$5M Castroneves never got key to tax evasion trial

To this day, race car driver and "Dancing With the Stars" winner Helio Castroneves hasn't seen a single dime of $5 million in licensing money he was promised under a 1999 contract with Penske Racing. It's either been parked at Penske or is still idling in a Dutch investment account.

But the Internal Revenue Service says Castroneves owes U.S. income taxes on the money anyway, contending the 33-year-old driver can't avoid tax by simply refusing cash to which he's entitled. A complex concept known as "constructive receipt" is at the heart of the prosecution's case against the two-time Indianapolis 500 winner.

Testimony resumes Tuesday in the tax trial of Castroneves, his business-manager sister Katiucia Castroneves — both originally from Sao Paulo, Brazil — and his lawyer Alan Miller of Birmingham, Mich. All are charged in a seven-count federal indictment with conspiracy and tax evasion from 1999 to 2004.

The three defendants are facing more than six years behind bars if convicted. Trial is expected to last about a month.

Experts say jurors will have to decide if the Castroneves deal was real or contrived to make it appear he didn't have control of his Penske money.

"What the government is saying is, if you are entitled to some cash, and you leave it in your mother's bank account, it's still your cash," said Chas Roy-Chowdrey, a tax expert with the global industry group Association of Chartered Certified Accountants.

Castroneves is a top Indy Racing League driver, winning the Indy 500 in 2001 and 2002 and finishing second in 2003. In 2007, he gained even greater fame by winning TV's "Dancing With The Stars" competition.

Issues at trial have their origins in the final event of1999 of the Championship Auto Racing Teams, or CART — at the time a rival of the Indy Racing League. On Oct. 31 of that year in Fontana, Calif., Castroneves was driving in the final race for his soon-to-be-disbanded Hogan team and Greg Moore was about to sign a lucrative new contract with Penske Racing.

Moore crashed and was killed. In less than a week, Penske signed Castroneves, using Moore's contract by simply crossing out the old names and amounts and replacing them in handwritten notations. Miller negotiated that deal for $6 million — $1 million paid directly to Castroneves and $5 million to license Castroneves' name and image.

At first, the $5 million was supposed to flow to a Panamanian corporation called Seven Promotions.

In mid-December 1999, Miller sent a letter to Penske asking that the transaction be halted, according to trial testimony. Penske's general counsel, Lawrence Bluth, said the company held onto the Castroneves cash until January 2003, when it was invested with Netherlands firm Fintage Licensing B.V., where it remains today.

"We were ready to make payments to Seven Promotions. We were told not to," Bluth testified.

The IRS and federal prosecutors charge that arrangement was a tax dodge.

They contend Castroneves secretly controlled Seven Promotions — disputed vigorously by the defense — and should have paid U.S. taxes under the "constructive receipt" doctrine as soon as Penske was ready to start cutting checks.

"The individual's wishes do not control," said Assistant U.S. Attorney Matt Axelrod. "A taxpayer may not deliberately turn his back upon income and thereby select the year for which he will report it."

Miller, a former professional football player and architect of the Castroneves contract, contends the IRS is wrong. In court papers, Miller attorney Robert Bennett said Castroneves never had control of the $5 million and therefore owes no tax.

Castroneves planned to pay the IRS when the "deferred royalty agreement" — a way of delaying income described as similar to a 401(k) — at Fintage comes due to him in May of this year, defense lawyers say. It's not unusual for athletes to receive some compensation at later dates, they say.

"Athletes ordinarily have a short period of economic productivity in their youth, and they may not be responsible enough to manage the money for a lifetime if they receive it all at once," Bennett said.

Axelrod, however, said the whole arrangement is fictional, with Castroneves' ultimate goal to move out of the U.S. to a tax haven such as Monaco where he would eventually get the Penske money tax-free.

Castroneves attorney Roy Black said the driver, who lives in a $2.2 million home in Coral Gables, never schemed to hide money from the IRS. He said in opening statements that the driver knows nothing about U.S. tax laws and relied on experts to handle his finances.

