With the merger of Merck (MRK) and Schering-Plough (SGP) scheduled to be completed by the fourth quarter this year, Merck is busy with the necessary groundwork.

Yesterday, the company announced the new management structure post merger. The current chairman, president and CEO of Merck, Richard T. Clark, will continue to head the combined company. The merged entity will comprise five main divisions — Global Human Health, Animal Health, Consumer Healthcare, Research and Manufacturing.

Global Human Health, the combined company’s largest segment, will be headed by Kenneth Frazier, who is currently heading that division of Merck. This division will include prescription drugs, biologics and vaccines along with an emerging-markets group. Both the Research and Manufacturing segments will be headed by the respective current heads at Merck.

The Animal Health and Consumer Health businesses will be headed by executives from Schering-Plough. In the merged entity, about 40% of Schering’s senior leadership will be included in executive roles.

The integration of the two companies is quite crucial for future operations. Merck is looking to establish a new structure that will succeed in combining the best practices of both the companies so that a customer-focused, innovative and diversified company is formed.

Merck is faced with significant patent cliffs over the next four years, while Schering has relatively little exposure to patent expirations through 2013. We feel that the deal is a clear attempt by Merck to address certain impending patent cliffs and pipeline failures. Merck is also contending with softening sales of key drugs such as Singulair and Gardasil that have hampered earnings in the last few quarters.

Given the minimal product overlap and relative ease in combining the cholesterol businesses, we would expect the combination to provide significant synergistic opportunities with combining sales, marketing, research and other back-office functions. The deal should also help geographically diversify revenue sources as Schering currently has about 70% of revenues coming from overseas, versus only 44% for Merck.
Read the full analyst report on “MRK”
Read the full analyst report on “SGP”
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