78
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$
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18.75
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1.0%
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$
|
22.76
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$
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21.36
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$
|
20.13
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2.0%
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$
|
25.20
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$
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23.43
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$
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21.90
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Goldman Sachs also performed a sensitivity analysis on the
impact on the illustrative discounted cash flow value of certain
operational events, such as decreases in EBIT margin, increases
and decreases in pipeline contribution, risks with respect to
Vytorin / Zetia, tax rate increases and exchange
rate fluctuation. These analyses resulted in impacts on
discounted cash flow values ranging from $(9.00) to $4.00 per
share of Schering-Plough common stock.
76
In addition, Goldman Sachs performed an illustrative pro forma
discounted cash flow analysis using Schering-Plough management
forecasts and Merck management forecasts, assuming
$3.5 billion of synergies phased in over three years (55%
in 2010, 80% in 2011 and 100% thereafter), a discount rate
ranging from 8.0% to 9.0% and a perpetuity growth rate ranging
from (1.0)% to 1.0%. The following table presents the results of
this analysis:
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Illustrative Pro Forma
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Discounted Cash Flow Value
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(per Share) of the Combined Company
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Discount Rate
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Perpetuity Growth Rate
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8.0%
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8.5%
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9.0%
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(1.0)%
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$
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43.47
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$
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41.16
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$
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39.07
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0.0%
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$
|
47.23
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$
|
44.46
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$
|
41.99
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1.0%
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$
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52.06
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$
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48.64
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$
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45.62
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Goldman Sachs calculated the illustrative pro forma discounted
cash flow value per share of
Schering-Plough
common stock on an as-converted basis for the merger
consideration, using Schering-Plough management forecasts and
Merck management forecasts, assuming $3.5 billion of
synergies phased in over three years (55% in 2010, 80% in 2011
and 100% thereafter), a discount rate of 8.5% and a 0.0%
perpetuity growth rate. The discount rate was derived from a
weighted average cost of capital analysis. The illustrative pro
forma discounted cash flow value per share of Schering-Plough
common stock, on an as-converted basis for the merger
consideration, was calculated as the present value of the sum of
(i) $10.50 in cash and (ii) the product of 0.5767
multiplied by the illustrative pro forma discounted cash flow
value per share of common stock of the combined company. This
calculation resulted in an illustrative pro forma discounted
cash flow value of $36.14 per share of Schering-Plough common
stock on an as-converted basis for the merger consideration.
Selected Transactions Analysis. Goldman Sachs
analyzed certain information relating to the following selected
transactions in the pharmaceutical industry since 1999
(acquiror target):
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2009: Pfizer Inc. Wyeth
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2004: Sanofi SA Aventis
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2002: Pfizer Inc. Pharmacia Corporation
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2000: Pfizer Inc. Warner-Lambert Company; Glaxo
Wellcome plc SmithKline Beecham plc
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1999 Monsanto Company
Pharmacia & Upjohn, Inc.; American Home Products
Corporation Warner-Lambert Company
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For each of the selected transactions, Goldman Sachs calculated
and compared enterprise consideration as a multiple of latest
twelve months EBIT and revenues, forward
price-to-equity
multiples and the premium represented by such multiples over a
composite
price-to-equity
multiple for large pharmaceutical companies on the date of such
transaction. While none of the companies that participated in
the selected transactions are directly comparable to
Schering-Plough, the companies that participated in the selected
transactions are companies that, for the purposes of analysis,
may be considered similar to certain of Schering-Ploughs
operations, market size or product profile. The range of
enterprise consideration as a multiple of the latest twelve
months EBIT for these transactions is 9.2x to 33.9x and as a
multiple of the latest twelve months revenues is 2.8x to 7.5x,
compared to 11.4x and 2.5x, respectively, for the transaction.
The range of forward
price-to-equity
multiples is 13.6x to 40.1x, representing a premium over the
composite
price-to-equity
multiple for large pharmaceutical companies on the date of such
transaction ranging from 5.8% to 53.7%, compared to a forward
price-to-equity
multiple of 14.0x for the transaction, representing a premium
over the composite multiple of 41.1%.
Pro Forma Transaction Analysis. Goldman Sachs
prepared illustrative pro forma analyses of the potential
financial impact of the transaction using earnings estimates for
Schering-Plough and Merck prepared by their respective
managements with assumed synergies in the amount of
$3.5 billion phased in over three
77
years (55% in 2010, 80% in 2011 and 100% thereafter). For each
of the years 2010 and 2011, Goldman Sachs compared the projected
earnings per share of Schering-Plough common stock, on a
standalone basis, to the projected earnings per share of the
common stock of the combined companies. Based on such analyses,
the proposed transaction would be accretive to
Schering-Ploughs shareholders on an earnings per share
basis in the years 2010 and 2011.
In addition, based on the projected dividend to be paid in 2010
on the Schering-Plough common stock of $0.26 per share, based on
a 1.5% dividend yield, and on the combined companys common
stock of $1.52 per share, based on a 6.7% dividend yield,
Schering-Plough shareholders would receive an additional $0.62
in dividends on a pro forma per share basis.
Present Value of Future Share Price
Analysis. Goldman Sachs performed an illustrative
analysis of the implied present value of (a) the future
price per share of Schering-Plough common stock and (b) the
estimated future dividends to be paid by Schering-Plough to
holders of such shares. This analysis is designed to provide an
indication of the present value of a theoretical future value of
a companys equity as a function of such companys
estimated future earnings and its assumed price to future
earnings per share multiple, plus any dividends paid by the
company to common equity holders. For this analysis, Goldman
Sachs used the financial information for Schering-Plough
prepared by Schering-Plough for the fiscal years 2009 to 2013.
Goldman Sachs first calculated the implied values per share of
Schering-Plough common stock in the years from 2009 to 2013 by
applying forward
price-to-earnings
multiple estimates of 9.4x to 11.4x earnings per share of
Schering-Plough common stock for the fiscal years 2009 to 2013.
The implied values per share of Schering-Plough common stock in
each year were then discounted back using a discount rate of
9.5%. Goldman Sachs also calculated the implied present value of
the future estimated dividends per share of Schering-Plough
common stock paid by the Company in the years from 2009 to 2013,
and then discounted the dividends back using a discount rate of
9.5%. The present value of the implied value per share of
Schering-Plough common stock in any given year was calculated as
the sum of (i) the present value of the product of the
forward
price-to-earnings
multiple and the earnings per share estimate for that given year
and (ii) the present value of each annual dividend paid
through the year prior to the given year. This analysis resulted
in implied present values ranging from $16.17 to $23.69 per
share of Schering-Plough common stock.
In addition, Goldman Sachs performed an illustrative analysis of
the implied present pro forma value per share of Schering-Plough
common stock by applying a blended forward
price-to-earnings
multiple of 8.1x for the fiscal years 2010 to 2013, using
information provided by Schering-Plough and Merck management,
$3.5 billion of synergies phased in over three years (55%
in 2010, 80% in 2011 and 100% thereafter) and the sale of 50% of
Schering-Ploughs Animal Health business segment. The
blended forward
price-to-earnings
multiple is based on Schering-Ploughs current
price-to-earnings
multiple of 10.4x and Mercks current
price-to-earnings
multiple of 7.0x. The implied pro forma values per share of
common stock of the combined company as well as the estimated
pro forma dividends paid to holders of shares of common stock of
the combined company in the years 2010 to 2013 were then
discounted back using a discount rate of 9.5%. The implied pro
forma present value per share of Schering-Plough common stock in
one year was calculated as the sum of (i) $10.50 in cash,
(ii) the present value of the product of 0.5767 multiplied
by the forward
price-to-earnings
multiple and the earnings per share estimate per share of common
stock of the combined company for that given year and
(iii) the present value of the product of 0.5767 multiplied
by each estimated pro forma annual dividend per share of common
stock of the combined company paid through the year prior to the
given year. This analysis resulted in implied present pro forma
values ranging from $26.39 to $30.25 per share of
Schering-Plough common stock. Applying Schering-Ploughs
current
price-to-earnings
multiple of 10.4x, this analysis resulted in implied present pro
forma values ranging from $30.92 to $35.28 per share of
Schering-Plough common stock, and applying Mercks current
price-to-earnings
multiple of 7.0x, this analysis resulted in implied present pro
forma values ranging from $24.16 to $27.76.
78
Premium Comparison of Selected
Transactions. Goldman Sachs analyzed certain
publicly available information relating to selected transactions
involving companies in the pharmaceutical industry. Using this
information, Goldman Sachs calculated the respective premium,
defined as the difference between the price offered to the
holders of the shares in the transaction compared to latest,
undisturbed market price for the shares of the acquired company
(i.e., before any rumors or disclosure, as the case may be, may
have affected the share price) and compared these premia to the
premia analysis set out above. For its premium comparison,
Goldman Sachs selected certain large transactions in the
pharmaceutical industry and other transactions with a value
greater than $20 billion. The following table sets forth
the analysis described above for selected transactions in the
pharmaceutical industry:
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Date
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Type of
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Premium
|
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Target
|
|
Acquirer
|
|
Announced
|
|
Consideration
|
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Paid
|
|
|
Schering-Plough
|
|
Merck
|
|
March 2009
|
|
cash/stock
|
|
|
44.7
|
%
|
Synthelabo SA
|
|
Sanofi SA
|
|
December 1998
|
|
all stock
|
|
|
39.6
|
%
|
Pharmacia Corporation
|
|
Pfizer Inc.
|
|
July 2002
|
|
all stock
|
|
|
34.0
|
%
|
Schering AG
|
|
Bayer AG
|
|
March 2006
|
|
all cash
|
|
|
33.4
|
%
|
Aventis
|
|
Sanofi SA
|
|
January 2004
|
|
cash/stock
|
|
|
31.2
|
%
|
Warner-Lambert Company
|
|
Pfizer Inc.
|
|
November 1999
|
|
all stock
|
|
|
29.8
|
%
|
Wyeth
|
|
Pfizer Inc.
|
|
January 2009
|
|
cash/stock
|
|
|
28.8
|
%
|
The 44.7% premium for the transaction is calculated based on the
undisturbed market price of $16.32 per share of Schering-Plough
common stock on March 5, 2009 and the undisturbed market
price of $22.74 per share of Merck common stock on March 6,
2009. The average premium for transactions with a value greater
than $20 billion is 24.1%.
Illustrative
Break-Up
Analysis. Goldman Sachs performed an illustrative
analysis of the
break-up
values of Schering-Ploughs business segments (Consumer
Health, Animal Health, Remicade/golimumab,
Vytorin/Zetia and the remainder of
Pharmaceuticals), based on information provided by
Schering-Plough management. The
break-up
values were calculated using EBIT multiples, sales multiples or
discounted cash flows, as appropriate in Goldman Sachss
judgment, taking into account tax assumptions provided by
Schering-Plough management. This analysis resulted in total
aggregate values of the business segments ranging from
$34.4 billion to $45.3 billion, based on which the
aggregate consideration to be paid to Schering-Plough
shareholders pursuant to the merger agreement represents a
premium ranging from 1.8% to 34.2% over such total aggregate
values.
General. The preparation of a fairness opinion
is a complex process and is not necessarily susceptible to
partial analysis or summary description. Selecting portions of
the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete
view of the processes underlying Goldman Sachss opinion.
In arriving at its fairness determination, Goldman Sachs
considered the results of all of its analyses and did not
attribute any particular weight to any factor or analysis
considered by it. Rather, Goldman Sachs made its determination
as to fairness on the basis of its experience and professional
judgment after considering the results of all of its analyses.
No company or transaction used in the above analyses as a
comparison is directly comparable to Schering-Plough or Merck,
respectively, or the contemplated transaction.
Goldman Sachs prepared these analyses for the purpose of
undertaking a study to enable Goldman Sachs to render its
opinion to the Schering-Plough board of directors as to the
fairness from a financial point of view of, as of the date of
the opinion, the $10.50 in cash and 0.5767 shares of New
Merck common stock to be paid as consideration for each share of
common stock of Schering-Plough to the holders (other than Merck
and any of its affiliates) of such shares pursuant to the merger
agreement. These analyses do not purport to be appraisals and
they do not necessarily reflect the prices at which businesses
or securities may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than
suggested by these analyses. Because these analyses are
inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their
respective advisors, none of Schering-Plough, Goldman Sachs or
any other person assumes responsibility if future results are
materially different from those forecasted.