"They've come up with a fiction," Black said.

As W.Va. coal companies expand, graves go missing

Walter Young can't find his great-grandmother's grave. The coal company that had it moved doesn't know where the remains ended up.

"It always looked like a safe, good place nobody would bother," the 63-year-old retiree said of the cemetery along Pigeon Creek where his relative, Martha Curry, was buried. "It was up on a hill."

But that hill was in West Virginia's southern coalfields, and over the years, it changed hands. The land around and under the cemetery passed from one coal company to another as mines grew up around it. Now, no one is sure where Young's great-grandmother was ultimately laid to rest.

The loss is a problem that resonates across West Virginia as small family cemeteries and unmarked graves get in the way of mining, timbering and development interests. Advocates are asking state lawmakers this year to enact regulations that would require better tracking of the graves and protect families who believed that their loved ones wouldn't be disturbed.

"We just keep hearing about more and more cases of it," said Carol Warren, a project coordinator with the Ohio Valley Environmental Coalition.

Young hadn't visited his great-grandmother's grave regularly since the 1970s, but wanted to check up on it when he realized the cemetery, near Delbarton in the southwestern corner of the state, was near a site being built to store coal waste. When he called for permission to cross company property, he was dumbfounded by the response. The company that now operates the site didn't know where the grave had been relocated.

"I wanted to secure in my mind that this cemetery was OK. I found out it wasn't OK. It was gone," Young said.

The graves get lost because sometimes, because of nearby mining, families have trouble gaining access to burial grounds. Sometimes, companies don't give proper public notice before removing or disturbing the graves.

One measure being pushed by the coalition would triple the no-disturbance buffer zone around cemeteries from 100 feet to 300 feet. Another would delete seemingly contradictory language in a law intended to protect human remains, grave artifacts and markers. Currently the law says it isn't meant to "interfere" with normal activities by landowners, whether they be farmers, developers or coal operators.

The current law is vague and allows individuals to waive any responsibility, said House Health and Human Resources Chairman Don Perdue, a co-sponsor on two measures.

"The more vague a law is, the less likely it is to be enforced," said Perdue, D-Wayne. "I really believe that we have to make sure that hallowed ground is not hollowed ground or harrowed ground."

A third proposal would require coal companies to explain ahead of time how proposed surface mines would affect nearby cemeteries. And a fourth would allow West Virginia University's extension service to use Global Positioning System to map and plot small cemeteries near mountaintop removal mines.

"Let's begin the process of trying to document where all these small cemeteries are located," said Delegate Robert Beach, D-Monongalia.

The legislation was prompted by a fly over Beach took last year of mountaintop removal mines. The mining method involves blowing up ridgelines to expose several coal seams.

A lot of people living near the expanding surface mines are afraid family cemeteries are "just going to be covered over and become nonexistent," Beach said.

Bill Raney, president of the West Virginia Coal Association, says coal operators follow the law and try to be sensitive when cemeteries get in the way, treating families with dignity. However, he can't say how often such disputes arise.

International Coal Group's Patriot Mining Co. is currently in court in northern West Virginia, seeking approval to relocate a cemetery where the last burial occurred more then 70 years ago. Patriot received permission last year to move a nearby cemetery.

Patriot estimates there is 7,000 tons of coal beneath the 22 graves it now wants to move. Because of buffer zone and blasting laws, Patriot technical services manager Tom Jones said 80,000 to 100,000 tons of coal would be lost if the cemetery isn't relocated. At today's spot market prices, the coal would be worth at least $5.2 million.

Patriot says it will treat the remains with respect and move them to a public cemetery with perpetual care where descendants can visit. Eight of 12 descendants have agreed, but one is challenging the move.

Ohio Valley Environmental Coalition organizer Robin Blakeman doesn't know how much coal is beneath her family cemetery in Brier Branch Hollow. The Harless-Bradshaw Cemetery had been used by her family and the nearby community since the mid-1800s, and contains the grave of a Civil War cavalry corporal. The last burial was in 2001 and the area is now overgrown by trees.

