Merck KGaA’s pending $17-billion acquisition of Sigma-Aldrich significantly adds to its life science and products service portfolio as the company also emphasizes its R&D and commercial strategy for its biopharmaceutical business.

Merck KGaA’s announced $17-billion acquisition of Sigma-Aldrich this week signals the company’s strategic emphasis in life science products and services. Already positioned in that sector through EMD Millipore, the pending acquisition of Sigma-Aldrich would provide Merck KGaA with combined revenues of its life science products and service businesses of approximately $6.1 billion. At the same time, the company recently outlined its growth strategy for its biopharmaceutical business, emphasizing its position in immunology and oncology and increased investment in biosimilars.

In a move to strengthen its life-sciences supply organization, Merck KGaA has agreed to acquire Sigma-Aldrich for $17.0 billion. Under the deal, Merck KGaA, will acquire all of the outstanding shares of Sigma-Aldrich for $140 per share in cash. The transaction has been unanimously approved by Sigma-Aldrich’s board of directors. A merger agreement will be presented to Sigma-Aldrich shareholders for approval at a special meeting of shareholders. The transaction has the full support of Merck KGaA’s executive board and E. Merck KG, including its board of partners, and a Merck KGaA shareholder vote will not be required. Bridge financing has been secured for the all-cash transaction, and Merck KGaA, expects the final financing structure will consists of a combination of cash on Merck KGaA’s balance sheet, bank loans, and bonds. Closing is expected in mid-year 2015, subject to regulatory approvals and other customary closing conditions.

Karl-Ludwig Kley Chairman of the Executive Board Merck KGaA

Merck KGaA expects to achieve annual synergies of approximately EUR 260 million ($340 million), which should be fully realized within three years after closing. Sources of synergies include consolidation of the combined company’s manufacturing footprint, increased conversion to eCommerce channels, further optimization in sales and marketing, streamlining of administrative functions and infrastructure, and an optimized R&D portfolio. The cost of integration is EUR 400 million ($512 million), to be spread over 2015 to 2018. The combined company will serve the life-science industry with more than 300,000 products, which includes a range of products across laboratory chemicals, biologics, and reagents. In pharma and biopharma production, Sigma-Aldrich will complement EMD Millipore’s existing products and capabilities with additions along the value chain of drug production and validation. Merck KGaA said it plans to maintain a significant presence in St. Louis, Missouri and in Billerica, Massachusetts following completion of the transaction, as well as in important EMD Millipore sites, such as Darmstadt, Germany and Molsheim, France.

Based on fiscal year 2013 financials, the business would have had combined sales of EUR 4.7 billion ($6.1 billion), an increase of 79% and combined EBITDA-pre (earnings before interest, taxes, depreciation and amortization before one-time items) of EUR 1.5 billion ($2.0 billion), which is an increase of 139%. With the deal, Merck KGaA’s Group’s sales would have increased by approximately 19%. For the same period, the acquisition would have increased Merck KGaA’s Group’s EBITDA-pre by approximately 24% and improve group EBITDA pre-margin from approximately 30% to approximately 33%, including expected synergies. 

In seeking to acquire Sigma-Aldrich, Merck KGaA gains several key elements: greater scale, a broader product range, complementary products to its existing life science products and services business, and a stronger presence in the US market. “This transaction marks a milestone on our transformation journey aimed at turning our three businesses into sustainable growth platforms, said Karl-Ludwig Kley, chairman at Merck KGaA. For our life-sciences business, it’s even more than that. It is a quantum leap. In one of the world’s key industries, two companies that fit perfectly together have found each other to present a much broader product offering to our global customers in research, pharma and biopharm manufacturing, and diagnostic and testing labs.”

Life Science Tools is one division in Merck KGaA (which operates as EMD in Canada and the United States), which further includes three other divisions: Biopharmaceuticals, Consumer Health, and Performance Materials. In 2013, the company generated sales of EUR 11.1 billion and had approximately 39,000 employees. EMD Millipore, the life science products and services business, had 2013 revenues of approximately EUR 2.645 billion ($3.384 billion) and employed approximately 10,000 employees, which included 600 in research and development. It offers approximately 60,000 products and solutions. 

Sigma-Aldrich had revenues of $2.704 billion in 2013 and employed approximately 9,000 employees. It offers approximately 230,000 products and solutions, which includes e-commerce and supply-chain platforms. It supplies to research and applied laboratories as well as in industrial and commercial markets. In fiscal year 2013, the company’s Research Division generated 52% of the company’s revenues. The Applied and Industrial Division accounted for 23% of sales, and SAFC Commercial, which includes the company’s custom manufacturing arm, generated 25% of sales. On a regional basis, the Americas was the company’s largest segment, accounting for 43% of sales. Europe, Middle East and Africa accounted for 38% and Asia/Pacific 19%. 

In the laboratory and academia sector, the largest segment of the combined company, the two companies have combined sales of EUR 2.3 billion ($2.9 billion) (EUR 1.2 billion ($1.5 billion) from EMD Millipore and EUR 1.1 billion ($1.4 billion) from Sigma-Aldrich. Biopharmaceutical and pharmaceutical production would account for approximately EUR 1.6 billion ($2.0 billion) on a combined basis, with EMD contributing EUR 1.1 billion ($1.4 billion) and Sigma-Aldrich EUR 500 million($639 million). Other industries account for the balance of the companies’ combined sales, or EUR 800 million ($1.0 billion), with EMD Millipore contributing EUR 300 million ($384 million) and Sigma-Aldrich EUR 500 million ($639 million). 

In addition to its plan to strengthen its life sciences business with the pending acquisition of Sigma-Aldrich, Merck KGaA also announced plans for its Biopharmaceutical Division. The company reported that Biopharmaceutical division is well on track with the implementation of the Group’s “Fit for 2018” transformation and growth program. This is reflected by efficiency gains and the successful execution of growth initiatives as well as progress in the pipeline, among others in immuno-oncology and in the field of biosimilars, in which Merck plans to step up investments next year. Its key pipeline products are an anti PD-L1 therapy, atacicept (a recombinant fusion protein to treat autoimmune disease), and the oncology drug TH-302, an investigational hypoxia-targeted drug that Merck KGaA licensed from Threshold Pharmaceuticals.

“While we are moving forward expeditiously with our internal programs, we have initiated a competitive process to select the best partner for the global codevelopment and co-commercialization of our anti-PD-L1 compound,” said Stefan Oschmann, CEO Pharma and member of the Executive Board of Merck KGaA, in a company statement. “We are currently in advanced discussions with major oncology players and aim to reach an agreement by year-end.”

The company plans to center its biopharmaceutical business around currently key marketed products, the cancer drug Erbitux (cetuximab) the multiple sclerosis drug Rebif  (interferon beta-1a) and fertility  products as well as expand its position in emerging markets with its general medicines portfolio, build its devices and services portfolio, and move its R&D focus to immuno-oncology, immunology and, oncology to drive growth from 2016 and beyond. The company also is emphasizing the use of enhanced biomarkers in drug development as part of translational innovation platform.

With respect to biosimilars, in addition to the already disclosed investment plan of EUR 100 million ($128 million) for this year, the unit plans to invest EUR 130 million ($166 million) to EUR 150 million ($192 million) in 2015, depending on the outcome of ongoing Phase I studies. Existing partnerships with India’s Dr. Reddy’s and Brazil’s Bionovis will be expanded by another, yet undisclosed in-licensing agreement for a late-stage biosimilar, initially for smaller emerging markets. Between 2015 and 2016, Merck KGaA plans to initiate between two and five Phase III clinical trials.