79
The $10.50 in cash and 0.5767 shares of New Merck common
stock per outstanding share of common stock of Schering-Plough
was determined through arms-length negotiations between
Schering-Plough and Merck and was approved by the
Schering-Plough board of directors. Goldman Sachs provided
advice to Schering-Plough during these negotiations. Goldman
Sachs did not, however, recommend any specific amount of
consideration to Schering-Plough or its board of directors or
that any specific amount of consideration constituted the only
appropriate consideration for the transaction.
As described above, Goldman Sachss opinion to the
Schering-Plough board of directors was one of many factors taken
into consideration by the Schering-Plough board of directors in
making its determination to approve the merger agreement. The
foregoing summary does not purport to be a complete description
of the analyses performed by Goldman Sachs in connection with
its fairness opinion and is qualified in its entirety by
reference to the written opinion of Goldman Sachs attached as
Annex C.
Goldman Sachs and its affiliates are engaged in investment
banking and financial advisory services, securities trading,
investment management, principal investment, financial planning,
benefits counseling, risk management, hedging, financing,
brokerage activities and other financial and non-financial
activities and services for various persons and entities. In the
ordinary course of these activities and services, Goldman Sachs
and its affiliates may at any time make or hold long or short
positions and investments, as well as actively trade or effect
transactions, in the equity, debt and other securities (or
related derivative securities) and financial instruments
(including bank loans and other obligations) of Schering-Plough,
Merck, the combined company and any of their respective
affiliates or any currency or commodity that may be involved in
the transaction contemplated by the merger agreement for their
own account and for the accounts of their customers. Goldman
Sachs acted as financial advisor to Schering-Plough in
connection with, and participated in certain of the negotiations
leading to, the transaction. In addition, Goldman Sachs has
provided certain investment banking and other financial services
to Schering-Plough and its affiliates from time to time,
including having acted as sole lead arranger on an acquisition
bridge financing provided to Schering-Plough (aggregate
principal amount of 11.0 billion) in March 2007, sole
physical bookrunner on a mandatory convertible preferred
offering by Schering-Plough (aggregate amount of
$2.5 billion) in August 2007, sole physical bookrunner on a
common stock offering by Schering-Plough (aggregate amount of
$1.5 billion) in August 2007, joint bookrunner on two
investment grade offerings by Schering-Plough (aggregate
principal amounts of $2.0 billion and
2.0 billion, respectively) in September 2007, sole
financial advisor on
Schering-Ploughs
acquisition of Organon Biosciences in November 2007, and sole
financial advisor on a divestiture of certain of
Schering-Ploughs animal health assets in September 2008.
Goldman Sachs also has provided certain investment banking and
other financial services to Merck and its affiliates from time
to time, including having acted as joint bookrunner on
Mercks 5 year investment grade bond offering and swap
(aggregate principal amount of $750 million) in November
2006. Goldman Sachs also may provide investment banking and
other financial services to Schering-Plough, Merck, the combined
company and their respective affiliates in the future. In
connection with the above-described services, Goldman Sachs has
received, and may receive in the future, compensation.
The board of directors of Schering-Plough engaged Goldman Sachs
as its financial advisor because it is an internationally
recognized investment banking firm that has substantial
experience in transactions similar to the transaction described
in this joint proxy statement/prospectus. Pursuant to the terms
of this engagement letter, Schering-Plough has agreed to pay
Goldman Sachs a transaction fee of up to $33.33 million,
$10 million of which was payable upon the announcement of
the transaction and $23.33 million of which is contingent
upon consummation of the transaction. In addition,
Schering-Plough has agreed to reimburse Goldman Sachs for its
expenses, including attorneys fees and disbursements, and
to indemnify Goldman Sachs and related persons against various
liabilities, including certain liabilities under the federal
securities laws.
Opinion of Morgan Stanley & Co.
Incorporated. Schering-Plough retained Morgan
Stanley in 2009 to act as its financial advisor in connection
with a potential transaction involving Schering-Plough.
Schering-Plough selected Morgan Stanley to act as its financial
advisor based on Morgan Stanleys qualifications,
expertise, reputation and knowledge of the business and affairs
of Schering-Plough. As financial advisor to Schering-Plough, on
March 8, 2009, Morgan Stanley rendered to the
Schering-Plough board of directors its oral opinion, which
opinion was confirmed by delivery of a written opinion dated as
of the same date, that, as of such date and based
80
upon and subject to the various assumptions, qualifications and
limitations set forth in its opinion, the merger consideration
to be received by the holders of shares of
Schering-Ploughs common stock pursuant to the merger
agreement was fair from a financial point of view to such
holders.
The full text of the written fairness opinion of Morgan
Stanley, dated March 8, 2009, is attached hereto as
Annex D to this joint proxy statement/prospectus and is
incorporated by reference herein. The opinion sets forth, among
other things, the assumptions made, procedures followed, matters
considered and qualifications and limitations of the reviews
undertaken by Morgan Stanley in rendering its opinion. You
should read the entire opinion carefully and in its entirety.
Morgan Stanleys opinion is directed to the Schering-Plough
board of directors and addresses only the fairness from a
financial point of view of the merger consideration to be
received by the holders of shares of Schering-Ploughs
common stock pursuant to the merger agreement as of the date of
the opinion. It does not address any other aspect of the
transaction and does not constitute a recommendation to the
shareholders of Schering-Plough or Merck as to how to vote or
act on any matter with respect to the transaction. The summary
of the opinion of Morgan Stanley set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference
to the full text of the opinion.
In arriving at its opinion, Morgan Stanley, among other things:
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|
reviewed certain publicly available financial statements and
other business and financial information of Schering-Plough and
Merck, respectively;
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|
reviewed certain internal financial statements and other
financial and operating data concerning Schering-Plough and
Merck, respectively;
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|
reviewed certain financial projections prepared by the
managements of Schering-Plough and Merck, respectively;
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|
reviewed information relating to certain strategic, financial
and operational benefits anticipated from the merger, prepared
by the managements of Schering-Plough and Merck, respectively;
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|
discussed the past and current operations and financial
condition and the prospects of Schering-Plough, including
information relating to certain strategic, financial and
operational benefits anticipated from the transaction, with
senior executives of Schering-Plough;
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|
discussed the past and current operations and financial
condition and the prospects of Merck, including information
relating to certain strategic, financial and operational
benefits anticipated from the transaction, with senior
executives of Merck;
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|
reviewed the pro forma impact of the transaction on Mercks
earnings per share, cash flow, consolidated capitalization and
financial ratios;
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|
reviewed the reported prices and trading activity for
Schering-Ploughs common stock and Mercks common
stock;
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|
compared the financial performance of Schering-Plough and Merck
and the prices and trading activity of Schering-Ploughs
common stock and Mercks common stock with that of certain
other publicly traded companies comparable with Schering-Plough
and Merck, respectively, and their securities;
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reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
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|
participated in certain discussions and negotiations among
representatives of Schering-Plough and Merck and their financial
and legal advisors;
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|
reviewed the draft merger agreement dated March 7, 2009,
the draft commitment letter from J.P. Morgan Securities
Inc. and JPMorgan Chase Bank, N.A. substantially in the form of
the draft dated March 6, 2009 and certain related
documents; and
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performed such other analyses, reviewed such other information
and considered such other factors as Morgan Stanley had deemed
appropriate.
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81
In arriving at its opinion, Morgan Stanley assumed and relied
upon, without independent verification, the accuracy and
completeness of the information that was publicly available or
supplied or otherwise made available to it by Schering-Plough
and Merck and that formed a substantial basis for its opinion.
With respect to the financial projections, including information
relating to certain strategic, financial and operational
benefits anticipated from the transaction, Morgan Stanley
assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments
of the respective managements of Schering-Plough and Merck of
the future financial performance of Schering-Plough and Merck.
In addition, Morgan Stanley assumed that the transaction would
be consummated in accordance with the terms described in the
draft merger agreement dated March 7, 2009 without any
waiver, amendment or delay of any terms or conditions,
including, among other things, that Merck would obtain financing
in accordance with the terms set forth in the draft commitment
letter dated March 6, 2009. Morgan Stanley assumed that in
connection with the receipt of all the necessary governmental,
regulatory or other approvals and consents required for the
proposed transaction, no delays, limitations, conditions or
restrictions would be imposed that would have a material adverse
effect on the contemplated benefits expected to be derived in
the proposed transaction.
In its opinion, Morgan Stanley noted that it is not a legal, tax
or regulatory advisor and that as financial advisor it relied
upon, without independent verification, the assessment of
Schering-Plough and Merck and their legal, tax or regulatory
advisors with respect to such matters. Morgan Stanley expressed
no opinion with respect to the fairness of the amount or nature
of the compensation to any of Schering-Ploughs officers,
directors or employees, or any class of such persons, relative
to the consideration to be received by the holders of shares of
Schering-Ploughs common stock in the transaction. Morgan
Stanley did not make any independent valuation or appraisal of
the assets or liabilities of Schering-Plough or Merck, nor was
it furnished with any such appraisals. Morgan Stanleys
opinion was necessarily based on financial, economic, market and
other conditions as in effect on, and the information made
available to it as of, the date of the opinion. Events occurring
after the date of the opinion may affect Morgan Stanleys
opinion and the assumptions used in preparing it, and Morgan
Stanley did not assume any obligation to update, revise or
reaffirm its opinion. Morgan Stanleys opinion did not in
any manner address the prices at which Schering-Ploughs
common stock or Mercks common stock would trade following
the announcement of the transaction or at any other time.
In arriving at its opinion, Morgan Stanley was not authorized to
solicit, and did not solicit, interest from any party with
respect to an acquisition, business combination or other
extraordinary transaction, involving Schering-Plough, nor did it
negotiate with any party other than Merck.
The following is a brief summary of the material analyses
performed by Morgan Stanley in connection with its opinion dated
March 8, 2009. This summary of financial analyses includes
information presented in tabular format. In order to fully
understand the financial analyses used by Morgan Stanley, the
tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the
financial analyses. The analyses listed in the tables and
described below must be considered as a whole; considering any
portion of such analyses and of the factor considered, without
considering all analyses and factors, could create a misleading
or incomplete view of the process underlying Morgan
Stanleys fairness opinion. For purposes of its analyses,
Morgan Stanley utilized projections based on Wall Street analyst
consensus estimates for each of Schering-Plough and Merck and
Schering-Plough management forecasts and Merck management
forecasts.
82
Transaction Premium Analysis. Morgan Stanley
calculated the implied premium of the offer value, based on the
merger consideration per share of Schering-Ploughs common
stock of $10.50 in cash and 0.5767 shares of Mercks
common stock, to the average price of Schering-Ploughs
common stock. The average prices of Schering-Ploughs
common stock and Mercks common stock for these
calculations were derived from their closing prices on
March 5, 2009, for periods varying from one calendar month
to three calendar years. Morgan Stanley selected March 5,
2009 for the purpose of its analyses because that was the last
trading day before publication of media reports of a potential
transaction involving Schering-Plough. The following table
summarizes Morgan Stanleys analysis:
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Schering-Plough
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Merck Average
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|
Average Price per
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|
Implied Premium to
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|
Price per Share of
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|
Implied
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|
Share of Common
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|
Schering-Plough
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|
Range
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|
Common Stock
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|
Offer Value
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Stock
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|
|
Average Price
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|
Unaffected
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|
$
|
22.74
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|
|
$
|
23.61
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|
|
$
|
16.32
|
|
|
|
45
|
%
|
1 calendar month
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|
$
|
27.29
|
|
|
$
|
26.24
|
|
|
$
|
18.19
|
|
|
|
44
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%
|
3 calendar months
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|
$
|
28.13
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|
|
$
|
26.72
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|
|
$
|
17.82
|
|
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|
50
|
%
|
6 calendar months
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|
$
|
28.64
|
|
|
$
|
27.01
|
|
|
$
|
16.85
|
|
|
|
60
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%
|
1 calendar year
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|
$
|
33.37
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|
|
$
|
29.74
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|
$
|
18.09
|
|
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64
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%
|
2 calendar years
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|
$
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42.48
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|
$
|
35.00
|
|
|
$
|
23.26
|
|
|
|
50
|
%
|
3 calendar years
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|
$
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41.64
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|
$
|
34.51
|
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|
$
|
22.53
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|
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|
53
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%
|
The premium of 44.7% is based on Mercks unaffected share
price as of March 6, 2009 and on Schering-Ploughs
unaffected share price as of March 5, 2009.