In the past five years, Blakeman has watched Ravencrest Contracting slowly encircle the wooden knoll where the cemetery is located. The former farm passed out of her family's hands more then 50 years ago. The family now relies on state law and an agreement with the coal operator to reach the cemetery on a gravel roadway used to haul coal out of the mine.

On a recent Saturday, Blakeman planted Gladiolus bulbs near several of the stones. As she worked, the sound of heavy mining machinery and trucks drifted across the narrow valley.

"Sometimes in the midst of all this destruction, sometimes the only thing you can do is try and add a little bit of beauty," Blakeman said. "I'm also thinking these flowers will at least alert somebody to the fact that somebody cares."

THE INFLUENCE GAME: Lobbyists defend earmarks

What's it like to be at Washington's political ground zero? Ask Dave Wenhold, who trudges to work with two bull's-eyes pinned to his back.

He's a lobbyist and he earns part of his living fighting for special-interest earmarks, those prized pots of money that lobbyists vie for and critics decry.

"It's frustrating because 99.9 percent of us are doing the right thing for our clients all the time," said Wenhold, one of more than 14,000 registered lobbyists in a trade demonized by President Barack Obama and many members of Congress. "I'm proud of what I do. I'm extremely proud of it," said Wenhold, president of the American League of Lobbyists, his profession's trade group.

Even before Obama, the profession was reeling from the influence-peddling scandal surrounding Jack Abramoff, the now-imprisoned former lobbyist famously photographed in his black hat. Congress' battle over a $410 billion spending bill has trained a new spotlight on earmarks.

Barring last-minute changes, the bill contains 8,570 such pet projects for lawmakers' home states and districts worth $7.7 billion, according to Taxpayers for Common Sense, a conservative group that abhors the practice. They and other critics ridicule projects such as $819,000 for catfish genetics research in Alabama and $95,000 to help the state of New Mexico locate a dental school.

Often, there's a lobbyist who helped get those projects into the bill. Wenhold, a 16-year lobbying veteran, can take credit for $175,000 for Career Gear, a New York City-based nonprofit that provides business clothes and other help to recently released prisoners and other men seeking jobs.

Under pressure from conservatives who have made earmarks a symbol of Washington's gluttony amid unprecedented federal deficits, Obama and Democratic leaders have pledged to curb the practice.

"This is a political muscle system," said Steve Ellis, vice president of the taxpayers group. He argues that influential lawmakers or those in tight re-election races are awarded more earmarks by party leaders, making the projects not only wasteful but unfair. "This is not a meritocracy by any stretch of the imagination."

The criticism hasn't stopped Wenhold and thousands of others from pursuing the projects, which retain overwhelming support from lawmakers because they are ravenously sought by colleges, mayors and other constituents.

"We're not evil by any stretch," said John Sanful, Career Gear's executive director. "We're committed to doing public good."

In the latest demonstration of earmarks' appeal, the Senate last week easily rejected an effort by Sen. John McCain, R-Ariz., to strip the projects from the spending bill. It also batted down a proposal by Sen. Tom Coburn, R-Okla., to kill 13 of them sought by the PMA Group, which is disbanding its lobbying business after coming under federal investigation.

"I think earmarks will be around as long as members of Congress are elected by people," said Michael Fulton, a 20-year lobbyist who worked on Capitol Hill for a decade.

Wenhold, one of two partners at Miller/Wenhold Capitol Strategies, and other earmark defenders note that such projects make up less than 2 percent of the spending bill's total cost. Besides, they say, lawmakers understand their districts' needs better than federal officials who often make questionable spending decisions.

"You're asking people who are sometimes career-long bureaucrats who've been in Washington 20 years to make decisions on what's going to happen in Portsmouth, N.H.? That doesn't make any sense," Wenhold said.

Wenhold and Fulton say their earmark work is a year-round task. It includes helping clients pitch their plans, filling out detailed applications from members of Congress, arranging letters and visits to lawmakers from hometown supporters — all to coax the House and Senate Appropriations committees to put the projects into spending bills.

