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If at first you don’t succeed, try another round of pharma mega-deals. Coming on the heels of Pfizer’s $67bn deal for Wyeth and Roche’s recently-sweetened $47.5bn bid for full control of Genentech, Merck’s $41bn offer for Schering-Plough is the latest move by a drugmaker to plug holes in its research pipeline by snapping up a large rival.

Merck’s cash-and-shares offer represents a premium of 44 per cent over Schering’s average share price over the past 30 days. In return, Merck will double the number of late-stage drugs in its research porftolio, gain better access to overseas markets and carve out $3.5bn in annual cost savings by 2012. Allow for these synergies, and Merck’s post-tax return on investment will be a respectable 10 per cent. Pfizer’s recently-sealed takeover of Wyeth was justified on similar grounds: access to a more diversified drug portfolio to help offset a soon-to-expire patent on Lipitor, its blockbuster anti-cholesterol drug; and $4bn in annual costs savings by 2012, achieved in part through job cuts.

What is unusual is that Merck has traditionally eschewed such mega-deals – preferring to develop drugs in-house, or to buy smaller companies with promising research and development prospects. During the last round of mergers in the late 1990s and early 2000s, companies showed they could wring out billions of dollars in cost savings by combining with rivals that operated in similar areas. However, as weak patent pipelines now show, progress in cost cutting was not matched by improvements in R&D.

That seemed to vindicate Merck’s approach, especially as studies show that smaller companies tend to produce more patents per research dollar than bigger, more bureaucratic rivals. Still, drug development, even in the best of worlds, remains a hit-and-miss business, with benefits accruing far into the future, rather than now. Merck’s decision to join the cost-cutting bandwagon is a sign of these uncertain times.

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