Morgan Stanley also noted that the merger consideration had an
implied value of $23.61 per share of Schering-Ploughs
common stock based upon the closing price of Mercks common
stock on March 6, 2009, the last trading day prior to
announcement of the proposed transaction, and that based on such
value, an all-stock transaction using Mercks closing stock
price on March 6, 2009 would have resulted in an exchange
ratio of 1.038 shares of Mercks common stock for each
share of Schering-Ploughs common stock. Morgan Stanley
compared this exchange ratio to the closing price of
Schering-Ploughs common stock relative to Mercks
common stock over varying periods of time and calculated the
implied exchange ratio premium for each such period. The
following table summarizes Morgan Stanleys analysis:
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|
Implied Exchange
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|
Time Period
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|
Exchange Ratio
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|
Ratio Premium
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3 calendar months
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|
0.635
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x
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|
64
|
%
|
6 calendar months
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|
0.589
|
x
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|
|
76
|
%
|
1 calendar year
|
|
|
0.551
|
x
|
|
|
89
|
%
|
2 calendar years
|
|
|
0.552
|
x
|
|
|
88
|
%
|
3 calendar years
|
|
|
0.544
|
x
|
|
|
91
|
%
|
Premia Paid Analysis. Morgan Stanley performed
a premia paid analysis based upon the premia paid in 23 selected
public company transactions that were announced between
December 2, 1998 and January 26, 2009 in which the
target company was a publicly traded pharmaceutical company and
the transaction value was greater than $5 billion. The
following table summarizes Morgan Stanleys analysis of
these transactions:
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|
Premium to
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|
Price 1-Day
|
|
|
|
Prior to
|
|
Precedent Transactions Premia
|
|
Announcement
|
|
|
Mean
|
|
|
26.6
|
%
|
Median
|
|
|
28.8
|
%
|
High
|
|
|
52.9
|
%
|
Low
|
|
|
(1.1
|
)%
|
83
Morgan Stanley selected a representative range of implied premia
and applied this range of premia to the unaffected price of
Schering-Ploughs common stock of $16.32 as of
March 5, 2009. The following summarizes Morgan
Stanleys analysis:
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Representative
|
|
Implied Value
|
Precedent Transaction Financial Statistic
|
|
Premium Range
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|
per Share
|
|
Premium to Unaffected Stock Price
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|
25% - 35%
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|
$20.40 - $22.03
|
Morgan Stanley noted that the consideration to be received by
holders of Schering-Ploughs common stock pursuant to the
merger agreement had an implied value of $23.61 per share,
calculated by multiplying the merger exchange ratio of 0.5767 by
the closing price of Mercks common stock of $22.74 as of
March 6, 2009 plus $10.50 in cash. Morgan Stanley also
noted that Schering-Ploughs closing share price was $16.32
as of March 5, 2009 and $17.63 as of March 6, 2009.
No company or transaction utilized in the premia paid analysis
is identical to Schering-Plough, Merck or the merger. In
evaluating the precedent transactions, Morgan Stanley made
judgments and assumptions with regard to general business,
market and financial conditions and other matters, which are
beyond the control of Schering-Plough and Merck, such as the
impact of competition on the business of Schering-Plough, Merck
or the industry generally, industry growth and the absence of
any adverse material change in the financial condition of
Schering-Plough, Merck or the industry or in the financial
markets in general, which could affect the public trading value
of the companies and the aggregate value of the transactions to
which they are being compared.
Comparable Company Analysis. Morgan Stanley
performed a comparable company analysis, which attempts to
provide an implied value of a company by comparing it to similar
companies. Morgan Stanley compared selected financial
information for Schering-Plough with publicly available
information for comparable pharmaceutical companies that shared
similar characteristics with Schering-Plough. The companies used
in this comparison included those companies listed below:
U.S Pharmaceutical Companies:
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Abbott Laboratories Inc.
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|
Amgen Inc.
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|
Bristol-Myers Squibb Co.
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|
Eli Lilly & Co.
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Johnson & Johnson
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|
Merck & Co. Inc.
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|
Pfizer Inc.
|
European Pharmaceutical Companies:
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AstraZeneca P.L.C.
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|
GlaxoSmithKline P.L.C.
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Novartis A.G.
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Roche Holding A.G.
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Sanofi-Aventis S.A.
|
Based upon Institutional Broker Estimate System, or IBES,
consensus estimates for calendar year 2009 earnings per share
(EPS) and long-term growth rate of EPS, and using
the closing prices as of March 6,
84
2009 for shares of the comparable companies, Morgan Stanley
calculated the following ratios for each of these companies:
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|
the closing stock price divided by the estimated IBES consensus
EPS for calendar year 2009, referred to below as the P/E
multiple; and
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|
the annual dividend divided by the closing stock price, referred
to below as the dividend yield.
|
Based on the analysis of the relevant metrics for each of the
comparable companies, Morgan Stanley calculated (i) that
the mean P/E multiple was 8.7x and the mean dividend yield was
4.7% and (ii) that Schering-Ploughs P/E multiple as
of March 5, 2009, was 9.7x and its dividend yield was 1.6%.
Based on the relevant financial statistic(s) as provided by
Schering-Plough management and publicly available information,
Morgan Stanley calculated that the price offered by Merck for
each share of Schering-Ploughs common stock constituted an
implied transaction P/E multiple of 14.0x and this represented
an approximately 44% premium to Schering-Ploughs P/E
multiple as of March 5, 2009.
No company included in the comparable company analysis is
identical to Schering-Plough. In evaluating the comparable
companies, Morgan Stanley made judgments and assumptions with
regard to industry performance, general business, economic,
market and financial conditions and other matters. Many of these
matters are beyond the control of Schering-Plough, such as the
impact of competition on the business of Schering-Plough and the
industry in general, industry growth and the absence of any
material adverse change in the financial condition and prospects
of Schering-Plough or the industry or in the financial markets
in general. Mathematical analysis, such as determining the
arithmetic mean or median, or the high or low, is not in itself
a meaningful method of using comparable company data.
Equity Research Analyst Price Targets
Analysis. Morgan Stanley reviewed and analyzed
the price targets for Schering-Ploughs common stock and
Mercks common stock prepared and published by equity
research analysts during the period from February 3, 2009
through March 2, 2009. These targets reflect each
analysts estimate of the future public market trading
price of Schering-Ploughs common stock and Mercks
common stock and are not discounted to reflect present values.
Morgan Stanley noted that the range of undiscounted equity
analyst price targets of Schering-Ploughs common stock was
between $17.00 and $24.00 per share. Morgan Stanley further
calculated that using a cost of equity of 9.0% and a discount
period of one year, the present value of the equity analyst
price target range for Schering-Ploughs common stock was
approximately $15.60 to $22.02 per share. In connection with its
analysis, Morgan Stanley noted that the consideration to be
received by holders of Schering-Ploughs common stock
pursuant to the merger agreement had an implied value of $23.61
per share, calculated by multiplying the merger exchange ratio
of 0.5767 by the closing price of Mercks common stock of
$22.74 as of March 6, 2009 plus $10.50 in cash. Morgan
Stanley also noted that Schering-Ploughs closing share
price was $16.32 as of March 5, 2009 and $17.63 as of
March 6, 2009.
Morgan Stanley also noted that the range of undiscounted equity
analyst price targets of Mercks common stock was between
$30.00 and $40.00 per share. Morgan Stanley further calculated
that using a cost of equity of 9.0% and a discount period of one
year, the present value of the equity analyst price target range
for Mercks common stock was approximately $27.52 to $36.70
per share. In connection with its analysis, Morgan Stanley noted
that Mercks closing share price was $22.74 as of
March 6, 2009.
In each case above, the 9.0% cost of equity was selected based
on a cost of equity calculation that factored in a
companys beta which is a measure of a
companys volatility relative to the overall market, a 6%
market risk premium and a relevant predicted beta and risk-free
rate.
The public market trading price targets published by equity
research analysts do not necessarily reflect current market
trading prices for Schering-Ploughs common stock and
Mercks common stock and these estimates are subject to
uncertainties, including the future financial performance of
Schering-Plough and Merck and future financial market conditions.
Discounted Equity Value Analysis. Morgan
Stanley performed a discounted equity value analysis, which is
designed to provide insight into the future value of a
companys common equity as a function of the
85
companys future earnings and its current forward price to
earnings multiples. The resulting value is subsequently
discounted to arrive at a present value for the companys
stock price. Morgan Stanley calculated ranges of implied equity
values per share for Schering-Plough based on discounted equity
values that were based on estimated 2013 EPS utilizing Wall
Street analyst estimates and the Schering-Plough management
forecasts. In arriving at the estimated equity values per share
of Schering-Ploughs common stock, Morgan Stanley applied a
9.0x to 11.0x next twelve months price to earnings multiple
range to Schering-Ploughs expected 2013 earnings per share
and discounted those values to present value at an assumed 8.5%
to 9.5% cost of equity. Morgan Stanley selected a 9.0x to 11.0x
next twelve month price to earnings multiple range based on the
next twelve month price to earnings multiples of other
pharmaceutical companies that Morgan Stanley viewed as sharing
similar characteristics with Schering-Plough and the next twelve
month price to earnings multiple of Schering-Plough. Morgan
Stanley selected a 8.5% to 9.5% cost of equity range based on a
cost of equity calculation that factored in a companys
beta which is a measure of a companys
volatility relative to the overall market, a 6% market risk
premium and a relevant predicted beta and risk-free rate. Morgan
Stanley then added the present value of the estimated dividends
paid on Schering-Ploughs common stock over the period
beginning on January 1, 2009 through December 31,
2012. The present value of these dividends was calculated using
a 8.5% to 9.5% cost of equity. Based on the calculations set
forth above, this analysis implied a range for
Schering-Ploughs common stock of approximately $16.79 to
$21.07 per share based on Wall Street analyst estimates and
approximately $18.84 to $23.67 per share based on the
Schering-Plough
management forecasts. Morgan Stanley noted that the
consideration to be received by holders of
Schering-Ploughs common stock pursuant to the merger
agreement had an implied value of $23.61 per share, calculated
by multiplying the merger exchange ratio of 0.5767 by the
closing price of Mercks common stock of $22.74 as of
March 6, 2009 plus $10.50 in cash. Morgan Stanley also
noted that Schering-Ploughs closing share price was $16.32
as of March 5, 2009 and $17.63 as of March 6, 2009.
Morgan Stanley also calculated ranges of implied equity values
per share for Merck based on discounted equity values that were
based on estimated 2013 earnings per share utilizing Wall Street
analyst estimates and the Merck management projections. In
arriving at the estimated equity values per share of
Mercks common stock, Morgan Stanley applied a 6.0x to 8.0x
next twelve months price to earnings multiple range to
Mercks expected 2013 earnings per share and discounted
those values to present value at an assumed 8.5% to 9.5% cost of
equity. Morgan Stanley selected a 6.0x to 8.0x next twelve month
price to earnings multiple range based on the next twelve month
price to earnings multiples of other pharmaceutical companies
that Morgan Stanley viewed as sharing similar characteristics
with Merck and the next twelve months price to earnings multiple
of Merck. Morgan Stanley selected a 8.5% to 9.5% cost of equity
range based on a cost of equity calculation that factored in a
companys beta which is a measure of a
companys volatility relative to the overall market, a 6%
market risk premium and a relevant predicted beta and risk-free
rate. Morgan Stanley then added the present value of the
estimated dividends paid on Mercks common stock over the
period beginning on January 1, 2009 through
December 31, 2012. The present value of these dividends was
calculated using a 8.5% to 9.5% cost of equity. Based on the
calculations set forth above, this analysis implied a range for
Mercks common stock of approximately $19.84 to $25.57 per
share based on Wall Street analyst estimates and approximately
$24.25 to $31.68 per share based on the Merck management
projections. Morgan Stanley noted that the closing stock price
of Merck common stock on March 6, 2009 was $22.74.