By tradition, about 60 percent of the money for earmarks goes to members of the majority party, currently the Democrats. Fulton estimates that 95 percent of congressional offices he approaches accept earmark requests.

Yet it's highly competitive, with only a small percentage of proposals surviving.

Though Wenhold helped win $175,000 for Career Gear, the group had requested $475,000. And $1 million Wenhold sought for a different nonprofit group didn't make it into the bill at all.

Fulton, who works at the larger GolinHarris International, said the firm had 15 earmarks in the bill. That included $381,000 for a hospital in Carthage, Ill., and $197,000 for California State University at Dominguez Hills. He said he pushed an additional 10 projects that did not make the cut.

"These will stand the test of any third-party group picking them apart," Fulton said.

In a typical year, both men work on a handful of earmarks. Larger powerhouse lobbying firms such as Cassidy & Associates, Van Scoyoc Associates and The Livingston Group usually handle far more.

Fulton said that two years ago, he was working with two Illinois clients and was getting support from Obama's staff when he was still a senator from that state. That help ended when Obama began running for president, Fulton said.

"He polls, and lobbyists don't poll well," Fulton said. "I don't take it personally."

Southwest sticking with 4 percent capacity cut

Southwest Airlines Co. CEO Gary Kelly sees twin risks ahead, one if the economy gets worse, one if it gets better.

A worsening economy will keep Southwest cautious even as it adds routes like Minneapolis-to-Chicago, he said.

But he's also worried about another fuel price spike, especially if a recovering economy brings more demand for jet fuel, he said on Monday in Minneapolis to promote Southwest's new service to Chicago that began on Sunday.

Southwest is adding routes like Minneapolis and (later this year) service in Boston and New York-LaGuardia, even as it reduces overall capacity 4 percent this year. To make up for the new service, it's reducing flights elsewhere. Kelly said the carrier made the cuts on its least-used routes.

Speculation has been rising that as the recession continues, airlines will make deeper capacity cuts than they've already announced. But Kelly said the 4 percent capacity cut is "still about the right number."

"It's still early in the year. If anything I think the economic outlook has gotten worse, as we've gotten further into the year. So we're going to continue to be very cautious," he said.

Meanwhile he has his eye on fuel prices. Bets that fuel prices would rise saved Southwest's bottom line during the fuel price runup that peaked last summer. But like other carriers it lost money on those hedges as fuel prices dropped, and in January it said it had closed out most of its hedges.

But on Monday Kelly said oil prices in future months are running higher than the spot price, suggesting fear of another price runup. Fuel is the biggest expense at most carriers.

"We need to make sure that we protect against a fuel price spike. I think in this environment that would be pretty deadly. We'll just have to be very cautious about adding any new capacity at all in an environment where the overall market is shrinking."

Still, Southwest has about 10 percent of its 2009 fuel needs hedged, "which is considerably wound down from the previous position," spokesman Chris Mainz said.

Kelly said Southwest hasn't yet parked any of its Boeing 737s, but it could.

Northwest Airlines, now a part of Delta Air Lines Inc., had a reputation for fierce protection of its hubs, including Minneapolis, where it flew 76.6 percent of scheduled departures last year. Rather than barging in, Southwest has stuck more of a foot in the door, coming to Minneapolis with Chicago as its only destination, eight times a day.

"We purposefully only offered service for now to Chicago to limit the risk in this economic environment," but other destinations — especially to the West — might make sense in the future, he said.

Southwest shares rose 5 cents to $5.18 in afternoon trading.

Palm to remarket $49 million in shares

Smartphone maker Palm Inc. said Monday it will remarket more than $49 million of shares acquired by venture-capital firm Elevation Partners to improve its working capital and finance the launch of the Palm Pre and product development.

The Sunnyvale, Calif., company said it will remarket about 18.5 million shares and underwriters may purchase an additional 2.8 million common shares from Palm to cover over-allotments, if any.

The stock sale between now and March 31 would yield about $113.8 million based on Palm's closing price Friday. Elevation Partners will recoup $49 million from a $100 million investment it made in Palm in December, and expects to use the money to buy shares of Palm's common stock at the public offering price.

