German HealthCare giant Bayer (BAYRY) entered into a definitive agreement with Merck & Co. Inc. (MRK) to acquire the latter’s consumer care business for $14.2 billion (€10.4 billion). The companies also entered into a co-development and co-commercialization agreement for soluble guanylate cyclase (sGC) modulators.
The purchase price of $14.2 billion is inclusive of a payment related to sales of Merck’s Claritin and Afrin in certain countries where they are prescription only products. Merck’s consumer care unit, headquartered in New Jersey, currently has around 2500 employees.
Bayer expects revenue savings of approximately $400 million from Merck's complementary product portfolio by 2017. Bayer will incur one-time integration charges of around $500 million in 2014/15 and expects cost synergies of around $200 million annually by 2017. Bayer will however enjoy significant tax benefits from the deal.
With the successful completion of the deal Bayer will gain full control over Merck’s well-established products like Claritin, Coppertone and Dr. Scholl’s. The deal is expected to close in the latter half of this year subject to approval from the relevant antitrust authorities.
Moreover, the companies will collaborate in the area of cardiovascular diseases with a focus on sGC modulation. Bayer and Merck will be sharing costs and profits from the sGC modulators program and will implement development and commercialization strategies. For the sGC collaboration, Merck will be paying $2.1 billion to Bayer including an upfront payment of $1 billion and additional sales milestone payments of up to $1.1 billion in relation to collective sales of some collaborative compounds like Bayer’s Adempas.
What’s in it for Bayer?
Merck’s consumer care unit will be a great fit for Bayer’s existing consumer care business, which contributed around $5.2 billion (€3.9 billion) of revenues in 2013. The consumer care unit of Merck on the other hand fetched around $2.2 billion in 2013. Taken together pro forma sales of both Bayer’s and Merck’s consumer care units came to around $7.4 billion last year. Bayer has seen year-over-year improvements of 4% and 5% in its consumer care business in 2012 and 2013 respectively. With Merck’s consumer care arm Bayer will expand its existing business by over 40%.
Bayer already has well known over-the-counter (OTC.TO) products like Aspirin (pain), Aleve (pain), Bepanthen/Bepanthol (skin care) and Canesten (fungal infections) in its portfolio. Merck’s consumer care business, which focuses on areas like cold, allergy, sinus & flu, dermatology (including sun care), foot health and gastrointestinal categories, also has well-known brands like Claritin (allergy), Coppertone (sun care), Dr. Scholl's (foot health), MiraLAX (gastrointestinal) and Afrin (cold).
The acquisition will make Bayer one of the leaders in the global OTC market with many established brands. Bayer expects to become global leaders in areas like dermatology and gastrointestinal and will also advance in categories like cold, allergy, sinus and flu.
Besides category expansion, the addition of Merck’s consumer care business will expand Bayer’s geographic reach. We note that Merck’s consumer care business has a strong presence in North America, which is apparently the largest OTC market in the world. Bayer already has a strong presence in the ex-U.S. markets. The acquisition will significantly enhance Bayer’s position in the in the U.S. OTC market as well.
Bayer expects a 2% positive contribution to its earnings in the first full year following the closure of the deal. During its first quarter 2014 earnings release, the company stated that it expects core earnings to grow in the mid-single-digit percentage range. Bayer also expects its revenues to grow over 3% from next year.
Merck’s Point of View
Merck will receive ample cash to push ahead with its existing business units. The company intends to invest the amount in the development of its pipeline and in upcoming launches. Moreover, Merck expects to reduce costs by an additional $2.5 billion over its previously achieved merger synergies of $3.5 billion.
Although Merck’s consumer care unit consists of well-established branded products, the segment’s sales were down last year.
We are encouraged by Bayer’s initiatives to expand its consumer care business. With so many branded products in its bag, we are confident that Bayer will emerge as a leader in the global OTC market. Bayer has been looking to expand its OTC business globally for quite some time now. Bayer’s acquisition of Merck’s consumer car unit is thus in line with its plans.
Bayer carries a Zacks Rank #4 (Sell) and Merck carries a Zacks Rank #3 (Hold). Some better-ranked stocks include Allergan Inc. (AGN) and Johnson & Johnson (JNJ). Both Allergan and Johnson & Johnson carry a Zacks Rank #2 (Buy).
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