Discounted Cash Flow Analysis. Morgan Stanley
performed a discounted cash flow analysis, which is designed to
imply a value of a company by calculating the present value of
estimated future cash flows of the company. Morgan Stanley
calculated ranges of implied equity values per share for
Schering-Plough based on discounted cash flow analyses as of
December 31, 2008 utilizing Wall Street analyst estimates
and the Schering-Plough management forecasts. In arriving at the
estimated equity values per share of
Schering-Ploughs
common stock, Morgan Stanley calculated the sum of the
discounted cash flows of the Merck/Schering-Plough cholesterol
partnership through 2019 and the five-year discounted cash flows
and terminal value of the remainder of Schering-Plough. The
terminal value was calculated by applying a range of perpetual
free cash flow growth rates ranging from 0.0% to 2.0%. The
unlevered free cash flows and the terminal value were then
discounted to present values using a range of weighted average
cost of capital from 8.0% to 9.0%. The weighted average cost of
capital is a measure of the average expected return on all of a
given companys equity securities or debt based on their
proportions in such companys capital structure.
86
Based on the calculations set forth above, this analysis implied
a range for Schering-Ploughs common stock of approximately
$17.48 to $24.98 per share based on Wall Street analyst
estimates and approximately $18.76 to $25.01 per share based on
the Schering-Plough management forecasts. Morgan Stanley noted
that the consideration to be received by holders of
Schering-Ploughs common stock pursuant to the merger
agreement had an implied value of $23.61 per share, calculated
by multiplying the merger exchange ratio of 0.5767 by the
closing price of Mercks common stock of $22.74 as of
March 6, 2009 plus $10.50 in cash. Morgan Stanley also
noted that Schering-Ploughs closing share price was $16.32
as of March 5, 2009 and $17.63 as of March 6, 2009.
Morgan Stanley also calculated ranges of implied equity values
per share for Merck based on discounted cash flow analyses as of
December 31, 2008 using Wall Street analyst estimates and
the Merck management projections. In arriving at the estimated
equity values per share of Mercks common stock, Morgan
Stanley calculated the sum of the discounted cash flows of the
Merck/Schering-Plough cholesterol partnership through 2019 and
the five-year discounted cash flows and terminal value of the
remainder of Merck. The terminal value was calculated by
applying a range of perpetual free cash flow rates ranging from
(2.0%) to 0.0%. The unlevered free cash flows and the terminal
value were then discounted to present values using a range of
weighted average cost of capital from 8.0% to 9.0%. Based on the
calculations set forth above, this analysis implied a range for
Mercks common stock of approximately $30.34 to $37.46 per
share based on Wall Street analyst estimates and $37.84 to
$46.12 per share based on the Merck management projections.
Morgan Stanley noted that the closing stock price of Merck
common stock on March 6, 2009 was $22.74.
Sum-of-the-Parts
Analysis. Morgan Stanley performed a
sum-of-the-parts
analysis which is designed to imply a value of a company based
on the separate valuation of the companys business
segments. Morgan Stanley calculated ranges of implied equity
values per share for Schering-Plough based on the
Schering-Plough management forecasts and assuming a hypothetical
disposition of Schering-Ploughs Consumer Health, Animal
Health, Merck/Schering-Plough cholesterol partnership and
Remicade divisions. Morgan Stanley valued some of
Schering-Ploughs divisions using multiple ranges derived
from comparable precedent transactions and the others based on
discounted cash flow analyses. Morgan Stanley used a 14.0x to
16.0x multiple of estimated 2009 earnings before interest and
taxes for Schering-Ploughs Consumer Health division and a
9.0x to 11.0x multiple of estimated 2009 earnings before
interest and taxes for the Animal Health division. The
Merck/Schering-Plough cholesterol partnership was valued
assuming a 20% discount to the discounted cash flows through
2019, an 8.0% 9.0% weighted average cost of capital
and no terminal value. The Remicade/golimumab franchise
was valued assuming a 20% discount to the discounted cash flows
through 2024, an 8.0% 9.0% weighted average cost of
capital, and a (5.0%) to (25.0%) perpetual decline thereafter.
The remaining pharmaceutical division was valued at a multiple
range of 1.0x to 1.5x estimated 2009 sales. Based on the
multiple ranges described above, and including the value of the
tax benefit associated with Schering-Ploughs accumulated
net operating loss, this analysis implied a range for
Schering-Ploughs common stock of approximately $16.56 to
$21.78 per share. Morgan Stanley noted that the consideration to
be received by holders of Schering-Ploughs common stock
pursuant to the merger agreement had an implied value of $23.61
per share, calculated by multiplying the merger exchange ratio
of 0.5767 by the closing price of Mercks common stock of
$22.74 as of March 6, 2009 plus $10.50 in cash. Morgan
Stanley also noted that Schering-Ploughs closing share
price was $16.32 as of March 5, 2009 and $17.63 as of
March 6, 2009.
Synergies Valuation. Morgan Stanley also
analyzed the premium paid by Merck as compared to the total
value of the $3.5 billion in expected annual, run-rate,
pre-tax synergies. The total value of the synergies was
calculated using three benchmark methodologies: (i) Morgan
Stanley capitalized the $3.5 billion in annual synergies at
Mercks 2009 price to earnings multiple of 7.0x; (ii)
Morgan Stanley capitalized the $3.5 billion in annual
synergies at Mercks and Schering-Ploughs blended
(based on after-tax earnings before interest and taxes
contribution to the combined company) 2009 price to earnings
multiple of 7.7x; and (iii) Morgan Stanley calculated the
discounted cash flow value of the synergies assuming an 8.5%
discount rate; a 7.0x exit multiple applied to 2012 after-tax
earnings before interest and taxes of the combined company;
costs to achieve synergies of $1.10 per $1.00 of synergies
spread equally over the first full three years after the
effective date; and a gradual phase-in of the $3.5 billion
in annual synergies over the projected period on the following
schedule: 55% in calendar year 2010; 80% in calendar year 2011;
100% in calendar year 2012 and
87
thereafter. These three benchmarks for the total value of the
synergies were then compared to the $12.9 billion
total-dollar implied premium of the transaction based on
Schering-Ploughs stock price as of March 5, 2009. The
results of this analysis are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009E P/E Multiple
|
|
|
|
Merck
|
|
|
Blended
|
|
|
DCF
|
|
Valuation Basis
|
|
(7.0x)
|
|
|
(7.7x)
|
|
|
Value
|
|
|
|
(In billions of dollars)
|
|
|
Total Value of Synergies
|
|
$
|
17.1
|
|
|
$
|
19.0
|
|
|
$
|
17.3
|
|
Premium Paid as a Percentage of Total Value of Synergies
|
|
|
75.8
|
%
|
|
|
68.2
|
%
|
|
|
74.6
|
%
|
Pro Forma Accretion/Dilution Analysis. Based
on financial information provided by the management of Merck and
Schering-Plough and other publicly available information, Morgan
Stanley calculated the pro forma impact of the transaction on
the earnings per share of Mercks common stock as a result
of the transaction for each of the years ending
December 31, 2010 through December 31, 2013 by
comparing the projected earnings per share of the pro forma
entity and Merck as a standalone entity for each year. This
calculation assumed merger consideration of $10.50 per share in
cash and 0.5767 shares of Mercks common stock at a
share price of $22.74 as of March 6, 2009, among other
assumptions. This analysis indicated that the transaction would
be modestly accretive to Mercks calendar year 2010
estimated earnings per share and significantly accretive to
Mercks calendar years 2011, 2012 and 2013 estimated
earnings per share.
Pro Forma Trading Analysis. Morgan Stanley
performed a pro forma trading analysis for the purpose of
illustrating the potential effect of the combined company
trading at various forward multiples on the value of the merger
consideration (assuming merger consideration of $10.50 in cash
and 0.5767 shares of Mercks common stock per share of
Schering-Ploughs common stock). For purposes of this
analysis, Morgan Stanley reviewed a range of pro forma 2009
price to earnings trading multiples, including Mercks 2009
price to earnings multiple of 7.0x, a blended 2009 price to
earnings multiple of 7.7x (based on after-tax earnings before
interest and taxes contribution to the combined company), and
Schering-Ploughs 2009 price to earnings multiple of 9.7x,
each of which was based on Wall Street analyst consensus
estimates of the combined companys 2009 earnings. Using a
9.0% discount rate (i.e., the midpoint in the 8.5% to 9.5% range
of Schering-Ploughs cost of equity used by Morgan Stanley
for its other analyses), Morgan Stanley then calculated the
current value of the merger consideration (assuming merger
consideration of $10.50 in cash and 0.5767 shares of
Mercks common stock per share of Schering-Ploughs
common stock), based on Wall Street analyst consensus estimates
of 2010 2013 earnings for each of Schering-Plough
and Merck, on the one hand, and the combined Merck management
and Schering-Plough management forecasts of estimated
2010 2013 earnings, on the other hand. This analysis
implied a range for the pro forma entitys common stock of
approximately $24.65 to $31.41 per share based on Wall Street
analyst consensus estimates, and approximately $24.95 to $34.73
per share based on the Merck management forecasts and
Schering-Plough management forecasts.
General
In connection with the review of the transaction by the
Schering-Plough board of directors, Morgan Stanley performed a
variety of financial and comparative analyses for purposes of
rendering its opinion. The preparation of a financial opinion is
a complex process and is not necessarily susceptible to a
partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight
to any analysis or factor it considered. Morgan Stanley believes
that selecting any portion of its analyses, without considering
all analyses as a whole, would create an incomplete view of the
process underlying its analyses and opinion. In addition, Morgan
Stanley may have given various analyses and factors more or less
weight than other analyses and factors, and may have deemed
various assumptions more or less probable than other
assumptions. As a result, the ranges of valuations resulting
from any particular analysis described above should not be taken
to be Morgan Stanleys view of the actual value of
Schering-Plough or Merck. In performing its analyses, Morgan
Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other
matters. Many of these assumptions are beyond the control of
Schering-Plough and Merck. Any estimates contained in
88
Morgan Stanleys analyses are not necessarily indicative of
future results or actual values, which may be significantly more
or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as
part of its analysis of the fairness of the merger consideration
pursuant to the merger agreement from a financial point of view
to holders of shares of Schering-Ploughs common stock and
in connection with the delivery of its opinion to the
Schering-Plough board of directors. These analyses do not
purport to be appraisals or to reflect the prices at which
shares of common stock of Schering-Plough might actually trade.
Morgan Stanleys opinion and its presentation to the
Schering-Plough board of directors was one of many factors taken
into consideration by the Schering-Plough board of directors in
deciding to approve the merger agreement. Consequently, the
analyses as described above should not be viewed as
determinative of the opinion of the Schering-Plough board of
directors with respect to the merger consideration or of whether
the Schering-Plough board of directors would have been willing
to agree to a different merger consideration. The merger
consideration was determined through arms-length
negotiations between Schering-Plough and Merck and was approved
by the Schering-Plough board of directors. Morgan Stanley
provided advice to
Schering-Plough
during these negotiations. Morgan Stanley did not, however,
recommend any specific merger consideration to Schering-Plough
or that any specific merger consideration constituted the only
appropriate merger consideration for the merger.
Morgan Stanleys opinion was approved by a committee of
Morgan Stanley investment banking and other professionals in
accordance with its customary practice.
Morgan Stanley is a global financial services firm engaged in
the securities, investment management and individual wealth
management business. Its securities business is engaged in
securities underwriting, trading and brokerage activities,
foreign exchange, commodities and derivatives trading, prime
brokerage, as well as providing investment banking, financing
and financial advisory services. Morgan Stanley, its affiliates,
directors and officers may at any time invest on a principal
basis or manage funds that invest, hold long or short positions,
finance positions, and may trade or otherwise structure and
effect transactions, for their own account or the accounts of
its customers, in debt or equity securities or loans of Merck,
Schering-Plough, or any other company, or any currency or
commodity, that may be involved in this transaction, or any
related derivative instrument. During the two-year period prior
to the date of Morgan Stanleys opinion, Morgan Stanley
(i) provided investment banking, financial advisory and
financing services unrelated to the transaction to
Schering-Plough for which Morgan Stanley was compensated,
including having acted as underwriter and lender for
Schering-Plough and (ii) provided financing services to
Merck for which Morgan Stanley was compensated, including having
acted as a lender for Merck.