Palm will keep the remainder, or about $64.8 million.

Standard & Poor's Ratings Services on Wednesday lowered its creditworthiness rating on Palm one notch further into junk territory, citing significant declines in revenue and liquidity. It dropped its rating to 'CCC' — three levels above default — from 'CCC+'. The outlook is negative.

The professional-grade "Pre" smartphone has not launched, but is expected to be available in the next few months on Sprint Nextel Corp.'s network.

It's the first of a series of new phones based on an updated architecture, and is the core of Palm's anticipated rejuvenation.

Analysts have expressed concern about the company's cash flow, expecting Palm to look for more capital as it ramps up marketing for the Pre.

The company said Tuesday it expects a steep slide in fiscal third-quarter revenue, hurt by flagging demand for its older-model phones. It expects sales of $85 million to $90 million, well below the average Wall Street projection of $115 million, according to a Thomson Reuters poll.

Shares of Palm fell 13 cents, or 2.1 percent, to $6.02 in late afternoon trading Monday.

HEALTHBEAT: What's the best medicine -- really?

Think your doctor knows which drug — or surgery or even diagnostic test — works best? Think again. Half the time, there's little if any good evidence comparing one to another. And one of medicine's little secrets is that brand-new drugs don't have to work any better than cheap old ones to be approved for sale.

Now the government has a $1.1 billion down payment to start unraveling that problem, money provided in the economic stimulus package to better determine which test or treatment works best, when and for whom so that patients don't waste time and money on poor choices.

But which ailments go to the top of a very long wish list? And perhaps most important, how to make sure the results get into doctors' and patients' hands but not overly limit what therapies people can choose?

"There's a lot of clamor ... that this is going to deprive people of the choice to basically have every treatment they want. That's based on a false premise," Dr. Harold Sox, past president of the American College of Physicians, told The Associated Press. Last week, Sox was chosen to lead a panel of the prestigious Institute of Medicine to help guide what comparisons the government makes.

"If people had a good explanation of why a test that they wanted was more likely to hurt them than to help them, they might of their free choice say, 'You know, I was clearly wrong. I shouldn't want that test and now I don't.'"

At issue is what's called "comparative effectiveness." Should you have open-heart bypass surgery or far less invasive stents to open severely clogged heart arteries? Which of two hot treatments best prevents stroke from a clogged neck artery, surgically rooting out the clog or pushing it aside with a stent?

Does arthroscopic surgery work any better than painkillers for knee arthritis? Of all the competing pills, which is best to start with in treating Type 2 diabetes or high blood pressure? Is there really any difference between Prevacid and Prilosec for heartburn, or between Fosamax and hormone treatments for bone-weakening osteoporosis?

Those winners-and-losers questions drive fierce opposition to comparison effectiveness research from drug makers and others who have a financial stake in the outcome and fear that insurers will use the results to make coverage decisions. Back surgeons once lobbied to kill the federal Agency for Healthcare Research and Quality after it found "insufficient evidence" supporting certain spine operations — not that they didn't work, just that more evidence was needed.

The result: The nation has a scattershot method for determining best medicine. The little-known AHRQ spends about $30 million a year reviewing evidence of select tests and treatments. The National Institutes of Health occasionally compares contested therapies in expensive, years-long studies involving thousands of patients, like the stroke trial now under way.

So an extra $1.1 billion for the government to start spending on such comparisons this year marks a huge jump. By June's end, the Institute of Medicine panel will provide a priority list of up to 50 vexing medical questions to help the feds determine where to start.

Don't expect easy answers. Federal scientists are acutely aware that many of today's studies don't account for wide variations in responses to treatments by minorities or other subgroups.

"We have not yet seen a report or an assessment that says, 'Option A thumbs up, Option B forget it,'" says AHRQ Director Dr. Carolyn Clancy. The goal is "to figure out what's the right choice for me."

