Pfizer (NYSE:PFE) has already been rejected by AstraZeneca (NYSE:AZN) twice, but rumors suggest Pfizer may be considering another, higher bid for the company. While adding AstraZeneca's diabetes and oncology pipeline would bulk-up Pfizer nicely, Merck & Co. (NYSE:MRK) might be a better suitor.

While Merck isn't rumored to be looking at AstraZeneca, there are a lot of reasons such a deal might make sense.

Merck is already a leader in diabetes treatment thanks to its top selling Januvia, which means it could quickly integrate AstraZeneca's diabetes drugs into its existing sales team. Merck also has a strong presence in heart disease, and respiratory, and is building out an oncology business that could benefit from profit-friendly cost savings if it were to acquire AstraZeneca.

Given all those synergies, let's take a closer look at why the two might make a picture perfect combination.

MRK Chart

MRK data by YCharts

Adding horses to the stable
Merck is the planet's third biggest seller of diabetes medication, but all of its diabetes sales come from just one drug: Januvia. That one drug, however, is a blockbuster. Januvia's sales totaled more than $1.3 billion in the first quarter. And importantly, Januvia's patent is protected until 2022, which means there's plenty of time to continue ringing up sales.

But just because Januvia is a top seller with a long runway, doesn't mean Merck couldn't make more money if it had more products to sell. That's because it costs a lot to hire, train, and maintain a sales force large enough to serve the diabetes community. As a result, those sales and marketing costs aren't being leveraged to their fullest.  

That would change quickly if Merck were to acquire AstraZeneca. AstraZeneca acquired the half of its diabetes partnership it didn't own from Bristol-Myers Squibb in December, giving AstraZeneca complete control over diabetes drugs that represent more than $1 billion in annual sales.

Among the drugs Merck could begin pitching would be AstraZeneca's two GLP-1 drugs, Byetta and Bydureon. Merck would also get its hands on AstraZeneca's newly approved Farxiga.

Farxiga, which got the FDA green-light in January, is the second SGLT2 diabetes drug approved by the FDA and while AstraZeneca didn't break out Farxiga's first quarter sales, analysts think it could have billion dollar potential.

Since Merck has its own SGLT2 drug in late stage trials, its already acutely aware of the market for Farxiga, and if Merck does go on to win approval for ertugliflozin, which it's co-developing with Pfizer, it could have more options and opportunities than competitors like Johnson & Johnson, the company behind Invokana -- the first approved SGLT2 diabetes drug.

Merck has MK-1293, an insulin, and MK-3102, a DPP-4 inhibitor in late-stage trials, too. Given that Merck has clearly made a choice to bulk up its diabetes franchise, acquiring AstraZeneca's products could dovetail nicely.

Leveraging other indications
In addition to diabetes drugs, AstraZeneca also markets a slate of other drugs that would also benefit Merck.

AstraZeneca's best-selling drug is Crestor, a cholesterol-battling statin that would complement Merck's Zetia and Vytorin cholesterol drugs nicely. Crestor sales totaled more than $1.3 billion in the first quarter. While Crestor will lose patent protection in 2016, Merck would have plenty of time to remove overlapping marketing costs to make the drug more viable in the meantime.

Merck's push into cancer treatment would also benefit from putting AstraZeneca's oncology sales and research team to work.

The EU is considering conditional approval for vintafolide, Merck's ovarian cancer drug. Vintafolide was developed by Endocyte (NASDAQ:ECYT), and Merck signed on as a partner in 2012 in a deal that could eventually cost Merck $1 billion, depending on milestone payments. In March, a key EU advisory panel recommended the drug's conditional approval based on impressive trial results. 

Merck is also developing MK-3475, a promising cancer drug that is in trials as a treatment for melanoma and non-small-cell lung cancer.

If acquired, AstraZeneca would give Merck five additional oncology drugs that are already on the market and have global quarterly sales of more than $750 million.  

Additionally, Merck would get some promising oncology drugs in its pipeline, including olaparib. Olaparib could get the EU nod as a treatment for BRCA mutated ovarian cancer this year and is also being studied in BRCA mutated breast cancer.

Merck could also apply what it's learned in winding down Singulair, which lost patent protection in 2012, to AstraZeneca's Symbicort, which is going off patent this year. AstraZeneca's Symbicort and Pulmicort produced more than $1 billion in revenue last quarter, and despite facing generic competitors, Singulair sales still totaled $270 million in the first quarter for Merck.

Fool-worthy final thoughts
Merck is reportedly near selling its $2 billion-a-year consumer-care business for as much as $10 billion to $14 billion. That could go a long way toward the cash portion of a M&A offer, especially considering Merck is already sitting on more than $15 billion in cash. And while Pfizer is a bit bigger, with a market cap north of $200 billion, Merck isn't that much smaller at $170 billion. That suggests it has plenty of punch to execute such a deal. Whether it will is another question altogether, but it's interesting to think about and could be a great potential deal.

Top dividend stocks for the next decade -- is Merck on the list?
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.

The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.