Under the terms of its engagement letter, Morgan Stanley
provided Schering-Plough with financial advisory services in
connection with the transaction for which it will be paid
$22 million, $7 million of which became payable upon
public announcement of the transaction and $15 million of
which is contingent upon, and will become payable upon,
completion of the transaction. Schering-Plough has also agreed
to reimburse Morgan Stanley for its expenses incurred in
performing its services. In addition,
Schering-Plough
has agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each
person, if any, controlling Morgan Stanley or any of its
affiliates against certain liabilities and expenses, including
certain liabilities under the federal securities laws, related
to or arising out of Morgan Stanleys engagement.
Interests
of Merck Directors and Management in the Transaction
Under the terms of the merger agreement, all of the directors of
Merck immediately before the merger will be directors of New
Merck after the merger, and, unless otherwise indicated by Merck
prior to the closing of the merger, the officers of Merck
immediately before the merger will, after the merger, be
officers of New Merck holding the same offices at New Merck as
they held with Merck immediately before the merger.
89
Interests
of Schering-Ploughs Directors and Management in the
Transaction
In considering the recommendation of the Schering-Plough board
of directors that you vote to approve the merger agreement, you
should be aware that aside from their interests as
Schering-Plough shareholders, Schering-Ploughs executive
officers and directors have financial interests in the merger.
The members of Schering-Ploughs board of directors were
aware of and considered these interests, among other matters, in
evaluating and negotiating the merger agreement and the merger,
and in recommending to the shareholders that the merger
agreement be approved.
As described in more detail below, Schering-Ploughs
executive officers, including each of its named executive
officers as identified in Schering-Ploughs proxy statement
relating to the 2009 annual meeting of shareholders (Robert J.
Bertolini, Carrie Cox, Fred Hassan, Thomas P. Koestler and
Thomas J. Sabatino, Jr.), are eligible under
Schering-Ploughs employee benefit plans and individual
agreements to receive severance and other benefits in connection
with the completion of the merger or upon a qualifying
termination following completion of the merger.
Equity
Compensation Awards
The merger agreement provides that, upon completion of the
merger, Schering-Plough stock options, deferred stock units, and
performance share awards that are outstanding immediately before
completion of the merger will become stock options, deferred
stock units, and performance shares with respect to shares of
New Merck common stock based on a stock exchange ratio
described in the merger agreement. Please see The Merger
Agreement Treatment of Stock Options and Other
Equity Awards on page 102. For awards granted to
employees in and after 2008, Schering-Ploughs equity
compensation plans and award agreements generally provide for
the immediate vesting and settlement of stock-based awards upon
a grantees qualifying termination of employment during the
two-year period following completion of the merger, except that
in the case of performance shares only a prorata portion of the
unvested awards will vest. With respect to awards granted prior
to January 1, 2008, Schering-Ploughs equity
compensation plans and award agreements generally provide for
immediate vesting and settlement of stock-based awards (either
in cash or shares pursuant to the specific award agreement) upon
completion of the merger.
Assuming that the merger is completed on October 1, 2009
and each executive officer experiences a qualifying termination
upon completion of the merger, based on Schering-Plough equity
compensation holdings as of May 15, 2009, (1) the
number of unvested stock options to acquire shares of
Schering-Plough common stock (at exercise prices ranging from
$18.85 to $31.57) held by Bertolini, Cox, Hassan, Koestler,
Sabatino, and the 5 other executive officers (as a group) are
552,932; 577,934; 1,818,966; 436,366; 370,332; and 884,863,
respectively; (2) the number of unvested deferred stock
units in respect of shares of
Schering-Plough
common stock held by Bertolini, Cox, Hassan, Koestler, Sabatino,
and the five other executive officers (as a group), that would
vest in connection with the merger are 0; 0; 0; 325,000; 0; and
30,000, respectively; and (3) assuming performance at
target levels through the date of completion of the merger, the
number of Schering-Plough performance shares held by Bertolini,
Cox, Hassan, Koestler, Sabatino, and the five other executive
officers (as a group), that would vest in connection with the
merger are 185,510; 207,766; 626,156; 134,415; 125,862; and
314,823, respectively. The numbers of shares underlying the
awards described above as well as the exercise prices with
respect to stock options have been reported before the
application of the stock exchange ratio reflecting the merger
consideration.
None of Schering-Ploughs non-employee directors hold any
Schering-Plough stock options or performance shares. In
addition, none of Schering-Ploughs non-employee directors
hold any unvested deferred stock units.
Individual Agreements with Executive
Officers. Schering-Plough has previously
entered into individual employment agreements, which include
severance and other post-employment benefit provisions, with
each named executive officer and each of the five other
executive officers. With the exception of Brent Saunders, none
of the executive officers employment agreements were
amended in contemplation with the merger. Moreover,
Hassans agreement has not been amended since he joined
Schering-Plough in 2003 other than as required by changes to
income tax regulations. With respect to Saunders, as part of the
merger, Schering-
90
Plough amended Saunders employment agreement to provide
for a retention bonus in order to compensate him for his efforts
in leading Schering-Ploughs integration process following
the merger. Each executive officers employment agreement
was provided to Merck as part of the due diligence process when
the merger agreement was being negotiated.
As more fully described below, the agreements provide for
payment of severance benefits and enhanced pension benefits in
the event of a qualifying termination of employment in
connection with the merger. In addition, if any of the executive
officers becomes subject to the excise tax under
Section 4999 of the Code, the agreements provide for an
additional payment such that the executive will be placed in the
same after-tax position as if no such excise tax had been
imposed.
Individual Agreements with the Named Executive
Officers. In the event of a qualifying
termination, each executive would be entitled to receive the
following payments
and/or
benefits: (1) a pro-rata annual incentive for the year of
termination; (2) a lump sum cash severance payment equal to
three times the sum of (a) the executives annual base
salary in effect at the time of termination, (b) the
executives highest annual bonus paid in the three most
recent fiscal years (or in the case of Koestler, his highest
target annual incentive opportunity for the past three years or
current annual incentive payable, if greater) and (c) for
Koestler only, the highest contribution made on behalf of the
executive under Schering-Ploughs qualified and
nonqualified defined contribution plans for the three calendar
years preceding the date of termination; (3) continued
medical and other welfare benefits for up to three years
following termination; (4) a minimum benefit under
Schering-Ploughs
SERP equal to 32% (for Hassan), 26% (for Cox) and 35% (for
Koestler in connection with the milestone program as
described in the merger agreement) of their average final
earnings and without reduction for early payment; (5) a
lump sum supplemental pension payment based on three additional
years of deemed employment (for Bertolini, Koestler and
Sabatino); (6) supplemental pension benefits without any
early retirement reduction factors (for Bertolini, Koestler and
Sabatino); (7) three years of additional service credit for
purposes of determining retiree medical eligibility (except for
Koestler); and (8) retiree medical coverage following the
end of the three-year continued coverage period described above
(for Koestler) or at age 55 (for Bertolini and Sabatino).
Assuming that the merger is completed on October 1, 2009
and the executive experiences a qualifying termination
immediately thereafter, (A) the amount of cash severance
that will be payable to Bertolini, Cox, Hassan, Koestler and
Sabatino, is approximately $7,122,000; $8,106,000; $17,736,000;
$4,922,348; and $5,595,300, respectively; and (B) the value
of the continued or enhanced medical and other welfare benefits
as described above, that will be payable to Bertolini, Cox,
Hassan, Koestler and Sabatino is approximately $218,908;
$269,930; $130,750; $182,050 and $211,831, respectively.
Individual Agreements with other Executive
Officers. Schering-Plough has entered into
substantially similar individual agreements with each of its
five other executive officers (C. Ron Cheeley, Steven
Koehler, Raul Kohan, Lori Queisser and Brent Saunders). If the
executive experiences a qualifying termination during the
three-year period (or two years in the case of one executive)
following the completion of the merger, the executive is
entitled to receive (1) a pro-rata annual bonus for the
year of termination; (2) a lump sum cash severance payment
equal to three times (or two times in the case of one executive)
the sum of (a) the executives base salary,
(b) the executives highest target annual incentive
opportunity for the past three years (or the current annual
incentive if higher), and (c) the highest contribution made
on behalf of the executive under Schering-Ploughs
qualified and nonqualified defined contribution plans for the
three calendar years preceding the date of termination;
(3) a lump sum supplemental pension amount based on three
additional years (or two years in the case of one executive) of
deemed employment; (4) continued medical and other welfare
benefits for up to three years (or two years in the case of one
executive); (5) supplemental pension benefits without any
early retirement reduction factors if the executive is 50 or
older at the time of termination; (6) a minimum benefit
under Schering-Ploughs SERP equal to 35% of final earnings
and without reduction for early payment (for Cheeley in
connection with the milestone program as described
in the merger agreement); (7) retiree medical coverage
following the end of the three-year continued coverage period
described above (for Cheeley and Kohan) or at age 55 (for
Queisser); and (8) in the case of Koehler, immediate
eligibility for retiree medical coverage as of the date of
termination.
91
Assuming that the merger is completed on October 1, 2009
and each of these executive experiences a qualifying termination
immediately thereafter, (A) the amount of cash severance
that will be payable to each of the five other executive
officers (as a group) is approximately $12,243,075; and
(B) the value of the continued or enhanced medical and
other welfare benefits that will be payable to each of the five
other executive officers (as a group) is approximately
$1,134,801.
Pension
Benefits
As described above, each of the executive officers is entitled
to receive certain enhanced pension benefits upon a qualifying
termination following the closing of the merger. Assuming that
the merger is completed on October 1, 2009 and the
executive experiences a qualifying termination immediately
thereafter, the amount of enhanced pension benefits that will be
payable to Bertolini, Cox, Hassan, Koestler and Sabatino, and
the five other executive officers (as a group) is approximately
$13,905,200; $7,664,200; $13,179,700; $5,362,000; $3,839,900;
and $8,263,200, respectively.
Nonqualified
Deferred Compensation Plans
Schering-Plough maintains certain nonqualified deferred
compensation plans in which the executive officers and
non-employee directors are eligible to participate.
Pursuant to the terms of the Directors Compensation Plan,
non-employee directors may elect to defer up to 100% of their
annual service fee. Any amounts that have been deferred into a
directors deferred compensation account will be paid to
the director in a lump sum in cash within 30 days of
completion of the merger. Any portion of the directors
deferred account that is denominated in Schering-Plough common
stock, will be cashed out at the highest price paid for a share
of Schering-Plough common stock in connection with the merger,
or, if higher, the highest fair market value of a share of
Schering-Plough common stock during the
60-day
period ending on the date of completion of the merger.
Each of the executive officers participates in
Schering-Ploughs unfunded savings plan and supplemental
pension plans. Pursuant to the terms of the unfunded savings
plan, participant accounts may be distributed upon completion of
the merger, depending on the distribution election that they
made under the plan. Pursuant to the terms of the supplemental
pension plans, benefits are generally payable to participants in
a lump sum in cash immediately following termination of
employment unless the participant had previously elected to
defer receipt of such amounts.
Director,
Officer and Employee Indemnification and Insurance
From and after the effective time of the Merck merger, New Merck
will indemnify and hold harmless each present and former
director, officer, employee and fiduciary of Schering-Plough in
the same manner as presently provided by Schering-Plough against
any costs or expenses, judgments, fines, losses, claims, damages
or liabilities incurred in connection with any proceeding
arising out of the fact that such person was a director,
officer, employee or fiduciary of Schering-Plough. In addition,
for six years after the effective time of the merger, New Merck
will maintain a directors and officers insurance
policy covering each such person on terms no less favorable than
the officers and directors insurance policy
maintained by Schering-Plough on the date hereof. New Merck will
not be required to pay an annual premium for this insurance
policy in excess of 250% of the annual premium paid by
Schering-Plough. The obligation to maintain this policy may be
fulfilled by Merck or, with the consent of Merck,
Schering-Plough, by purchasing a tail policy from an
insurer with substantially the same or better credit rating as
the current carrier for Schering-Ploughs existing
directors and officers insurance policy.
New Merck will maintain for six years after the closing of the
transaction charter and by-laws provisions with respect to
indemnification and advancement of expenses that are at least as
favorable as those contained in New Mercks charter and
by-laws in effect as of the closing of the transaction, or in
any indemnification agreements of Schering-Plough or its
subsidiaries in effect immediately prior to the closing of the
transaction.