"Medical decision-making is rarely black-and-white," adds the NIH's heart chief Dr. Elizabeth Nabel. "We see certainly helping to provide additional evidence that really guides physicians and individuals in sorting through the shades of gray."

The bypass-versus-stent question for severe heart disease is a good example. Last week's New England Journal of Medicine published a comparison suggesting bypass recipients fare slightly better. But Nabel notes that in fact the study found tradeoffs that mean people may legitimately choose the easier recovery of a stent.

A bigger question is how to ensure that patients get the opportunity to consider such findings. AHRQ has begun translating its jargon-filled comparisons into easy-to-understand consumer brochures.

But the most-used comparative effectiveness research may come from a unique program in Oregon called the "Drug Effectiveness Review Project" that evaluates the evidence behind competing drugs.

One example: Two years before the painkiller Vioxx was pulled off the market because of heart side effects, the project declared it riskier than its equally effective cousins, says project director Mark Gibson at Oregon Health and Science University.

The reports don't weigh drug costs but they are used primarily by the Medicaid directors of 14 states in coverage decisions. A wider audience sees them thanks to the influential Consumers Union, which does add price to evaluations done by both the Oregon project and AHRQ to create its free Web-based "Best Buy Drugs" guides.

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P&G's Arnold steps down as president

The Procter & Gamble Co. said Susan E. Arnold stepped down Monday as president, which leaves Chief Operating Officer Robert A. McDonald as the current front-runner to be the next CEO of the world's largest consumer products maker.

Arnold, who has been P&G's highest-ranking female executive, and McDonald were both promoted in 2007 in a move some analysts perceived as setting up a succession for Chairman and CEO A.G. Lafley. Both McDonald and Arnold are 55 and have been with the company since 1980.

But Lafley, P&G's CEO since 2000 and now 61, has dismissed suggestions that he is ready to retire anytime soon. He told analysts in December: "The rumors of my passing are greatly exaggerated."

Arnold, who was president for global business units, helped lead the growth of P&G's beauty operations. McDonald is a veteran executive for the Asian emerging markets where the company increasingly sees its future growth.

Arnold, who could also emerge as a candidate for a top position at another company, wasn't immediately available for comment. P&G said she will retire Sept. 1 after 29 years with the company. The announcement said it has long been her intention to step down when she turned 55 — her birthday was Sunday.

Wendy Nicholson, a Citi Investment Research analyst, scoffed at that reason, writing in a note Monday that it "sounds like baloney to us."

She pointed out that Arnold was promoted less than two years ago, and also said the beauty and health businesses Arnold led have underperformed lately.

"Whether an internal decision about succession, or simply a change in enthusiasm about her current role or about PG, prompted her departure, with Arnold gone, we think it is pretty clear that McDonald will succeed Lafley," Nicholson wrote.

Ali Dibadj, a senior analyst for New York-based Sanford C. Bernstein & Co., said he wasn't entirely surprised and had already considered McDonald the leader in the succession race.

Dibadj said that while Arnold was a key architect in the growth of P&G's beauty business, other executives have been taking on increasing roles.

"I would say the bench strength in that business is strong," said Dibadj.

However, Nicholson expressed concern about the loss of another key executive — Clayton C. Daley Jr. had stepped down as chief financial officer Jan. 1 — at a time when P&G and other companies are battling the tough economic conditions.

P&G shares fell $1, or 2 percent, to $44.71 in trading Monday, just above their 52-week low of $44.63. They traded as high as $73.57 in the last year.

Arnold will be on "special assignment" to Lafley until retirement. Her job won't immediately be filled. The company said three vice chairmen who had reported to her will now report directly to Lafley, "reducing a layer of management as part of the company's ongoing simplification effort."

Lafley praised Arnold as a role model and credited her with helping P&G's beauty business to nearly triple in size, from $7 billion in 1999 to $20 billion in sales behind such brands as Olay skin care, Pantene shampoo and Head & Shoulders shampoo. She's also been a major contributor to global sustainability goals.

