Is The Market Betting That New Merck/Sanofi Will Divest A TON Of Animal Health Assets?

Sanofi Exercises “Call” — To Pay Merck $1 Billion — Merck’s Stock Clanks?! Wild.

I think the market (the NYSE opened nearly flat overall, but most of the rest of pharma is rising, even if just slightly) must feel that Merck is getting the “shorter end of the stick” — having previously agreed to let Sanofi-Aventis “call” the legacy Schering-Plough Intervet animal health assets, for a fixed price. Merck is now trading below $37. Wow. Is $1 billion, paid in cash, by the end of 2010, worth nothing these days?

That fixed price provision requires Sanofi-Aventis to pay Merck $1 billion in true-up and option exercise payments. And still, Merck falls on the news? That is entirely fascinating. Here is part of an AP report:

. . . .Given the slight discrepancy in the worth of the businesses -- Merial is valued at $8 billion and Intervet/Schering-Plough at $8.5 billion -- Sanofi-Aventis will give Merck a $250 million "true-up payment," plus another $750 million payment required under its option to combine the two businesses. . . .

I suppose at least some of this downdraft in Merck's NYSE trading is attributable to lingering uncertainty over United States health care reform outcomes, and some of it reflects the fact that animal health growth rates are, by the companies' own admissions, declining (2010 to 2014) into the 5 percent per year range (from an earlier 10 percent per year range -- 2006 to 2008), but it certainly also feels like the new Merial Joint Venture may need to divest more than one-third of itself, to its competitors -- just to ultimately get the deal done. That includes competitors like Pfizer (which, not entirely coincidentally, is up slightly on the NYSE, this morning).



Stay tuned.