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No
Dissenters Rights of Appraisal
Under New Jersey law, neither the holders of Merck common stock
nor the holders of Schering-Plough common stock are entitled to
any rights of appraisal with respect to the merger or the share
issuance.
Listing
of New Merck Common Stock
It is a condition to the completion of the transactions under
the merger agreement that the shares of New Merck common stock
issuable to shareholders of Schering-Plough upon consummation of
the Schering-Plough merger and the shares of New Merck common
stock issuable to shareholders of Merck upon consummation of the
Merck merger be approved for listing on the NYSE, subject to
official notice of issuance.
Legal
Proceedings Related to the Transaction
Since the announcement of the transaction, several putative
class action lawsuits have been filed on behalf of shareholders
of Schering-Plough. The complaints name as defendants
Schering-Plough, its directors, and in certain cases, Merck and
Schering-Plough subsidiaries, SP Merger Subsidiary One, Inc. and
SP Merger Subsidiary Two, Inc.
Eleven of the lawsuits were pending in the Superior Court of New
Jersey, Chancery Division, Union County, styled Manson v.
Becherer, et al. (UNN-C-37-09), Pirelli Armstrong Tire
Corp. Retiree Medical Benefits Trust v. Schering-Plough
Corp., et al. (UNN-C-36-09), Erste-Sparinvest
Kapitalanlagegesellschaft m.b.H. v. Schering-Plough
Corp., et al. (UNN-C-41-09), City of Dearborn Heights, et
al. v. Schering-Plough Corp., et al. (UNN-C-48-09),
Plotkin v. Becherer, et al. (UNN-L-934-09),
Rosenberg v. Hassan, et al.
(UNN-L-953-09),
Zank v. Hassan, et al. (UNN-L-952-09), Rubery
v. Schering-Plough Corp., et al.
(UNN-L-998-09),
Clark v. Schering-Plough Corp., et al.
(UNN-L-997-09), Gardone v. Becherer, et al.
(UNN-L-976-09),
and Murphy v. Schering-Plough Corp., et al.
(UNN-L-996-09). Four of the complaints were filed in the
United States District Court for the District of New Jersey,
styled Husarsky v. Schering-Plough Corp. et al.,
09CV01244; Landesbank Berlin Investment GMBH v.
Schering-Plough Corp. et al., 09CV1099; Louisiana
Municipal Police Employees Retirement System v.
Schering-Plough Corp. et al., 09CV1247; and City of
Edinburgh Council as Administering Authority for the Lothian
Pension Fund v. Schering-Plough Corp., et al.,
09CV1800. On April 30, 2009, the federal actions were
consolidated under the caption In re
Schering-Plough/Merck
Merger Litig., Civ
No. 09-1099
(the Federal Action). On June 1, 2009, the
judge overseeing the eleven actions pending in the Chancery
Division, Union County, dismissed the actions without prejudice
in light of the parallel federal litigation.
On June 3, 2009, plaintiffs filed a consolidated class
action complaint in the Federal Action, which alleges, among
other things, that Schering-Ploughs directors breached
their fiduciary duties by agreeing to a merger of
Schering-Plough with Merck without taking steps to ensure that
shareholders would obtain adequate, fair and maximum
consideration under the circumstances and that the preliminary
joint proxy statement/prospectus contains material misstatements
and omissions regarding the proposed transaction. The complaint
seeks, among other things, class action status, an order
preliminarily and permanently enjoining the proposed
transaction, an order requiring defendants to correct the
alleged material deficiencies in the preliminary joint proxy
statement/prospectus, rescission of the transaction if it is
consummated, and attorneys fees and expenses. The
complaint, as amended, no longer names Merck as a defendant.
Schering-Plough intends to vigorously defend against this
complaint.
Two additional putative class action complaints have been filed
on behalf of public shareholders of Merck and name as defendants
Merck, its board of directors, and Schering-Plough. One
complaint was filed in the Superior Court of New Jersey,
Chancery Division, Union County, styled Golombuski v.
Merck & Co. et al., UNN-C-3809, and one
complaint was filed in Superior Court of New Jersey, Chancery
Division, Hunterdon County, styled Kahn v.
Merck & Co. et al., HUN-C-14008-09. On
April 21, 2009, these actions were consolidated in the
Supreme Court of Hunterdon County under the caption In re
Merck & Co., Inc. Shareholder Litigation.
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On June 4, 2009, plaintiffs filed a consolidated class
action complaint, which alleges, among other things, that
Mercks directors breached their fiduciary duties to
Mercks shareholders by failing to ensure that the
shareholders were properly represented in the merger, that
Mercks directors engaged in self-dealing, and that Merck
directors failed to make material disclosures about the proposed
transaction in the preliminary joint proxy statement/prospectus.
The suit also alleges that Schering-Plough aided and abetted the
Merck directors breaches of fiduciary duty. The complaint
seeks, among other things, class action status, an order
preliminary and permanently enjoining the proposed transaction,
rescission of the transaction if it is consummated, and
attorneys fees and expenses. Merck and Schering-Plough
intend to vigorously defend against this complaint.
A subsidiary of Schering-Plough is a party to a Distribution
Agreement with Centocor, a wholly owned subsidiary of
Johnson & Johnson, under which the Schering-Plough
subsidiary has rights to distribute and commercialize the
rheumatoid arthritis treatment Remicade and golimumab, a
next-generation treatment, in certain territories.
Under Section 8.2(c) of the Distribution Agreement,
If either party is acquired by a third party or otherwise
comes under Control (as defined in Section 1.4 [of the
Distribution Agreement]) of a third party, it will promptly
notify the other party not subject to such change of control.
The party not subject to such change of control will have the
right, however not later than thirty (30) days from such
notification, to notify in writing the party subject to the
change of Control of the termination of the Agreement taking
effect immediately. As used herein Change of Control
shall mean (i) any merger, reorganization, consolidation or
combination in which a party to this Agreement is not the
surviving corporation; or (ii) any person
(within the meaning of Section 13(d) and
Section 14(d)(2) of the Securities Exchange Act of 1934),
excluding a partys Affiliates, is or becomes the
beneficial owner, directly or indirectly, of securities of the
party representing more than fifty percent (50%) of either
(A) the then-outstanding shares of common stock of the
party or (B) the combined voting power of the partys
then-outstanding voting securities; or (iii) if individuals
who as of the Effective Date [April 3, 1998] constitute the
Board of Directors of the party (the Incumbent
Board) cease for any reason to constitute at least a
majority of the Board of Directors of the party; provided,
however, that any individual becoming a director subsequent to
the Effective Date whose election, or nomination for election by
the partys shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual
or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board; or (iv) approval
by the shareholders of a party of a complete liquidation or the
complete dissolution of such party.
Section 1.4 of the Distribution Agreement defines
Control to mean the ability of any entity (the
Controlling entity), directly or indirectly, through
ownership of securities, by agreement or by any other method, to
direct the manner in which more than fifty percent (50%) of the
outstanding voting rights of any other entity (the
Controlled entity), whether or not represented by
securities, shall be cast, or the right to receive over fifty
percent (50%) of the profits or earnings of, or to otherwise
control the management decisions of, such other entity (also a
Controlled entity).
On May 27, 2009, Centocor delivered to Schering-Plough a
notice initiating an arbitration proceeding to resolve whether,
as a result of the proposed merger between Schering-Plough and
Merck, Centocor is permitted to terminate the Distribution
Agreement and related agreements. As part of the arbitration
process, Centocor will likely take the position that it has the
right to terminate the Distribution Agreement on the grounds
that, in the proposed merger between Schering-Plough and Merck,
Schering-Plough and the Schering-Plough subsidiary party to the
Distribution Agreement are (i) being acquired by a
third party or otherwise come[ing] under Control (as
defined in Section 1.4) of a third party
and/or
(ii) undergoing a Change of Control (as defined
in Section 8.2(c)). Merck and Schering-Plough believe that
the proposed merger will not entitle Centocor to terminate the
Distribution Agreement because the merger is not a Change
of Control as defined by Section 8.2(c). Merck and
Schering-Plough also believe that neither Schering-Plough nor
the Schering-Plough subsidiary party will be
acquired by Merck or will otherwise come under
Control of Merck.
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The arbitration process involves a number of steps, including
the selection of an independent arbitrator, information
exchanges and hearings, before a final decision will be reached.
The arbitration proceeding is expected to take place over the
next 9 to 12 months and could continue after the merger has
closed. Schering-Plough and Merck are fully prepared to
arbitrate the matter and to vigorously defend
Schering-Ploughs rights (and after the proposed merger has
closed, the combined companys rights) under the
Distribution Agreement.
Although Schering-Plough and Merck are confident that the
arbitrator will determine that Centocor does not have the right
to terminate the Distribution Agreement, there is a risk of an
unfavorable outcome. If the arbitrator were to conclude that
Centocor is permitted to terminate the Distribution Agreement as
a result of the merger and Centocor in fact terminates the
Distribution Agreement following the merger, the combined
company would not be able to distribute Remicade, which
generated sales for Schering-Plough of approximately
$2.1 billion in 2008, and would not have the right to
commercialize and distribute golimumab in the future. In
addition, due to the uncertainty surrounding the outcome of the
arbitration, the parties may choose to settle the dispute under
mutually agreeable terms but any agreement reached with Centocor
to resolve the dispute under the Distribution Agreement may
result in the terms of the Distribution Agreement being modified
in a manner that may reduce the benefits of the Distribution
Agreement to the combined company.
However, in spite of these factors:
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Any change or termination of the Distribution Agreement with
Centocor is excluded by the merger agreement from the definition
of material adverse effect both with respect to
Merck and Schering-Plough and is excluded from the definition of
material adverse effect in the credit agreements for
the credit facilities entered into in connection with financing
the merger.
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The estimated annual cost savings of $3.5 billion expected
to be realized from the transaction annually after 2011 is not
dependent on the retention of the rights to distribute
Remicade and golimumab, although the loss of these rights
would reduce the amount of sales expected to be generated by the
combined company.
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The anticipated continued payment by the combined company of the
current Merck dividend of $1.52 per share annually is not
conditioned on the retention of the rights to distribute
Remicade and golimumab.
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Accounting
Treatment
The transactions contemplated by the merger agreement will be
accounted for under the acquisition method of accounting in
conformity with FASB Statement No. 141(R) Business
Combinations of accounting principles generally accepted
in the U.S. New Merck will account for the transaction by
using Merck historical information and accounting policies and
applying fair value estimates to Schering-Plough as of the date
of the transaction.
Combined
Company Dividend
Merck currently pays an annual dividend on shares of its common
stock equal to $1.52 per share. Schering-Plough currently pays
an annual dividend on shares of its common stock equal to $0.26
per share. The merger agreement contemplates that, prior to
completion of the transaction, Merck may continue to pay its
regular quarterly cash dividend (not to exceed $0.38 per share),
and that Schering-Plough may continue to pay its regular
quarterly cash dividend (not to exceed $0.065 per share). Upon
completion of the transaction, it is expected that current
shareholders of Merck will own approximately 68% of the
outstanding shares of New Merck common stock on a fully diluted
basis and current shareholders of Schering-Plough will own
approximately 32% of the outstanding shares of New Merck common
stock on a fully diluted basis. It is currently anticipated
that, following completion of the transaction New Merck will
maintain the dividend policies of Merck and pay a quarterly
dividend of $0.38 per share.
The payment of dividends by Merck and Schering-Plough prior to
completion of the merger, and by New Merck following completion
of the merger, will be subject to approval and declaration by
the board of directors of each such company.
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Treatment
of Schering-Plough Convertible Preferred Stock
After the merger, each share of Schering-Ploughs 6%
Mandatory Convertible Preferred Stock (Schering-Plough 6%
preferred stock) will remain outstanding as one share of 6%
Mandatory Convertible Preferred Stock of New Merck (New Merck 6%
preferred stock).
Upon completion of the merger and for a period of fifteen days
thereafter, holders of the New Merck 6% preferred stock will be
entitled to convert each share of New Merck 6% preferred stock
into a number of units of merger consideration equal to the
make-whole conversion rate determined in accordance
with the Annex A of Schering-Ploughs certificate of
incorporation. Each unit of merger consideration will consist of
$10.50 in cash and 0.5767 of a share of New Merck common stock.