Arnold, whose P&G firsts included first female president and the first vice chairwoman, is frequently ranked among the most powerful women in U.S. business. She was named vice chair for P&G Beauty in 2004, then vice chair for Beauty and Health in 2006. She also serves on several boards of directors, including McDonald's Corp. and Walt Disney Co., and will continue those roles, P&G said.

Moody's cuts Clear Channel Communications ratings

Moody's Investors Service said Monday it cut its ratings on Clear Channel Communications Inc. further into junk status, citing a "high probability" that the radio station operator will not comply with a debt agreement this year and be forced to restructure its debt.

Clear Channel is a unit of CC Media Holdings Inc. The company was taken private last July by Bain Capital Partners and Thomas H. Lee Partners.

Moody's lowered the company's corporate family rating and probability-of-default rating to "Caa3" from "B2."

In February, Moody's lowered its expectations for radio broadcasting stations and outdoor advertising, predicting deeper revenue declines for both.

Moody's now expects Clear Channel's radio revenue will decline in the upper teens percentage range and outdoor advertising revenue will drop by about 15 percent.

Based on the new estimates, Moody's said Clear Channel is likely to violate its secured debt leverage covenants in 2009.

"With a capital structure that was highly speculative from its inception, the company's ability to continue as a going concern is completely dependent upon remaining in compliance with its covenants," said Moody's Senior Vice President Neil Begley in a statement. "But in the current economic environment, compliance will be very challenging, and as a result, such a capital structure will not likely be sustainable."

Moody's also cut its ratings on Clear Channel's senior secured credit facilities to "Caa2" from "B1" and its senior unsecured notes ratings to "Ca" from "Caa1." In addition, Moody's downgraded Clear Channel's speculative grade liquidity rating to "SGL-4" from "SGL-2."

The ratings outlook was lowered to "Negative."

About $23 billion of rated debt is affected by the action, Moody's said.

Merck buying Schering-Plough in a $41.1B deal

Merck & Co. is buying Schering-Plough Corp. for $41.1 billion in a deal that gives Merck key new businesses, access to a promising pipeline of new products and the chance to further cut costs, including eliminating about 16,000 jobs.

Merck hopes the cash-and-stock deal helps it better compete in a drug industry facing slumping sales, tough generic competition and intense pricing pressures.

The deal announced Monday would unite the maker of asthma drug Singulair with the maker of allergy medicine Nasonex and form the world's second-largest prescription drugmaker. Merck and Schering are already partners in a pair of popular cholesterol fighters, Vytorin and Zetia, although concerns about safety and effectiveness have hurt sales.

Shares of the two companies traded furiously after the announcement, with Schering's shares skyrocketing and Merck's dropping, typical for a company doing a big acquisition. In early afternoon trading, Schering shares jumped $2.63, or 15 perent, to $20.26, and Merck shares fell $2.19, or 9.6 percent, to $20.55.

The deal comes only a few weeks after Lipitor maker Pfizer Inc. agreed to pay $68 billion for drugmaker Wyeth.

Merck and Schering-Plough, along with most of their rivals, are eliminating thousands of jobs and restructuring operations to cut costs.

"There'll be no immediate changes" in staffing, Merck spokeswoman Amy Rose told The Associated Press. "Eventually, we anticipate an approximate 15 percent reduction in the combined company's headcount," implying nearly 16,000 fewer jobs.

The deal also would let Merck do the same thing Pfizer is trying to do with its acquisition — diversify into a more broad-based health care company.

Merck is a top maker of pills and vaccines, and acquiring Schering-Plough will add strength in the prized area of biologic drugs, which are made from living cells. It will also give Merck one of the world's biggest animal health businesses and a sizable consumer health division that includes products such as allergy pill Claritin, Dr. Scholl's foot products and the Coppertone sun-care line.

Merck Chairman and CEO Richard Clark told The Associated Press the company will be "well-positioned for sustainable growth through scientific innovation."

Big drugmakers are facing slumping sales as the blockbuster drugs of the 1990s lose patent protection, complicated by a dearth of new drugs. Schering-Plough, however, has patent protection for key products until the middle of the next decade and what is considered one of the best product pipelines.

