Bayer AG agreed to buy Merck & Co.’s consumer unit for $14.2 billion, solidifying its position near the top of the market for over-the-counter health products.
Merck and Bayer also will collaborate to develop and market a class of drugs that includes Bayer’s Adempas, which is approved to treat a deadly lung disease, they said in a statement today. Merck will pay Bayer $1 billion for the collaboration, with additional payments possible if sales goals are met.
The deal is the second-biggest in Bayer’s history, and the second large consumer-health transaction in a month of pharmaceutical industry reshuffling as drugmakers drop units that aren’t leaders in a particular segment. Novartis AG and GlaxoSmithKline Plc agreed April 22 to a consumer joint venture. Glaxo also sold its oncology business to Novartis, which sold its vaccines line to Glaxo and its animal-health business to Eli Lilly & Co.
“Strategically, this is a consistent step for Bayer,” Ulrich Huwald, a Hamburg-based analyst for Warburg Research, said in a telephone interview. “They have a very strong brand, a clearly positive position in the over-the-counter business.”
Bayer fell less than 1 percent to 99.07 euros in Frankfurt. Merck dropped 2.6 percent to $57.11 in New York.
Buying the Merck unit adds the allergy medicine Claritin and Coppertone sunblock to a Bayer portfolio anchored by the iconic pain pill aspirin. Bayer, based in Leverkusen, Germany, had 3.9 billion euros ($5.4 billion) in sales of non-prescription medicines last year, accounting for about 9.7 percent of the drug and chemical conglomerate’s revenue.
“We are strong in the over-the-counter business with Bayer aspirin and other products, so this was a great opportunity for us to strengthen the business and truly become a global leader,” Chief Executive Officer Marijn Dekkers said in an interview with Bloomberg Television.
Bayer ranks second in over-the-counter drugs by sales, behind Johnson & Johnson, according to a ranking compiled by the German company. After the Bayer-Merck transaction closes and Glaxo and Novartis form their venture, that venture will be the largest, followed by Bayer and then J&J, according to Bayer.
Consumer health is a unit that Dekkers has sought to strengthen. The executive, known as a dealmaker from his days molding Thermo Fisher Scientific Inc., has said since the beginning of his tenure in 2010 that he wants Bayer near the top of each of its markets.
The Merck unit reported $1.89 billion in sales last year, down 3 percent from 2012 after the termination of some distribution agreements in China. Merck decided to put that business and its animal-health unit under review last year in order to allocate more capital to new drugs, CEO Ken Frazier has said.
The sale of the business is part of a push to “ensure that assets within our portfolio align with our core strategy, have industry-leading potential and generate long-term shareholder value,” Frazier said in today’s statement.
At a Boston investor meeting today, Frazier said Bayer paid “a very good price” for the unit. Merck is still evaluating what it will do with its animal health business, which the company could sell, or buy assets to bulk up, he said.
Bayer is also watching market developments in animal health, Dekkers said today on a conference call with reporters, citing Novartis’s sale of its unit. Bayer wants to see its unit grow, Dekkers said.
“We like our animal health business a lot,” he said. “We think we have in the top five a significant position with a very defendable mix of products.”
Merck expects after-tax proceeds from the sale of $8 billion to $9 billion. The U.S. company will use the money to invest in areas of its business with the highest growth potential, to acquire new medicines and to return capital to shareholders, Merck said. The company cited MK-3475, an experimental drug that uses the body’s immune system to fight cancer, as an area for internal investment.
The segment accounts for about 4 percent of Merck’s revenue and includes the Miralax constipation treatment, Lotrimin athlete’s foot creams and Afrin nasal congestion sprays. Seventy percent of its sales come from the U.S., Exane analysts estimate.
Bayer won the contest after Reckitt Benckiser Group Plc, a U.K. company that moved aggressively on recent consumer-health assets, dropped out of the bidding on April 30.
A tussle between the two companies ended the other way in 2012. Reckitt Benckiser outbid Bayer then to buy Schiff Nutrition International Inc. with a $1.4 billion offer that valued the maker of MegaRed Omega-3 capsules at about 28 times earnings before interest, taxes, depreciation and amortization. The U.K. company has been willing to pay a premium to expand the health unit, its fastest-growing business, which increased revenue 27 percent last year.
Bayer said it’s paying about 21 times last year’s earnings for the business. The price seems high, though Bayer will benefit from tax savings, lower expenses and added sales, said Jeffrey Holford, an analyst at Jefferies LLC in New York, in a report.
“In a highly contested quest for a crown jewel, we made it at a very, very adequate level,” Bayer Chief Financial Officer Werner Baumann said on a call with analysts. The company’s only bigger acquisition was the purchase of drugmaker Schering AG in 2006 for about 16.3 billion euros.
The pharmaceutical collaboration also will include Bayer’s vericiguat, a drug that’s in mid-stage clinical trials for worsening chronic heart failure. The companies will share costs and profit equally and work together to develop and commercialize the drugs. Merck will pay as much as $1.1 billion if sales goals met. Adempas is approved to treat pulmonary hypertension.
Bank of America Corp. advised Bayer while Merck worked with Morgan Stanley. The law firms Fried Frank Harris Shriver & Jacobson LLP and Morgan Lewis & Bockius LLP acted as legal counsel to Merck. JPMorgan Chase & Co. advised Merck in the assessment of its portfolio leading up to the deal, Merck said.
Bayer plans to finance the acquisition with a bridge facility provided by Bank of America, BNP Paribas SA and Mizuho.