Nov. 4, 2009 (Business Wire) -- As a result of the completed merger between Merck & Co., Inc. (Merck) and Schering-Plough Corp. (Schering-Plough) yesterday, Fitch Ratings has downgraded Merck's Issuer Default Rating (IDR) to 'A+' from 'AA-' and upgraded Schering-Plough's IDR to 'A+' from 'BBB+'. Simultaneously, Fitch downgraded Merck's senior unsecured debt and bank loan ratings to 'A+' from 'AA-' and downgraded the short-term IDR and commercial paper rating to 'F1' from 'F1+'. The ratings were also removed from Rating Watch Negative where they were originally placed on March 9, 2009 and assigned a Stable Rating Outlook. The ratings apply to approximately $9.1 billion of debt. (A full list of rating actions follows at the end of this release.)
In addition to the upgrade of Schering-Plough's IDR to 'A+' from 'BBB+', Fitch also upgraded the company's senior unsecured debt and bank loan ratings to 'A+' from 'BBB+' and upgraded the trust preferred stock 'A-' from 'BBB-'. Simultaneously, Fitch upgraded the short-term IDR and commercial paper rating to 'F1' from 'F2'. The ratings were also removed from Rating Watch Positive where they were originally placed on March 9, 2009 and assigned a Stable Outlook. Additionally, Fitch has withdrawn the short-term IDR and commercial paper rating. The ratings apply to approximately $8.2 billion of debt.
Yesterday, the merger of Merck and Schering-Plough was completed for approximately $41.1 billion. In line with expectations, incremental debt of $8.5 billion, comprising $4.25 billion of long-term issuances and $4.25 billion short-term borrowings, were used for the cash portion. Including Schering Plough's debt load, pro forma total debt leverage rose to 1.4 times (x) at the end of the third quarter. Fitch expects actual leverage to decrease to 1.3x by the end of 2011. Fitch believes that another leveraging transaction during this time frame would pressure the current rating.
The transaction effectively addresses the anticipated decline of revenues over the long-term horizon due to patent expirations of several of key Merck medicines. With the exception of an estimated revenue decrease in 2010 due to the patent loss of Cozaar, the new combined entity is anticipated to see top-line growth every year thereafter including the patent lapse of the top-selling pharmaceutical, Singulair, in 2012. Overall sales growth is supported by the addition of Schering Plough's diversified and solidly protected product portfolio.
Merck is striving for annual synergies totaling around $3.5 billion beyond 2011, of which 50% will be realized in the first full year, and 75% in the second year after the close of the transaction. The additional synergies are in addition to ongoing programs at each company, specifically a $1.5 billion cost reduction at Schering-Plough ($600 million already achieved in 2008) and around one billion from Merck's 2008 program.