Still, analyst Steve Brozak of WBB Securities said the deal is mainly about Merck "buying revenue and buying earnings."

"It's a good short-term fix, but it unfortunately makes it more complicated for the long term," Brozak said.

He said it will now be more difficult for Merck to continue its strategy of buying or licensing the few promising experimental compounds available from small biotech companies, many of which are on the verge of shutting down amid the recession and credit crunch.

Brozak said he thinks the next big move likely will be a large drugmaker, perhaps J&J itself, acquiring a medical device maker. J&J already has a huge business in that field and lost a heated battle three years ago to acquire heart implant maker Guidant to Boston Scientific.

Merck and Schering-Plough said the deal will save them about $3.5 billion per year after 2011 and will boost earnings in the first full year after the deal closes. Combined with their current restructuring, they expect a total of $5.95 billion in annual savings after 2011.

"We'll double Merck medicines in (late-stage development) to 18," Clark added.

Schering-Plough CEO Fred Hassan, 63, said in an interview that Nasonex, Pegintron for hepatitis, cancer drug Temodar, the Nuvaring contraceptive and the two cholesterol drugs all have patent protection until 2014 or later.

The two companies had a combined $47 billion in revenue in 2008, nearly as much at the largest drugmaker, Pfizer Inc., which posted $48.42 billion last year. Pfizer expects late this year to acquire Wyeth, which would add more than $20 billion in revenue.

Merck has about 55,200 employees and Schering-Plough, which grew significantly with its November 2007 acquisition of Dutch biopharmaceutical company Organon BioSciences NV, has about 50,800.

Schering-Plough shareholders will get $10.50 in cash and 0.5767 Merck shares for each Schering-Plough share they own. That's a 34 percent premium to Schering-Plough's closing stock price Friday.

Stock would cover 56 percent of the deal's funding, with the other 44 percent in cash: $9.8 billion in existing cash balances and $8.5 billion in financing committed by JPMorgan Chase & Co., the companies said. The small amount being borrowed — barely 20 percent of the price — is a sign of the credit crunch's effects.

Clark, 63, will lead the combined company, which will be a dominant player in treatment areas including cholesterol, respiratory, infectious disease and women's drugs, as well as vaccines.

Schering sells the arthritis drug Remicade outside the U.S. and also has some rights to another in late-stage development, golimumab, under a partnership with Johnson & Johnson, which makes Remicade.

Because Schering has been making roughly $2 billion a year from that deal, Merck's acquisition of Schering-Plough is structured as a reverse merger to avoid triggering provisions in the J&J deal that might cost the new company that revenue.

As a result, Schering-Plough will be the surviving corporation but will take the Merck name and will be based at Merck's headquarters in Whitehouse Station, N.J.

Hassan said the three companies have a good relationship and that he "had a cordial conversation with Bill Weldon," New Brunswick, N.J.-based J&J's CEO, Monday morning.

Brozak, the analyst, said "it's always possible" J&J could throw a wrench in the deal, but it's too soon to say.

Johnson & Johnson spokesman Bill Price said the company is not commenting on whether it might protest or try to block the deal. Any dispute between J&J and Schering-Plough would be decided by binding arbitration, under their deal, according to Merck General Counsel Bruce Kuhlik.

Stock analysts have long pressured Clark to do a major deal to address falling sales, as blockbusters including Fosamax and Zocor for high cholesterol have seen generic competition hammer sales in the past 2 1/2 years.

Hassan will participate in planning how to combine the companies until the deal closes, expected in the fourth quarter.

Merck's sales fell 3 percent in the fourth quarter, at $6 billion, while Schering-Plough's rose 17 percent to $4.35 billion, mainly because of Organon's products.

Moody's Investors Service backed its Aa3 credit rating for Merck but revised its outlook on the rating to negative from stable. Standard & Poor's reaffirmed Merck's 'AA,' long-term rating. Both are high grades. Both Moody's and S&P put Schering-Plough's ratings on review for possible upgrade.

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