Holders electing to so convert their shares of New Merck 6%
preferred stock following the merger will be entitled to
receive: (i) all accrued, cumulated and unpaid dividends on
those shares of preferred stock that have not been declared;
(ii) any dividends on those shares that have been declared
and not yet paid; and (iii) an amount equal to the present
value of the dividends that would otherwise be payable in
respect of those shares during the period from the date of
conversion through August 13, 2010, the mandatory
conversion date of the New Merck 6% preferred stock, using a
discount rate of 6.75%. Assuming completion of the merger on
October 1, 2009 and that Schering-Plough had paid in full
all dividends on the Schering-Plough 6% preferred stock due and
payable prior to that date, upon conversion of a share of New
Merck 6% preferred stock on October 1, 2009, the present
value of the dividends that would otherwise be payable in
respect of that share during the period from the date of
conversion through August 13, 2010 would be $14.45.
If a holder does not elect a make-whole conversion with respect
to shares of New Merck 6% preferred stock, those shares will
remain outstanding and be convertible at the option of the
holder at any time until those shares become subject to
automatic conversion in accordance with their terms.
This description is qualified in its entirety by reference to
terms of the Schering-Plough 6% preferred stock and New Merck 6%
preferred stock as set forth in Annex A of the Schering-Plough
certificate of incorporation and the form of restated
certificate of incorporation of New Merck, respectively, each of
which are incorporated by reference as an exhibit to the
registration statement of which this joint proxy
statement/prospectus is a part. Additional information regarding
the terms of the New Merck 6% preferred stock is located
beginning on page 143.
Financing
of the Transaction
Merck estimates that the total amount of funds necessary to
complete the proposed merger is approximately
$18.4 billion. Merck expects to use available cash and the
proceeds of the credit facilities described below, or, if
available, proceeds from alternative financing sources, to
complete the merger.
Merck has agreed to use its reasonable best efforts to obtain
the financing on the terms described below. Schering-Plough has
agreed to provide, and to use its reasonable best efforts to
cause its legal, tax, regulatory, accounting and other
representatives to provide, all cooperation reasonably requested
by Merck in connection with the financing described below or any
alternative debt financing. Notwithstanding the satisfaction or
waiver of all of the conditions set forth in the merger
agreement, if the proceeds of such financing are not available
in full on the date that would otherwise be the closing date,
Merck will not be required to effect the closing of the merger
and, as such, the closing date will be delayed until the date on
which the proceeds of the financing are available in full.
On April 20, 2009, Merck obtained the requisite consents
for the amendment of its existing $1.5 billion five-year
revolving credit facility to allow it to remain in place after
the merger. In addition, Merck anticipates that
Schering-Ploughs existing $2.0 billion revolving
credit facility will remain in place following consummation of
the merger.
On May 6, 2009, Merck entered into:
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a $3 billion
364-day
bridge loan agreement which we refer to as the bridge loan
facility;
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a $3 billion
364-day
asset sale facility agreement which we refer to as the asset
sale facility; and
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a $1 billion
364-day
incremental loan agreement which we refer to as the incremental
facility.
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On June 25, 2009, Merck completed a $4.25 billion
public offering of senior unsecured notes. In connection with
this offering, the bridge loan agreement was terminated and the
commitment of the lenders under the
364-day
asset sale facility was reduced by approximately
$375 million.
Under each of the new credit facilities, JPMorgan Chase Bank,
N.A. is the administrative agent, J.P. Morgan is the sole
bookrunner and the sole lead arranger and Banco Santander, S.A.
New York Branch, Bank of America Securities LLC, BNP Paribas
Securities Corp., Citigroup Global Markets Inc., Credit Suisse
(USA) LLC, HSBC Bank USA, National Association, The Royal Bank
of Scotland plc, and UBS Securities LLC are the co-arrangers. In
addition to J.P. Morgan and the eight co-arrangers, twenty
other lenders are party to the asset sale facility and fourteen
other lenders are party to the incremental facility. The maximum
aggregate exposure for any single lender under the new credit
facilities is approximately $301.0 million.
The commitments described above and the ability to draw under
the new credit facilities or render the amendment of
Mercks existing revolving credit facility effective expire
on a drop-dead date of December 8, 2009.
However, this drop-dead date will be automatically extended to
March 8, 2010, if the drop-dead date under the merger
agreement is extended to March 8, 2010.
Conditions
Precedent to the Availability of the Debt
Financing
The funding of the new credit facilities and, if applicable, the
effectiveness of the amendment to Mercks existing
revolving credit facility, is subject to various conditions
precedent including:
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the consummation of the merger in accordance with the merger
agreement;
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the absence, since December 31, 2008, of any material
adverse change (as defined in the new credit facilities) with
respect to Merck and Schering-Plough taken as a whole;
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the execution of definitive documentation with respect to the
new credit facilities and, if applicable, the amendment to
Mercks existing revolving credit facility (which condition
has been satisfied);
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certification by the chief financial officer of Merck that the
ratio of total debt to capitalization of the combined company on
a pro forma basis as of the last fiscal quarter ended at least
45 days before closing does not exceed 60%; and
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other customary closing conditions each as more fully described
in the new credit facilities.
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Credit
Facilities
Merck is expected to be the borrower under the new credit
facilities and, if applicable, Mercks existing revolving
credit facility, as amended, and New Merck will guarantee all of
the obligations of Merck under these credit facilities.
Interest
Rate and Fees
Loans under the credit facilities will bear interest, at the
borrowers option, at (1) a rate equal to LIBOR
(London Interbank Offered Rate) plus an applicable margin or
(2) a rate equal to the higher of (a) the prime rate
of JPMorgan Chase Bank, N.A., (b) the federal funds
effective rate plus 0.50% and (c) the one-month adjusted
LIBOR plus 1%, plus (in each case) an applicable margin. On the
closing date, the applicable margins for Mercks existing
revolving credit facility, the asset sale facility and the
incremental facility will be in a range between 2.00% to 2.75%
for option (1) above and 1.00% to 1.75% for option
(2) above, in each case based on the credit rating of New
Merck; the applicable margins for the bridge loan facility will
be in a range between 2.25% to 3.25% for option (1) above
and 1.25% to 2.25% for option (2) above, based on the
credit rating of New Merck. After the closing date, the
applicable margins to the credit facilities will be subject to
increase or decrease based on the credit rating of New Merck and
subject to increase after each quarter until the maturity date.
Merck has paid, and will pay until the earlier of the date of
the funding of the new credit facilities or the drop-dead date,
commitment fees to the lenders. Upon the initial funding of the
new credit facilities, Merck
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has also agreed to pay an underwriting fee to the lenders. In
addition, following funding of the new credit facilities, Merck
will pay to the lenders customary commitment and facility fees
(subject to increase or decrease based on the credit rating of
New Merck) and, only with respect to the bridge loan facility,
duration fees, which will increase every 3 months.
Prepayments
and Commitment Reductions
Under the credit facilities, Merck will be permitted to make
voluntary prepayments at any time, without premium or penalty
(other than LIBOR breakage costs, if applicable). In addition,
Merck will be required to make prepayments of (or, prior to the
date the facilities are funded to consummate the merger, to
reduce commitments in respect of) term loans under the asset
sale facility (in the case of (2) and (3) below, only
after repayment in full of the bridge loan facility) and the
bridge loan facility with (1) net cash proceeds of
non-ordinary course asset sales (subject to certain exceptions,
including an exception for up to $100 million of net cash
proceeds of asset sales), (2) issuances of debt (other than
certain debt, including borrowings under the credit facilities,
the issuance of commercial paper, and certain other
indebtedness) and (3) net cash proceeds from the issuance
of equity of Merck and New Merck (other than any issuance
pursuant to the merger agreement, the issuance of equity
pursuant to employee stock plans and other similar arrangements
currently existing or established in the ordinary course and
certain other equity issuances).
Other
Terms
The credit facilities contain customary representations and
warranties, affirmative covenants and negative covenants,
including restrictions on liens, mergers and consolidations and
maintenance of a maximum ratio of total debt to capitalization
of 60%, in each case applicable to New Merck and its
subsidiaries. The bridge loan facility contains the following
additional negative covenants (subject to exceptions and
baskets): limitations with respect to non-guarantor
indebtedness, limitations on dividends and share repurchases,
restrictions on subsidiary distributions and negative pledges,
restrictions on investments and restrictions on transactions
with affiliates. The credit facilities also include customary
events of default, including a change of control default. The
credit facilities will be unsecured.
Senior
Notes Debt Financing
Merck intends to issue senior unsecured notes (senior notes) in
one or more series in an aggregate principal amount of at least
$3 billion. The net proceeds of any issuance of senior
notes are expected to be used in lieu of the bridge loan
facility to finance a portion of the cash consideration payable
to Schering-Plough shareholders in the Schering-Plough merger
or, if issued after the completion of the merger, to repay
outstanding amounts under the bridge loan facility. The net
proceeds of any issuance of senior notes may also be used for
general corporate purposes.
Regulatory
Approvals
Merck and Schering-Plough have agreed to use their reasonable
best efforts to take, or cause to be taken, all actions to do,
or cause to be done, all things necessary, proper or advisable
to obtain all required regulatory approvals for completion of
the merger. If any objections are asserted by any governmental
entity with respect to the merger or if any investigation or
proceedings are instituted by a governmental entity challenging
the merger under applicable antitrust laws, or if any order is
issued enjoining the merger under applicable antitrust laws,
Merck and Schering-Plough have agreed to use reasonable best
efforts to defend any such action or proceeding and to have
reversed, terminated, lifted, or vacated any stay, temporary
restraining order, other injunctive relief or other order that
is in effect and that could prevent or delay consummation of the
transaction.
However, notwithstanding the foregoing obligations, Merck will
not be obligated to take any action that would result in, or
would be reasonably likely to result in, making or offering
commitments or undertakings, executing or carrying out any
agreement or submitting to any law or order (1) requiring
the license, sale, divestiture or other disposition of any
equity interests of a subsidiary of Merck or Schering-Plough or
business, assets or products of Merck, Schering-Plough or their
respective subsidiaries, or (2) that otherwise places a
98
limitation on the freedom of action of Merck or Schering-Plough
with respect to, or their ability to retain, any business, asset
or product ((1) and (2) being regulatory divestitures),
which in the case of (1) and (2) would result in,
individually or in the aggregate, a one year loss of net sales
revenues (based on 2008 net sales revenues) in excess of
$1 billion (excluding any loss of net sales revenues
related to the license, sale, divestiture or other disposition
or holding separate of Schering-Ploughs animal health
segment and Mercks direct or indirect interest in Merial
Ltd.). Furthermore, Schering-Plough agrees it will not commit
to, enter into, consent to or acquiesce to any regulatory
divestiture whether to a governmental entity or a third party
without either the consent of Merck or as directed by Merck.
Department
of Justice, Federal Trade Commission and Other United States
Antitrust Authorities
The transactions contemplated by the merger agreement are
subject to the HSR Act. The HSR Act and related rules prohibit
the completion of transactions such as the proposed merger
unless the parties notify the Federal Trade Commission, or the
FTC, and the Antitrust Division of the Department of Justice, or
the DOJ, in advance. The HSR Act further provides that a
transaction notifiable under the HSR Act, such as the proposed
merger, may not be completed until the expiration of a 30
calendar-day
waiting period, or the early termination of that waiting period,
following the parties filing of their respective HSR Act
notification forms. If the DOJ or the FTC issues a Request for
Additional Information and Documentary Material prior to the
expiration of the waiting period, the parties must observe a
second
30-day
waiting period, which would begin to run only after both parties
have substantially complied with the request for information,
unless the waiting period is terminated earlier or extended with
the consent of the parties.
Merck and Schering-Plough each filed its required HSR
notification and report form with respect to the merger on
April 17, 2009, commencing the initial
30-day
waiting period. On May 18, 2009, Schering-Plough, with the
concurrence of Merck, voluntarily withdrew its notification and
report form.
Schering-Plough
refiled the required notification and report form on
May 20, 2009, at which time a new initial
30-day
waiting period commenced. On June 19, 2009, Merck and
Schering-Plough each received a Request for Additional
Information and Documentary Material, often referred to as a
second request, from the FTC. Merck and
Schering-Plough are working cooperatively with the FTC and
expect to close the transaction during the 4th quarter of
2009.
