Novartis Said to Be in Talks With Merck on $5 Bln Swap

Novartis AG (NOVN) is in talks with Merck & Co. to trade its animal-health and human vaccines businesses for the New Jersey drugmaker’s over-the-counter health-products unit, people familiar with the matter said.

The swap would fit strategies at both companies -- and within the industry -- to focus on core strengths and get rid of other business lines. The two drugmakers may each trade about $5 billion in assets to do so, said one of the people, who asked not to be named because the process is private.

Merck’s over-the-counter business, including Coppertone sunblock and Claritin allergy medicine, would complement Novartis’s consumer line-up of items such as Triaminic cold medicine and Lamisil anti-fungal treatment. Novartis would prefer to trade the veterinary unit because it doesn’t need cash and would rather invest in an area in which it is already a leader, people familiar with the situation said last month.

“The numbers make sense” for Novartis to trade the two businesses for Merck’s (MRK) consumer unit, Steve Scala, an analyst with Cowen & Co. in Boston, wrote in a Dec. 11 note to clients.

Novartis hasn’t finalized a deal with Merck, the people said, and may choose another option. Novartis rose less than 1 percent yesterday in Swiss trade, to 72.65 francs. Merck dropped less than 1 percent to $49.79 in New York.

2014 Earnings

The Novartis businesses together are projected to generate $529 million in earnings before interest and taxes next year, while Merck’s consumer unit will have $568 million in earnings before interest and taxes in 2014, the Cowen report shows.

Julie Masow, a spokeswoman for Basel, Switzerland-based Novartis, said the company doesn’t comment on rumor or speculation. Steven Cragle, a spokesman for Whitehouse Station, New Jersey-based Merck, declined to comment.

In November, Cragle said in an e-mail that the company continues to evaluate all of its businesses, including its consumer unit and animal-health business, and that the company “would consider alternatives” if it were to view them as being more productive outside of Merck.

A swap with Merck would follow a trend in the industry in which Pfizer Inc., Bristol-Myers Squibb Co. and Abbott Laboratories have all in the last two years sold, spun off or split apart non-core businesses. Pfizer divested its animal health and nutrition units to focus on new brand-name drugs. Bristol-Myers last month sold its stake in a diabetes joint venture so it could put more bets on cancer, and Abbott last year split its drug unit into a new company, AbbVie Inc.

Bulking Up

Merck says its animal-health business is the second-biggest in the industry, with $3.40 billion in sales in 2012. Its consumer buiness, meanwhile, doesn’t have enough size, CEO Ken Frazier has repeatedly said. Getting rid of the consumer unit and bulking up in animal health would follow a move Frazier and his new R&D chief, Roger Perlmutter, made last year to trim drug research projects to focus on vaccines, cancer, diabetes and hospital care.

Citigroup Inc. analysts valued the Novartis veterinary unit at about $4 billion including net debt in October. Novartis doesn’t publicly report separate financial results for the business.

Novartis has been working with Goldman Sachs Group Inc. to explore options for its various businesses, people familiar with the company’s plans said in November.

The drugmaker wants its divisions to be among industry leaders or it will consider divesting them, Chief Executive Officer Joe Jimenez has said. Acquiring consumer products would fit well with Jimenez’s past expertise: he was an executive at H.J. Heinz Co. before joining Novartis in 2007 as head of its consumer-health business.

The company hasn’t made any final decision on whether to divest any units, Chairman Joerg Reinhardt said at a conference in December.

To contact the reporters on this story: David Welch in New York at dwelch12@bloomberg.net; Robert Langreth in New York at rlangreth@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net; Reg Gale at rgale5@bloomberg.net

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