At any time before or after the merger is completed, either the
DOJ or FTC could take action under the antitrust laws in
opposition to the merger, including seeking to enjoin the
transaction or seeking divestiture of substantial assets of
Merck or Schering-Plough or their subsidiaries. Private parties
also may seek to take legal action under the antitrust laws
under some circumstances. Based upon an examination of
information available relating to the businesses in which the
companies are engaged, Merck and Schering-Plough believe that
the merger will receive the necessary regulatory clearance.
However, Merck and Schering-Plough can give no assurance that a
challenge to the merger on antitrust grounds will not be made,
or, if such a challenge is made, that Merck and Schering-Plough
will prevail.
In addition, the merger may be reviewed by the attorneys general
in the various states in which Merck and Schering-Plough
operate. There can be no assurance that one or more state
attorneys general will not attempt to file an antitrust action
to challenge the merger.
European
Union
Both Merck and Schering-Plough sell products to customers based
in the European Union. The EC Merger Regulation requires
notification of and approval by the European Commission of
mergers or acquisitions involving parties with worldwide sales
and European Union sales exceeding given thresholds. Merck and
Schering-Plough will file a formal notification of the
transaction with the European Commission as promptly as
reasonably practicable and advisable. The European Commission
will have 25 business days after receipt of the formal
notification, which period may be extended by the European
Commission to up to 35 business days in certain circumstances,
to issue its decision regarding the merger. If, following this
phase I review period, the European Commission determines that
the merger raises serious competition concerns, it would
initiate a phase II investigation. The basic period for a
phase II investigation is 90 business days, which may be
extended to up to 105 business days if remedies are offered by
the parties on or after the
55th day
of
99
the investigation. An additional further extension of 20
business days can also be sought in certain circumstances.
Other
Non-U.S.
Approvals to be Obtained
The completion of the merger is also subject to certain filing
requirements
and/or
approvals under the competition laws of Canada, China, Mexico
and Switzerland.
Canada
The merger is subject to prior notification to the Commissioner
of Competition under the Competition Act of Canada (Competition
Act), and the completion of the merger is subject to the
expiration, waiver or termination of the waiting period under
the Competition Act. In addition, the Commissioner shall have
either issued an advance ruling certificate under
section 102 of the Competition Act or provided a no-action
letter to Merck, indicating that the Commissioner does not, at
that time, intend to make an application under Section 92
of the Competition Act in connection with the merger.
China
The merger is subject to approval under the Anti-Monopoly Law
2008 of the Peoples Republic of China, or the termination
or expiration of the applicable mandatory waiting period,
whichever is sooner.
Mexico
The merger is subject to approval from the Federal Competition
Commission of Mexico, under the Federal Competition Law 1992, as
amended. Specifically, if within ten business days of filing
with the Federal Competition Commission, the Federal Competition
Commission issues an order (standstill order) that the parties
refrain from completing the merger until written approval is
obtained, then such written approval must be received.
Switzerland
The merger is subject to approval from the Swiss Competition
Commission under the Swiss Federal Act on Cartels and other
Restraints of Competition 1996, as amended, or the termination
or expiration of the applicable mandatory waiting period,
whichever is sooner.
Timing
Merck and Schering-Plough cannot assure you that all of the
regulatory approvals described above will be obtained and, if
obtained, Merck and Schering-Plough cannot assure you as to the
timing of any approvals, ability to obtain the approvals on
satisfactory terms or the absence of any litigation challenging
such approvals. Merck and Schering-Plough also cannot assure you
that the DOJ, the FTC or any state attorney general, the
European Commission or any other governmental entity or any
private party will not attempt to challenge the merger on
antitrust grounds, and, if such a challenge is made, Merck and
Schering-Plough cannot assure you as to its result.
Merck and Schering-Plough are not aware of any material
governmental approvals or actions that are required for
completion of the merger other than those described above,
though Merck and Schering-Plough have made, and expect to make,
antitrust notifications in a number of other jurisdictions. It
is presently contemplated that if any such additional material
governmental approvals or actions are required, those approvals
or actions will be sought. There can be no assurance, however,
that any additional approvals or actions will be obtained.
100
THE
MERGER AGREEMENT
The following summary describes certain material provisions of
the merger agreement and is qualified in its entirety by
reference to the merger agreement. The merger agreement is
attached to this joint proxy statement/prospectus as
Annex A for purposes of providing you with information
regarding its terms, and is incorporated by reference into this
joint proxy statement/prospectus. It is not intended to provide
any other factual information about either Merck or
Schering-Plough. This summary may not contain all of the
information about the merger agreement that may be important to
you. We encourage you to read the merger agreement carefully and
in its entirety.
The
Transaction
Upon the terms and subject to the conditions set forth in the
merger agreement, SP Merger Subsidiary One, Inc., a wholly owned
subsidiary of Schering-Plough, will be merged with and into
Schering-Plough. Schering-Plough will be the surviving
corporation in this merger, which is referred to as the
Schering-Plough merger. At the effective time of this merger,
Schering-Ploughs name will be changed to
Merck & Co., Inc., and is referred to as
New Merck.
Immediately after the effective time of the Schering-Plough
merger, upon the terms and subject to the conditions set forth
in the merger agreement, SP Merger Subsidiary Two, Inc., a
second wholly owned subsidiary of Schering-Plough, will be
merged with and into Merck. Merck will be the surviving
corporation in this merger. At the effective time of this
merger, Merck will change its name. As a result of this merger,
Merck will become a wholly owned subsidiary of New Merck.
Closing
and the Effective Time of the Merger
The consummation of the merger will take place on the fifth
business day after the satisfaction or waiver of the conditions
set forth in the merger agreement (other than those conditions
that by their terms are to be satisfied at the closing, but
subject to the satisfaction or waiver of such conditions at the
time of the closing) unless another time or date is agreed on by
Merck and Schering-Plough. See The Merger
Agreement Conditions to the Transaction
beginning on page 114.
Notwithstanding the satisfaction or waiver of all of the
conditions set forth in the merger agreement, if the full
proceeds of the financing are not available on the date that
would otherwise be the closing date, Merck will not be required
to effect the closing until the date on which the proceeds of
the financing are available.
Directors
and Officers of New Merck
Prior to the closing, all but three of the members of
Schering-Ploughs board of directors will resign effective
upon completion of the Schering-Plough merger. The three
directors that do not resign will remain as directors of New
Merck. Also prior to the closing, Schering-Ploughs board
of directors will elect as directors of New Merck, effective
upon completion of the Schering-Plough merger, all of the
persons who are members of the board of directors of Merck
immediately prior to the effective time of the Schering-Plough
merger and those other individuals as Merck will designate in
writing prior to the closing, each to hold office in accordance
with the certificate of incorporation and bylaws of New Merck.
In addition, unless otherwise indicated by Merck in writing, the
board of directors of Schering-Plough will appoint, effective
upon completion of the Schering-Plough merger, the persons who
are officers of Merck immediately prior to the closing of the
Schering-Plough merger as officers, holding the same offices of
New Merck, each to hold office in accordance with the
certificate of incorporation and bylaws of New Merck, and,
effective upon completion of the Schering-Plough merger, remove
the persons who are officers of Schering-Plough immediately
prior to the effective time of the Schering-Plough merger.
101
Merger
Consideration
Conversion
of the Schering-Plough Common Stock in the Schering-Plough
Merger
At the effective time of the Schering-Plough merger, each issued
and outstanding share of Schering-Plough common stock (other
than shares of Schering-Plough common stock owned by
Schering-Plough, Merck or their subsidiaries that will be
cancelled or shares held by a wholly owned subsidiary of
Schering-Plough that will be converted solely into common stock
of New Merck as contemplated by the merger agreement) will be
converted into the right to receive 0.5767 of a validly issued,
fully paid and nonassessable share of common stock of
New Merck and $10.50 in cash.
Treatment
of the Schering-Plough 6% Mandatory Convertible Preferred Stock
in the Schering-Plough Merger
After the Schering-Plough merger, each issued and outstanding
share of Schering-Plough 6% preferred stock shall remain
outstanding as one share of New Merck 6% preferred stock.
Conversion
of the Merck Common Stock in the Merck Merger
At the effective time of the Merck merger, each issued and
outstanding share of Merck common stock (other than shares to be
cancelled in accordance with the merger agreement) will be
converted into one validly issued, fully paid and nonassessable
share of common stock of New Merck. All certificates and
book-entry shares formerly representing common stock of Merck
will, without any action on the part of holders thereof,
represent a number of shares of New Merck equal to the number of
shares of common stock of Merck such certificates and book-entry
shares represented immediately prior to completion of the Merck
merger.
Treatment
of Stock Options and Other Equity Awards
Merck
Stock Options and Other Equity Awards
At the effective time of the Merck merger, each outstanding
equity-based award, including stock options, performance share
units and restricted stock units granted pursuant to any Merck
stock incentive plan, whether vested or unvested, and all Merck
stock incentive plans will be assumed by New Merck. The assumed
Merck equity awards will have the same terms and conditions as
were applicable to such equity awards prior to the effective
time of the Merck merger except that they will be exercisable or
settled, as applicable, for shares of common stock of New Merck
and except for certain changes that may be necessary to reflect
the Merck merger.
Schering-Plough
Options and Other Equity Awards.
Schering-Plough Options. Each
Schering-Plough option outstanding at the effective time of the
Schering-Plough merger, whether vested or unvested, will be
converted into an option entitling its holder to acquire, upon
exercise, a number of shares of common stock of New Merck equal
to the product of (x) the sum of 0.5767 plus the fraction
resulting from dividing $10.50 by the closing price per share of
Merck common stock on the last trading day immediately preceding
the date of the closing of the transaction, and (y) the
number of shares of Schering-Plough common stock subject to such
converted Schering-Plough option immediately prior to the
effective time of the Schering-Plough merger. The converted
Schering-Plough options will have an exercise price per share of
New Merck common stock equal to the quotient of (x) the
per-share exercise price of the converted Schering-Plough option
immediately prior to the effective time of the
Schering-Plough
merger, and (y) the sum of 0.5767 plus the fraction
resulting from dividing $10.50 by the closing price per share of
Merck common stock on the last trading day immediately preceding
the date of the closing of the transaction.
Schering-Plough Deferred Stock Units/Restricted Stock
Units. Each Schering-Plough deferred stock
unit and restricted stock unit outstanding at the effective time
of the Schering-Plough merger will be adjusted so that its
holder will be entitled to receive, upon settlement, a number of
shares of common stock of New Merck equal to the product of
(x) the sum of 0.5767 plus the fraction resulting from
dividing $10.50 by the closing price per
102
share of Merck common stock on the last trading day immediately
preceding the date of the closing of the transaction and
(y) the number of shares of Schering-Plough common stock
subject to such Schering-Plough deferred stock unit or
restricted stock unit immediately prior to the effective time of
the Schering-Plough merger.
Schering-Plough Performance
Awards. Each Schering-Plough
performance-based award or performance-based share unit award
outstanding at the effective time of the Schering-Plough merger
will vest in accordance with the terms and conditions applicable
to such performance award immediately prior to the effective
time of the Schering-Plough merger and be adjusted into the
number of shares of common stock of New Merck determined by
multiplying (x) the number of shares subject to such
Schering-Plough performance award by (y) the sum of 0.5767
plus the fraction resulting from dividing the cash portion of
$10.50 by the closing price per share of Merck common stock on
the last trading day immediately preceding the date of the
closing of the transaction.
Exchange
and Payment Procedures in the Schering-Plough Merger
Merck will choose an exchange agent reasonably satisfactory to
Schering-Plough. At or prior to the effective time of the
Schering-Plough merger, Schering-Plough will deposit, or cause
to be deposited, with the exchange agent book-entry shares
(which, to the extent subsequently requested, shall be exchanged
for certificates) representing the total number of shares of
common stock of New Merck issuable pursuant to the
Schering-Plough merger and the aggregate amount of cash lent by
one or more
non-U.S. subsidiaries
of Merck to certain subsidiaries of Schering- Plough for payment
in satisfaction of debt owed by such subsidiaries to
Schering-Plough), and Merck will cause the proceeds of the
financing to be deposited with the exchange agent, which,
together with the cash deposited or caused to be deposited by
Schering-Plough, will be sufficient to pay the appropriate cash
consideration payable pursuant to the merger. Promptly (and no
more than five (5) business days) after the effective time
of the Schering-Plough merger, the exchange agent will mail each
holder of record